Second Circuit Concludes that Plaintiffs Failed to Plausibly Allege Payments to Generic Drug Manufacturers Were Unjustified or Unexplained

By David Lerch and Nathaniel Kahn

On May 13, 2024, the United States Court of Appeals for the Second Circuit affirmed the district court’s dismissal of the plaintiffs’ claims in In re Bystolic Antitrust Litigation, No. 23-410 (2d Cir. May 13, 2024), concluding that the plaintiffs did not plausibly allege that Forest Laboratories’ payments to the generic manufacturers to keep their product off the market were unjustified or unexplained, as required by the Supreme Court in Federal Trade Commission v. Actavis, Inc., 570 U.S. 136, 141, 153–58 (2013). The agreements were legitimate business transactions and there was no evidence of anticompetitive intent. The Second Circuit noted that this opinion is the first in which it has considered an Actavis claim.?

Background

Forest Laboratories (“Forest”), the brand manufacturer of the high-blood -pressure drug Bystolic, engaged in patent infringement litigation with seven generic drug manufacturers. This litigation arose from the regulatory framework established by the Hatch-Waxman Act (“Act”), which aims to balance the interests of brand name drug manufacturers and generic drug manufacturers.

The Act allows generic manufacturers to file abbreviated new drug applications (“ANDAs”) with a Paragraph IV certification, asserting that the brand name drug’s patent is invalid or will not be infringed by the generic drug. Filing a Paragraph IV certification constitutes a nominal act of patent infringement, enabling the brand manufacturer to sue the generic manufacturer. If the parties settle, the generic manufacturer might agree to delay the launch of its product, potentially in exchange for a payment from the brand manufacturer. In Federal Trade Commission v. Actavis, Inc., the Supreme Court held that reverse payments can “sometimes” violate the antitrust laws if they are large and “unjustified” — but that they do not do so when they represent fair value for goods or services exchanged as part of a bona fide commercial relationship. 570 U.S. 136, 141, 153–58 (2013).

This type of payment, known as a reverse payment, can sometimes be anticompetitive if it is large and unjustified, as it may be used to share monopoly profits and delay competition from generic manufacturers.

Forest settled its patent infringement lawsuits against the seven generic manufacturers. However, contemporaneously with these settlements, Forest entered separate commercial transactions with each of the generic manufacturers for various goods and services. The terms of these commercial transactions stipulated that the generic manufacturers must wait until three months before the Bystolic patent’s expiration to introduce their generic versions of the drug to the market.

The plaintiffs, purchasers of Bystolic and its generic equivalents, alleged that these contemporaneous transactions involved unlawful reverse payments disguised as pretextual compensation for various goods and services. They claimed these transactions were intended to delay the market entry of generic Bystolic, thus violating federal and state antitrust laws.

The United States District Court for the Southern District of New York twice dismissed the case–initially without prejudice and then with prejudice–for failure to state a claim, citing the plaintiffs’ inability to plausibly allege that the reverse payments were unjustified under the standards set forth in FTC v. Actavis, Inc. The plaintiffs appealed, and the United States Court of Appeals for the Second Circuit reviewed the case.

Analysis

The central issue is whether Forest’s contemporaneous payments to the generic manufacturers were unjustified reverse payments intended to delay the market entry of generic Bystolic (slip op. at 32-33) According to the Supreme Court’s decision in Actavis, reverse payments can sometimes violate antitrust laws if they are both “large” and “unjustified.” 570 U.S. at 158. The Court held that such payments must be evaluated under the familiar rule of reason test, a test that balances anticompetitive effects against procompetitive justifications. Id. at 159. Importantly, the Actavis decision clarified that reverse payments are not per se illegal but can be subject to antitrust scrutiny due to their potential for genuine adverse effects on competition. Id.

A reverse payment is unlawful if it is made to induce the generic manufacturer to stay out of the market, thereby maintaining monopoly profits to be shared between the brand and generic manufacturer. Id. at 154. The Court emphasized that these payments are evaluated against a backdrop of strong public policy favoring the settlement of disputes, including patent litigation. Id. at 153. Settlements encourage judicial economy and the continuation of innovation incentives provided by patents.? “It instructed that whether a reverse payment passes antitrust muster ‘depends upon its size, its scale in relation to the payor’s anticipated future litigation costs, its independence from other services for which it might represent payment, and the lack of any other convincing justification,” including fair value for goods and services exchanged as part of a bona fide commercial relationship.”? See id. at 156, 159.

A reverse payment can violate antitrust laws only if it is both “large” and “unjustified.” Id. at 158.? For a payment to be deemed unjustified, it must lack legitimate business justifications and not reflect fair value for goods or services provided. Id. The relevant antitrust question is whether the payment was made to maintain and share monopoly profits absent any other convincing justification. Id. at 154.

The Supreme Court instructed that whether a reverse payment passes antitrust muster “depends upon its size, its scale in relation to the payor’s anticipated future litigation costs, its independence from other services for which it might represent payment, and the lack of any other convincing justification,” including fair value for goods and services exchanged as part of a bona fide commercial relationship. Id. at 156, 159 (slip op. at 12).

The Second Circuit further noted that “[m]ost important for this case, whether a reverse payment is “unjustified” turns on whether it “reflects traditional settlement considerations,” including “fair value” for products or services provided by the generic manufacturer pursuant to a legitimate commercial relationship entered into at arms’ length with the brand manufacturer. See id. at 156 (slip op. at 31-32). A plaintiff must plausibly allege that the payment is a pretext for nefarious anticompetitive motives rather than made pursuant to traditional settlement considerations. Id. at 159; see also id. at 158 (“Although the parties may have reasons to prefer settlements that include reverse payments, the relevant antitrust question is: What are those reasons? If the basic reason is a desire to maintain and to share patent-generated monopoly profits, then, in the absence of some other justification, the antitrust laws are likely to forbid the arrangement.”) (slip op. at 32).

According to Plaintiffs, Forest used the six commercial transactions to pretextually pay the generic defendants for products or services it did not truly need. These overpayments, Plaintiffs claim, shielded brand Bystolic from competing with its generic equivalents and enabled Forest to share monopoly profits with the generic defendants (slip op. at 32-33).

The Court concluded that there is no allegation plausibly showing that any of the six commercial transactions reflected anything other than “fair value” for goods and services obtained as a result of good faith business dealings–one of the “traditional settlement considerations” squarely privileged under Actavis.? 570 U.S. at 156 (slip op. at 34).

Evaluation of Forest’s Payments

The Second Circuit’s analysis in this case focused on whether the payments made by Forest to the generic manufacturers were unjustified as set forth in Actavis.

The Court noted that the following reasons for dismissal are overarching: (1) the terms of the commercial transactions reflect bona fide business considerations; (2) the size of payments is not sufficiently contextualized or compared to enable us to infer that the payments are plausibly unjustified; (3) Forest’s need for alternative supplies of active pharmaceutical ingredients (“API”) or finished pharmaceutical products was consistent with what Forest previously disclosed to investors; (4) a lack of public disclosures about business plans or investments does not necessarily bear upon whether those ventures are truly legitimate or genuine; (5) it is sensible for counterparties to enter into condensed term sheets with the expectation of subsequently negotiating definitive agreements that are more detailed; (6) payments for developmental or commercial milestones, or research and development expenses, bespeak rational commercial incentives; (5) provisions in the commercial transactions that are designed to ensure price competition do not fit with Forest’s alleged intention to funnel secret payments to the generic defendants; (6) agreements between Forest and other counterparties need not be identical to Forest’s agreements with the generic defendants, or even closely resemble them; and (7) the agreements’ provisions trump allegations of unsupported speculation about nefarious motives (slip op. at 37).

Hetero Transaction

The first agreement involved Hetero, where Forest agreed to purchase nebivolol API–the active ingredient in Bystolic–from Hetero, committing at least $37.5 million over five years (slip op. at 38). Plaintiffs argued that Forest did not need an alternative supplier since it already had sufficient supply (slip op. at 38). However, the court found that securing an alternative supplier was consistent with Forest’s disclosed need for supply chain security (slip op. at 38). The terms, including a meet-or-release provision to ensure competitive pricing, reflected bona fide business considerations (slip op. at 38). For example, the Forest-Hetero term sheet included a “meet-or-release” provision providing that if Hetero did not match a third-party offer to supply nebivolol API at a 15%-lower price, Forest’s minimum purchase amount would drop from 50% to 20% per year (slip op. at 38). There was a similar meet-or-release provision in the Janssen agreement (slip op. at 39).? The court noted that having multiple suppliers is a common business strategy to mitigate risks associated with supply chain disruptions (slip op. at 38). The court further emphasized that the meet-or-release provision allowed Forest to benefit from any lower prices offered by other suppliers, thus promoting competition rather than hindering it (slip op. at 39-40). Forest’s decision to secure another supplier was also consistent with its 10-K filings, which highlighted the importance of having multiple sources for critical supplies to avoid potential shortages and ensure a steady supply of the active ingredient (slip op. at 38).

Torrent Transaction

In the second agreement, Forest purchased ten patents from Torrent for $5 million upfront and up to $12 million in milestone payments (slip op. at 41-42). Plaintiffs claimed the milestone payments were easy to achieve and that the patents themselves had little value to Forest (slip op. at 42). Of the milestone payments, $7 million was owed to Torrent following the issuance of one of the ten assigned patents in the U.S.; only one such payment was owed irrespective of how many of the ten patents issued there. Forest agreed to assist Torrent in prosecuting the patents, to increase the chances of issuance. The remaining $5 million in milestone payments was triggered upon the earliest of five events: (1) Forest submitting a NDA for a new nebivolol drug covered by one of the assigned patents; (2) Forest selling such a drug in the U.S.; (3) Forest suing a third party for infringement of an assigned patent in the U.S.; (4) Forest licensing an assigned patent to a third party; and (5) Forest and Torrent having a reasonable basis to believe that a third party is infringing an assigned patent (slip op. 41-42).? The court determined that the milestone payments were based on significant development achievements and that the patents’ issuance in the U.S. added value to Forest’s portfolio, supporting legitimate business interests (slip op. at 42-43). The agreement aimed to help Forest develop and market new nebivolol products, which was a rational business strategy (slip op. at 43). The court also noted that the $7 million milestone payment was only triggered upon the issuance of a patent in the U.S., indicating that the payment was linked to the successful development and commercialization of the new products (slip op. at 43). Additionally, the $5 million milestone payment was contingent on Forest achieving key developmental milestones, such as submitting a New Drug Application (NDA) or initiating a lawsuit for patent infringement, further demonstrating the agreement’s alignment with Forest’s business objectives (slip op. at 43).

Alkem Transaction

The third agreement involved a term sheet between Forest and both Alkem and Indchemie (together, “Alkem”), which entailed paying up to $20 million for the supply of finished (nebivolol) and Byvalson (nebivolol and valsartan) (slip op. at 44-45). Plaintiffs contended that Forest did not need additional supply and that the milestone payments were duplicative (slip op. at 45-46). The court found that the agreement’s terms, including development work payments and price caps, were consistent with Forest’s business needs and did not indicate a pretext for anticompetitive payments (slip op. at 46-47). The court highlighted that the term sheet included provisions to ensure price competition and the ability to seek alternative suppliers (slip op. at 47). As with the Hetero transaction, Forest’s 10-K filings also supported the need for additional suppliers, as they disclosed potential risks associated with relying on a single manufacturing source for finished products (slip op. at 46). The development work payments were tied to specific milestones, such as the completion of clinical trials or regulatory approvals, ensuring that the payments were made in exchange for tangible, important progress in product development (slip op. at 46-47). Moreover, the price cap provision protected Forest from potential price increases by limiting Alkem’s ability to charge more than 10% above market rates, promoting competitive pricing and preventing the agreement from being used as a means to transfer excessive payments (slip op. at 47).

Glenmark Transaction

In the fourth agreement, Forest entered into a $15 million collaboration and option agreement with Glenmark to develop mPGES-1 inhibitors (slip op. at 48). Plaintiffs argued that Forest’s interest in Glenmark’s development was not publicly disclosed, and that the agreement was structured differently from a previous collaboration agreement between Forest and Glenmark (slip op. at 50). The court held that the agreement reflected a genuine business relationship, with payments structured around R&D milestones and a potentially lucrative exclusive negotiation option for Forest (slip op. at 52-53). The agreement allowed Forest to leverage Glenmark’s expertise in developing mPGES-1 products, aligning with Forest’s business objectives. The court noted that the collaboration and option agreement provided Forest with significant oversight and control over the development process through a Joint Development Committee (JDC) (slip op. at 49). The JDC’s responsibilities included monitoring the progress of the development work, providing recommendations, and reviewing clinical research data (slip op. at 47). This structure ensured that Forest’s payments were linked to the successful development of the mPGES-1 inhibitors and were not merely a pretext for delaying competition.

Amerigen Transaction

In the fifth agreement, Forest and Amerigen executed a term sheet for a collaboration agreement, under which Forest would pay Amerigen for the development of eight products (slip op. at 53). ?Forest would make a $5 million payment upfront, as well as milestone payments of up to $20 million contingent on developments such as the completion of clinical bioequivalence studies, the FDA’s acceptance for filing of an ANDA for a U.S. Product, and the first commercial sale of such products (slip. op. at 53). Amerigen agreed to pay Forest specified percentages of gross margin (ordinarily 20%) as royalties for sales of the U.S. Products. If Amerigen failed to commercialize at least one U.S. Product within five years, Forest could terminate the term sheet as to all U.S. Products and recover all milestone payments, otherwise, Forest’s right of termination was limited to products for which specified developmental objectives had not been met, and so Forest was expressly authorized to recoup its (allegedly unlawful) reverse payment to Amerigen (slip op. at 53-54).

Plaintiffs argued that Forest “did not truly care” whether the U.S. Products fit into its portfolio, given that the term sheet allowed Amerigen to discontinue the development of these products if it met certain requirements (slip op. at 54). The Court noted that Amerigen’s discontinuation right was subject to several qualifications granting Forest considerable control over both the discontinuation process and the substitute products: (1) Amerigen could seek to discontinue only products that it believed were “no longer technically or commercially viable”; (2) Amerigen needed to provide Forest with a “Discontinuation Notice,” with a written explanation; (3) at Forest’s request, the parties were required to “promptly” meet to discuss the proposed discontinuation, and Amerigen was required to give reasonable consideration to Forest’s comments; (4) only after this meeting, and not until thirty days after Forest received the Discontinuation Notice, could Amerigen discontinue the product in question; (5) even then, discontinuation was contingent on Amerigen providing Forest with a written “Substitution Notice” proposing at minimum two alternative products “of similar value” for the discontinued product, “taking into account probability of technical success, time to commercial launch and commercial potential”; and (6) within thirty days of receiving the Substitution Notice, Forest would choose one of the substitution products to replace the discontinued product (slip op. at 55-56).

Plaintiffs also observe that, even though the term sheet contemplated the parties negotiating a definitive collaboration agreement “[i]mmediately” after the term sheet’s execution, the parties’ agreement is dated nearly a year after the term sheet’s effective date and only weeks after Forest received a civil investigative demand from the FTC concerning its settlements with the Generic Defendants (slip op. at 56). ?According to Plaintiffs, this timing suggests that the collaboration agreement was executed chiefly as protection against antitrust liability but Forest entered into the term sheet well before it received the CID and the term sheet expressly anticipated subsequent negotiation of a definitive collaboration agreement, and the Complaint offers no reason to infer that it was unusual or improper for these negotiations to last close to one year (slip op. at 56-57).

Watson Transactions

Finally, Plaintiffs argued Forest made an unlawful reverse payment to Watson via two separate transactions:

• Forest entered into a letter agreement with Moksha8, a pharmaceutical company that commercializes products in Brazil and Mexico. The agreement acknowledged that Moksha8 had materially breached three loan and security agreements with Forest, relieving Forest of the need to extend additional loans to Moksha8. Forest nevertheless undertook to provide Moksha8 with roughly $7 million in credit. In exchange, Forest obtained a broad release from claims arising out of the loan and-security agreements. This letter agreement, therefore, provided for Forest to transfer value to Moksha8, not Watson, the alleged recipient of the illegal reverse payment, in exchange for a broad release.
• ?Moksha8 entered into a termination and release agreement with Watson’s successor, Actavis (hereinafter “Watson”). Watson and Moksha8 agreed to release each other from any obligations or liabilities arising from: (a) prior agreements entered into by Watson and Moksha8 and (b) a prior merger agreement among Forest, Moksha8 and another entity and terminate the former set of agreements. Finally, Watson, not Forest, agreed to pay Moksha8 $4 million.

(slip. op. at 57-58). ?

Plaintiffs claim that Forest’s letter agreement with Moksha8, in conjunction with the termination and release agreement between Moksha8 and Watson, effected a roundabout payment to Watson of $15 million or more in order to delay its launch of generic Bystolic. In particular, Plaintiffs contend that the releases Moksha8 granted to Watson pursuant to their termination and release agreement were worth at least $15 million more than the $4 million Watson agreed to pay Moksha8 and thus at least $19 million in total. Plaintiffs alleged that Forest somehow paid Moksha8 to make up the difference, although Plaintiffs admit that they “cannot tell precisely how Forest used the transaction with Moksha8 to transfer this payment to Watson” (slip op. at 59). ?The Court concluded that the means of payment was a mystery and Plaintiffs made no attempt to explain how Forest’s $7 million loan to Moksha8, which is not a party to this case and was not involved in the Nebivolol Patent Litigation, was used to effect a $19 million payment to Watson (slip op. at 59). ?The Court rejected Plaintiffs’ allegation that there was a “clear inference” Forest used the letter agreement with Moksha8 to pay off Watson as conclusory and concluded that Plaintiffs failed to plead “how value was transferred from Moksha8 to Watson” as a reverse payment (slip op. at 59).