District Of New Jersey Rejects Claim Of Sham Patent Litigation
11/09/2021On October 27, 2021, Judge Kevin McNulty of the United States District Court for the District of New Jersey dismissed a complaint alleging that a cancer drug manufacturer engaged in sham litigation in violation of Section 2 of the Sherman Act and various state antitrust and consumer protection laws based on the same alleged sham litigation. Louisiana Health Service & Indemnity Company v. Janssen Biotech, Inc., 19-14146 (D.N.J. Oct. 27, 2021).
In 2013, as its original patent on a therapeutic compound known as abiraterone acetate (and marketed as “Zytiga”) for use in the treatment of prostate cancer was nearing expiry, the defendant drug manufacturer obtained a new follow-on combination therapy patent relating to Zytiga. In response, several generic drug manufacturers filed applications under the Hatch-Waxman Act with the FDA alleging that this new combination therapy patent was invalid, and they should be allowed to sell generic versions of Zytiga upon expiration of the original patent. Defendant responded in turn with a patent infringement action against the generic manufacturers. After lengthy proceedings, including a trial on the merits, both the district court and the Patent Trial and Appeal Board determined that the manufacturer’s second combination therapy patent was invalid. After unsuccessful appeals to the Federal Circuit and the Supreme Court, generic competition began in late 2018.
Plaintiff health insurance companies then brought this action under Section 2 of the Sherman Act, as well as various state law claims, alleging that the defendant drug manufacturer engaged in sham litigation in order to delay generic competition, and seeking to represent a class of indirect purchasers who were allegedly injured by paying artificially inflated prices for Zytiga during the period when generic competition was improperly delayed.
In addressing these claims, the Court first determined that plaintiffs’ case should not be dismissed for lack of standing based on differences in their state law claims. Defendant argued that Plaintiffs lacked standing to bring certain state law claims because they purchased Zytiga in only 22 states yet sought recovery for a putative class of purchasers under the law of 41 states. The Court rejected this argument, finding that named plaintiffs had adequately alleged personal standing by alleging that they were injured by paying inflated prices due to the delay in generic competition caused by the alleged sham litigation. At the motion to dismiss stage, this claim was enough to establish standing as to putative class members who suffered the same injury. The issue of the impact of different state laws, the Court found, was a question of predominance under Rule 23 and was thus properly addressed at the class certification stage, not on a motion to dismiss.
The Court then turned to defendant’s motion to dismiss plaintiffs’ Sherman Act claims under the Illinois Brick direct purchaser rule, which generally limits overcharge damages claims under the Sherman Act to plaintiffs who purchased the impacted product directly from the defendant. Plaintiffs argued that, although they purchased Zytiga from pharmacies, not directly from the defendant, they nevertheless possessed standing under the control exception to Illinois Brick, which permits damages claims by indirect purchasers “where the direct purchaser is owned or controlled by its customer.” Illinois Brick Co. v. Illinois, 431 U.S. 720, 736 n.16. Plaintiffs alleged that their claims fell within the control exception because of the manufacturer’s close relationship with the pharmacies who sold Zytiga to the indirect purchaser class. Specifically, plaintiffs claimed that the pharmacies were specialty pharmacies whose economic interests were aligned with the defendant. The Court rejected this argument, holding that mere alignment of economic incentives is not enough, and finding that plaintiffs had not sufficiently alleged that defendant controlled the specialty pharmacies to such a degree that its sales to the pharmacies could be imputed to their customers. The Court also rejected plaintiffs’ argument that the control exception applied because of a principal/agent relationship, holding that a mutually profitable business relationship was a far cry from the fundamental economic unity required by Illinois Brick.
Finally, the Court addressed the issue of whether defendant’s actions were protected under the Noerr-Pennington doctrine. To invoke the sham exception to the Noerr-Pennington doctrine, a plaintiff must show that the challenged litigation was “both subjectively and objectively baseless.” A claim is not “objectively baseless” if the claimant has “a reasonable belief that there is a chance that a claim may be held valid upon adjudication.” Here, the Court determined that the infringement action was not objectively baseless and thus protected by Noerr-Pennington. In doing so, Judge McNulty, who was also the trial judge for the underlying infringement action, pointed to the substantial analysis required to dispose of the issues including an eight-day bench trial and a 70-page opinion. After discussing the conflicting evidence and arguments at the infringement trial, the Court concluded that the manufacturer presented a “plausible case, if not a winning one,” with a “real, if not strong, chance of prevailing.” Because all the claims in the action were predicated on the same flawed allegation of sham litigation, this finding was dispositive not only to the Sherman Act claims but the state law claims as well.
Establishing the sham litigation exception to Noerr-Pennington’s petitioning immunity is always a difficult endeavor. This case illustrates that it can be particularly difficult when the court deciding the question of whether it was a sham is the same court that presided over the “hard fought” underlying litigation.