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Second Circuit Affirms Dismissal of Bystolic Pharmaceutical Antitrust Class Actions, Holding Plaintiffs Must Plead Facts Showing a Reverse Payment Settlement Is Unjustified

On Monday, May 13, 2024, the U.S. Court of Appeals for the Second Circuit affirmed Judge Lewis Liman’s decision dismissing Plaintiffs’ reverse payment class actions for failure to state a claim. In re Bystolic Antitrust Litig., No. 23-410, __ F.4th __, 2024 WL 2118248 (2d Cir. May 13, 2024) (“Bystolic III”). Circuit Judge Jacobs, writing for a unanimous panel, found in a 60-page opinion that the Plaintiffs failed to sufficiently plead facts showing alleged side deals were unjustified payments as required by FTC v. Actavis, 570 U.S. 136 (2013).1

Background

Bystolic’s brand manufacturer, Forest Laboratories, settled Hatch-Waxman patent infringement litigation with seven generic nebivolol manufacturers.  In exchange for dismissing their claims, Forest agreed to pay the generic defendants the parties’ saved legal expenses, in sums reaching up to $2 million.  Forest also granted each defendant a non-exclusive royalty-free license to market generic nebivolol three months prior to the expiration of Forest’s Bystolic patent, which was set to expire on December 17, 2021.  The agreements further included acceleration clauses whereby if any generic entered the market prior to the licensed date, all of the other generics would be permitted to enter at the same time.2

Alongside these settlement and licensing agreements, Forest entered into six additional transactions with the defendants.  These included supply agreements for active pharmaceutical ingredients and finished nebivolol product, as well as development agreements for new products.  Plaintiffs—including putative classes of direct and indirect purchasers, as well as retailers—sued Forrest, alleging that these agreements were pretextual “side deals,” that effectively paid generics for staying off the market while providing Forest with goods and services that it did not need.  Plaintiffs claimed and that but for these “side deals,” generic competition would have entered the market earlier by either prevailing in the patent litigation, by entering the market at-risk, or by reaching a settlement with an earlier license date that did not contemplate any payment by Forest.

Judge Liman twice dismissed the complaints, finding that the Plaintiffs failed to sufficient plead that the contemporaneous commercial transactions, even if they qualified as reverse payments, provided payments that were unexplained or unjustified.3 Plaintiffs appealed.

The Second Circuit Affirms

In what the Panel noted was “the first time that this Court has considered an Actavis claim,” the Second Circuit affirmed the district court’s order granting Forrest’s motions to dismiss.4 Looking to Actavis itself, the Panel noted that the decision “is not self-reading,” and distilled Actavis down to six key principles, providing a helpful primer for future courts:

  1. A reverse payment is subject to a rule-of-reason analysis and is not presumptively unlawful.
  2. A reverse payment violates the antitrust laws “only ‘sometimes,’” with “[t]he ‘relevant antitrust question’” being “why the reverse payment was made,” e., a reverse payment is unlawful only if made to bring about anticompetitive harm and not where there is a “convincing justification” for it apart from a bare desire to prevent generic competition.
  3. A reverse payment is to be analyzed against the backdrop of a strong policy “favoring the settlement of disputes,” which applies to patent litigation, and an overly restrictive interpretation of Actavis “would reduce the incentive to challenge patents by reducing the challenger’s settlement options should he be sued for infringement, and so might well be thought anticompetitive.”
  4. A reverse payment can violate the antitrust laws only if it is both (a) “large” and (b) “unjustified,” or unexplainable, and both prongs must be plausibly alleged at the pleading stage.
  5. To determine whether a reverse payment is sufficiently “large,” courts should focus on the payment’s absolute size and “scale in relation to the payor’s anticipated future litigation costs.”
  6. To determine whether a reverse payment is “unjustified” courts should consider whether the payment “reflects traditional settlement considerations,” including “fair value” for products or services pursuant to a legitimate commercial relationship entered into at arms’ length. A plaintiff must plausibly allege that the payment is a pretext for nefarious anticompetitive motives rather than made pursuant to traditional settlement considerations.5

With these principles in mind, the Panel addressed the Plaintiffs’ allegations, along with arguments from both Plaintiffs and the Federal Trade Commission which had submitted an amicus brief in support of the Plaintiffs.6 The Panel addressed each commercial transaction, finding that there was “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.”7 Quoting its sister Circuit Court, the Panel further noted that “Actavis does not stand for the proposition that parties must reach the most procompetitive settlements possible,”8 but addresses only those settlements where a patent holder pays off its counterparties “‘purely so [they] will give up the patent fight’ and stay out of the market” as “[t]hat—and only that—is the anticompetitive evil that Actavis condemns.”9

The Panel rejected Plaintiffs’ contrary arguments as “speculation and supposition” that pointed to “atmospheric allegations[.]”10 The Panel relied on the underlying term sheets and agreements that were integral to the complaints in reaching its conclusions, which the Panel found provided “crucial context” to Plaintiffs’ allegations and the inferences Plaintiffs sought to draw therefrom.11

In rejecting Plaintiffs’ arguments, the Panel summarized its overarching reasons for affirming dismissal of the complaints: (1) the terms of the commercial transactions reflected “bona fide business considerations;” (2) the size of payments was “not sufficiently contextualized or compared to enable us to infer that the payments are plausibly unjustified;” (3) Forest’s need for alternative supplies of API/finished pharmaceutical products was consistent with its public disclosures; (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 term sheets and to subsequently negotiate definitive and more detailed agreements; (6) payments for developmental or commercial milestones, or R&D expenses, “bespeak rational commercial incentives;” (7) provisions designed to ensure price competition to the benefit of Forrest “do not fit with Forest’s alleged intention to funnel secret overpayments to the Generic Defendants;” (8) agreements between different parties (or even the same parties at different times) need not be identical or even closely resemble each other to be legitimate; and (9) the agreements’ provisions trump allegations of unsupported speculation about nefarious motives.12

Takeaways

As the first decision from the Second Circuit to address a claim under Actavis, and as one of the few decisions to dismiss such a claim at the pleading stage, the Bystolic decision offers key takeaways:

  1. A reverse payment is not automatically unlawful.
  2. Plaintiffs must plausibly allege not only the existence of a reverse payment, but also that the payment was both large and unjustified. Plaintiffs must demonstrate these elements of its claims with well-pled facts, not conjecture, speculation, or supposition.
  3. Agreements and terms sheets between counterparties can help demonstrate that ordinary business considerations were the motivating factor of an agreement, as opposed to an alleged anticompetitive scheme.
  4. The key question in a reverse payment case is why was the payment made—i.e., whether there was a “convincing justification” for making the payment other than a desire to prevent generic competition.13

To these points, just because a brand pays a generic as part of or contemporaneously with settling a patent litigation, this should not by itself make such a “reverse payment” a payment that Actavis sought to curtail.  Rather, Plaintiffs must plausibly show that the payment was both large and unjustified, especially when the agreements on their face plausibly demonstrate appropriate bona fide business justifications for the payment.  Because Actavis preserves “traditional settlement considerations” when settling patent disputes,14 Plaintiffs must do more than point to the existence of such consideration to clear the motion to dismiss bar.

1 As noted previously by our team, as of late 2023, Bystolic was one of four cases to result in a dismissal of all reverse payments claims. See 10 Years after Actavis, the Cases that Follow Tell a Story, Haug Partners LLP, available at https://haugpartners.com/article/10-years-after-actavis-the-cases-that-follow-tell-a-story/.
2 Relying on Judge Abrams’ decision in In re Actos End Payor Antitrust Litig., the Panel noted in passing that such acceleration clauses are generally viewed as procompetitive under Actavis as they “increase competition in the event that other generics entered the market earlier than contemplated by the agreement[s].” Bystolic III, 2024 WL 2118248, at *4 (quoting Actos, No. 13-cv-9244, 2015 WL 5610752, at *15 (S.D.N.Y. Sept. 22, 2015), vacated in part on other grounds, 848 F.3d 89 (2d Cir. 2017)).
3 In re Bystolic Antitrust Litig., 583 F. Supp. 3d 455 (S.D.N.Y. 2022) (“Bystolic I”); In re Bystolic Antitrust Litig., 657 F. Supp. 3d 337 (S.D.N.Y. 2023) (“Bystolic II”).
4 Bystolic III, 2024 WL 2118248, at *2.
5 See id. at *2, 8-9.
6 The Panel also noted that the FTC had, in fact, investigated the Bystolic settlements and chose “not to bring suit itself against Forest or the generic Bystolic manufacturers.” Id. at *2.
7 See id. at *10 (quoting Actavis, 570 U.S. at 156).
8 Bystolic III, 2024 WL 2118248, at *10 (quoting King Drug Co. of Florence, Inc. v. Smithkline Beecham Corp., 791 F.3d 388, 408-09 (3d Cir. 2015)); see also id. (quoting In re Loestrin 24 Fe Antitrust Litig., 814 F.3d 538, 552 (1st Cir. 2016) for the proposition that “the burden imposed on Plaintiffs by Actavis is to affirmatively ‘allege facts sufficient to support the legal conclusion that the settlement at issue involves a large and unjustified reverse payment.’”) (emphasis supplied).
9 See Bystolic III, 2024 WL 2118248, at *10 (quoting Actavis, 570 U.S. at 152).
10 See Bystolic III, 2024 WL 2118248, at *10. The Panel also took the opportunity to remind district courts that they are not to weigh “competing plausibilities” of a complaint’s allegations at the motion-to-dismiss stage, as some of the district court’s language appeared to suggest. Id. The Panel nevertheless affirmed because it was “clear in context here that the district court was actually concluding that Plaintiffs’ allegations were not plausible, period[.]” Id. at *10 n.9.
11 See id. at *5 n.5.
12 See id. at *11.
13 See id. at *9 n.7 (quoting Actavis, 570 U.S. at 159).
14 Actavis, 570 U.S. at 156.