In re Solodyn Pay-for-Delay Suit Heads Toward Trial After District of Massachusetts Denies Motion for Summary Judgment
Harrison (Buzz) Frahn, Steven D. McLellan, Justin J. Calderon
Simpson Thacher & Bartlett LLP
On January 25, 2018, Judge Denise J. Casper moved the parties in In re Solodyn (Minocycline Hydrochloride) Antitrust Litigation closer to trial by denying motions for summary judgment from both sides. No. 14-md-02503, 2018 WL 563144, at *1 (D. Mass. Jan. 25, 2018). Defendants Medicis Pharmaceutical Corporation (“Medicis”) and Impax Laboratories, Inc. (“Impax”) (collectively “Defendants”) argued that Plaintiffs could not carry their burden under a Sherman Act Section 1 rule-of-reason analysis or a Section 2 monopolization theory because Defendants lacked market power. They also argued that the reverse payment settlement between Defendants could not have caused antitrust injury because Impax would never have launched a generic product with the risk of infringing Medicis’s patents. Consolidated Plaintiffs (or “Plaintiffs”), consisting of direct purchasers, end-payors, and major retailers, moved for summary judgment, arguing that Medicis had market power.
This case was brought before Judge Casper in 2014 as a multidistrict litigation proceeding, combining twelve antitrust actions in the District of Massachusetts, the District of Arizona, and the Eastern District of Pennsylvania. The complaints alleged violations of the Sherman Act based on Medicis’s reverse payment settlement with Impax in a patent case concerning Medicis’s patents for the drug Solodyn, a minocycline hydrochloride tablet used to treat moderate to severe acne. In 2006, after gaining FDA approval, Medicis launched Solodyn. The following year, Impax submitted an Abbreviated New Drug Application (“ANDA”) and sought a declaratory judgment in the Northern District of California that no valid Solodyn patent was infringed by Impax’s ANDA for its generic Solodyn. Impax then withdrew its suit in 2008 following a licensing and joint development agreement with Medicis. Under the agreement, Impax could sell its generic Solodyn under Medicis’s patents starting in November 26, 2011, and Medicis would pay Impax $40 million upfront, along with other future payments. Meanwhile, Medicis had also sued other generic manufacturers for infringing its Solodyn patents. Some manufacturers settled with Medicis using similar terms as the one with Impax: they could sell their generic Solodyn starting on November 26, 2011 under a license, and would receive payments from Medicis as well.
Plaintiffs in this class action consisted of three groups. The class of Direct Purchaser Plaintiffs (“DPPs”) consisted of persons or entities who purchased Solodyn or a generic version directly from Defendants during the class period, and they argued, under an Actavis rule-of-reason framework, that the reverse payment settlements violate Section 1 of the Sherman Act. The class of end-payors consisted of persons or entities not in the DPP class who paid for all or some of the purchase price for Solodyn or its generic versions, and they asserted state law claims not relevant to these motions for summary judgment. The third group, Retailer Plaintiffs, consisted of major retailers such as Walgreen Co., Safeway, Rite Aid, Albertson’s, HEB Grocery, and The Kroger Company, and they claimed that Defendants’ actions violated Section 2 of the Sherman Act.
On November 1, 2017, Defendants filed motions for summary judgment: one arguing that they did not have market power as required for the Section 1 and Section 2 claims, and another arguing that their actions did not cause the alleged injury. Plaintiffs filed a motion for partial summary judgment on market power and causation.
The district court began its analysis by rejecting Plaintiffs’ argument that a large reverse payment was sufficient to show market power. The Plaintiffs based their argument on the United States Supreme Court’s decision in FTC v. Actavis, Inc., 133 S. Ct. 2223, 2227 (2013), where the Supreme Court had reversed a motion to dismiss because a large reverse payment in a patent case “can sometimes violate the antitrust laws.” The district court distinguished Actavis on the grounds that the Supreme Court ruled on a motion to dismiss rather than a motion for summary judgment. In re Solodyn, 2018 WL 563144, at *5. Indeed, the district court ruled that large reverse payments are “not necessarily sufficient to demonstrate market power” for summary judgment. Id. As such, the district court followed the traditional method of looking at circumstantial and direct evidence of market power. Id.
Circumstantial Evidence of Market Power
To determine market power through circumstantial evidence, the court first needed to evaluate Medicis’s share of the relevant market. To do so, the court needed to define the market, since the parties disputed each other's market definition. Defendants defined the relevant market as consisting of all oral tetracyclines used for moderate-to-severe acne, arguing that it could not have had meaningful market power given Solodyn’s functional interchangeability with an array of other drugs in the market, and “vigorous” competition for patients between Medicis and other oral tetracycline manufacturers. Defendants also attacked the Plaintiffs’ cross-elasticity price studies, relying on the Third Circuit’s decision in Mylan Pharmaceuticals, Inc. v. Warner Chilcott PLC, 838 F.3d 421 (3d Cir. 2016) (“Doryx”), which affirmed a district court’s summary judgment ruling that the relevant market for Doryx—an anti-acne medication like Solodyn—consisted of all oral tetracyclines prescribed to treat acne, including Solodyn and its generic equivalents.
On the other hand, the Plaintiffs’ much narrower market definition consisted only of Solodyn and its generic equivalents. Plaintiffs offered cross-elasticity studies showing that Solodyn did not exhibit great economic interchangeability—consumers tended to stick with Solodyn despite increases in price. In particular, Plaintiffs pointed to expert analysis showing that when the functionally similar Doryx entered the market, Solodyn sales actually rose, as opposed to other products which suffered significant reductions in prices. They also pointed to other studies comparing Solodyn with functionally interchangeable competitors such as generics and other oral tetracyclines, which concluded that Solodyn’s price increases were not constrained by price elastic substitution. Plaintiffs also differentiated Doryx because the Doryx plaintiffs failed to rebut defendants’ evidence of cross-price elasticity of demand. By contrast, the Plaintiffs argued in their motion that “Plaintiffs [in this case] have evidence of a lack of cross price elasticity between Solodyn and any drug other than generic Solodyn, and Defendants failed to rebut it.”
Judge Casper denied both parties’ motions for summary judgment on market power as to circumstantial evidence, finding genuine issues of fact. Id. at *10. Significantly, the court noted that Defendants did not introduce cross-elasticity models comparing Solodyn and the broad number of other oral tetracycline products that it argued was part of the relevant market. “Even in the pharmaceutical market,” the court ruled, “cross-elasticity must be demonstrated between products to establish a market definition that includes them.” Id. at *8. The court also rejected Defendants’ argument that it had to follow Doryx because in that case, the plaintiffs had failed to show any “quantitative analyses,” whereas the Plaintiffs in this case provided quantitative analyses on Solodyn and its supposed competitors. Id. at *10.
However, Judge Casper also denied Plaintiffs’ summary judgment motion because Defendants’ criticisms of their models “amount[ed] to a disputed issue of fact.” Id. at *9. So even though Defendants needed cross-elasticity evidence to define the market for its summary judgment motion, it did not need such evidence to oppose the Plaintiffs’ summary judgment motion. As such, the court denied summary judgment on market power based on the circumstantial evidence.
Direct Evidence of Market Power
Separately, Plaintiffs argued in their motion for summary judgment that they had direct evidence of Defendants’ market power, thereby eliminating the need to provide a market definition. Defendants argued that Plaintiffs’ evidence was insufficient.
Direct evidence of market power includes the ability to charge supracompetitive prices and restrict output. The Plaintiffs pointed to Medicis’s ability to charge supracompetitive prices, resulting in high margins. As part of that argument, the Plaintiffs said that Solodyn’s Lerner Index number—the ratio of a product’s margin to its price—was over 0.9, much higher than the threshold ratio of .05 that Plaintiffs’ argued was the baseline in determining potentially supracompetitive market power. Id at *10. However, the Plaintiffs did not show any evidence of restricted output. Id. at *12. Additionally, the court was concerned that high margins may be explained by factors that are not inherently anticompetitive, such as high fixed costs, a superior product, or superior marketing. Id. The court also noted the absence of cases holding that direct evidence was “sufficient for a showing of market power beyond the pleading stage.” Id. As such, the court denied Plaintiffs’ summary judgment motion on the basis of direct evidence. Id. at *13.
Defendants also argued that the Medicis-Impax settlement did not injure competition. Plaintiffs countered that the settlement unreasonably restrained competition because (A) Impax would have otherwise launched its generic Solodyn at-risk prior to the November 2011 date agreed to in the settlement, and (B) a no-payment settlement agreement would have allowed Impax to launch its generic Solodyn prior to November 2011.
Impax Would Have Launched At-Risk Prior to November 2011
To show that Impax would have launched its generic Solodyn at-risk prior to November 2011, the Plaintiffs needed to show that Impax could have launched without infringing any valid patent held by Medicis. Otherwise, Medicis’s legal monopoly over its patents, not necessarily anticompetitive conduct, prevented Impax from competing with Medicis. The court noted that because the burden of proving infringement falls on the patentee in patent suits, Plaintiffs in antitrust suits must only produce “some evidence” of invalidity or noninfringement, and are not required to prove that the generic defendant would have won, only that it could have. In other words, in this antitrust suit, the Plaintiffs’ required showing for patent invalidity is lower.
As evidence of patent invalidity, Plaintiffs proffered expert testimony saying that the patent was obvious and anticipated. Defendants attacked Plaintiffs’ proffer by trying to exclude the expert witnesses; however, Judge Casper waived off these objections by directing Defendants to address any such weaknesses in cross-examination. Id. at *15-16. As such, the Plaintiffs’ expert witnesses presented enough evidence to show that Impax was willing to launch at-risk, since its board approved at-risk launch, took orders from customers, and manufactured at least three months of supply. Id. at *19-20.
Impax Would Have Launched With A No-Payment Settlement Agreement Prior to November 2011
To show that Impax would have launched its generic Solodyn prior to November 2011 if there were a no-payment settlement, Plaintiffs proffered estimates of litigation costs as compared to expected profits. Those experts opined that if a no-payment settlement had been reached, then Impax would have entered the market either between February and June 2009 or September 2009 and October 2009. Defendants again objected regarding the reliability and relevance of these studies, but Judge Casper ruled that such objections were best suited for cross examination. Id. at *23.
This case now heads toward a jury trial scheduled for March 12, 2018. In the meantime, the court’s opinion further illuminates the risk that drug patentees face after the Supreme Court’s landmark ruling in Actavis, and the opinion may be relevant to other pay-for-delay cases that are still in discovery, such as In re Loestrin 24 Fe Antitrust Litigation (D.R.I., No. 1:13-md-02472), In re Intuniv Antitrust Litigation (D. Mass., No. 1:16-cv-12653), In re Aggrenox Antitrust Litigation (D. Conn., No. 3:14-md-02516), and In re Opana ER Antitrust Litigation, (N.D. Ill., No. 1:14-cv-10150). It is probably too early to say that Actavis has led to faster entry of generics into the market, but this case does not contradict the claim of Federal Trade Commission Acting Chairman Maureen Ohlhausen that pay-for-delay settlements are declining, and it actually highlights the difficulties that reverse payment settlors face in extricating themselves from similar cases.
For instance, Judge Casper’s decision suggests that functional equivalence does not help defendants prove market definition. Instead, Defendants must bring evidence of cross-elasticity as to the products at issue. Additionally, the court’s decision shows that prior rulings on market definition do not meaningfully constrain another court from making its own determinations; the court’s differentiation of Doryx on burden-of-proof grounds suggests that a party’s own production of econometrics plays a primary role in any market definition. As such, the production of expert testimony is paramount. Similarly, courts will likely remain wary of efforts to exclude such testimony from trial, as shown by Judge Casper’s unsolicitous treatment of Medicis’s attempts to defeat causation before trial by excluding expert witnesses. Merely attacking the analysis of an expert report is generally insufficient to prevent a court from considering the report. And finally, on the causation issue of a pay-for-delay case, plaintiffs’ burden to show patent invalidity is lower than it otherwise would be in a patent case, thereby making it easier for plaintiffs to overcome a motion for summary judgment focused on causation.
Overall, this case highlights the fact that entities contemplating reverse payment settlements must consider the likelihood of litigating antitrust claims up to trial.
Middle District of North Carolina Certifies Class of Duke And UNC Medical School Faculty in "No Lateral Hire" Class Action
On February 1, 2018, Judge Catherine C. Eagles of the District Court for the Middle District of North Carolina certified a class of medical school faculty from the University of North Carolina at Chapel Hill (“UNC”) and Duke University who alleged that the universities violated section 1 of the Sherman Act by agreeing to and enforcing a “no lateral hire” policy that prevented medical faculty from obtaining employment from the rival campuses and suppressed faculty wages. Seaman v. Duke Univ., No. 1:15-CV-462, 2018 WL 671239, at *1 (M.D.N.C. Feb. 1, 2018).
The no-hire policy was discovered by Dr. Danielle Seamen, a Duke radiology professor, when she sought employment from UNC in 2015. Dr. Seamen was told via e-mail from a UNC department head that, “lateral moves between Duke and UNC faculty are not permitted” due to a “‘guideline’ which was agreed upon between the deans of UNC and Duke a few years back.” Id. at *2. The agreement historically prevented lateral hires from moving between the two schools, but was “tightened up” when Duke attempted to hire UNC’s bone marrow transfer team in 2012 and UNC had to offer a substantial retention package to keep them.
Plaintiffs sought certification for a class of both faculty and non-faculty, the latter group comprised of physicians (without academic appointment), nurses, and skilled medical staff working for both defendants. The court held that the faculty class met Federal Rule of Civil Procedure 23(a) and (b)(3) requirements, but the non-faculty class injected issues that could not be “resolved based on the proof offered for the faculty case, would cause significant confusion at trial, and would raise difficult manageability problems.” Id. at *1.
The class certification decision came nearly one month after settlement was reached between the UNC defendants and the plaintiffs, leaving the Duke entities (collectively “Duke”) as the remaining defendants. See Seaman v. Duke Univ., 2018 WL 718961 (M.D.N.C. Jan. 4, 2018) (granting final approval of class action settlement because the “broad injunctive relief” secured, both preventing UNC from making agreements to refrain from recruiting, hiring, or competing for employees and securing UNC’s assistance with the ongoing litigation, was adequate). The court noted that injunctive relief would have been largely impossible without the settlement because most of the UNC defendants “are agents of the State of North Carolina for purposes of Eleventh Amendment immunity, barring suit without their consent,” and that UNC’s cooperation “provides a significant benefit in the ongoing pursuit of monetary damages against the Duke Defendants.” Id. at *3.
The court weighed class certification of the faculty and non-faculty separately, considering the merits of plaintiffs’ claims “only when relevant to determining whether the Rule 23 prerequisites for class certification [were] satisfied.” Seaman, 2018 WL 671239 at *3 (internal citation and quotation omitted). In opposition, Duke argued that antitrust impact and damages could not be proven with common evidence, emphasizing that the core problem was the individualized nature of class members’ claims.
Faculty Class Certified
The plaintiffs’ two experts opined that the two schools were “unique competitors” in the Durham/Chapel Hill, South Carolina area based on evidence of the schools’ similar rank and geographic proximity. Seaman, 2018 WL 671239 at *4. Thus, the schools were each other’s main rivals for physicians who want to live in the area. Plaintiffs’ experts concluded that “lateral hiring competition between the defendants would encourage the defendants to preemptively increase compensation to retain faculty.” Id. at *5.
In support of this conclusion, Plaintiffs offered two theories of antitrust impact. First, because the no-hire agreement, defendants were not required to “preemptively increase compensation” that otherwise would have ensured against faculty members leaving for higher paying positions at the school across town. Id. at *5. This, plaintiffs argued, suppressed compensation across all faculty, based on Duke employees’ testimony about the need to increase salaries to prevent lateral movement and Duke’s attempted recruitment of UNC’s bone marrow transplant team.
Second, plaintiffs alleged that “defendants’ internal equity structures—policies and practices that are alleged to have ensured relatively constant compensation relationships between employees— spread the individual harm of decreased lateral offers and corresponding lack of retention offers to all faculty, thus suppressing compensation faculty-wide.” Id. at *4. Plaintiffs’ experts also conducted “‘sharing’ regression analyses that examine how an individual faculty member’s compensation moved in relationship to other faculty compensation.” Id. at *6.
Plaintiffs proposed calculating damages using a “returns to seniority” concept drawing on class-wide data, namely payroll and other employment records for all faculty. Id. Returns to seniority are compensation increases commensurate with increasing experience. Using regression analyses, one of plaintiffs’ experts calculated the degree to which returns to seniority were suppressed, developing an aggregate class-wide damages estimate for faculty. Thus, for both impact and damages, the court was satisfied that the faculty class showed class-wide theories supported with class-wide proof.
Analyzing predominance and superiority, the court batted down Duke’s arguments that individual issues could undermine predominance, because the issues Duke raised didn’t align with plaintiffs’ theories of liability. Duke unsuccessfully challenged that plaintiff established internal equity structures, the unique competitive relationship between the schools, and identified alleged flaws in one expert’s analysis, but did not move to exclude it. Id. at *6. The court held that issues raised went to the persuasiveness of plaintiffs’ evidence and did not defeat the fact that impact and damages were offered by common proof.
As to the Rule 23(a) requirements, numerosity, commonality, typicality, and adequacy, the court breezed through all but the last, finding them easily satisfied; of note was the size of the proposed faculty class at 5,469 members. One concern was raised as to whether defendants might assert a res judicata defense against future claims that are based on a theory of individualized (rather than class-wide) impact and damages. The court held that the risk was small because res judicata does not bar theories not raised in the first instance, no other antitrust claims had been brought against defendants based on the no-hire agreement, and any risk could be managed via disclosure in class notice. Id. at *10.
Non-Faculty Class Not Certified
At the outset of the court’s discussion of the non-faculty class, the court wrote that plaintiffs “do not seriously contend that the no-hire agreement applied to non-faculty,” setting the tone for its consideration and decision to deny the motion as to non-academic physicians, nurses, and skilled medical workers. Id. at *6. The court accepted plaintiffs’ theories of antitrust impact as provable through common evidence, but agreed with Duke that individualized issues defeated predominance and superiority.
The court found that inclusion of non-faculty in addition to the faculty would cause confusion, in part because “[d]isputes already have arisen as to whether witnesses are talking only about faculty, only about non-faculty, or both.” Id. at *9. Coupled with this, “the evidence as to non-faculty is substantially weaker, at least on this record, since it is based on several inferences-on-inferences; this gives rise to the possibility that the strength of the faculty claim or the weakness of the non-faculty claim might tend to bleed over to the other claim in the jury’s mind.” Id. In the court’s view, an otherwise straightforward trial would become “unduly complicated” and present potential unfairness to the class members and defendants. Cumulatively, the court held that this caused non-faculty class claims to fail the predominance and superiority requirement, noting that non-faculty class members were free to pursue a separate class action. Id.at *10 n.1.
Failing to Find Sufficient Facts Pleading Sham Litigation or Unreasonably Listing Patents in Orange Book, District of Massachusetts Grants Eli Lilly's Motion to Dismiss in In re Lantus
Gibson Dunn & Crutcher LLP
On January 10, 2018, U.S. District Judge Gail Dein granted Sanofi’s motion to dismiss the plaintiffs’ amended complaint. The plaintiffs, who are purchasers of insulin glargine products Lantus and Lantus SoloSTAR, alleged that Sanofi improperly extended its monopoly for Lantus and Lantus SoloSTAR by improperly listing six patents in the FDA Orange Book and by pursuing, and then settling, sham litigation against Eli Lilly and Company (Lilly). In re Lantus Direct Purchaser Antitrust Litig., No. 16-12652-JGD, 2018 WL 355372 at*1 (D. Mass. January 10, 2018). Judge Dein found that the plaintiffs failed to allege sufficient facts to support a finding of antitrust liability against Sanofi for listing its patents in the Orange Book unreasonably or for engaging in sham litigation with the Lilly. Id.
Sanofi holds the “formulation” patents covering preparations of insulin and the patents that cover the injector pens for said insulin. Sanofi’s patents were listed in the FDA’s Orange Book, which is intended to put other drug manufacturers on notice of any relevant patents that should be addressed in any new drug applications (NDA) filings. The plaintiffs contended that the listing of six patents that covered the injector pens were part of a scheme to maintain and extend Sanofi’s monopoly power with respect to its Lantus and Lantus SoloSTAR. Id. at *2. In Sanofi’s motion to dismiss, Sanofi focused on one patent covering the injector pen, the ‘864 patent, arguing that if Sanofi prevailed with respect to the ‘864 patent, then the entire complaint must be dismissed due to the inability of plaintiffs to establish any damages. Id.
In 2013, Lilly sough FDA approval for its own insulin-glargine product and notified Sanofi of the relationship between Lilly’s product and Sanofi’s patents listed in the Orange Book for Lantus and Lantus SoloSTAR. In its notification to Sanofi, Lilly stated that all patents, except one, were invalid, unenforceable, and/or would not be infringed by the commercial manufacture, use, or sale of the Lilly product. Sanofi responded with a suit alleging infringement of four patents, including the ‘864 injector pen patent. Due to the lawsuit, an automatic stay on FDA approval of any Lilly product was triggered. The plaintiffs alleged that the litigation instigated by Sanofi was a sham—brought without any basis—and for the exclusive reason of extending Sanofi’s monopoly in the Lantus and Lantus SoloSTAR markets. Id.
Sanofi’s Patents Were Reasonably Submitted to the Orange Book
Turning to how patents get listed in the Orange Book, the courts looked to regulation 21 C.F.R. section 314.53(b)(1), which describes the patents that must be listed when filing an NDA. Regulation 21 C.F.R. Section 314.53(b)(1) provides that applicants need to list “patent[s] that claim  the drug or a method of using the drug . . . [which] consist of drug substance (active ingredient) patents drug product (formulation and composition) patents, and method-of-use patents.” Id. at *4. The section also provides that patents which describe process or packaging should not be submitted to the FDA. Id. The court then described the confusion around which patents, outside of the active ingredient and composition patents, must be listed on the Orange Book, as there was some confusion surrounding the FDA’s requirements. The court boiled down the issue to whether the ‘864 injector pen patent was just a packaging patent and did not need to be included in the Orange Book or if the ‘864 patent was required to be listed in the Orange Book.
In analyzing the listing of the ‘864 patent in the Orange Book, the court stated that the FDA is required by law to publish information provided by the applicant. Id. at *8. Quoting United Food and In re Lipitor Antitrust, the court determined that the FDA did not independently determine whether a particular drug product actually tracked to a particular patent claim and that the Orange Book listing was simply a statutory obligation. Id. at *8 (citing United Food and Comm. Workers Unions &Employers Midwest Health Benefits Fund v. Novartis Pharm Corp., No. 15–cv–12732, 2017 WL 2837002, at *5 (D. Mass. June 30, 2017); ” In re Lipitor Antitrust Litig., MDL No. 2332, 2013 WL 4780496, at *21 (D.N.J. Sept. 5, 2013). Nevertheless, the court still found that improperly listing a patent in the Orange Book may subject the patent holder to antitrust liability, unless the applicant had a reasonable basis for the submission. Id. at *8. The plaintiffs alleged that it was obvious that the ‘864 patent should not have been listed in the Orange Book since it was just a packaging change, but the court disagreed, finding that the record demonstrated the Lantus SoloSTAR product was approved as a drug delivery system. Id. at *9. The language used—“drug delivery system”—would require more analysis. Id. at *9.
After reviewing Orange Book submission protocol, the court turned to analyze the FDA’s statements regarding what kind of patents should be listed in the Orange Book and the exact language used in the FDA’s approval letter for Lantus SoloSTAR,. The plaintiffs argument basically relied solely on the FDA’s response to comments on the 2003 proposed rule 21 C.F.R. § 314.53. Those comments stated that key to determining whether a patent should be submitted to the Orange Book is whether the patent claims the finished dosage form of the approved drug product, which the ‘864 did not. Id. at *9. While the court gave deference to the FDA’s language, the court still found that the plaintiffs did not plead sufficient facts to establish the listing in the Orange Book to be unreasonable or objectively baseless. Id. The court’s holding was additionally supported by the fact that Sanofi’s interpretation of the FDA’s language and requirements to submit patents to the Orange Book were similar to interpretations by other pharmaceutical companies including AstraZeneca and GlaxoSmithKline. The court chose not to make any determinations as to the correct interpretation of the FDA requirement, but stated that it was “clear from [the] requests that the issue whether the ‘864 patent should have been listed is an open question in the industry.” Id. at *11.
The Sham Litigation Claim
The court then turned to the sham litigation claim alleged by the direct purchasers. Id.at *11. Allegedly Sanofi sought to wrongfully extend its exclusionary period by commencing and maintaining sham litigation against Lilly in order to delay the introduction of competing products, according to the direct purchasers. Yet, according to the court, the moment that Lilly filed its Paragraph IV Certification in its NDA, Sanofi had a statutory right to sue under the Hatch-Waxman Act. Id. And while a patent holder was not obligated to bring patent infringement litigation upon notification of a Paragraph IV Certification, the court stated, it could bring such litigation, and in doing so, would be generally protected under the First Amendment per the Noerr-Pennington doctrine. Id.
After walking through the basics of the Noerr-Pennington doctrine, the court explained that the plaintiffs needed to establish that Sanofi had no reasonable basis to believe that its patent claims were valid or that they were infringed. Id. at *12. Reviewing the complaint, the court found that “other than repeatedly stating that the documents showed that Lilly’s products would not infringe any of the claims in the two injector pen patents or any claims in the two vial formulation patents, the plaintiffs have offered no facts in support of these conclusions.” Id. at *12. The court, disregarding the conclusory allegations of fact and law, found that the allegations in the complaint were insufficient to show that the underlying lawsuit lacked any reasonable merit. Id. at *12.
Additional evidence was cited by the court to support the holding that the lawsuit was not objectively baseless. Additional facts that supported the court’s finding included: 1) Sanofi enforcing patents that had never been invalidated or found unenforceable,
2) Sanofi seeking to protect the ‘864 patent in the face of a Paragraph IV Certification, 3) Sanofi participating in claim construction disputes that addressed the challenged patents, and 4) the litigation between Sanofi and Lilly being heavily contested. Id. at *13. All of these facts weighed in favor of finding that the litigation was not a sham or objectively baseless. Since the court found that the Orange Book listings and the underlying litigation were not a sham, the court found that the plaintiffs failed to show any casual connection between the antitrust violation and the actual damages suffered, thereby dismissing the rest of the complaint. Id. at *14
California Court of Appeals Rules that Sargon Standard Governing Reliability and Admissibility of Expert Opinion Applies in All Stages of Litigation - Including Class Certification
Pritzker Levine LLP
On January 29, 2018, the California Court of Appeal for the Fourth Appellate District ruled, in Apple Inc. v. Shamrell, et al, 2018 WL 579858, that a California state trial court may consider only reliable expert opinion evidence on class certification. This is the first time a California appellate court has held that Sargon Enterprises, Inc. v. University of Southern California (2012) 55 Cal.4th 747—the state law equivalent of the federal Daubert standard governing the reliability and admissibility of expert opinion—applies at any stage of the trial court proceedings, including class certification.
Plaintiffs alleged that Apple’s iPhone 4, 4S, and 5 smartphones were sold with a defective power button that began to work intermittently or fail entirely during the life of the phones. The button, which is used to power the phone on or off, reboot the phone, lock the phone’s screen, and put the phone to sleep, is important to the operation of all iPhones. Plaintiffs asserted that Apple knew of the defects in the power buttons based on pre-release testing and post-release analysis, yet sold the phones anyway. 2018 WL 579858, at * 1. The proposed class was comprised of California citizens who purchased the iPhones at issue and whose power button stopped working or worked intermittently, and plaintiffs asserted claims under the Consumer Legal Remedies Act, the Song-Beverly Consumer Warranty Act, the Unfair Competition Law, and the common law for breach of express and implied warranty. Id.
Plaintiffs’ motion sought to certify two classes in California, one for iPhone 4 and 4s purchasers and one for iPhone 5 purchasers, because the length of warranty period differed between the 4-series and 5-series iPhones. Plaintiffs offered “several” classwide damages theories, including the cost to repair the defective power button, the diminution in value, the “difference in value (what was paid versus what was received),” and restitution. Id., at *2. Plaintiffs supported their damages theories with a declaration by expert Heather Xitco, an accountant, who asserted that classwide damages and restitution could be calculated based upon diminished trade-in value or Apple’s profits. Id., at *3. In two rounds of supplemental briefing, plaintiffs submitted a supplemental declaration by Xitco, as well as declarations from three additional experts, including Fred Schenkelberg, a specialist in quality control and statistics, who indicated he believed he could calculate a power button failure rate in the affected iPhones using Apple’s own quality control documents. Id.
Apple, citing to Sargon, criticized Xitco as being unqualified to opine regarding economic loss, and that the Apple documents she purported to rely upon had no relevance to the economic value or loss for which Xitco was using them, and criticized Schenkelberg’s reliance on Apple’s quality control documents because they did not show the failure rates Schenkelberg attributed to them, but instead showed warranty returns. Id. at *4.
In discussing Sargon at the second hearing on class certification, the trial court expressed concern that applying Sargon would “turn class certification motions into these massive hearings”, and its final order granting class certification confirmed that the trial court did not believe Sargon applied at the class certification phase and that plaintiffs met their initial burden of establishing a method by which damages could be proven on a classwide basis. Id., at *4, *6. Apple challenged the order by petition for peremptory writ of mandate to the Court of Appeal, arguing that the trial court had erred by failing to apply Sargon and for two other grounds that were later deemed moot by the appellate panel. Id., at *6.
Sargon Enterprises v. University of Southern California
In Sargon, a small dental implant company sued the university in California state court for breach of a contract for the university to clinically test a new implant the company had patented. The company sought damages for lost profits ranging from $200 million to over $1 billion, claiming that, despite its size, it would have become a worldwide leader in the industry and made many millions of dollars a year if not for the university’s breach. The trial court, following an evidentiary hearing and applying California Evidence Code sections 801 and 802, excluded the proffered expert damages testimony on the grounds that it was speculative. 55 Cal.4th 753.
The California Court of Appeal held that the trial court erred in excluding the testimony, but the California Supreme Court reversed, agreeing with the trial court that while, “lost profits need not be proven with mathematical precision,…they must also not be unduly speculative.” Id. “Under Evidence Code section 801, the trial court acts as a gatekeeper to exclude speculative or irrelevant expert opinion. The expert’s opinion many not be based ‘on assumptions of fact without evidentiary support or on speculative or conjectural factors…’” Id., at 770 (internal citation omitted).
The California Supreme Court cautioned that a trial court’s preliminary determination of whether an expert opinion is founded on sound logic is not a decision on the opinion’s persuasiveness, and that the trial court’s gatekeeping role with respect to expert opinion does not involve choosing between competing expert opinions, and exactitude in calculating damages is not required. Id., at 772, 779. For example, if lost profits can be estimated with reasonable certainty, a court may not deny recovery merely because one cannot determine precisely what they would have been. Id., at 779. But, the Supreme Court explained, exactitude was not the problem in Sargon; the speculative nature of the basis of the expert’s opinion was. Id., at 779-780.
California State Courts Must Apply Sargon Standard for Admissibility of Expert Opinion at Every Stage of Trial Court Proceedings
1. Sargon standard for admissibility of evidence applies at the class certification stage
In Shamrell, the California Court of Appeal identified the sole issue on appeal as “simply whether the Sargon standard of admissibility applies to expert opinion evidence submitted in connection with class certification motions”, reviewing de novothe proper standard of admissibility. 2018 WL 579858, at *8. The Court found that the trial court was bound to adhere to Sargon at class certification and wherever the Evidence Code applies. Id., at *9. There is only one standard for admissibility of expert opinion evidence in California, and Sargon describes that standard, and requires trial courts to consider the materials and methodologies of proposed expert opinion evidence. Id., at *9, and *10, citing to Sargon, supra, 55 Cal.4th at pp. 771-772. If the matter the expert relies upon does not provide a reasonable basis for the opinion, because it is irrelevant or is based on a leap of logic or conjecture, the opinion may be excluded. Id., at *10. The Court of Appeal found that the trial court erred by holding otherwise. Id.
The Court of Appeal acknowledged that federal courts apply an analogous standard under Daubert v. Merrell Dow Pharmaceuticals, Inc., (1993) 509 U.S. 579, and that such application shows both the feasibility and desirability of ensuring the reliability of expert opinion evidence at the class certification stage. Id., at *10. Similarly, it held, where expert opinion evidence provides the basis for a plaintiff’s arguments regarding numerosity, ascertainability, commonality, or superiority (or a defendant’s opposition thereto), a California trial court must assess that evidence under Sargon, and whether the trial court needs to hold a hearing under Evidence Code section 802 to determine the admissibility of the testimony is within the trial court’s discretion at any stage of the litigation. Id.
2. Trial court’s error in disregarding Sargon was prejudicial
Once determining that the trial court erred in disregarding Sargon, the Court of Appeal was then required to find whether the error was prejudicial, i.e. whether there was a reasonable probability that would have been more favorable to Apple absent the error. Id., at *11. Looking to the proceedings below, the record showed that plaintiffs’ expert opinion evidence was crucial to the trial court’s decision regarding certification, and that the trial court had twice refused to grant certification on the grounds that plaintiffs had not shown classwide injury and damages. Id. It was only after the third round of briefing, and supplemental and new expert declarations, that the trial court granted certification. The Court of Appeal understood the trial court’s reticence reflected, in part, that the plaintiffs’ allegations raised “a number of significant individual questions”, and that, therefore, their experts’ claims that that they could prove the fact of damage on a classwide basis “would have been persuasive to the trial court in establishing predominance of common questions and the superiority of the class action procedure.” Id.
Plaintiffs’ theory of recovery was that every iPhone purchaser in the proposed class was harmed at the time of purchase because the power button on their iPhone was defective and would later stop working or work intermittently, yet three of plaintiffs’ four experts focused on other measures of damages that only arose after purchase and even then, only affected certain purchasers in the proposed class. Id. (emphasis in original). For example, expert Xitco claimed that she could use Apple documents to calculate Apple’s internal costs of repair and the diminished trade-in value, but did not explain how those calculations would lead to a reasonable estimate of the damage suffered by the class at the time of purpose. Id. Furthermore, the Court of Appeal noted, Xitco was not an economist and not qualified to opine on the issue of whether the cost of repair or diminished trade-in value would be equivalent to the diminution in value suffered by class members at the time of purchase. Id. “An unknown methodology is the equivalent of no methodology…[u]nder Sargon, expert opinions based on irrelevant or unreliable materials are also suspect.” Id. The Court found similar problems with plaintiffs’ other three experts’ opinions, including but not limited to finding “serious flaws” in expert Schenkelberg’s formula to determine class size based upon his admitted failure rate. Id., at *12.
Plaintiffs argued that even if Sargon applied, it wouldn’t change the trial court’s ruling because the evidentiary standards did not change. Id. The Court of Appeal disagreed, holding that, “Sargon now provides the applicable standard for admissibility at the trial court level, at class certification and otherwise…[;] a trial court must examine the type of material on which an expert relies, whether that material actually supports the expert’s reasoning, and whether the expert’s methodology is sound.” Id., at *13, citing to Sargon, 55 Cal.4th at 772. The Court found that, had the trial court undertaken such an analysis, there was a reasonable probability it would have excluded substantial portions of plaintiffs’ expert opinion evidence and declined to certify the proposed classes. Id. A peremptory writ of mandate issued, directing the superior court to vacate its order granting class certification and to reconsider the motion in accordance with the opinion. Apple’s other grounds for appeal were mooted by the ruling. Id.
This is the first California appellate decision to hold that Sargon applies to class certification motions – reaffirming the court’s gatekeeping role to assess and evaluate the reliability and admissibility of expert testimony at all phases of the litigation, including class certification. Although courts may not weight expert opinion testimony, determine its persuasiveness, or require exactitude, Shamrell and Sargon now require that trial courts evaluate, at class certification, the reasoning of, and underlying support for, the expert’s opinion, including determining whether the information upon which the expert relies is speculative, irrelevant, or unreliable.
Locally Brewed - NOT! Northern District of California Finds UCL Claims Against Brewery for Deceptively Representing that its Beer is Brewed in California are Plausible
Daniel Macioce, Intern
Federal Trade Commission
In an action for false advertising brought under California’s Unfair Competition Law (UCL) and Consumer Legal Remedies Act (CLRA), Northern District of California District Court Judge John Tigar partially denied defendant 21st Amendment Brewery Café’s (21st Amendment) motion to dismiss. Peacock v. 21st Amendment Brewery Café, No. 17-cv-01918-JST, 2018 WL 452153, at *1 (N.D. Cal. Jan. 17, 2018). The decision involves a putative class action alleging that 21st Amendment’s website and on product labels, which feature a map and description of the company’s original brewery site in San Leandro, California, deceptively represent that its beer products are made entirely in the San Francisco Bay Area, when in fact some of its beers are made elsewhere, including in Minnesota.
Peacock brought this putative class action after paying a “premium price” for 21st Amendment’s “Brew Free! Or Die IPA” and “Hell or High Watermelon Wheat Beer.” Id. Peacock alleged that 21st Amendment’s website and the beers’ packaging and labeling misled consumers into believing that 21st Amendment brewed its beers exclusively in the San Francisco Bay Area, even though it brewed some of it—including the cans that Peacock purchased—in Minnesota. Id. Specifically, Peacock points to the map of the San Francisco Bay Area printed on the carton, statements on 21st Amendment’s website pertaining to the brewery’s origins in the San Francisco Bay, and the label on the can, which—Peacock claims—suggests the beer was brewed in San Leandro, California. Id. But for his belief that the beer was brewed exclusively in California, Peacock would not have purchased these beers. Id
In ruling on 21st Amendment’s motion to dismiss, the court considered several significant issues, including 1) whether Peacock alleged actionable misrepresentation under the UCL and CLRA; 2) whether Peacock’s UCL claim adequately alleged that that 21st Amendment’s labels were unlawful under the Sherman Food, Drug, and Cosmetic Law; 3) whether 21st Amendment’s compliance with federal labeling laws entitles it to safe harbor protection; and 4) whether Peacock’s CLRA claim was adequately alleged. See id. at *4–9.
The Court’s Motion to Dismiss Ruling
The UCL prohibits business practices that are “unlawful, unfair, or fraudulent,” as well as “unfair, deceptive, untrue or misleading advertising.” Cal. Bus. & Prof. Code § 17200 (West, Westlaw through Ch. 2 of 2018 Reg. Sess.); Peacock, 2018 WL 452153, at *3. Similarly, the CLRA proscribes an enumerated list of “unfair methods of competition and unfair or deceptive acts or practices,” including representations that goods have characteristics that they do not have. Cal. Civ. Code § 1770(a)(2) (West, Westlaw through Ch. 2 of 2018 Reg. Sess.); Peacock, 2018 WL 452153, at *3. Under both statutes, a misrepresentation is actionable only if a reasonable consumer would likely be deceived by it. Peacock, 2018 WL 452153, at *4 (quoting Ebner v. Fresh, Inc., 838 F.3d 958, 965 (9th Cir. 2016); and then quoting Broomfield v. Craft Brew All., Inc., No. 17-cv-01027-BLF, 2017 WL 3838453, at *5 (N.D. Cal. Sept. 1, 2017)).
Applying this “reasonable consumer” test, the court found actionable misrepresentation to be adequately alleged, because a reasonable consumer would likely be deceived by a Bay Area map printed on the beer cartons, wherein an “X” marked the location of “The Brewery.” Id. at *5. However, claims pertaining to the website and the labels on the cans were insufficient under this standard. See id. at *4–5. Although the website spoke of 21st Amendment’s origins in the Bay Area, it also stated that some of the beer is brewed in Minnesota. Id. at *4. Similarly, the label on the cans—stating “Brewed & Canned by 21st Amendment Brewery, San Leandro, CA”—was not likely to mislead consumers, since this statement reasonably could refer to the location of 21st Amendment’s headquarters. Id. at *5.
In addition, the court dismissed Peacock’s UCL claim that 21st Amendment’s conduct was unlawful because the beer’s labeling violated FDA regulations incorporated into California’s Sherman Food, Drug, and Cosmetic Law (Sherman Law). Id. at *6; seeCal. Health & Safety Code § 110100(a) (West, Westlaw through Ch. 2 of 2018 Reg. Sess.) (adopting federal food labeling regulations as state law). Noting that Federal Rule of Civil Procedure Rule 9(b)’s heightened pleading standard for claims of fraud applies to the “unlawful” prong of the UCL, the court held that Peacock had not satisfied Rule 9(b)’s particularity requirement, because he failed to identify which of the many FDA regulations incorporated into the Sherman Law was violated. See id. at *6. In addition, the court held the FDA’s regulations to be inapplicable to alcoholic beverages and cited this as an additional ground for dismissing the claim. Thus, the court dismissed claims predicated on violations of the Sherman Law. Id.
The court next considered whether 21st Amendment was entitled to safe harbor protection as a result of its compliance with federal laws regulating the labeling of alcoholic beverages. Id. at *6–7. California’s consumer protection laws, including the UCL and CRLA, recognize a safe harbor exception where the conduct at issue is clearly and explicitly permitted by law or where another provision bars the action under consumer protection laws. Id. at *6. Important to the court’s reasoning, federal regulations promulgated under the Federal Alcohol Administration Act evinced no “intent to occupy the field or limit consumers’ remedies,” nor were those regulations “inconsistent” with California’s consumer protection laws. Id. at *7. Thus, because the federal regulations did not explicitly bar the present action, the court held that 21st Amendment was not entitled to safe harbor protection. Id.
Turning to the issue of whether Peacock’s CLRA claim was adequately alleged, the court ruled that Peacock had not complied with the Statute’s notice requirement. Id. at *7–8. The CLRA requires a consumer to give thirty days’ notice of “the particular alleged violations” of Section 1770 prior to bringing an action. See Cal. Civ. Code § 1782(a); Peacock, 2018 WL 452153, at *7. Although Peacock had provided notice to 21st Amendment prior to filing suit, the court found that notice to be “clearly inadequate” because it did not state with particularity the alleged violations. Peacock, 2018 WL 452153, at *8. As a result, 21st Amendment could not have known which of its practices were in violation of the CLRA or “what . . . to do about it.” Thus, the court dismissed Peacock’s CLRA claim in its entirety. Id. However, the court granted leave to amend the claim, provided that Peacock first satisfy the notice requirement. Id.
Only a portion of Peacock’s UCL claim—relating to the map printed on the cartons of beer and the “unfair” and “fraudulent” prongs of the UCL—survives the motion to dismiss. See id. at *4–6. Although the CLRA claim could ultimately be amended, Peacock’s argument likely faces a significant uphill battle. First, the court cautioned that its holding on the issue of actionable misrepresentation should not be interpreted to mean that Peacock’s argument is “particularly compelling,” suggesting that it would be a difficult case for Peacock. See id. at *5 & n.4. Moreover, the court deferred to the class certification stage the issue of whether the class of “all purchasers of 21st Amendment beer” is overbroad. Id. at *10.