On September 28, a unanimous panel of the U.S. Court of Appeals for the Third Circuit affirmed the district court’s grant of summary judgment in favor of the defendants, brand drug companies Warner Chilcott and Mayne Pharma Group Ltd., in the Doryx product-hopping case. Mylan Pharm. Inc. v. Warner Chilcott Pub. Ltd. Co., No. 15-2236 (3d Cir. Sept. 28, 2016) (Doryx). The decision instructs lower courts to think critically about the relevant product market and to examine carefully whether the challenged conduct actually harmed competition.

Background

Product hopping occurs when pharmaceutical companies prevent generic competitors from entering the market by “making various insignificant modifications to a drug,” forcing the generic drug company to “re-enter a cumbersome regulatory approval process” and preventing the generic company from benefiting from automatic generic substitution laws. See Doryx, No. 15-2236, slip op. at 8, 10. In July 2012, generic manufacturer Mylan Pharmaceuticals joined a group of plaintiffs to sue the brand manufacturers and marketers of Doryx, an oral antibiotic used to treat acne, for allegedly engaging in exactly that type of conduct. Specifically, the plaintiffs argued that the defendants changed some dosage strengths, from capsules to tablets, and scored the tablets in an attempt to prevent competition. Id. at 14-15, 18. The crux of the plaintiffs’ complaint was that these product changes had “little or no therapeutic benefit” and served no purpose other than preventing generics from obtaining the benefit of automatic substitution under the Hatch-Waxman Act and various state laws. Id. at 17-18.

By the time the defendants moved for summary judgment, they had settled with all plaintiffs except Mylan. Mylan opposed the defendants’ summary judgement motion and convinced the district court that the “[d]efendants had indeed made the Doryx ‘hops’ primarily ‘to delay generic market entry.’” Id. at 18. Nonetheless, the lower court concluded that Mylan’s antitrust claims failed as a matter of law, holding that its claim under section 2 of the Sherman Antitrust Act failed because Mylan had not mustered sufficient evidence of monopoly power and that both its section 1 and section 2 claims failed because it did not put forth sufficient evidence that the defendants’ conduct harmed competition. Id. at 18-19.

Insufficient Evidence of Market Power Stymies Section 2 Claim

The Third Circuit affirmed the district court’s decision. As to Mylan’s section 2 claim, the court held that Mylan’s expert reports were “devoid of any substantiated quantitative analysis showing that [the d]efendants maintained high price-cost margins or that [the d]efendants markedly restricted output,” and thus did not amount to direct evidence of monopoly power. Doryx, No. 15-2236, slip op. at 25, 27-28. Although Mylan could have relied on structural evidence of a monopolized market — i.e., indirect evidence — it failed in that respect, too. The Third Circuit rejected Mylan’s argument that the relevant product market comprised only branded and generic Doryx, concluding that all oral tetracylines prescribed to treat acne should be included in the market. Id. at 29-30. Dermatologists, health insurers and other managed care providers acknowledged that other more affordable tetracyclines were fully substitutable for Doryx, and the defendants’ unrebutted expert evidence showed that, when the defendants increased the price of Doryx, its sales decreased and the sales of other oral tetracyclines increased. Id. at 30-33. With that broader market as the baseline, the appellate court agreed with the lower court that the defendants’ market share never exceeded 18 percent, well short of the “significantly larger than 55 [percent]” water mark required to establish monopoly power through indirect evidence. Id. at 34.

Lack of Anticompetitive Conduct Controls Rule of Reason Analysis

The Third Circuit also affirmed the district court’s conclusion that Mylan failed to create a genuine factual issue regarding anticompetitive conduct, thus requiring dismissal of Mylan’s section 1 claim and providing an alternative reason to dismiss Mylan’s section 2 claim. Id. at 35-37. The appellate court reasoned that “[w]hile product hopping under certain circumstances may be viewed as anticompetitive conduct, this is not one of those cases.” Id. at 36. Rather, the evidence showed that Mylan was “not foreclosed from the market” but instead (1) could have introduced a generic Doryx capsule over a 20-year time span, but failed to do so; (2) received 180 days of market exclusivity that gave it “a significant leg up on generic competitors”; and (3) had set its tablet prices higher than the price of branded Doryx for at least some period of time. Id. at 36. Having “reaped generous profits from its sale of the generic tablet,” Mylan failed to satisfy its burden of showing anticompetitive conduct. Id. at 37. Although beyond the scope of the district court’s opinion (and indeed in partial tension with its conclusion that the defendants made the challenged “hops” to delay market entry), the Third Circuit reached the alternative holding that pro-competitive justifications supported the defendants’ conduct. Specifically, the appellate court was swayed by the defendants’ evidence of non-pretexual, pro-competitive purposes for their product changes, including to address safety concerns, to respond to competitors’ innovations and to enable self-dosing at patient-specific levels. Id. at 37-38.

The Third Circuit also distinguished Doryx from other product-hopping cases, including the Second Circuit’s decision in New York ex rel. Schneiderman v. Actavis PLC, 787 F.3d 638 (2d Cir. 2015) (Namenda), which upheld an injunction that required a brand company to continue manufacturing and selling an obsolete drug, Namenda IR, until after generic competitors had an opportunity to launch their generic versions. Namenda was factually and procedurally distinguishable, the Third Circuit held, because it involved the defendants’ attempts to avoid a “patent cliff” — the end of patent exclusivity — by stringing together new periods of patent exclusivity procured by introducing product changes. Doryx, No. 15-2236, slip op. at 38. Here, “there were no patent cliffs on the horizon,” and “there were plenty of other competitors already in the oral tetracycline market” at the time of the defendants’ product reformulation. Id. at 38-39. More importantly, Namenda merely upheld a preliminary injunction, whereas, in this case, full discovery resulted in a “robust record void of any evidence of anticompetitive conduct.” Id. at 39.

Conclusion

The Doryx decision makes clear that creating hurdles to generic companies’ ability to compete through state automatic substitution laws does not automatically qualify as exclusionary conduct. To prevail in a product-hopping case, a plaintiff must be prepared to establish both monopoly power and anticompetitive effects. Even so, the Third Circuit left the door open to plaintiffs with similar theories, holding that it did “not rule out the possibility that certain insignificant design or formula changes, combined with other coercive conduct, could present a closer call with respect to establishing liability in future cases.” Id. at 40. The appellate court acknowledged that it was not presented with such a close call in Doryx, but that, in other cases, “the disposition of each claim will necessarily turn on the facts and circumstances surrounding a company’s alleged anticompetitive conduct.” Id. at 41.