In re: Lamictal Direct Purchaser Antitrust Litigation
No. 19-1655
UNITED STATES COURT OF APPEALS FOR THE THIRD CIRCUIT
April 22, 2020
Before: AMBRO, KRAUSE, and PHIPPS, Circuit Judges
PRECEDENTIAL. Argued March 9, 2020.
GlaxoSmithKline, LLC d/b/a SmithKline Beecham Corporation; Teva Pharmaceuticals USA, Inc.; Teva Pharmaceuticals Industries Ltd., Appellants
Appeal from the United States District Court for the District of New Jersey (D.C. Civil Action No. 2-12-cv-00995) District Judge: Honorable William H. Walls
Daniel J. Boland
Lindsay D. Breedlove
Robin P. Sumner Pepper Hamilton LLP 3000 Two Logan Square 18th and Arch Streets Philadelphia, PA 19103
Joseph A. Fischetti Gavin J. Rooney Lowenstein Sandler LLP One Lowenstein Drive Roseland, NJ 07068
Counsel for Appellant GlaxoSmithKline LLC
Devora W. Allon (Argued) Jay P. Lefkowitz Dmitriy Tishyevich Kirkland & Ellis LLP 601 Lexington Avenue New York, NY 10022
Katherine M. Romano Liza M. Walsh Walsh Pizzi O‘Reilly Falanga LLP One Riverfront Plaza 1037 Raymond Boulevard, 6th Floor Newark, NJ 07102
Counsel for Appellants Teva Pharmaceuticals USA Inc. Teva Pharmaceutical Industries Ltd.
Elena K. Chan Bruce E. Gerstein Joseph Opper Noah Silverman Garwin Gerstein & Fisher LLP Wall Street Plaza 88 Pine Street, 10th Floor New York, NY 10036
Caitlin G. Coslett (Argued) David F. Sorensen Berger Montague 1818 Market Street, Suite 3600 Philadelphia, PA 19103
Matthew F. Gately Peter S. Pearlman Cohn Lifland Pearlman Herrmann & Knopf LLP Park 80 West, Plaza One 250 Pehle Avenue, Suite 401 Saddle Brook, NJ 07663
Peter R. Kohn Joseph T. Lukens Faruqi & Faruqi LLP 1617 John F. Kennedy Boulevard, Suite 1550 Philadelphia, PA 19103
Stuart E. Des Roches Chris Letter Dan Chiorean Odom & Des Roches LLC 650 Poydras Street, Suite 2020
New Orleans, LA 70130
Susan C. Segura David C. Raphael, Jr. Erin R. Leger Smith Segura Raphael & Leger LLP 3600 Jackson Street, Suite 111 Alexandria, LA 71303
Russell Chorush Allan Bullwinkel Heim Payne & Chorush LLP 111 Bagby Street, Suite 2100 Houston, TX 77002
Counsel for Appellees
Brian T. Burgess Goodwin Procter 1900 N Street, N.W. Washington, DC 20036
Christopher T. Holding Goodwin Procter 100 North Avenue Boston, MA 02210
Counsel for Amicus Appellant Association for Accessible Medicines
AMBRO, Circuit Judge,
This case is the latest in the years-long antitrust battle over whether GlaxoSmithKline (“GSK“) and Teva Pharmaceuticals (“Teva“) violated the antitrust laws through their settlement agreement to end an unrelated patent dispute over GSK‘s brand drug Lamictal and Teva‘s generic form lamotrigine. We need not reach the antitrust issues here, however, for we are concerned at present only with the District Court‘s class certification analysis, specifically whether common issues pertaining to the class predominate over individual issues.
Though judges must conduct a “rigorous analysis” of the facts, evidence, and arguments submitted at the class certification stage, the District Court certified this class without undertaking the analysis needed
I. FACTUAL AND PROCEDURAL BACKGROUND
GSK is a pharmaceutical manufacturer that holds the patent to an anti-epilepsy drug called Lamictal. It began selling Lamictal in 1994, and its patent was set to expire in early 2009. A patent generally excludes all other competitors from producing a drug with the same active ingredient until patent expiration. See King Drug Co. of Florence, Inc. v. Smithkline Beecham Corp., 791 F.3d 388, 394 (3d Cir. 2015).
Teva is a drug maker that manufactures a generic version of Lamictal called lamotrigine. Importantly, it sought to begin marketing lamotrigine before GSK‘s patent on Lamictal expired.
Congress provided a pathway for Teva to do so through the
lengthy and expensive clinical trials, and so they are priced below that of the brand. See id. at 142.
When a generic certifies on its ANDA that the brand‘s patent is invalid or will not be infringed by the generic, that certification “automatically counts as patent infringement,” Actavis, 570 U.S. at 143, and often “provok[es] litigation” from the brand. In re Modafinil Antitrust Litig., 837 F.3d 238, 244 (3d Cir. 2016), as amended (Sept. 29, 2016) (citation omitted). If so, FDA approval of the generic is withheld for 30 months or until resolution of the litigation, whichever comes first.
In April 2002, Teva filed the relevant paragraph IV ANDAs, and GSK followed suit by suing for patent infringement. See King Drug Co., 791 F.3d at 397 (reciting the history of this litigation). But after Teva received a favorable ruling in a bench trial with respect to one of the infringement claims in 2005, the parties settled. As part of the settlement, Teva would begin
AGs are generics launched by the brand manufacturer itself (or an authorized third-party distributor) via the brand‘s drug application rather than by a separate manufacturer via an ANDA. See
That brings us to the issue in this case. After GSK and Teva settled the patent litigation, plaintiffs—companies that directly purchased brand Lamictal from GSK or lamotrigine from Teva (“Direct Purchasers“)—filed suit, claiming the settlement violated the antitrust laws as an impermissible “reverse payment agreement” whereby GSK “paid” Teva to stay out of the market by promising not to launch an AG.2
They argue that but for the alleged reverse payment, Teva would have launched lamotrigine sooner and GSK would have launched an AG the very day Teva entered the market. As a result, they contend they paid more for the drugs than they would have otherwise. Their theory of liability, at least with respect to those entities that purchased lamotrigine from Teva during the six-month period, is premised on the principle that, on average, the price of a generic is lower when there are two generics rather than just one.
GSK and Teva contend that even though GSK was precluded by the settlement from launching an AG, it still competed with Teva on price during the exclusivity period through its so-called Contracting Strategy. GSK claims that it had long been concerned about the effectiveness of launching an AG because doctors seemed more reluctant to switch patients from one epilepsy drug to another, meaning that those who started patients on brand Lamictal would be less inclined to switch them to a lower-priced generic once one launched. Thus GSK planned to take advantage of this nuance in the anti-epilepsy drug market and compete aggressively with Teva on price by contracting with targeted pharmacies to offer them significant discounts and rebates if they agreed to sell brand Lamictal instead of Teva‘s generic version. Further, and critical to their defense, GSK and Teva assert that the latter learned about this strategy before it began selling lamotrigine, and thus it preemptively lowered its lamotrigine prices in order to compete. As a result, GSK and Teva argue that some Direct Purchasers never paid more for lamotrigine than they would have absent the settlement.
GSK and Teva brought this timely interlocutory appeal.
II. JURISDICTION AND STANDARD OF REVIEW
The District Court had jurisdiction under
We review a class certification order for abuse of discretion, which occurs if a district court‘s decision rests on a “clearly erroneous finding of fact, an errant conclusion of law or an improper application of law to fact.” In re Hydrogen Peroxide Antitrust Litig., 552 F.3d 305, 312 (3d Cir. 2009), as amended (Jan. 16, 2009) (citation omitted). “[W]hether an incorrect legal standard has been used is an issue of law to be reviewed de novo.” Id. (alteration in original) (citation omitted). A District Court “errs as a matter of law when it fails to resolve a genuine legal or factual dispute relevant to determining the requirements” of
III. DISCUSSION
A. The Analysis Required to Certify a Class
1. The Basics
(1) the class must be so numerous that joinder of all members is impracticable (numerosity); (2) there must be questions of law or fact common to the class (commonality); (3) the claims or defenses of the representative parties must be typical of the claims or defenses of the class (typicality); and (4) the named plaintiffs must fairly and adequately protect the interests of the class (adequacy of representation, or simply adequacy).
Marcus v. BMW of N. Am., LLC, 687 F.3d 583, 590-91 (3d Cir. 2012) (citation and internal quotation marks omitted).
GSK and Teva challenge only the District Court‘s predominance finding. Stated more expansively, a plaintiff “must ‘demonstrate that the element of [the legal claim] is capable of proof at trial through evidence that is common to the class rather than individual to its members.‘” Marcus, 687 F.3d at 600 (alteration in original) (quoting Hydrogen Peroxide, 552 F.3d at 311). “Because the nature of the evidence that will suffice to resolve a question determines whether the question is common or individual, a district court must formulate some prediction as to how specific issues will play out in order to determine whether common or individual issues predominate in a given case.” Id. (citation omitted). “If proof of the essential elements of the cause of action requires individual treatment, then class certification is unsuitable.” Hydrogen Peroxide, 552 F.3d at 311 (citation omitted).
To determine whether the putative class has satisfied predominance (indeed,
2. The Predominance Inquiry Here
The Direct Purchasers contend that they need not prove antitrust injury at this stage, but rather it suffices if they show only that injury is capable of common proof at trial. True enough. See Hydrogen Peroxide, 552 F.3d at 311-12. But they go further and say that our case is controlled by a comment in Tyson Foods v. Bouaphakeo, 136 S. Ct. 1036 (2016), that suggests an even lower standard for predominance whereby that criterion is satisfied unless no reasonable juror could believe the common proof at trial.
In Tyson Foods, the Supreme Court was reviewing a motion to decertify a class brought under the
But contrary to the Direct Purchasers’ assertion, Tyson Foods does not control our case, and its no-reasonable-juror statement certainly does not overturn our longstanding rule announced in Hydrogen Peroxide, and reiterated in many a case, that a putative class must demonstrate that its claims are capable of common proof at trial by a preponderance of the evidence. See, e.g., Modafinil, 837 F.3d at 248-49; Marcus, 687 F.3d at 591; In re K-Dur Antitrust Litig., 686 F.3d 197, 219-20 (3d Cir. 2012) (subsequent history omitted). First, Tyson Foods was discussing representative evidence in the FLSA context, a unique labor situation in which, often due to inadequate record keeping, “a representative sample [of employees] may be the only feasible way to establish liability.” Tyson Foods, 136 S. Ct. at 1040; see also Anderson v. Mt. Clemens Pottery Co., 328 U.S. 680, 685-88 (1946). In those cases, the accuracy
Our non-FLSA class certification decisions that post-date Tyson Foods have reiterated that district courts are required, per Hydrogen Peroxide, to resolve factual determinations by a preponderance of the evidence at the class certification stage.3 See, e.g., Ferreras v. Am. Airlines, Inc., 946 F.3d 178, 183 (3d Cir. 2019); Mielo v. Steak ‘n Shake Operations, Inc., 897 F.3d 467, 483-84 (3d Cir. 2018); Harnish v. Widener Univ. Sch. of Law, 833 F.3d 298, 304 (3d Cir. 2016). We hold that our standard—plaintiffs must prove their claim is capable of common proof by a preponderance of the evidence—continues to apply to class certification determinations outside of the FLSA context.
With that in mind, we turn to the Direct Purchasers’ claim. The injury element is at issue here. Recall that their theory of liability is that they suffered an antitrust injury because but for the reverse-settlement agreement, each would have paid less for lamotrigine than it actually did. This requires the Direct Purchasers to prove by a preponderance of the evidence that they could establish, through common proof at trial, facts supporting an antitrust injury, namely: 1) GSK would have launched an AG but for the reverse-settlement; and 2) as a result, all class members would have paid less for lamotrigine in this but-for world. If each individual class member could rely on this same proof to prove the elements of its claim, then the injury is capable of common proof at trial.
3. Whether the Direct Purchasers’ Claims Are Capable of Common Proof
GSK and Teva opposed certification, arguing before the District Court that the Direct Purchasers were unable to show that injury is capable of common proof at trial because their proof impermissibly relies on averages, which, in a market
characterized by individual negotiations and a discounted-brand competition strategy, masks the fact that many—up to one-third of the entire class—likely paid no more, or even less, for lamotrigine than they would have if GSK had launched an AG. Because each class member could not rely on the same common evidence to show injury, individual issues predominate; hence they contend the District Court erred by accepting the Direct Purchasers’ expert testimony that relied on these averages without
We agree that a more rigorous analysis is needed. The District Court refused to “address the multi-leveled microeconomic analysis of what each Defendant would or would not have possibly done in the but-for world, and instead focuse[d] on whether the presence of the Contracting Strategy raises individualized issues that defeat predominance.” In re Lamictal Indirect Purchaser & Antitrust Consumer Litig., No. 12-CV-00995, 2018 WL 6567709, at *6 (D.N.J. Dec. 12, 2018). Without that inquiry, it is impossible to determine whether the Contracting Strategy raised individualized issues.
The Direct Purchasers’ expert, Dr. Russell Lamb, opined that evidence common to the proposed class as a whole “demonstrates that the prices paid by all or nearly all proposed Class members for lamotrigine tablets were impacted (artificially inflated) by the allegedly illegal agreement between GSK and Teva,” and thus the class was “injured by the Defendants’ alleged[ly] anticompetitive conduct.” J.A. 487-88. This “common evidence” includes: (1) economic literature showing that, on average, prices of generics are lower as more enter the market; (2) Teva‘s own general pricing forecast tending to discount a generic by 50% without competition, but by 65% when facing an additional competitor; and (3) transaction-level sales data showing that the average actual price paid was consistent with these predictions. Lamb also created a model purporting to show the price each purchaser would have paid absent the settlement, and he opined that the prices would have been lower both had GSK just launched an AG4 and had it launched an AG along with the Contracting Strategy. But, as GSK and Teva accurately point out, that model still relies on an average hypothetical price, which again fails to account for individual negotiations or the effect of GSK‘s Contracting Strategy on each Direct Purchaser.
GSK and Teva‘s expert, Dr. James Hughes, countered that it is “not possible, absent individualized inquiry, to determine whether any particular member of the proposed [c]lass suffered injury in the form of higher prices as a result of the alleged anticompetitive conduct.” J.A. 265-66. He rebutted many of Dr. Lamb‘s findings, primarily criticizing the use of averages—contending that Lamb committed “meaningful error” when he assumed an aggregate “actual” price that he applied to all class-members, which failed to acknowledge that purchasers paid “dramatically different prices,” dropped charge-backs and discounts, and ignored low “outlier” prices. Further, Dr. Hughes criticized Dr. Lamb‘s reliance on general forecasting documents using average prices, rather than lamotrigine-specific prices. Hughes created his own model, using lamotrigine-specific prices from Teva company documents, to show that, when accounting for Teva‘s preemptive response to the Contracting Strategy, the price of
lamotrigine was likely lower for some purchasers than it would have been had GSK launched an AG. Based on this, Hughes found that 25 of the 33 generic-only purchasers likely paid the same or lower prices in the actual world under the Contracting Strategy than they would have paid had GSK launched an AG. In effect, the amount each purchaser
Here, the District Court abused its discretion when it assumed, absent a rigorous analysis, that averages are acceptable. As is clear from the dueling expert reports, the acceptability of averages depends largely on the answer to several factual predicates, most importantly: 1) whether the market is characterized by individual negotiations; 2) whether Teva preemptively lowered its pricing in response to the Contracting Strategy; and 3) whether and to what extent GSK, absent the settlement agreement, would or could have pursued both the Contracting Strategy and an AG. The Court did not resolve these factual disputes, which would have required it to weigh the competing evidence and make a prediction as to how they would play out at trial. Further, much of each expert‘s analysis turned on his sources of evidence for pricing and discounting data, many of which were in tension. It was up to the District Court to scrutinize the evidence to determine what was credible and could be used in the expert analysis.
This lack of analysis perhaps was due to the Court‘s assumption that antitrust injury here occurred “at the moment the price of generic lamotrigine was artificially inflated by the no-AG agreement, even if GSK‘s Contracting Strategy later on possibly eroded some or all of the inflated price.” Lamictal, 2018 WL 6567709, at *6. But that assumption misunderstood GSK and Teva‘s argument—the prices were never inflated to begin with because Teva preemptively lowered its prices before launching; thus some Direct Purchasers never suffered an overcharge. But the District Court cannot simply make that assumption—rather, whether Teva preemptively lowered its prices is a factual matter hotly contested by the parties. And the Court was required to resolve that dispute by a preponderance of the evidence.
Thus, contrary to the District Court‘s belief, addressing the micro-level analysis here, even though it touches on the merits, was necessary in order to determine whether the Direct Purchasers, in light of the competing expert reports and evidence, could show that common issues predominated by a preponderance of the evidence. While averages may be acceptable where they do not mask individualized injury, see Gates v. Rohm & Haas Co., 655 F.3d 255, 266 (3d Cir. 2011), we cannot determine whether that occurred here because of the lack of analysis. Accordingly, we vacate and remand for the District Court to analyze the evidence and arguments submitted as part of class certification.
B. Injury and Damages
To compound matters, the District Court appears to have treated the parties’ arguments as a dispute about damages, rather than antitrust injury, reasoning that “[t]he use of averages to develop the aggregate amount of damages does not suggest [the Direct Purchasers] will be unable to ensure recovery is only for injured parties.” Lamictal, 2018 WL 6567709, at *6 (alteration in original) (emphases added) (citation omitted). That was amiss, as averages here were used to show injury—i.e., the Direct Purchasers were overcharged for lamotrigine because of the reverse-settlement—in addition to damages.
We have consistently distinguished injury from damages. See, e.g., Newton v. Merrill Lynch, Pierce, Fenner & Smith, Inc., 259 F.3d 154, 188 (3d Cir. 2001), as amended (Oct. 16, 2001) (“Proof of injury (whether or not an injury occurred at all) must be distinguished from calculation of damages (which determines
IV. CONCLUSION
Because the District Court did not conduct a rigorous analysis of the competing expert reports that rely on competing evidence and assume competing facts, we are unable in the first instance to determine whether the Direct Purchasers have met the predominance requirement by a preponderance of the evidence. Also, the Court incorrectly conflated injury with damages in its analysis. We therefore vacate the class certification order and remand for the District Court to conduct the required analysis.