Dear readers,
As previously announced, I am incredibly happy and honored to publish guest articles written by the world’s most renowned antitrust scholars every month of the year 2020. The one for August is authored by Michael A. Carrier, Distinguished Professor of Law at Rutgers Law School. In it, Michael explores why courts have been making fundamental mistakes when it comes to pharmaceutical antitrust. I am confident that you will enjoy reading it as much as I did. Michael, thank you very much!
All the best, Thibault Schrepel
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Why Do Courts Err in Pharmaceutical Antitrust Cases?
The pharmaceutical industry presents challenges for courts. Anticompetitive conduct results in significant harms, as patients are not able to afford needed medicines. But the analysis is nuanced, the drug companies have every incentive to muddy the waters, and courts often make fundamental mistakes. Why? In a recent article, I explored three reasons. Let me summarize here.
First is complexity. Unlike other markets, the consumer who pays for a drug does not choose it and the doctor who selects it does not pay. This “price disconnect” has created a gap that can be exploited, with drug companies convincing doctors to prescribe expensive drugs instead of equally effective cheaper versions. In addition to complex markets, the industry is characterized by a complicated regulatory regime that includes the Hatch Waxman Act and state drug product substitution laws. No other industry has such a central goal of promoting lower-cost competitors.
The second reason for errors stems from simplistic frameworks. Courts have full dockets, pharmaceutical antitrust cases are complicated, and judges sometimes resort to approaches that lead to quick, but erroneous, resolutions. In my article, I discussed examples of courts upholding drug patent settlements based on an encouragement of settlements and patents’ presumptive validity, and analyzing “product hopping” based on the number of products on the market and the size of the generic firm. Let me focus on the number-of-products approach here.
Product hopping involves a brand firm’s reformulating a drug so a generic version can’t be substituted and encouraging doctors to write prescriptions for the reformulated product. In engaging in this behavior, firms sometimes (in what is known as a “hard switch”) remove the old drug from the market. Other times (in a “soft switch”) they leave the old drug on the market. What some courts have failed to recognize is that even soft switches can harm consumers, as the companies switch their robust marketing to the new drug and make the old version less desirable through price hikes or fictitious safety concerns.
The example of Walgreen v. AstraZeneca is instructive. In that case, the plaintiff alleged that there was “almost no difference” between the old (Prilosec) and new (Nexium) versions of a heartburn drug. Despite this, and to gain an additional 13 years of patent exclusivity, AstraZeneca “aggressively promoted” Nexium to doctors while stopping its promotion of Prilosec. But the court ignored all of this in assuming that: “AstraZeneca added choices . . . [by] introduc[ing] a new drug to compete with already-established drugs”; “[d]etermin[ations of] which product among several is superior . . . are left to the marketplace”; and “[n]ew products are not capable of affecting competitors’ market share unless consumers prefer the new product.”
As Steve Shadowen and I have explained, each of those assertions contradicted plaintiffs’ allegations regarding the price disconnect and its effects. In a price-disconnected market, switching doctors’ prescriptions from an original branded product (facing impending generic competition) to a reformulated product (not facing such competition)—what the court called “add[ing] choices”— impairs consumers’ ability to choose a generic drug. In addition, the question is not which product among several is superior, but which offers consumers the best trade-off between price and quality, a determination that “the marketplace” cannot make in a price-disconnected market. Finally, the switching of the market from the original to the reformulated version is capable of affecting competitors’ market shares despite consumers’ preferences. The court’s contrary assertion ignored the economic rationale of state substitution statutes and the Hatch-Waxman Act, both of which would not be necessary if consumers revealed their preferences through price/quality choices.
The third explanation for judicial errors stems from Sisyphus. Yes, the mythological figure that famously labored to push a boulder uphill, with any progress quickly followed by the boulder rolling back downhill. Similarly, courts feel the pressure to let the boulder roll downhill when they are confronted with arguments that sound legitimate on their face but are difficult to disprove.
In my article, I discussed eight of these hurdles, focusing on arguments taking the form of safety, product liability, and assistance to rivals (in the context of sample denials); immunity (covering “citizen petitions” filed with the FDA); innovation (in the setting of product hopping); and the “scope of the patent,” risk aversion, and patent invalidity showings (justifying settlements). Let me focus on one here: the test based on the scope of the patent.
In the settlement context, the scope-of-the-patent framework is the biggest boulder running downhill. Between 2005 and 2012, courts upheld reverse-payment settlements (so-called because the payment flows from patentee to alleged infringer, unlike typical settlements that go the other way) allowing generic entry at or before the end of the patent term. The Ciprofloxacin court, for example, found that “[t]he essence of the inquiry is whether the agreements restrict competition beyond the exclusionary zone of the patent.” Courts applying the scope-of-the-patent test reason that a payment within the patent term cannot harm competition because competition could be excluded based on the patent itself.
In its landmark 2013 decision, FTC v. Actavis, the Supreme Court appropriately rejected the scope test, understanding that “[t]he patent . . . may or may not be valid, and may or may not be infringed” but that “an invalidated patent carries with it no . . . right . . . [to] permit the patent owner to charge a higher than competitive price for the patented product.” The Court concluded that “[i]t would be incongruous to determine antitrust legality by measuring the settlement’s anticompetitive effects solely against patent policy, rather than by measuring them against procompetitive antitrust policies as well.” Instead, both antitrust and patent policies were relevant to determining the proper “scope of the patent monopoly—and consequently antitrust immunity—that is conferred by a patent.”
It thus would have appeared incontrovertible after Actavis that the settling parties could no longer rely on the scope-of-the-patent test. But the difficulties of ultimately burying this argument are revealed by the lure of the claim that generic entry before patent expiration is procompetitive. On its face, and with Actavis receding ever further into the rearview mirror, courts are tempted to find that pre-expiration entry provides “extra” competition that is good for the consumer. An FTC Administrative Law Judge (ALJ) and a district court took this bait.
In In the Matter of Impax Laboratories, the ALJ concluded that it was “procompetitive” for a settlement to permit a generic “to enter the market eight months before the original patents expired.” Such entry allowed “consumers [to] benefit[] . . . by having uninterrupted and continuous access” to the generic. The ALJ stated that entry before the end of the patent term “can be considered in assessing the [settlement’s] competitive consequences.” And the ALJ even downplayed the anticompetitive harm at the heart of Actavis by claiming that “the magnitude or extent of such harm is largely theoretical, based on an inference” that the generic’s entry date would have been earlier without the reverse payment.
A similar ruling occurred in the context of a generic’s underpayment for products provided by the brand firm. In that case, the FTC claimed that Abbott paid Teva to delay entering the market with a generic version of testosterone gel AndroGel by providing Teva with cholesterol drug TriCor at “a price that is well below what is customary in such situations.” Despite this payment, the court praised the agreement’s “allow[ing] Teva to enter the AndroGel market almost six years prior to the expiration of the [] patent,” viewing this as “an early entry date into the AndroGel market.”
In short, the Impax and TriCor rulings provide examples of the adoption of a framework based on the scope-of-the-patent test unequivocally rejected in Actavis. Generic entry before the end of the patent term is procompetitive only if the patent is valid and infringed. But whether there is a valid, infringed patent is precisely the inquiry short-circuited when a brand pays a generic to drop its patent challenge. And given that 89 percent of patents in settled litigation cover not the active ingredient but ancillary aspects (with the majority of these patents ultimately overturned), the revival of the scope test threatens significant harms.
Courts confronting pharmaceutical antitrust issues face significant challenges. The issues are complex. The courts yearn for simplicity. And the defendants have every incentive to muddy the waters and erect Sisyphean hurdles in the form of facially reasonable arguments difficult to rebut. As issues of drug pricing become more prominent and the conduct described here shows no signs of abating, it is worth remembering the challenges confronting courts.
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Citation: Michael A. Carrier, Why Do Courts Err in Pharmaceutical Antitrust Cases?, CONCURRENTIALISTE (August 20, 2020)
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