In In re Modafinil Litigation, the Eastern District of Pennsylvania recently held that a plaintiff challenging a reverse payment as anti-competitive need not prove as a threshold matter that the reverse payment was both large and unjustified. Rather, this analysis should be part of the traditional “rule of reason” test. The Court also held that the size of the payment should be judged against litigation costs, not potential monopoly profits. We previously have written about reverse payment settlements in the ANDA context (see here, here and here). In particular we have written (here) about the Supreme Court’s Actavis decision, which clarified that reverse payment settlements that allow for generic entry prior to the expiration of a patent still are subject to antitrust scrutiny under the “rule of reason” test.

The present antitrust litigation arose after Cephalon, which owns a patent covering specific formulations of modafinil (the active ingredient in Provigil), entered into reverse payment settlements with several generic drug makers ending ANDA litigations. As part of summary judgment briefing, the defendants argued that under Actavis a plaintiff must meet a threshold burden of showing that a reverse payment was both large and unjustified before proceeding to the traditional “rule of reason” antitrust analysis.

The Court held that there is no such threshold requirement, noting that the term “threshold burden” does not appear anywhere in Actavis. Rather, the Court held that a plaintiff must establish as part of the first step of the traditional rule of reason test (which requires a showing of anticipative effects of an agreement) that a reverse payment was large. The Court cited Actavis, which noted that the likelihood of anticompetitive harm increases with the size of a reverse payment. Once anticompetitive effects are established (via a showing of a large reverse payment), the defendant may then present evidence that the reverse payment is justified by procompetitive considerations. If the plaintiff provides evidence to rebut those considerations, the fact finder then weighs the anticompetitive and procompetitive effects. This follows the traditional rule of reason burden-shifting format.

The Court next turned to the question of what constitutes a large payment for the sake of the rule of reason analysis. Defendants argued that the payment should be measured against the brand manufacturer’s expected monopoly profits, while plaintiffs argued that a payment is sufficiently large if it exceeds the expected savings in litigation costs and induces a generic challenger to abandon its patent claim. The Court held that the latter was the appropriate measure, noting that Actavis specifically instructed that the scale of a payment in relation to anticipated litigation costs was an appropriate benchmark. Furthermore, the Court held that the entirety of the reveres payment, not just the unexplained portion, should be considered in determining whether a payment is large under Actavis.

Overall, this case helps those who would challenge a reverse payment as anticompetitive. First, it makes clear that there is no threshold burden before engaging in what essentially is a traditional rule of reason analysis, slightly tailored to the reverse payment scenario—the Court refused to add an additional hurdle to the traditional analysis. Second, determining whether a payment is large for the sake of the rule of reason analysis requires a comparison to litigation costs rather than expected monopoly profits. As litigation costs typically are lower than expected profits, the Court adopted a relatively lower barrier to showing anticompetitive effects.