Second Circuit Holds That Coercive “Product Hopping” Likely Violates Antitrust Law

In New York v. Actavis, the Second Circuit Court of Appeals became the first circuit to address so-called “product hopping” in the pharmaceutical industry—the alleged use of innovation to thwart generic competition by forcing a shift in demand to a new version of a drug from an existing one that is on the verge of losing its patent protection. The court ruled that Actavis likely violated Section 2 of the Sherman Act by removing twice-daily Alzheimer’s medicine Namenda IR from the market prior to generic entry, in order to force patients taking the drug to switch to Namenda XR, a newly introduced once-daily formulation of the same active ingredient. The court upheld the preliminary injunction issued by the district court, which required Actavis to keep the old version on the market until 30 days after the expected launch of generic competition.

Background

Brand name prescription drug companies are innovation-driven businesses, relying on patent protection and product exclusivity to recover—and profit from—their investment in research, development and regulatory compliance. As a result, they are constantly seeking to develop new products to replace their inventory of aging products that are, or are about to be, “off patent” and which therefore can no longer be sold at prices that will justify the investment in marketing them to health professionals. This process of replacing older products with new and better ones, which is not unique to the pharmaceutical industry, is common, desirable and lawful; indeed, it is a central purpose of the patent laws. And where it leads to greater consumer choice, it is entirely consistent with antitrust law.

The value of a particular product improvement, however, is often in the eye of the beholder, and pharmaceutical companies—as well as others—have been accused of making insignificant changes to products simply to prolong their patent life. The practice of migrating customers from the old to the new protected versions has been labeled “product hopping” by its detractors, who claim it is done for the purpose of thwarting generic competition.

Because of the regulatory framework governing approval of generic drugs and the circumstances under which they may be substituted for their brand counterparts, withdrawal of a brand drug from the market will typically pose a significant barrier to generic entry. A generic drug can be substituted for a brand drug only if the generic manufacturer establishes that the product is “bioequivalent” to the brand drug within Food and Drug Administration standards. Significantly, to be substitutable, the generic label must also be identical in terms of product administration and other important information. While state laws vary, pharmacists either are required to, or may, substitute the generic version when presented with a prescription written for the brand product, unless the prescriber specifically forbids it for medical reasons. As a practical matter, once generics are on the market, the vast majority of prescriptions are filled with the less expensive generics and the brand manufacturer typically reduces or eliminates its investment in affirmatively marketing the brand product to prescribers. If, however, prescribers can be persuaded to prescribe a new patented version instead of the old product, the pharmacy cannot substitute the generic of the old product for the new product, even if they have the same active ingredient, because the labeling and use will be different.

New York v. Actavis^[1]
As the end of Namenda IR’s patent protection was approaching, Actavis developed and introduced Namenda XR, a once-daily formulation of the same active ingredient. Actavis initially chose to market the new version as a superior product that would allow patients and caregivers the ability to reduce the number of pills the patient had to take each day. That approach—sometimes called a “soft switch”—would leave to the patients, caregivers, and prescribers the choice to use the more expensive new product or the less expensive generic version of the old product.

Actavis eventually chose a different approach, and announced that it would withdraw Namenda IR from the market before any generic twice-a-day version was able to enter. As a result, patients who had been taking Namenda IR would either have to be prescribed the new Namenda XR—a so-called “hard switch”—or moved to a different drug altogether. For patients doing well on Namenda IR, switching to a different drug altogether would be particularly undesirable, because although there are other brand drugs used to treat moderate to severe Alzheimer’s, the Circuit Court viewed Namenda as different. As a result, the Court concluded that all or most Namenda IR patients would effectively be forced to switch to Namenda XR. Moreover, once Namenda IR was withdrawn, any generic poised to enter would no longer be bioequivalent to a brand product. In this case, the switch thus would—in the Court’s view—have eliminated the possibility of generic substitution altogether.

The Second Circuit analyzed Actavis’ conduct under its decision in Berkey Photo, Inc. v. Eastman Kodak Co.,^[2] which held that a monopolist’s introduction of a new product is not anticompetitive unless it removes competitors from the market and thereby compels consumers to purchase the new product. Under the Berkey Photo doctrine, the critical issue when analyzing the effect of a new product introduction is the presence or absence of consumer choice.

The court’s assessment of Actavis’ conduct therefore turned on whether consumers were coerced into making the switch to XR. The Second Circuit agreed with the district court’s determination, made after a five-day evidentiary hearing on a motion for preliminary injunction, that consumer choice would be eliminated. The Court viewed Actavis’ initial efforts to encourage consumers to convert to Namenda XR as acceptable “persuasion.” By pulling the old version from the market, however, Actavis would “cross the line from persuasion to coercion.”

The Second Circuit adopted the burden-shifting approach used by the D.C. Circuit in U.S. v. Microsoft Corp.,^[3] which permits a monopolist to defeat a showing that its product change was exclusionary by offering evidence of “nonpretextual” procompetitive justifications for its conduct. The burden then shifts to the plaintiff to rebut “those justifications or demonstrate that the anticompetitive harm outweighs the procompetitive benefit.”^[4] Actavis offered several procompetitive justifications for withdrawing Namenda IR from the market. But its defense was undermined by evidence suggesting that the main purpose of the withdrawal was to force the market to adopt the new product before generic substitution could occur—including statements by the CEO such as “We need to convert as much IR business to Namenda XR as quickly as possible” and “we believe that by potentially doing a forced switch, we will hold on to a large share of our base users.”^[5] He gave the same explanation in an earnings call: “if we do the hard switch . . . it’s very difficult for the generics then to reverse-commute back.” In light of that evidence the Court concluded that Actavis’ “explicit purpose” was to impede generic competition.

The Second Circuit did not quarrel with numerous actions Actavis took in promoting Namenda XR prior to removing Namenda IR from the market, including ending all marketing of Namenda IR and aggressively promoting Namenda XR, selling Namenda XR at rates below the cost of Namenda IR, and offering consumers rebates to ensure, at worst, cost-equivalency between Namenda IR and Namenda XR. It is unclear whether the court would have viewed anything short of withdrawal of the old product before generic entry as unacceptable “coercion.”

Conclusions

The Second Circuit’s ruling was consistent with several previous decisions by district courts in other cases involving alleged “product hopping,” in which the courts emphasized the distinction between efforts designed to “persuade” consumers to switch from those that force them to do so by withdrawing the prior version of the drug from the market. The decision serves as a powerful reminder that evidence of anticompetitive intent in a defendant’s own files can and will have a powerful effect on litigation outcomes.