On June 26, 2015, the Third Circuit issued its long-awaited decision in King Drug Company of Florence v. Smithkline Beecham Corp. The Third Circuit adopted a broad reading of the Supreme Court’s 2013 decision in FTC v. Actavis, 133 S. Ct. 2233, holding that a patent settlement that includes a promise by a brand manufacturer not to market an “authorized generic” (i.e., a drug marketed by the brand company as a generic under a private label) to compete with the generic manufacturer may be subject to antitrust scrutiny under the rule of reason. Although this decision addressed the scope of Actavis and its application to so-called “no-AG agreements” in Hatch Waxman litigation, the Third Circuit’s holding is broadly framed and has important implications for pharmaceutical patent litigation settlements generally, including eventual settlements involving biosimilars. The case arose out of a patent settlement between the producer of the brand-name drug Lamictal, an anti-seizure medication, and a potential generic competitor, which challenged the validity and enforceability of the patents on Lamictal’s active ingredient. Under the terms of the settlement, the generic company agreed to drop its patent challenge in exchange for a license to begin marketing chewable versions of Lamictal before patent expiration and a promise by the brand not to produce its own authorized generic version of Lamictal tablets during the generic’s 180-day exclusivity period. Direct purchasers of Lamictal later sued both the brand and generic companies, alleging that the settlement—and the no-AG agreement in particular—was an unlawful reverse payment intended to delay generic competition. The district court initially granted a motion to dismiss. When the case was remanded following Actavis, the district court reaffirmed its decision and held that the settlement was not subject to antitrust scrutiny because it did not involve a transfer of money between the brand and generic companies. On appeal, the Third Circuit reversed. The court held that Actavis is not limited to reverse payments for cash and specifically concluded that no-AG agreements may be subject to antitrust scrutiny. The court emphasized that the no-AG agreement involves more than just an early-entry license; the provision restricting the brand’s marketing of the AG created the basis for a reverse-payment challenge because it potentially represents an “unexplained large transfer of value from the patent holder to the alleged infringer.” In so ruling, the court rejected the defendants’ argument that no-AG agreements are exclusive licenses that should not give rise to antitrust liability because section 261 of the Patent Act expressly authorizes them. The court held that even if no-AG agreements were like exclusive licenses (which it doubted), they were actionable. According to the court, “even exclusive licenses cannot avoid antitrust scrutiny” under Actavis “when they are used in anticompetitive ways,” such as to induce a generic company to “respect” the brand’s patent and quit the patent challenge. The Third Circuit thus adopted a broad reading of Actavis, urged by the plaintiffs as well as by the Federal Trade Commission as amicus curiae, under which settlement agreements that transfer value from the brand to the generic (other than by early entry alone) are potentially subject to antitrust scrutiny. The court made clear, however, that its holding did not mean that no-AG agreements are per se unlawful, but only that they can be reviewed under the rule of reason. And the court expressly declined to address whether other elements of a private plaintiff’s antitrust claim, such as antitrust injury, were satisfied. While some of the issues in this case arise under the specific provisions of the Hatch-Waxman Act and may not be equally applicable to biologics, the case remains noteworthy for the court’s willingness to adopt an expansive reading of Actavis. We anticipate that the general principles of Actavis will be relevant to biosimilars, though again specific features of the biosimilar regulatory pathway may influence how those principles apply.
