The FTC Asks the Third Circuit to Take a Second Look at Product Hopping

In June, we updated you on the first product hopping case to make its way to the Third Circuit.  In Doryx, generic manufacturer Mylan challenged Warner Chilcott’s scheme to stay one hop ahead of generic competition by changing its acne treatment first from a capsule to a tablet, then from one tablet strength to another, then from one tablet type to another.  With each change, generic competition was impeded, because a generic version of a prior formulation could not be automatically substituted for a prescription for the new (but not necessarily improved) form.  Mylan argued that such product hopping not only harmed competition, but also frustrated Congress’ goal of making more affordable generic drugs more speedily and readily available to consumers.

The district court, however, disagreed, essentially concluding that product hopping is only a concern where it results in complete foreclosure of generic competition.  Since Mylan could and did launch generic versions of certain superseded Doryx forms (and could have elected to promote its own generic products), Warner Chilcott’s scheme to deny generics the benefit of State-mandated automatic generic substitution was not anticompetitive.  On appeal, Mylan argued that completely foreclosure is the incorrect standard.  Under existing Third Circuit precedent including Microsoft and Dentsply, competition is harmed where a competitor is denied access to the most efficient means of product distribution – in this case, automatic substitution at the pharmacy counter.

This Summer, a panel of the Third Circuit handed Mylan another setback.  Upholding the district court’s grant of summary judgment, the panel concluded that Warner Chilcott’s multiple product hops had not been anticompetitive because Mylan “was not foreclosed from the market.”  The panel acknowledges that “it may not necessarily be cost-efficient for generic manufacturers to promote their products” in the same way as brand manufacturers and that “Hatch-Waxman seems to provide generic the means to participate in the market” without promotion.  Nonetheless, because Mylan is a large generic manufacturer, alternative avenues of competition were open to it, and therefore the product hops had no anticompetitive effect.

Mylan has moved for rehearing en banc, and last month, the FTC filed a brief in support, arguing that the panel had misapplied Microsoft and Dentsply, and highlighting the need for care when applying that old antitrust chestnut, that the law is intended to protect competition, not competitors.  The FTC argues that the panel focused overmuch on Mylan’s size and robustness as a pharmaceutical competitor.  Because Mylan was able to launch its generic forms of Doryx (and, in fact, made money doing so), the panel reasoned that it was not so much injured as not “advantaged” by generic substitution.  But this conclusion essentially penalizes Mylan for its ability to compete even in the face of conduct intended to delay and burden generic competition.  But the pertinent question should be to what extent competition was burdened, not the competitor.  Here, the inquiry should end with the conclusion that Warner Chilcott intended to, and did, deny Mylan access to the most efficient means of competition – generic substitution.  That Mylan nonetheless made money is immaterial.

The FTC also argues (correctly) that the panel’s decision puts the Third Circuit squarely in conflict with its neighbor to the northeast.  In Namenda, which we have previously discussed in detail, the Second Circuit upheld a claim in which brand manufacturer Forest hopped its Alzheimer’s drug from an immediate to extended release form, just ahead of the former’s loss of patent protection and the commencement of generic competition.  Forest then announced it would discontinue its prior formulation, encouraging patients to switch to the extended release form quickly, rather than risk a disruption in treatment.  Despite the fact that generic versions of immediate release Namenda eventually became available, Forest’s product hop could nonetheless impose anticompetitive harm because patients, once switched to a different formulation, were unlikely to switch back, even if doing so offered cost savings.  And in any event, patients would have to take the extra steps involved in changing prescriptions, since generic cost savings would not be conferred by automatic substitution.

The Third Circuit panel distinguishes Namenda by pointing to the “patent cliff” that the brand there sought to avoid.  But this is a distinction without a difference to the pharmaceutical consumer.  As the FTC points out, brand drugs may draw exclusivity from a number of sources, including FDA regulation and the practical difficulties of bringing a generic drug to market.  The source of exclusivity is ultimately immaterial – whether patent or regulatory, the net effect of a product hop when that exclusivity ends is the same.

The FTC’s position, and the burgeoning conflict between the circuits, underscores why this case is well suited for en banc review. The Third Circuit should take the opportunity to develop a framework for product hop cases consistent with existing law, yet tailored to take into account the unique realities of the pharmaceutical industry and its regulation.  Most important in this framework should be a recognition that automatic substitution is not a “bonus” granted to generic manufacturers, but rather an efficiency created by Congress and the States specifically to encourage the development of generics and the attendant consumer benefit of lower drug costs.  Effectively excepting automatic substitution from its role as the most efficient means of distribution would not only uniquely deny generic manufacturers the benefit of existing antitrust law, but threaten to undue Congress’ intent in fostering generic drugs and the States’ intent in ensuring efficient generic substitution.

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About Adam Steinfeld

Adam Steinfeld is Senior Counsel in Faruqi & Faruqi, LLP’s New York office.  He practices in the area of antitrust litigation with a focus on competition in the pharmaceutical industry.

Posted by Adam Steinfeld

Partner at Faruqi & Faruqi, LLP
New York Office
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Email: asteinfeld@faruqilaw.com
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