Reverse Payment Claims: The Second Circuit Assesses Pleading Standards Under Actavis
Despite the prevalence of "reverse-payment" or "pay-for-delay" litigation, following the Supreme Court's decision in F.T.C. v Actavis, Inc., 570 U.S. 136 (2013), until recently, the Second Circuit had not evaluated the pleading standard on a reverse payment claim.
In Watson Labs., Inc., 101 F.4th 223 (2d Cir. 2024), the Second Circuit affirmed dismissal of antitrust claims filed against Forest Laboratories, the brand manufacturer of the FDA-approved drug Bystolic, and seven manufacturers of generic versions of Bystolic. In so doing, the Second Circuit provided insight into the standards governing the pleading of Actavis claims that may be useful to pharmaceutical companies settling patent disputes.
Background and Reverse Payments
Bystolic received marketing approval from the FDA in 2007 for the treatment of hypertension, or high blood pressure. In December 2011, seven companies seeking FDA approval to manufacture generic versions of Bystolic, filed Abbreviated New Drug Applications certifying that the underlying Bystolic patents were, in their view, invalid or would not be infringed by their generic products. Forest subsequently filed patent infringement lawsuits against those companies.
Between October 2012 and November 2013, Forest reached separate settlement agreements with each of the seven generic manufacturers. Each agreement contained broad liability releases and obligated Forest to pay avoided legal expenses. The settlements also granted each generic manufacturer a license to market its version of generic Bystolic three months before the expiration of the Bystolic patents. Contemporaneous with the settlement agreements, Forest entered into other "side agreements" with the generic manufacturers under which Forest agreed to pay them for various goods and services.
The plaintiffs were a proposed class of purchasers of Bystolic and its generic equivalents. The plaintiffs brought suit under the Sherman Act, the Clayton Act, and state antitrust and consumer-protection laws, alleging that the "side agreements" were sham transactions under which Forest unlawfully paid manufacturers of generic Bystolic to delay the market entry of their generics. This, according to the plaintiffs, allowed Forest to continue charging "supra-competitive" prices for Bystolic.
Such payments—from patent holder to alleged infringer—are known as "reverse payments" because the patent-holding plaintiff pays the allegedly patent-infringing defendant even though the defendant has no claim for damages. The concern with reverse payments is that the patent holder is paying the generic manufacturer to keep the generic off the market, which may allow the patent holder to charge a higher price for its branded drug than it would be able to charge if it faced generic competition. In Actavis, the Supreme Court held that reverse payments are not per se unlawful but may violate antitrust laws if they are "large" and "unjustified." 570 U.S. at 141, 158-59.
Procedural History
After multiple actions were consolidated under one docket, the defendants moved to dismiss for failure to state a claim, which the District Court for the Southern District of New York granted without prejudice. The plaintiffs then filed amended complaints and the defendants renewed their motions to dismiss. The District Court dismissed the claims with prejudice, holding that the plaintiffs had not plausibly alleged that the transactions between Forest and the generic manufacturers were large and unjustified.
Second Circuit Analysis
The Second Circuit affirmed, holding that the plaintiffs had not plausibly alleged that Forest made an "unjustified" reverse payment to any of the generic manufacturers. The Second Circuit analyzed each of the side agreements between Forest and the generic manufacturers and concluded that no allegation plausibly shows that any of the at-issue transactions "reflected anything other than fair value for goods and services obtained as a result of good-faith business dealings."
For example, under the term sheet between Forest and Hetero Labs, the parties agreed to negotiate a five-year supply agreement where Hetero would manufacture and supply Bystolic's active ingredient to Forest in exchange for a fee of at least $37.5 million. The plaintiffs argued this agreement was pretextual because Forest had a supplier in place at the time of the term sheet with Hetero and thus had "sufficient supply" to meet its needs. The Second Circuit rejected the plaintiffs' argument, noting that before the agreement with Hetero, Forest had publicly identified supply chain risks, including that relying on a "single manufacturing source" could lead to "shortages" or "long-term product unavailability." The Second Circuit concluded it is "not plausible" that securing an alternative supplier "for a billion-dollar blockbuster drug was nefarious," particularly given the "obvious alternative explanation."
The Second Circuit identified several "overarching" reasons for affirming dismissal of plaintiffs' claims with respect to each agreement between Forest and a generic manufacturer, including that:
The terms of each transaction "reflected bona fide business considerations."
Many of Forest's agreements with the generic manufacturers related to securing supplies or finished products, and Forest's need for these agreements was "consistent with what Forest previously disclosed to investors."
"Payments for developmental or commercial milestones, or research-and-development expenses, bespeak rational commercial incentives."
Provisions in the agreements were designed to ensure price competition, which is inconsistent with Forest's "alleged intention to funnel secret overpayments" to the generic manufacturers; and
"The agreements' provisions trump allegations of unsupported speculation about nefarious motives."
Notably, given its conclusion that plaintiffs failed to plausibly allege that the reverse payments were "unjustified," the Second Circuit "did not consider" whether plaintiffs "satisf[ied] their other burden under Actavis"—to plausibly allege the payments were "sufficiently large." The Second Circuit nevertheless stated that the plaintiffs did not "sufficiently contextualize[] or compare[]" the size of the payments, which may have "enabled" the Court "to infer that the payments are plausibly unjustified." The Second Circuit provided no further guidance on what "context" illuminates whether a payment is "sufficiently large" to be plausibly unjustified.
Implications
The Second Circuit made clear that the key question on whether a reverse-payment claim is properly pled is "why the reverse payment was made." A reverse payment that is made to "induce the generic manufacturer to stay out of the market, and to maintain monopoly profits to share between the brand and generic manufacturer," is unlawful. A payment with a "convincing justification" apart from a desire to prevent competition is not. Given this focus, pharmaceutical companies settling patent disputes with generic manufacturers should ensure that any settlement agreements or other contemporaneous transactions are supported by a clear business rationale that has been publicly articulated, that any payments flowing from the innovator to the generic manufacturer relate to rational commercial incentives, and, where it makes sense to do so, include provisions that promote, rather than suppress, competition.
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