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In re Aggrenox Antitrust Litigation

United States District Court, D. Connecticut

August 8, 2016



          STEFAN R. UNDERHILL Stefan R. Underhill United States District Judge.

         This large and complex multidistrict litigation, which was brought in the wake of the Supreme Court’s seminal decision in FTC v. Actavis, Inc., 133 S.Ct. 2223 (2013), aggregates cases challenging what the plaintiffs allege was a large and unjustified “reverse payment” settlement resolving patent litigation over the antiplatelet drug Aggrenox. Because it became clear that massive discovery and expensive litigation turned on questions related to market power and relevant market definition, I directed the parties to submit supplemental briefs and later issued an order for the defendants to show cause why I “should not enter an order restricting discovery and evidence in this case to the market in Aggrenox and any AB-rated bioequivalent substitute for Aggrenox” (doc. # 432), and setting a schedule for the plaintiffs to respond.[1]

         For the reasons that follow, I hold that the relevant market in this case is determined by the nature of the challenged agreement, that the only relevant market in this litigation is therefore the market of Aggrenox and its generic equivalents, and that no discovery or evidence relating to other drugs as potential substitutes is relevant.

         I. Actavis and Market Power

         This litigation was in significant part made possible by the Supreme Court’s decision in FTC v. Actavis, Inc.[2] In short, the Actavis Court held that, in patent-invalidity litigation, large and unjustified reverse-payment settlements may violate antitrust law. The Court reasoned that such settlements can lead to the inference that the “payment’s objective is to maintain supracompetitive prices to be shared among the patentee and the challenger rather than face what might have been a competitive market-the very anticompetitive consequence that underlies the claim of antitrust unlawfulness.” Actavis, 133 S.Ct. at 2236.

         The Actavis Court rejected presumptive rules and “le[ft] to the lower courts the structuring of the present rule-of-reason antitrust litigation, ” id. at 2238, providing very limited guidance on that “structuring.” It did, however, make at least two observations that begin to light the way. First, sketching the nature and limits of the flexibility left to the courts below, and providing a guiding principle for them, the Supreme Court noted that “trial courts can structure antitrust litigation so as to avoid, on the one hand, the use of antitrust theories too abbreviated to permit proper analysis, and, on the other, consideration of every possible fact or theory irrespective of the minimal light it may shed on the basic question-that of the presence of significant unjustified anticompetitive consequences.” Id. Second, articulating more fully the contours of that “basic question, ” the Court wrote that “the likelihood of a reverse payment bringing about anticompetitive effects depends upon its size, its scale in relation to the payor’s anticipated future litigation costs, its independence from other services for which it might represent payment, and the lack of other convincing justification.” Id. at 2237.

         The Actavis Court did not expressly include market power in that list of factors, but it did, however briefly, allude to the concept. “[W]here a reverse payment threatens to work unjustified anticompetitive harm, ” the Court wrote, “the patentee likely possesses the power to bring that harm about in practice.” Id. at 2236. Moreover, “the size of the payment from a branded drug manufacturer to a prospective generic is itself a strong indicator of . . . the power to charge prices higher than the competitive level.” Id. (quotation marks removed). “An important patent itself helps to assure such power. Neither is a firm without that power likely to pay large sums to induce others to stay out of its market.” Id. (quotation marks removed).

         That “power to charge prices higher than the competitive level” is market power, which is an essential element of antitrust cases. Courts have sometimes defined market power as the ability to control prices or exclude competition, though it has been noted that such a definition is needlessly confusing, not least because “the disjunctive ‘or’ implies erroneously that excluding rivals-whether by the defendant, the law, or market circumstances-itself brings substantial market power.” IIB Areeda & Hovenkamp, Antitrust Law, ¶ 501, at 111 (3rd ed. 2007) (“Areeda”). On the contrary, there are circumstances in which the exclusion of rivals does not permit charging supracompetitive prices and may not reflect a meaningful power at all-for instance, a patent allows the lawful exclusion of rivals but it brings the patent-holder “no market power when consumers have little use for [the patented product] or can buy adequate substitutes from others.” Id. The exclusion of rivals will typically go hand-in-hand with market power, but it is the ability to charge supracompetitive prices that is the sine qua non of market power. As the leading antitrust treatise puts it: “[M]arket power is the abilities (1) to price substantially above the competitive level and (2) to persist in doing so for a significant period without erosion by new entry or expansion.” Id. See also, e.g., Nat’l Collegiate Athletic Ass’n v. Bd. of Regents of Univ. of Oklahoma, 468 U.S. 85, 109 (1984) (“Market power is the ability to raise prices above those that would be charged in a competitive market.”); William M. Landes & Richard A. Posner, Market Power in Antitrust Cases, 94 Harv. L. Rev. 937, 937 (1981) (“The term ‘market power’ refers to the ability of a firm (or a group of firms, acting jointly) to raise price above the competitive level without losing so many sales so rapidly that the price increase is unprofitable and must be rescinded.”).

         To be sure, as the defendants point out, the Actavis Court did not hold that a large reverse payment is dispositive of antitrust liability, nor that a patent guarantees market power. Indeed, reverse payments beg to be explained, and defendants will have the opportunity to proffer an explanation, perhaps to a jury. And some patents are worthless-consumers may have no interest in the patented product, or they may be equally satisfied by unpatented alternatives.[3] But patents are only valuable as a result of whatever market power they confer, and they are more or less valuable precisely in proportion to that market power. Indeed, it is the reward of lawful (albeit temporary) market power that creates the incentive for innovation that patent protection is intended to foster. And the size and circumstances of the reverse payment are suggestive of the market power conferred by the patent: the larger the reverse payment (and the greater its independence from other services for which it might represent compensation), the likelier that the challenged patent in fact confers a high degree of market power-and the stronger the inference that the reverse payment is intended “to maintain supracompetitive prices to be shared among the patentee and the challenger rather than face what might have been a competitive market.” Actavis, 133 S.Ct. at 2236.

         Evidence of market power (in addition to direct evidence of competitive harm in the form of supracompetitive prices) will therefore be available in cases like this one even without an express articulation of the relevant market definition. Moreover, as a practical matter, the only “relevant” market in this case, and in similar cases brought under FTC v. Actavis, will be the market in which the challenged settlement agreement allegedly acted as an anticompetitive restraint: that is, in this case, it will be implicitly defined by the scope of the disputed patent. It does not necessarily follow from the existence of that patent that the defendants have market power, because it is conceivable that the patented drug faced such fierce competition from therapeutically similar drugs that it could not be sold at supracompetitive prices-in other words, it is conceivable that the patent was worthless. It is vanishingly unlikely, however, that a large reverse payment would be made in such a case, which is why a large reverse payment is such a strong indicator of market power.

         Moreover, market power exists in degrees. See Areeda, ¶ 501 (“Market power exists in degrees. Power is small when more than a slight increase in price would lead to an unacceptable loss of sales. It is large when a firm can profit by raising prices substantially without losing too many sales.”). The patented drug could face some competition from imperfectly interchangeable drugs (which may or may not themselves be supracompetitively priced) yet still have a meaningful degree of market power, enabling it to be sold profitably at supracompetitive prices. A large reverse payment is itself suggestive of market power, but the ability to profitably charge supracompetitive prices over a sustained period (which ability the reverse payment may be calculated to preserve) is conclusive of market power, by definition.

         II. Supracompetitive Prices Despite Some Restraints on Price

         The defendants assert that proof of the extraction of supracompetitive prices “emphatically” does not constitute proof of market power, Defs.’ Mem. 8 (doc. ## 439/445 at 16), but it is not clear that they actually mean that; rather, they dispute what constitutes “supracompetitive” and assert that a mere price differential between brand and generic drugs (or a price above marginal cost) is insufficient. They make two principal arguments: first, that analysis of what constitutes “competitive” pricing must take into account certain fixed (or sunk) costs, like research and development; and second, that even if the challenged settlement delayed competition among different manufacturers of the same molecule, that molecule still faced fierce competition from other drugs in the same therapeutic class, and its pricing therefore cannot be deemed “supracompetitive.”

         A. The Need ...

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