King Drug Co of Florence Inc v. Smithkline Beecham Corporation, 2015 U.S. App. LEXIS 10859

Background

GSK (SmithKline Beecham) marketed Lamictal (lamotrigine); Teva filed first‑filed paragraph IV ANDAs for generic tablets and chewables in 2002, triggering patent litigation under Hatch‑Waxman.
After trial, the district judge held the patent’s main claim invalid; before rulings on remaining claims, GSK and Teva settled in 2005.
Settlement: Teva could market chewables early and would have tablet entry at a later agreed date; critically, GSK promised not to launch an authorized generic (AG) competing with Teva during Teva’s 180‑day exclusivity period (the “no‑AG agreement”).
Plaintiffs (direct purchasers of Lamictal) sued under Sections 1 and 2 of the Sherman Act, alleging the no‑AG agreement is effectively a reverse payment that unlawfully delayed competition.
The district court dismissed under Rule 12(b)(6), treating Actavis as limited to cash reverse payments; the Third Circuit stayed, reconsidered post‑Actavis, and now vacated and remanded, holding no‑AG agreements can be subject to rule‑of‑reason antitrust scrutiny when they represent an unexplained transfer of value.

Issues

Issue	Plaintiff's Argument	Defendant's Argument	Held
Whether Actavis antitrust scrutiny is limited to cash reverse payments	No; noncash transfers (here, a no‑AG promise) can be equivalent to substantial value and thus a reverse transfer to induce delay	Yes; Actavis targets monetary "payments," and no‑AG is an exclusive‑license or ordinary settlement term immune from antitrust review	A no‑AG agreement may fall within Actavis when it represents an unexplained, valuable transfer from patentee to challenger and is subject to rule‑of‑reason review
Whether a no‑AG agreement is merely an exclusive license shielded by patent law	Plaintiffs: it functions to buy off challenge and avoid invalidation risk, not a legitimate license purpose	Defendants: patent statute permits licenses and exclusive arrangements; settlements and licenses are pro‑competitive and should be encouraged	The patent‑licensing power does not immunize agreements that use licensing or self‑restraint to eliminate competition without justification
Whether plaintiffs pleaded facts sufficient to survive Rule 12(b)(6)	Plaintiffs alleged patent likely weak, GSK had incentive to launch an AG, the no‑AG promise was valuable, and Teva had history of at‑risk launches	Defendants: allegations speculative; plaintiffs fail to show that, but‑for the no‑AG, earlier or more competitive entry would have occurred	Allegations and reasonable inferences are sufficient at pleadings stage to state a rule‑of‑reason claim; dismissal vacated and remanded
Whether the district court could resolve rule‑of‑reason merits at pleading stage	Plaintiffs: merits (including justifications) are fact‑specific and for the finder of fact	Defendants: settlement appears reasonable and would survive Actavis balancing	The court erred in deciding the merits on pleadings; rule‑of‑reason inquiry generally fact‑bound and for factfinder after discovery

Key Cases Cited

FTC v. Actavis, 133 S. Ct. 2223 (2013) (reverse‑payment settlements can sometimes violate antitrust law and should be analyzed under the rule of reason)
In re K‑Dur Antitrust Litig., 686 F.3d 197 (3d Cir. 2012) (Third Circuit previously rejected the scope‑of‑the‑patent test and applied a rule‑of‑reason approach to reverse payments)
United States v. Line Material Co., 333 U.S. 287 (1948) (patent and antitrust policies must be balanced; patent does not confer immunity from antitrust law)
United States v. New Wrinkle, Inc., 342 U.S. 371 (1952) (patent‑related agreements may be unlawful if used to restrain trade)
Walker Process Equip., Inc. v. Food Mach. & Chem. Corp., 382 U.S. 172 (1965) (patent is an exception to antitrust rules; fraudulently obtained patents may trigger antitrust liability)
Palmer v. BRG of Ga., Inc., 498 U.S. 46 (1990) (agreements not to compete based on intellectual property licenses can be unlawful on their face)