IN RE: SOLODYN ANTITRUST LITIGATION: LESSONS FROM A "BIG STAKES" REVERSE PAYMENT PHARMACEUTICAL TRIAL

By Kenneth R. O’Rourke¹

PANELISTS

• For the Plaintiffs: Richard A. Arnold & Anna T. Neill—Kenny Nachwalter PA
• For the Defendant: J. Doug Baldridge & Lisa Jose Fales—Venable LLP
• Moderator: Kenneth R. O’Rourke—O’Melveny & Myers LLP

I. INTRODUCTION AND OVERVIEW

In 2014, Impax Laboratories, Inc., was sued for allegedly conspiring with Medicis Pharmaceutical Corp. to delay launching a generic version of Medicis’ branded acne drug, Solodyn. Antitrust cases were filed by direct purchaser plaintiffs, including wholesale pharmacies such as Kroeger, and by end-payor plaintiffs, including health plans and benefit plans that paid the price of members’ Solodyn prescriptions. The Judicial Panel on Multidistrict Litigation consolidated the class actions and direct action cases, and transferred them to the United States District Court for the District of Massachusetts.²

The consolidated case was tried for 10 days before Judge Denise J. Casper in March 2018. On March 29, 2018, in the midst of the trial, the cases settled, and Judge Casper discharged the jury before a verdict was reached.

Had the case gone to the jury, it would have been only the second jury verdict in such a so-called "pay-for-delay" or "reverse payment" action since the U.S. Supreme Court clarified the standards for these types of claims in 2013.

Trial counsel for certain direct purchaser plaintiffs and for defendant Impax shared their experiences trying the case with the Golden State Institute in November 2018 during a panel discussion moderated by Kenneth O’Rourke.

MR. O’ROURKE:

Good morning. My name is Ken O’Rourke. I’m with O’Melveny & Myers. I have the privilege of moderating the discussion about our next big stakes 2018 antitrust trial. This case is quite different from the last one. The industry is pharmaceuticals. The type of case is sometimes called "pay-for-delay." When you hear someone call these cases pay-for-delay, it is a plaintiff’s lawyer. Defense lawyers contend these cases stem from procompetitive reverse payment settlements.

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These cases are becoming more common. They are going to trial more often. While pharmaceutical reverse payment cases have been around for more than a dozen years, it was not until 2013 when the Supreme Court decided FTC v. Actavis³ that we received Supreme Court direction on what the standard is for proving these cases. Long story short, it is the rule-of-reason. In these cases, that rule often can mean most anything to anybody. It certainly makes the litigation and trial more interesting.

The trial that we are focused on involved a drug called Solodyn. Solodyn is an acne medicine—a high value, popular acne medicine. This case was brought by buyers of Solodyn—both a class of buyers and separately by large wholesale pharmacies, Kroeger, for example, which has pharmacies in 35 states. Kroeger’s is a large purchaser of drugs, including Solodyn.

Plaintiffs—the buyers—allege there was an anti-competitive reverse payment or a pay-for-delay deal between Medicis, the brand maker of the drug, and several generic drug makers. The core allegation is there was a pay-off to the generics to keep them out of the market for years, so that while they’re out of the market, Medicis, the branded company, can enjoy monopoly profits.

We know from common experience when there is a new brand drug in the market, prices for that drug are often quite high. Then, when generic companies finally enter the market, prices often crater. The allegation is that the delay in the entry by these generics caused harm, financial harm to the buyers; that is, to consumers and to everyone else in the drug distribution chain.

With this brief background, I’ll introduce our panelists. We are fortunate to have the trial lawyers who litigated these cases.⁴

Doug Baldridge is with the Venable law firm. His partner is Lisa Jose Fales. They were trial lawyers for the defense, for Impax. Impax, at the time, was a Hayward, California, based generic pharmaceutical maker that has since merged into another company, but at the time it was one of the generic makers of Solodyn.

Richard Arnold was a trial lawyer for direct purchasers, for the large independent buyers. Anna Neill is his partner. They are both from the Kenny, Nachwalter firm in Miami.

We are first going to have a short tutorial on the law and facts of this case, and then we have questions for each of the trial lawyers. Lisa, will you tell us more about reverse payment settlements and why they are so often the subject of antitrust lawsuits.

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A. Development of The Legal Standard

MS. FALES: You bet.

Good morning. I will tell you that as defense counsel we call these early entry settlements. I think Ken did a nice job explaining where these cases come from. They involve underlying patent litigation, hotly contested, that is then settled between a brand drug company and a generic pharmaceutical company.

There is something of value, typically a payment, that flows from the brand to the generic; hence, the concept of a reverse payment. Plaintiff’s view is that that payment delays the entry of the generic drug that’s covered by the brand’s patent. Defense argues that, in fact, these settlements are procompetitive because they eliminate litigation risk and uncertainty that’s inherent in every patent infringement case and ensure early entry by the generic.

When there is a settlement of the litigation, generics typically get a license from the brand for years of early entry. You’re going to hear from Anna in a few minutes that in this case Impax got a license that allowed it to enter the market six and a half years earlier than the expiration of the brand’s patent. That’s entry with certainty. And, the license covered not only the patent that was at issue in the underlying patent litigation, but any subsequent patents that the brand company procured.

That’s where this case comes from. In terms of the law, Ken touched on the FTC v. Actavis case. That is a seminal case in this area. Supreme Court case, summer of 2013, and it literally changed the legal landscape for the antitrust analytical framework under which these patent litigation settlements are considered.

Prior to Actavis, most of the courts used the scope of the patent test. And what the scope of the patent test says is, look, as long as the drugs covered in the underlying patent litigation settlement agreement are within the scope of the brand’s patent—both the patent’s claims on the drugs and by time—the settlement is not unlawful. The Third Circuit took a different view. The Third Circuit applied a "quick look" approach. If there is a so-called reverse payment, that is prima facie evidence of an unlawful restraint of trade.

The case went up to the Supreme Court. The Supreme Court rejected both of the standards used by the lower courts. We’re not going with scope of the patent, we’re not going with "quick look." Instead, the Court said we’re going to use a traditional rule-of-reason analysis. We are going to apply to these patent litigation settlement agreements a traditional rule-of-reason analysis.

And interestingly the Supreme Court said, you lower courts figure out in your infinite wisdom how to apply the traditional rule-of-reason analysis to these incredibly complicated cases which have, of course, the underlying patents in them and, as well, other things you are going to hear about in our discussion.

What is essential in the Actavis ruling is that the first step before you even get to the traditional rule-of-reason analysis is that—and the burden of proof issue is contested—the plaintiffs have to establish that there was a large and unjustified or unexplained payment.

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As I said, there is a different viewpoint on just about everything in these cases, but in particular there is a difference on who bears the burden of proof. Our judge—Judge Denise Casper, who was superb—said that the plaintiffs have to prove whether or not there was a large payment from the brand company, the holder of the patent, to the generic to settle, and then the burden shifts to the defense to establish whether the payment was justified or explained.

So, what you’re going to hear about today is the concept of large and unjustified, as well as other critical issues in our case and the court’s struggle with trying to apply the Actavis decision.

This morning, Doug, Richard and I had coffee, and the one thing we all agreed on is that there is a paucity of the Supreme Court giving the lower courts any direction on how to structure the rule-of-reason—and no definition for what constitutes "large." So, that’s a critical and central part of these cases, and you are going to hear particularly about it in the Solodyn trial.

MR. ARNOLD: There must have been something in that coffee. I don’t remember agreeing to that.

MR. O’ROURKE: Well, we can say the Supreme Court did lawyers a favor by leaving it open as to exactly how the rule-of-reason operates as applied to these cases. The Court has given counsel on both sides the opportunity to convince their judge how to try the case and the procedures for doing so.

Let’s turn back to the facts of the Solodyn case. Anna, tell us more about the case. Give us the who, what, where, when and why.

B. Factual Background

MS. NEILL: Sure. I’ll just say before I get started, that was a great introduction, Lisa. And, I think we tend to disagree on almost everything except that Judge Casper was superb. She was fantastic.

This case is based on the underlying patent case, on a patent known as the ‘838 patent that covered the acne drug, Solodyn. The patent was owned by the brand company, Medicis. That patent issued back in 1999, with an expiration date in 2018.

About seven, eight years after that patent issued, Impax, a generic company, filed an Abbreviated New Drug Application (or ANDA) to bring a generic version of the Solodyn drug to the market.

And, at that time Impax wanted, purportedly, to get certainty as to whether or not the patent would be enforced against its generic version of Solodyn, so it sent a letter to the brand company asking for a covenant not to sue it and asserting that the ‘838 patent was invalid, unenforceable and not infringed, and if Medicis were to assert the patent against Impax, that would be improper. Not receiving a satisfactory response, Impax then filed a declaratory judgment complaint seeking a judicial ruling that Medicis’ ‘838 patent would not block Impax’s entry.

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That declaratory judgment action was dismissed for lack of standing as to Impax. The court found there was not a sufficient case or controversy. Impax appealed, and it was during the appeal that Impax negotiated a reverse payment settlement with the brand company, Medicis.

That settlement was entered into in November of 2008. On that same day, Medicis and Impax signed two agreements: (i) a license and settlement agreement which gave Impax an entry date of November 2011 for its generic product, and (ii) a joint development agreement that, among other things, provided for a $40 million payment to Impax and additional milestone payments totaling approximately $23 million as Impax completed various new drug development steps.

That is a brief chronology. One other thing to point out is that in 2008 there was a request by a third party for a re-examination of the ‘838 patent, and the ‘838 patent was ultimately upheld during that re-exam in 2010.

A couple of more things that are relevant, particularly to the causation part of this case. Medicis, the brand company, ended up launching what were called add-on strengths of the drug, Solodyn. So, the Solodyn product was originally available in three different strengths, and in 2009 and 2010 Medicis withdrew some of those strengths and launched other strengths. We refer to this approach in changing strengths as a "product hop"; it’s part of the brand company’s life cycle management to avoid generic competition.

Finally there were three other generic drug companies that also filed ANDAs as to Medicis’ Solodyn product. All three of those were approved by the FDA. All three of them then entered the market very briefly for a day or two, sold large volumes of Solodyn, and then all three of those ended up settling with Medicis as well.

So, there was some product, some generic product that was launched into the market very briefly in December 2009, early 2010.

MR. O’ROURKE: Thank you, Anna.

II. PROVING A LARGE AND UNJUSTIFIED PAYMENT TO THE GENERIC

MR. O’ROURKE: One of the key issues that arose from Actavis, and we’ve heard about it already today, is whether there has been a so-called large and unjustified payment. That’s one of the elements for plaintiffs to prove. Lisa, give us, very briefly, the legal standard on whether there has been a large payment. Then I’ll ask Richard and Doug to talk about how they went about to prove or disprove it.

MS. FALES: Well, the only thing I would say in response to Anna’s comment about Medicis, the brand, ostensibly engaging in a product hop strategy to restrain competition, is that we represented Impax, the generic. Medicis wasn’t at the trial. We didn’t represent Medicis. We don’t control Medicis. Impax had nothing to do with Medicis’ strategies, whatever they may or may not be.

So, on the question of proving a large and unexplained payment of some type, let me address that just quickly. The plaintiffs take the view that "large" is limited to two considerations, either that the payment from the brand to the generic exceeded the brand’s saved litigation costs, or the payment induced the generic to abandon its patent litigation and settle the lawsuit. Of course the terms of all settlements induce people to abandon the litigation and settle their lawsuits.

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I’m not quite clear on what that absolutely means, but those considerations, I think plaintiff’s counsel will admit, are somewhat aspirational in the sense that no court in the five and a half years since Actavis has been litigated—and it has been heavily litigated—has litigated what constitutes a large payment.

That view has never been adopted by any court and, instead, what the courts have said—and I will take it to this particular court in the Solodyn case—in order to determine whether a payment is "large," you look at the facts and circumstances that existed at the time when the parties entered into the transaction to determine whether or not it is large.

Judge Casper said that in this case, specifically rejecting the plaintiff’s view that we could only argue those two conditions.

Judge Mitchell Goldberg, in the Modafinil⁵ case—another case that Doug and I tried—said exactly the same thing, that you look at the facts and circumstances of the case and that you can consider the value of the patent, and related to that, what the brand stands to make under that patent relative to the payment. So, that’s the state of play on the law for purposes of this discussion.

MR. O’ROURKE: Richard, tell us about proving whether there was a large payment in this case. We’ve heard reference already to a $40 million payment and to another $23 million in milestone payments, but was all the money paid to Impax large enough and substantial enough under Actavis?

A. Importance of Trial Themes

MR. ARNOLD: Thank you. And, Lisa, of course we’ve got to recount this a little bit. Anna and I have other cases with Doug and Lisa, and we will probably end up trying at least one more of these, maybe two. And we tried one separately that they didn’t.

There are a number of comments here that I want to temper a little bit. But to answer any question about trial tactics, you have to first understand what you’re trying to accomplish.

Lisa is correct on the court’s ruling, but we felt we could meet the standard. It’s just a matter of trying to prevent some of the evidence that they put in. She’s correct on the rulings. She’s also correct that we maintain we had the correct reading of Actavis, and we will continue to make that motion. And, one of these days one judge is going to actually read Actavis correctly.

Now, let me just make something real clear here. I want to talk about Judge Young in Boston, Judge Collier in Chattanooga, Tennessee, Judge Goldberg in the Eastern District of Pennsylvania, and Judge Casper in Boston. And, all four of those judges were excellent trial judges. We may have disagreed with their ruling on what evidence came in, but we certainly didn’t disagree with the way they conducted the trial. The trials were done very well. Judge Young stubbed his toe a couple of times where he admitted it on the record, so it’s not like I’m saying anything out of school.

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However, the answer to how you try to prove it’s a large payment has to be put in context with the theme of your case. You see—especially from the plaintiff perspective and I know it’s the same for the defense—Doug tries cases, and Lisa, they try cases a lot, like we do—you have got to, first of all, develop a theme to put that question in context. Juries look at cases as a whole. They don’t look at individual issues like we do. And, so, you need to have an overall theme to a case.

By the way, this case, this particular case we’re talking about, because of a technicality, was not a Hatch-Waxman case; however, the theme that relates to the structure of the industry fits this case just like it does the others, and that theme is simple.

We have a system set up, I call it the "grand bargain." Congress and the state legislatures have put together a drug manufacturing and distribution set-up that has what I call the grand bargain with three partners in it: (i) the brand companies, (ii) the generic companies, and (iii) the consumers—the people that basically end-up paying the end price for these drugs.

And, the bargain is simply this: we want drug companies to go out and produce drugs and help us fight disease. That’s a very expensive proposition. When they discover something that’s significant, they should be allowed to make some money on it. We do not attack the high prices of brand drugs on the initial launch of an innovative drug, and we make that clear to a jury. That’s not why we’re here.

The bargain is that if the brand company, through research and development, develops an important and useful drug, they then can through the FDA process file an NDA—a New Drug Application—getting a period of exclusivity, and sometimes getting a patent that also sometimes helps extend that period of exclusivity. They have a right—if that molecule is good enough—they have a right to make a bunch of money on that, and they do. It’s all over the newspaper. You read about it all the time. They charge very high prices for that. They’re recouping their investment. They’re being motivated to fight disease for all of us. There is nothing wrong with that. However, there are other parts of the bargain.

The other part of the bargain is, we’ve created a channel for generic drugs. This generic industry is created effectively by statute. Generic drug companies have low costs for a very simple reason. They have low costs because they don’t have to do the research again. I’m not going to get into all the technical parts of it, but they are free to file what is known as an ANDA—that is an Abbreviated New Drug Application. They get to come in and use the research basically that’s already been done by the branded drug company. All they have to do is prove that they’re bio equivalent to the branded drug and that it’s safe and effective, and then they’re allowed to come into the market with their generic drug.

The second part of that is if the generic company gets in first, they get six months exclusivity where they can make a decent amount of money. The other part of that is, we have 50 states that have generic substitution laws, some of them automatic, all of them with some type of permissive way to do substitution. So, what does that mean? That means generic companies don’t have to hire marketing people. They don’t have to have those drug reps going around trying to convince doctors that this is the right drug and they should be writing it in prescriptions. Their cost basis goes way down. Basically, their cost is the cost of manufacturing, plus cost of litigation when they get involved in lawsuits with branded companies.

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Now branded companies, their bargain is they get to reap a lot of profit. Generic companies’ bargain is they are filling a role in society by coming in and bringing in lower priced drugs, and their way to come in has been eased all the way through.

And guess what, at the bottom of this grand bargain are consumers who basically pay the high prices, or pay through insurance and co-pays and everything else. It’s a tax—rent is being charged in society for these drugs. We pay them because we get in return good drugs, but when the game is up and it’s time for these generics to bring in a new drug, "we"—that is all of us who consume drugs—get rewarded by being able to now get inexpensive drugs that do the same exact thing. But when that system gets cheated, that’s when these cases come in to play.

One thing that we didn’t point out, Lisa brought it up: they represent generics. In all of these cases, we sue the brand too. In this case, Medicis and other generics had settled with us before trial. Doug and Lisa are excellent trial lawyers, and they’re very difficult to settle with. And so, we were trying a case against them by themselves. The real bad actor here, in our theory of the case, was Medicis, but the generics were enablers, and that’s why we were presenting the case against them.

You have to understand the theme to start out with. There’s an asymmetry in the drug industry. A billion dollar drug to a brand company is only a $100 million drug to a generic, sometimes divided by three or four, and maybe even five other generics. So, when you’re looking at what type of payment is large enough to disincentivize generics from coming into the market, persisting and launching at risk. You hear a lot about this. Because of that asymmetry, it has two impacts on this industry.

Number one is the brand company. Let’s use an example. There’s a term in the drug industry called "blockbuster" drugs. When they have a billion dollar drug, they call that a blockbuster drug; that’s standard. They’re looking at protecting a billion dollars’ worth of revenue. These generics who are going to launch are looking at grabbing off 20 percent of that, if they’re lucky. And in Solodyn, Impax’s projections were they were looking for something like $37 million to $40 million on this deal, and that was greater, probably, than what they were going to make on the deal.

So, when you start talking about "large," it depends on whether you’re talking about the branded company or the generic company. If you compare what Medicis was going to make on the drug to what share these people would like to have of that, if they were a brand company then it would be hundreds of millions of dollars.

This case pivoted on the size of whether $40 million was sufficient or large enough. And, we had an interesting debate on that.

MR. O’ROURKE: Thank you.

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B. Proof at Trial

MR. O’ROURKE: Doug, was the payment to Impax large?

MR. BALDRIDGE:

As Lisa said, the plaintiffs’ bar looks at Actavis as having said the way you judge "large" is comparing it to the brand’s saved litigation costs, as well as did the payment induce settlement. Plaintiffs file that motion in every case. Respectfully, because the Supreme Court left it very uncertain, plaintiffs have lost every time. And as Judge Casper said solidly, no, you need to look at the business context in which the payment took place to determine whether it’s large. So, the way we tried it was very simple: compare them, compare the amounts.

If you take the amount of money made by the brand on sales of Solodyn, its billions of dollars—I believe a couple billion dollars. Compare it to the payment they alleged that my client received, about $40 million. It’s less than a half a percent of the going-forward revenue made by the brand on sales of the Solodyn product. What does that mean? Half a percent, even to a jury, is not large. That’s one point.

The second point is that the plaintiffs in another context say, this patent was weak. You—the generic—would have won that patent case. Well, my answer would be to the jury, are we so stupid to only take a half a percent of the going-forward revenue on a patent case we would have won? That, in and of itself, shows the strength of the patent, as well as that the payment is not large.

What we’re learning in these cases is that within the rule-of-reason you can do almost anything to put forth, comparatively or otherwise, why a payment is not large. What I learned in the Modafinil case with Richard was, I can’t compare the amount of payment to the size of the worldwide pharmaceutical market, because I was stopped from doing that, and I think rightfully so. So, we have kept the comparisons within the box of what the actual revenues are on the drugs. That’s basically the way we have tried it.

MR. O’ROURKE: Lisa, quick comment?

MS. FALES: Yes. I was going to add that it’s a two-part test, right? It’s large and unexplained. So, even if the plaintiffs can check the box on "large," they still have to establish that the payment was unexplained. And, basically what plaintiffs say about the payment is, it’s a sham. Whatever the defendants say the payment was for, it wasn’t.

So, what is "unexplained"? The Supreme Court says you look at traditional settlement considerations, and there is a litany of them, about five. For purposes of this case, the issue was, was there fair market value for the goods or services that the generic, Impax, provided to the brand in exchange for the $40 million?

I don’t want people to sit here and think there were was $40 million that was freely handed over. That’s not the case at all. There was, as I said earlier, a joint development agreement. That joint development agreement covered an obligation on Impax to work mightily to develop the next generation Solodyn, as well as four other generic dermatological drugs. And, guess what, Impax succeeded. Impax brought Adoxa to the market. It’s on the market today, being sold earlier than it would have been, benefiting the healthcare system and consumers, because of the joint development agreement.

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What the plaintiffs say in these cases is, the joint development agreement didn’t really mean anything. That joint development agreement was just a way for the brand to funnel cash to the generic. Guess what, my client—our client—spent four years developing these drugs—four years, 50 meetings between scientists, technical people all over the country. These scientists and technical people didn’t know anything about a settlement agreement or patent litigation. They were tasked with one thing: "Go out and develop these drugs."

We had very good witnesses, including the former general counsel of Medicis, who was the chief negotiator for Medicis, who gave superb testimony on all of the work that his client and our client did together to develop drugs under this joint development agreement. It was a legitimate fair market value transaction.

MR. O’ROURKE: Thank you, Lisa.

MR. ARNOLD: Well, let me just add one thing. Everything she said is true, except she left out one small fact. They were paid under that contract for all of that activity separately from the $40 million that was plugged into that contract at the last minute. And the amount, $40 million, happens to coincide exactly with the $37 million to $40 million their client said inside they would have to have to not go to market with their generic version of Solodyn.

And, in addition to that, the thing that’s always missing from the defense case is the documents. It’s a great story. The problem is, we’ve got thousands of documents, and there’s not anything to back that part of it up. There is plenty to back up the fact there was a $40 million payment.

We told the jury at the beginning, we’re not saying this whole agreement is bogus. We told them that this agreement is valid if you take one paragraph out and put it over here, all of a sudden this is a valid agreement. These people are being paid for everything they’re being asked to do.

The problem is, there’s a $40 million paragraph in here. It really belongs over there in the settlement agreement, but if they put it in the settlement agreement they all go to jail, so they put it over here in this agreement so that it could look like a joint development agreement.

That’s our view of her eloquent argument about why we should have never went to court.

MR. BALDRIDGE: No one has gone to jail yet, and the Nexium jury did find that the documents were there.

MR. ARNOLD: Actually, no they didn’t. They found anticompetitiveness by your client. They just found there was no causation, period.

MR. O’ROURKE: All right. We won’t reach agreement on that issue today.

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III. ROLE OF THE UNDERLYING PATENT AT TRIAL

MR. O’ROURKE: We talked about the fact that the rule-of-reason comes into play in these types of cases. We’ve also heard that the patents are a big part of what led to the litigation and to the delayed entry allegations. Anna, I’d like to turn back to you. Tell us about how the patents and the patent infringement allegations play into these antitrust trials. If you have to try a patent case in order to win your antitrust case, you have a trial in a trial.

So, how did this play out?

MS. NEILL: You’re exactly right. One thing that we always have to keep in mind throughout these cases is, it’s an antitrust case—it’s not a patent case. That being said, obviously what happened with the patent in the underlying case and the settlement is critical.

We basically took the approach that we need to establish that Impax knew that the patent was bad; it was no good. In fact, they’re the ones who came up with the arguments and they’re the ones who told Medicis in a letter, your patent is bunk. We know it; you know it. If you try to enforce your patent against us, we’re going to sue you for anticompetitive behavior. That letter was from Impax. They’re the ones who said this to the brand company, Medicis, back in 2008.

What we wanted to do is, first and foremost, use Impax’s own words against it. We wanted to say it again and again, and show the jury this letter. Look, Impax said they knew that the patent was bad, and if Medicis tried to use the patent against Impax then that would be anticompetitive, that would violate the antitrust laws.

So, that being said, there’s also the issue of causation. We alluded to it briefly. But in order to establish that our clients were injured by the anticompetitive behavior, we have to show that Impax would have come to the market without this agreement.

And, part of what we are faced with in these cases is trying to overcome the generics’ argument that they wouldn’t have been able to come to the market, they wouldn’t have defeated the patent, or they wouldn’t have launched at risk of the patent.

For those reasons, showing that the patent was, in Impax’s mind a baseless patent they weren’t concerned with, is super important. But, we also want to show the patent is baseless objectively and give the jury this additional evidence. We did have patent experts, we had a scientist who came in and talked about the patent and why everyone would have known that this patent was obvious and therefore invalid.

We also had another expert. The former head of the U.S. Patent and Trademark Office, the PTO, who talked about the inequitable conduct that Medicis engaged in, in obtaining the patent. And then, we also had another expert, a professor and patent expert, talk about the fact Impax did not infringe the patent. He also opined that, based on what he had heard from the other experts, this was one of the worst patents he had ever seen. And, he would only give the brand company a less than 5 percent chance of prevailing on that patent.

MR. ARNOLD: Can I add one thing, real quickly?

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MR. O’ROURKE: Quickly.

MR. ARNOLD: You notice all the conduct she’s talking about there is Medicis’ conduct. The balance in the trial on a case like this, if the brand company is there, then you hammer them and you drag the generics in at the end. When they’re not there, you have got to be careful.

You want to tell the same story, but you’ve got to keep more of the spotlight on Impax in this case, otherwise Doug gets up and says, that’s a great case. I don’t know why we’re here. And, I would have to agree with him, unless we tie the generic to the brand.

And, so, not only do you not want to get down into the details on the patent too much, you also realize that all of the real bad conduct with the patent was done by the brand, not the generics.

MR. O’ROURKE: Great points.

Doug, he’s foreshadowed what you were going to say, but please tell us how you try these cases from the defense perspective when the patents are a key issue but you don’t want to overplay them with the jury.

MR. BALDRIDGE: Putting it in context, it’s pretty obvious when you’re entering into a license agreement that allows you to get on the market before the expiration of the patent, the plaintiff has to put on the case that you would have won that patent litigation or gotten it into market. That’s the context within which plaintiffs’ argument falls. And what the plaintiffs, in our view, have been unable to defend against is the fact that there’s always risk of losing that patent case, and there is no obligation that the generic take on that risk.

You can bring in as many patent experts as you want to say this patent is not good. In fact, the patent expert that Anna just mentioned sat on the stand and saw, as certain as the sun comes up tomorrow, Impax would have won that patent case. And Richard and I were, truthfully, chuckling a little bit about that this morning. No matter what the evidence is, you cannot remove the risk of having lost.

Most of these cases, the Hatch-Waxman cases, occur in the District of New Jersey. You have a 37 percent chance of winning a patent case as a generic in the District of New Jersey. So, no matter what case is put on, every witness is going to answer on their side and ours that, yes, you’re still at risk.

So, then the question becomes, well, were we obligated to take on that risk, to bust the patent so that other potential competitors could come in with us and eat the pie with us? And, the answer is no.

Now, Anna mentioned in her opening about how in this particular case the patent had been challenged and upheld. That was a good fact for us. So, it was hard for them, in some sense, to argue that this was a bogus patent, notwithstanding all of our claims against it in the patent litigation because the patent had been upheld. You have other cases where patents have not been upheld, so it gets a little more complicated.

MR. O’ROURKE: Doug, allow me to follow up.

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IV. PRIVILEGED INTERNAL ANALYSES

MR. O’ROURKE: Anna mentioned that there was a letter from Impax to Medicis, an advocacy letter saying your patent is no good, in essence. You would also expect that there’s a lot of internal analyses that generic companies do analyzing the brand’s patents and deciding what is the level of risk of losing the patent infringement case and being hit with damages if we were to enter. Much of that analysis is privileged, and much of it, though, may be favorable to your side because it shows the generic knowing it is at risk of losing.

How do you, if at all, work with these issues?

MR. BALDRIDGE: What’s interesting in most of these cases—and Richard and Anna’s team did this is a little less than some of the other plaintiffs’ counsel—is the plaintiffs try to bust the generic’s attorney-client privilege. They say it would be impossible to make your decision about risk of the patent and risk of litigation without incorporating the privilege analysis, which necessarily must come in.

Our position has been, and evidence in these cases has shown, that the business decision makers, non-lawyers, don’t care about whether it’s a risky patent case or not a risky patent case. All they care about is, if I lose, I’m going to pay treble damages that might be hundreds of millions of dollars. If I launch at risk, my upside is only the amount I make on sales less some amount, so there’s no way that it’s worth taking the risk of a big loss given the risk of a patent case. That’s inherent in every patent case, unrelated to the merits of this particular patent. So, that’s how we have avoided privilege, and that’s why privilege hasn’t come in.

Now, in Nexium there were privileged documents from the brand—not the company we were defending—that came in because they crossed that line between the risks inherent in patent litigation versus the risk as to the particular patent.

MR. O’ROURKE: Anna, notwithstanding the fact that pharma companies may face a large patent judgment if they enter and are found to have infringed, there are times when there are so-called "at risk" launches. Generic companies will sometimes launch their products into the market all but assuming they will get sued for patent infringement.

What are your views on the kinds of documents that you’re going to see or not see about whether and how the company evaluated its own risk of having to pay damages?

MS. NEILL: Well, it’s interesting because in this instance, Impax actually was prepared to launch. They made three months’ worth of product. They had a document showing that they had contracted for about 84% of the generic market. They had a launch date ready to go, and so that’s exactly the type of evidence that we love to have, that we love to rely on and show the jury. Look, what type of company is going to spend millions of dollars to make a bunch of pills just to turn around and throw them out?

And, so, they can have somebody come in and say, well, we were never going to launch at risk. From our perspective, if you were never going to launch at risk, perhaps you should have told someone that before they spent millions of dollars making three months’ worth of supply. They also had taken orders from our clients for their generic product that they were planning to launch at risk.

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So, again you can say, well, we were never going to launch at risk, but if you were never going to launch at risk you certainly wouldn’t go to one of your biggest buyers, Walgreens, and say, hey, Walgreens, we’re going to have this great product on the market. You want to buy some? And sign them up, and then, come back later and say, oh, no, no, we were never going to do that. You’re going to basically ruin the relationship with your customer.

That’s exactly the types of evidence we would like to have, and did in this case.

MR. O’ROURKE: Is there a short answer from the defense side of the table? A short answer to the question of, if you have these documents saying that you’re prepared to launch, and you’ve gone out to customers to get orders but you’re really not going to launch, is there an answer for the jury as to why we see these kind of documents?

MR. BALDRIDGE: That’s not what the documents say. Bottom-line, if you look for a launch date in the documents, almost 100 percent of the time that launch date will be the end of the 30-month stay under Hatch-Waxman, which is just a placeholder date. It’s impossible to really pull it away from the end of what Hatch-Waxman says about the time period you can’t launch within. So, they just knock in 30 months from that point, and that’s how we explain it.

V. BALANCING THE PROCOMPETITIVE BENEFITS AND ANTICOMPETITIVE HARM

MR. O’ROURKE: Let’s change to the procompetitive justifications that are argued in these cases. Lisa, let me turn to you. In your trial, what were the procompetitive benefits or justifications for these payments that we’ve been hearing about?

MS. FALES: I think I’ve touched on them but, you know, the first thing is, how do you look at the procompetitive justifications? The plaintiffs take the view that you only look at the actual payment and not at all of the license and settlement agreement terms or the terms of any other agreements that may have been entered into.

We don’t take that view and, quite frankly, with all due respect, the courts don’t take that view. The courts say you look at all terms of the agreements at issue, and you look at the business context of those agreements. And, in fact, the procompetitive justifications, or benefits, or efficiencies that flow from all of those agreements are relevant to the rule-of-reason balancing test that we all know how to do.

So in this case, under the license and settlement agreement, as we have said, there is over six and a half years of early entry. That is the opportunity for the generic to come onto the market with 100 percent certainty and no risk. We also got a license to future patents. So, to the extent that Medicis procured additional patents that could be asserted against us to keep us off the market, we got a license to those as well. That’s the license and settlement agreement.

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Then we touched on the joint development agreement. Under that agreement we were tasked with developing—and we spent four years trying to do this—four other generic dermatological products, and we succeeded. We got Adoxa to the market. We had another product which we succeeded in developing and, guess what, the brand sued us and blocked us under its patent. Go figure. So, we succeeded on those fronts.

We also worked diligently for these four years to develop the next generation of Solodyn. This is, as you have heard, a $2 billion product that was very valuable to Medicis to have—and valuable to the healthcare community and to patients. It was an improved, next generation Solodyn, a Minocycline ER drug. And, the goal was to minimize the side effects of Solodyn. We worked mightily to do that, and we came out with various prototypes. Ultimately they were not that much better. We could get it more efficient, then the side effects were higher, and vice versa.

So, all of these things are, in fact, procompetitive justifications for the alleged unlawful payment.

MR. O’ROURKE: Anna, that’s a long list of alleged procompetitive benefits. At trial how are you overcoming their showing of that long list of benefits flowing from the underlying agreements?

MS. O’NEILL: Well, first and foremost, I would say that none of those benefits flow to anyone who is actually purchasing Solodyn. So, those benefits are not within the relevant market as we would define it.

Certainly, and as Richard pointed out earlier, to the extent that the joint development agreement was a proper agreement and was used to develop great new products, that’s wonderful. Medicis could have paid the milestone payments, they could have paid Impax the $23 million, and they did. The $40 million was just gravy. It was just there to help Impax decide that they were going to launch their product several years after the date they were otherwise planning to do so.

And, as to the early entry, we’re going to argue again and again, about the six and a half year early entry because, of course, that’s a great procompetitive justification if you’re talking about the dissent in the Actavis case, which Justice Roberts pretty much said the scope of the patent is, as long as you’re coming in early, that’s procompetitive.

Well, we think that Actavis has made clear that arguing it is procompetitive because you’re coming in before the end of the patent is not legally acceptable.

MS. FALES: I’d just add, we love Richard, we love Anna and their team. The one thing that continues to amuse me is that they never let the developed law stand in the way of a good story.

MR. ARNOLD: I haven’t used all my time. A couple of things. One is, remember, we’re the plaintiffs. We get to go first. We’re telling the story a little piece at a time. That’s not how we told the story. Secondly, Lisa’s 100 percent correct about the court rulings, but all those court rulings were made before we started the trial, in the sense that we already knew basically what the evidence was going to be coming in.

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Here’s the two small facts that have been left out of this entire thing. One, Impax did get in before the patent expired. Impax did agree to a three-year delay, but the reason that three-year delay was put in—and, this is why I was also telling you about why the brand wasn’t there at trial. Medicis already knew they had a terrible patent, so what they did is they were working on a product hop. It was going to take them three years to make sure they got this market moved to their new product. So, at the time Impax came in, the product that they were going to come in with wouldn’t have been worth anything anyway, and Medicis went to work on that right away.

Secondly is, they weaponize these people by giving them what is known as an authorized generic license, that is, the generic could come in with the blessing of Medicis to bring in a product which we used to call it in the old days a "fighting brand." They basically put a brand up there that any generic looking at it says, well, wait a minute. Even if I come to this market, these guys are sitting right here with Medicis as an authorized generic. Now they weren’t allowed to launch that unless somebody else got in the market. And, if they let someone else in the market, they were allowed to bring the authorized generic in the market.

It was those two things, the weaponization of this authorized generic and assisting them in the product hop, so that by the time they got in, this supposed procompetitive benefit was instead a mercenary gesture on your part by coming into the industry and lowering prices on the drug, the drug you’re going to lower the prices on simply is not where Medicis would be with the product.

MR. O’ROURKE: I sense there’s strong disagreement with that viewpoint from the defense side of the table, but rather than go there, I want to go to the next question.

Richard, back to you. We’ve heard about the procompetitive benefits, and we’ve heard that Impax launched other pharmaceutical products that had benefits for consumers. These events all happened in the future because of this deal. We’ve also heard there was a subsequent patent office ruling upholding the validity of the patent. These events, of course, happened after the settlement agreement itself was signed.

When is it, as we perform our rule-of-reason analysis and we’re balancing the procompetitive benefits and the alleged anticompetitive harm of this alleged delay, are you looking at all of these events. Is it from the perspective of the time the ink is drying on the settlement deal, or do you go out into the future to look at what’s actually happened after the settlement was signed?

MR. ARNOLD: The truth is that it’s only fair to analyze it from the point of view of what was being looked at, at the time that people did the deal. That’s why we concentrate on the idea that they knew how weak this patent was, and they were clear about it.

They were prepared to launch. As Doug was saying a minute ago, this was kind of normal procedure, but it’s actually not. You don’t manufacture the drug, you don’t go out and get people to do this and take orders unless you’re planning on launching. And, if you’re not planning on launching, you at least have a board of directors’ minute or two to say you’re not going to launch, which they didn’t—it seemed to be missing from their files. And so, that part of it we concentrate on. That’s what was going on right then, and that’s analyzing that point of view.

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However the cases that we have tried, it turns out that most of the subsequent events seemed to underscore that what the generics thought was going to happen actually did happen. That is, that this was a weak patent and things weren’t working out, and those types of things. And, so, we wanted to bring in evidence of things like that. They obviously don’t.

But, I said it depends because I promise you if the evidence made it look more like they were right, they would want it in also. So, that’s the struggle between us.

And, it depends. Depends on what the facts look like at the end. However, there is no question all of us recognize we’ve got to prove what the circumstances were at the time the deal was entered.

MR. O’ROURKE: Doug?

MR. BALDRIDGE: Richard says, it all depends on the facts. And we spend a lot of time fighting over what counts after the fact versus the day of the settlement, to the extent it favors our respective clients. But, the courts have pretty much adopted, you look at it on an ex-ante basis as of the date of settlement. What were the facts as of the date of settlement? And the issue is, would we have launched at risk? And the situation of generics, you almost always have the fact that the generics didn’t have final FDA approval to launch a product as of the date we settled, so as a matter of law we couldn’t have launched anyway as of that day.

As of that date of settlement there was a valid patent that barred us from launching as well, and so on and so forth. That’s the reason that we focus on the ex-ante date, and it’s also what the court told us to do at this point.

MR. ARNOLD: And let me just say real quickly. And, Doug—and we—as I said, we’ve tried several of these, and not in the trial we’re talking about now, Solodyn; rather in the one we tried the year before. Doug and Lisa did a great job of coming up with an expert who basically was able to testify as to everything that happened on the date of the settlement, and had his memory erased for every day after that. So even when the judge actually allowed us to ask a few questions about subsequent events, this guy didn’t remember any of it. It was very well done, actually.

MR. O’ROURKE: We haven’t reached agreement on any of these issues today. And we’re coming to the end of our session. The natural next question I should be asking is, okay, so what did the jury decide; who won?

In this particular case we never got the answer from the jury. The parties ended up settling about halfway through the trial. It was right about the time the plaintiffs closed their case, closed their evidence. The parties settled. The judge thanked and excused the jury. So, we’re going to have to wait for another trial to actually get a jury’s answers.

But, speaking of questions, we have a few minutes left, and if anybody in the audience has a question, we saved a couple of minutes for you.

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VI. RELEVANT PRODUCT MARKET

JAMES KEYTE, with the Fordham Competition Law Institute: With the rule-of-reason we’re usually litigating market definition. I’m curious in these reverse payment cases if you do that anymore. You’re fighting about whether the molecule is the market. Just wondered if you would address this topic.

MS. FALES: Yes, we absolutely do. The plaintiffs take the view that the relevant product market is the brand and its A-B generic substitute. We take the position, depending on the drug in the case, here it was an acne medicine, and there are dozens and dozens of drugs that treat acne. We had an excellent expert, a guy named Guy Webster who was a world renowned dermatologist, who testified as to his practices regarding substitution of drugs for Solodyn.

Plaintiffs had an expert, a dermatologist who they ended up not calling because in her deposition she admitted that she uses substitutes for Solodyn, other tetracyclines. So, market definition absolutely is an issue. There’s not much we agree on, except that we appreciate and like each other. Market definition is hotly contested in these cases.

And you can hear from all of this, there are dozens of expert witness, there are dozens of fact witnesses. For every document that they say says "X," we have a fact witness who says it says "Y." They say we overpaid. We had Dennis Carlton of the University of Chicago, and we had Greg Bell of CRA, both of whom said there wasn’t an overpayment here. So, you can see how dynamic and hotly contested these issues are.

MR. BALDRIDGE: I would just say, as a jury trial lawyer, it’s pretty easy for people to understand there are a lot of substitutes to treat acne. So, even if it’s not the right standard, which plaintiffs’ counsel would argue it’s not the right way to look at this, it’s a pretty easy thing to say everything from oatmeal to sunlight treats acne.

MR. ARNOLD: Except for a very simple thing. This is an antitrust case, and price sensitivity is clearly the best way to define a market. And the data, including the charts and data out of their files, show that there’s very little price sensitivity with a launch of new acne drug.

Yet with Solodyn, there is a huge drop in price when an A-B rated generic comes into the marketplace, and that’s the economic basis for claiming the molecule is the market.

MS. FALES: I would just say that our expert on that issue was Sumanth Addanki of NERA, who did a superb job showing, in fact, that there is price sensitivity. It’s a very difficult concept in pharmaceutical markets because it is so complicated as to who pays for the drug and what price they pay, so you don’t have the data that you need to do cross-elasticity of demand the way the plaintiffs would suggest, but Sumanth did an excellent job on that issue.

VII. CONCLUSION

MR. O’ROURKE: Our time is up. Great discussion. I ask all of you, please join me in thanking our terrific trial panelists. [Applause.]

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Notes:

^1. Kenneth R. O’Rourke is a partner of O’Melveny & Myers LLP, where he litigates complex cases and represents clients in high-stakes US and international disputes. Mr. O’Rourke served as counsel for Impax in various matters including the underlying FTC investigation, which was closed before the MDL trial.

^2. The multidistrict litigation is In re Solodyn Antitrust Litigation, D. Mass., Case No. 14-md-02503.

^3. FTC v. Actavis, Inc., 570 U.S. ___, 133 S. Ct. 2223 (2013).

^4. This article is intended for general educational purposes. The panel discussion presented here has been edited stylistically and substantively for publication. The views expressed are those of the speakers to which the views are attributed and not necessarily to those of their clients, firms or other firm lawyers. Importantly, the speakers do not necessarily concur with statements made by their litigation adversaries simply because those statements are not expressly rebutted here.

^5. In re: Modafinil Antitrust Litigation, E.D. Pa., Case No. 2:06-cv-01797.