Addressing for the first time whether a patent holder under a contractual duty to deal is also subject to an antitrust duty to deal, the U.S. Court of Appeals for the Second Circuit upheld dismissal of a putative antitrust class action challenge to a drug manufacturer’s refusal to fully supply competitors’ requested quantities under patent settlement agreements.  In re Adderall XR® Antitrust Litigation, Case No. 13-1232 (2d Cir., June 9, 2014) (Sack, J.).

The defendants, Shire, hold patents covering Adderall XR.  Previously, Shire sued generic drug manufacturers Teva and Impax for patent infringement after those manufacturers—seeking U.S. Food and Drug Administration (FDA) approval to produce generic Adderall XR—argued that Shire’s patents were “invalid or will not be infringed.”  Shire settled with Teva and Impax in 2006 with variants of the traditional reverse-payment agreement.  In these settlement agreements, Teva and Impax agreed to stay out of the Adderall XR market for three years (even if FDA approval came earlier), but unlike a traditional reverse-payment agreement (where the patent holder pays money to the potential entrant), Shire agreed to grant licenses starting in 2009 for making and selling the drug and, if FDA approval had not yet occurred, to supply Teva and Impax’s requirements of unbranded Adderall XR for resale.  The 2d Circuit summarized the arrangement as follows: “Shire undertook to give its competitors both the rights and the supplies necessary to participate in the market for [Adderall XR].”  By the time Shire’s contractual exclusivity expired, the FDA had not approved either Teva or Impax’s applications, so Teva and Impax began purchasing from Shire.  Shortly thereafter, both companies alleged that Shire breached the settlement agreement obligations by refusing to fully fulfil their requirement orders.  However, both companies eventually settled with Shire.

In the present case, drug wholesaler and plaintiff Louisiana Wholesale Drug Company (LWD) brought a putative class action against Shire.  It alleged antitrust violations stemming from the effect of the supply shortfall on the prices the proposed class of drug wholesalers paid.  LWD argued that Shire’s “ordinary breach of contract” became “an unlawful act of monopolization” because, by entering into the agreements, Shire “relinquish[ed] its monopoly control over” Adderall XR vis-à-vis Teva and Impax and thereby created a “duty to deal” with its competitors under the Supreme Court’s 1985 Aspen Skiing decision.  Specifically, LWD alleged that Shire artificially inflated prices by holding back some of its supply from generic manufacturers/patent licensees Teva and Impax, from whom LWD purchased Adderall XR.  After the district court dismissed the complaint on a R. 12(b)(6) motion to dismiss, LWD appealed.

The 2d Circuit affirmed the district court’s dismissal for failure to state a claim, concluding that LWD’s “allegations amount to the self-defeating claim that Shire monopolized the market by ceding its monopoly” and that “the complaint does little more than attach antitrust ‘labels and conclusions’ to what is, at most, an ordinary contract dispute to which the plaintiffs are not even parties.”  The court reasoned that “‘the sole exception to the broad right of a firm to refuse to deal with its competitors’ comes into play only ‘when a monopolist seeks to terminate a prior (voluntary) course of dealing with a competitor’” (emphasis added), and that unlike Aspen Skiing, “the agreements here were explicitlyunprofitable—they introduced price competition into a market where none would otherwise have existed” (emphasis in original).  As such, the 2d Circuit concluded that “[t]he mere existence of a contractual duty to supply goods does not by itself give rise to an antitrust ‘duty to deal.’”

Practice Note:  Last year (while the Adderall case was on appeal), the Supreme Court in F.T.C. v. Actavis found that reverse-payment settlements are not immune from antitrust scrutiny merely because they may “fall within the scope of the exclusionary potential of the patent” at issue and that such agreements are subject to the antitrust law rule of reason.  Patent holders should note, therefore, that the 2d Circuit’s holding in Adderall, while it appears to be on firm jurisprudential ground, does not immunize them from all antitrust claims relating to reverse-payment settlement agreements—or, for that matter, from breach of contract claims.  In fact, Shire faced (and settled) breach of contract suits from both Teva and Impax.  The 2d Circuit expressly based its decision only on “the plaintiff’s theory of the case” (i.e., the alleged existence and violation of an antitrust “duty to deal”) and stressed that it expressed no view regarding “the potentially anticompetitive effects, if any,” of the Shire/Teva/Impax settlement agreements.