Reverse-Payment Claims Fail at the Second Circuit in Latest Case to Assess Pleading Standards Under FTC v. Actavis

Antitrust cases challenging so-called “reverse-payment” patent settlements have proliferated in the decade since the US Supreme Court handed down its decision in Federal Trade Commission v. Actavis, Inc.¹ But until last week, the US Court of Appeals for the Second Circuit had not considered an Actavis claim on the merits.

In CVS Pharmacy, Inc. v. Forest Laboratories Inc. (captioned as In re Bystolic Antitrust Litigation at the district court), the Second Circuit affirmed the dismissal of antitrust claims alleging that Forest Laboratories and seven other pharmaceutical companies had entered into settlement agreements that unlawfully delayed the launch of generic Bystolic. The Second Circuit’s decision adds to the body of law governing pleading standards in reverse-payment cases, providing a new wrinkle by assessing the branded pharmaceutical company’s alleged underlying intent in making the payment.² It also leaves unanswered certain questions that Actavis posed eleven years ago — meaning that life sciences companies must still negotiate patent settlements under a cloud of legal uncertainty.

Reverse-Payment Settlements Explained

“Reverse-payment” settlements all but exclusively arise in the context of pharmaceutical patent settlements. The term refers to a settlement whereby the patent owner pays an accused infringer cash or other consideration to end patent litigation, even though the patent owner — the plaintiff — does not itself face any claim of damages. The payment is considered “reverse” because, ordinarily, the accused infringer — the defendant — is the one that pays the patent holder to settle an infringement case.

The antitrust concern with “reverse-payment” settlements is that the patent owner, which typically markets a brand name drug covered by the patent (or patents), is making the payment to induce the accused infringer, a company seeking to sell a generic version of the drug, to stay away from the market for a period of years. By staving off competition from low-priced generic alternatives, the reverse payment may allow the patent holder to charge a high price for its brand-name drug for longer than might otherwise have been the case (for example, if the accused infringer succeeded in proving that the patent was invalid or that its generic drug would not infringe the patent) — or so the theory goes.

Pleading Standards For Reverse-Payment Challenges

In the years since the seminal Actavis decision, several Courts of Appeals have addressed what plaintiffs must allege at the pleading stage to state a reverse-payment claim.

In 2015, the Third Circuit in King Drug Co. of Florence, Inc. v. SmithKline Beecham Corp., vacated an order dismissing reverse-payment claims at the pleading stage.³ The Third Circuit held that Actavis does not apply solely to cash payments, but may also condemn non-monetary settlement terms that confer value on the generic firm. It held that plaintiffs alleging a non-monetary reverse payment must show that the relevant term provides “an unusual, unexplained reverse transfer of considerable value from the patentee to the alleged infringer.”⁴

Subsequently, the First Circuit held in In re Loestrin 24 Fe Antitrust Litigation that plaintiffs are not required to allege precise figures or calculations at the pleading stage to survive a motion to dismiss in a reverse-payment case.⁵ There, the First Circuit reversed the dismissal of reverse-payment claims, holding (consistent with King Drug) that non-cash reverse “payments” are subject to challenge. The court stressed that plaintiffs must “plead information sufficient to estimate the value of the term, at least to the extent of determining whether it is large and unjustified”⁶ — but clarified that this need not entail “precise figures and calculations.”⁷ It is enough to “allege facts sufficient to support the legal conclusion that the settlement at issue involves a large and unjustified reverse payment under Actavis.”⁸

More recently, in Mayor and City Council of Baltimore v. AbbVie Inc.,⁹ the plaintiffs asserted that AbbVie, maker of Humira, had entered into a series of reverse-payment settlements with companies vying to sell biosimilar alternatives.¹⁰ The settlements permitted the biosimilar makers to enter the European market in short order, but forbade them from entering the US market for several years.¹¹ The plaintiffs’ theory was that the European license “paid” the biosimilar makers to delay entering the US market. The Seventh Circuit held that the alleged settlements were “traditional resolutions of patent litigation,” not reverse-payment settlements.¹²

In re Bystolic

Against that backdrop, in In re Bystolic, purchasers, wholesalers, and employee benefit funds alleged that they overpaid for brand-name Bystolic, a hypertension drug, as a result of Forest Laboratories’ patent settlement agreements with several would-be generic competitors. The plaintiffs’ theory was that Forest had funneled large cash payments to each of the generic companies by entering “side deals” contemporaneous with the settlements.¹³ These deals provided that the generic firms would perform various services for Forest, such as “supplying drug ingredients or developing new products.”¹⁴

The district court twice dismissed the plaintiffs’ claims, holding that the plaintiffs failed to allege that payments made to generic drug manufacturers were “large and unjustified” because the allegations did not demonstrate that Forest’s agreements were “inconsistent with a pro-competitive justification.”¹⁵

The Second Circuit affirmed the district court’s decision. According to the Second Circuit, the plaintiffs had not plausibly alleged “that Forest’s reverse payments were unjustified or unexplained.”¹⁶ This was not a function of the payments’ size, or even whether the payments exceeded the value of the services the generic companies agreed to provide. Rather, because the plaintiffs failed to plead facts showing that the business deals were “sham and pretextual,” the Second Circuit could only conclude that the “payments … constituted fair value for goods and services obtained as a result of arms-length dealings.”¹⁷

The Second Circuit closely evaluated each of these “side deals” and found, based on the plaintiffs’ own allegations, that there were “bona fide business considerations” for each.¹⁸ For instance, Torrent agreed to sell Forest ten patents covering a new nebivolol drug that Torrent was developing. In return, Forest agreed to pay Torrent $5 million up front, and up to $12 million more if Torrent achieved certain milestones linked to a patent’s issuance and the approval and marketing of the nebivolol drug. In the Second Circuit’s view, “the milestones were ‘in line with a wide swath of rational and competitive business strategy’”¹⁹ — Forest agreed to pay Torrent “upon the issuance in the US of a potentially valuable patent” and for “the achievement of important milestones that bespeak the desirability and value of that patent to others,” such as selling a product covered by the assigned patent.²⁰ The court rejected as “implausibl[e]” the plaintiffs’ contention that these milestones were “illusory” or “easy to achieve.”²¹

The Second Circuit stressed that it did not reach the question of whether Forest’s payments were “large” — half of Actavis’s “large and unjustified” inquiry — because, in its view, the allegations made clear that the payments were justified. That said, the court criticized the plaintiffs for failing to “sufficiently contextualize or compare[]” the payments’ size.²² Had plaintiffs done so, the court suggested, it may have been able to “infer that the payments are plausibly unjustified.”²³ But it provided no guidance as to what makes a payment “large” or when a payment’s size might render it “unjustified.”²⁴

Observing that Actavis is “not self-reading,” the Second Circuit attempted to distill certain principles to help courts determine if payments made by a patent holder to an alleged infringer violate antitrust law. In particular, the court focused on the need for intent allegations: “The ‘relevant antitrust question’ is why the reverse payment was made” — if it was “made to bring about anticompetitive harm,” then it’s unlawful.²⁵ Elsewhere in the opinion, the court similarly underscored that “the basic question is why the payment was made, i.e., was there a ‘convincing justification’ for it apart from a bare desire to prevent generic competition?”²⁶ The other circuits with previous Actavis rulings had not delved into intent allegations; thus, in re Bystolic adds a new concept for analyzing reverse payment claims.

Looking Ahead

In the wake of the Second Circuit’s decision, pharmaceutical companies should consider Bystolic’s principles when settling patent cases so as to (1) avoid reverse-payment suits; and (2) minimize potential exposure in the event of a lawsuit. For example, given Bystolic’s focus on intent, pharmaceutical companies should proactively articulate the business rationales for any collaborations with competitors — particularly those negotiated close in time to settlements — both in public-facing statements (e.g., SEC filings) and in internal deal documents. Those rationales should identify any procompetitive and consumer benefits, such as the introduction of new products, the expansion of consumer choice, and any efficiencies that will allow the collaborating companies to compete more aggressively and/or offer lower-priced products. The companies should avoid language suggesting that the deal was not for a fair market value or that the business collaboration was contingent on settlement of a patent suit.

Consistently ranked among the top global antitrust practices, O’Melveny’s Antitrust & Competition team is well-positioned to help companies navigate the complex strategic questions posed by the current aggressive enforcement and litigation environment, particularly with respect to pricing strategies. If you have any specific questions, please reach out to a member of the team listed below.

This memorandum is a summary for general information and discussion only and may be considered an advertisement for certain purposes. It is not a full analysis of the matters presented, may not be relied upon as legal advice, and does not purport to represent the views of our clients or the Firm. Stephen McIntyre, an O’Melveny partner licensed to practice law in California; Pete Herrick, an O’Melveny partner licensed to practice law in New York and the District of Columbia; Monsura A. Sirajee, an O’Melveny counsel licensed to practice law in the District of Columbia and California; and Mike Rosenblatt, an O’Melveny associate licensed to practice law in the District of Columbia, contributed to the content of this newsletter. The views expressed in this newsletter are the views of the authors except as otherwise noted.