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IN RE K-DUR ANTITRUST LITIGATION

September 29, 2004.

In re K-DUR ANTITRUST LITIGATION. This document relates to: ALL ACTIONS.


The opinion of the court was delivered by: JOSEPH GREENAWAY, District Judge

OPINION

INTRODUCTION

This matter arises from actions brought by private litigants and the Commonwealth of Pennsylvania against defendant pharmaceutical manufacturers, Schering-Plough Corp. and its subsidiary Key Pharmaceuticals, Inc. (collectively "Schering"), Wyeth (f/k/a American Home Products, Inc.) and its business unit ESI Lederle (collectively "ESI"), and Upsher-Smith Laboratories, Inc. ("Upsher").*fn1 The Judicial Panel on Multidistrict Litigation has transferred these cases to this Court for consolidated pretrial proceedings, pursuant to 28 U.S.C. § 1407. These cases involve K-Dur, a pioneer potassium chloride supplement used to treat patients with depleted potassium levels, a condition typically occurring in people who take blood pressure medication. Schering-Plough is the manufacturer of K-Dur. Schering entered into separate agreements with generic manufacturers Upsher and ESI while those companies were pursuing FDA approval of generic versions of K-Dur. Plaintiffs have brought claims alleging that these agreements violated the Sherman Act's prohibitions against contracts in restraint of trade.

  Defendants Schering and Upsher have moved for judgment on the pleadings, pursuant to FED. R. CIV. P. 12(c), as to the Direct Purchasers' Complaint, and to dismiss the claims, pursuant to FED. R. CIV. P. 12(b), and as to all remaining complaints. Defendant ESI has moved for judgment on the pleadings, pursuant to FED. R. CIV. P. 12(c), as to the Direct Purchasers' Complaint, and to dismiss the claims, pursuant to FED. R. CIV. P. 12(b), as to all remaining complaints, except for the CVS Complaint in which they are not defendants. This Court must also resolve the Direct Purchasers' motion to amend their complaint.

  For the reasons set forth below, the Direct Purchasers' motion to amend their complaint is granted. Defendants Schering, Upsher, and ESI's motions to dismiss and for judgment on the pleadings are granted in part, and denied in part.

  BACKGROUND

  I. The Parties

  A. Defendants*fn2

  The Schering Defendants

  Defendant Schering-Plough Corp. ("Schering") is a New Jersey corporation engaged in the development, manufacturing, and marketing of, among other things, brand name and generic drugs. Defendant Key Pharmaceuticals, Inc. ("Key") is a subsidiary of Schering. Key produces and holds the patent on K-Dur 20, the primary drug at issue in this litigation.

  The Upsher Defendants

  Defendant Upsher-Smith Laboratories, Inc. ("Upsher") is a Minnesota corporation that develops, manufactures, and markets brand-name pharmaceutical products. Upsher primarily uses wholesale and drug chain distribution channels to market its products to retail, chain and hospital pharmacies, and key physician groups.

  The Wyeth/ESI Defendants

  Defendant Wyeth (formerly known as American Home Products, Inc.) is a Delaware corporation engaged in the development, manufacturing, and marketing of, among other things, brand name and generic drugs, as well as over-the-counter medications. Defendant ESI Lederle ("ESI") is a business unit of Wyeth that engages in research, manufacture, and sale of primarily generic drugs.

  B. Plaintiffs*fn3

  Indirect Purchaser Class

  The Indirect Purchaser*fn4 plaintiffs are named individual consumers, "Third-Party Payors" (e.g., health insurers and employee benefit funds), and consumer advocates in the United States and Puerto Rico who purchased or paid for K-Dur products, other than for resale, since June 1997.

  The Commonwealth of Pennsylvania

  The Commonwealth of Pennsylvania ("the Commonwealth") brings suit in its sovereign capacity on behalf of the Commonwealth's general economy, as parens patriae on behalf of natural persons in the Commonwealth, and in its proprietary capacity on behalf of departments, bureaus, and agencies of the Commonwealth, who purchased K-Dur products, or who were reimbursers under medical or pharmaceutical reimbursement programs to which Defendants contractually remitted rebate payments, since June 1997.

  Direct Purchaser Class

  Louisiana Wholesale Drug Company, Inc. ("Louisiana Drug") brings suit on behalf of itself, and all others similarly situated, who purchased K-Dur directly from defendant Schering during the period November 20, 1998 until the cessation of the effects of Defendants' alleged illegal conduct. This class includes wholesalers, hospitals, health maintenance organizations, and retail chain drug stores (collectively "Direct Purchasers"). The Direct Purchasers' motion for class certification is currently pending before this Court, (see Direct Purchasers' Motion for Class Certification, dated June 4, 2004), as well as the Direct Purchasers' motion for preliminary approval of proposed settlement with Wyeth/ESI (see Direct Purchasers' Motion for Preliminary Approval of Proposed Settlement with Defendant Wyeth, for Conditional Certification of the Proposed Settlement Class, and For Approval of the Form and Manner of Notice to the Class, dated July 23, 2004.)

  Non-Class Pharmacy Purchasers

  Albertson's, Inc., CVS Meridian, Inc., Eckerd Corp., Hy-Vee, Inc., the Kroger Company, Rite-Aid Corp., Safeway, Inc., and Walgreen Company (collectively "Non-Class Pharmacy Purchasers")*fn5 are national retail store operators which dispense prescription drugs to the public, and that purchased K-Dur directly from Schering for resale during the relevant period.

  II. Generic Drug Approval Process

  The Hatch-Waxman Act of 1984 ("HWA"), 21 U.S.C. 355(j), regulates the Food and Drug Administration's ("FDA") approval of generic counterparts to patented drugs. The HWA created an expedited FDA approval process for a generic version of a drug previously approved by the FDA. The expedited process allows the generic manufacturer to forego clinical trials by relying on the test results of the brand name manufacturer.

  Under the HWA, a generic drug manufacturer seeking to utilize the expedited approval process must submit an Abbreviated New Drug Application ("ANDA"). To protect the rights of the brand name drug patent holder, the ANDA applicant generic manufacturer must certify that the generic drug will not infringe the brand name manufacturer's patent.*fn6

  Pursuant to 21 U.S.C. § 355(j)(5)(B)(iii), when an ANDA is submitted with a paragraph IV certification concerning a listed drug, "approval [by the FDA] shall be made effective immediately unless an action is brought for infringement of a patent which is the subject of the certification before the expiration of forty-five days from the date the notice provided under paragraph (2)(B)(i) is received." Pursuant to the statute, the FDA must suspend approval of the ANDA until the earliest of the expiration of the pioneer patent, judicial resolution of the correctness of the ANDA applicant's certification (that the patent is invalid or not infringed), or thirty months from the receipt of notice. If a court finds that the patent is either invalid or not infringed before the 30 month period expires, then the generic drug ANDA is granted approval on the date of the ruling.

  As an incentive to file Paragraph IV certifications, the first generic manufacturer to file an ANDA containing a Paragraph IV certification for a specific drug receives a 180-day exclusivity period to market its version of the generic drug without competition from other ANDA applicants. This exclusivity period prevents other generic drugs from receiving ANDA approval during that time. The exclusivity period begins to run from the earlier of 1) the day that the initial applicant first markets the drug; or 2) the day a court determines that the original patent is invalid or not infringed by the generic drug.

  The 180-day exclusivity period has been at the center of the controversy surrounding the potential to subvert certain provisions of the HWA. The concern is that brand name and generic manufacturers will collude to eliminate generic entry into the market. This is accomplished when the brand name manufacturer pays the first generic ANDA applicant to keep its product off the market, thereby causing the 180-day exclusivity to never run. As a result, both the generic manufacturer entering the agreement, and all other generic manufacturers (who under the statute cannot market their drug until the 180-day period expires) would be prevented from marketing their drugs to consumers. Settlement agreements ending patent litigation between brand name and generic manufacturers have been scrutinized and criticized as potentially anti-competitive under this scenario. See e.g., David A. Balto, Pharmaceutical Patent Settlements: The Antitrust Risks, 55 FOOD & DRUG L.J. 321 (2000); Herbert Hovenkamp, Mark Janis & Mark A. Lemley, Anticompetitive Settlement of Intellectual Property Disputes, 87 MINN. L. REV. 1719 (2003); Keith B. Leffler, & Cristofer I. Leffler, Want to Pay a Competitor to Exit the Market? Settle a Patent Infringement Case, 2 ABA ANTITRUST SEC. ECON. COMM. NEWSL. 26 (2002).

  III. Schering's K-Dur Product and Patent

  Schering manufactures and markets two extended-release potassium chloride products: K-Dur 20 and K-Dur 10, which are used to help restore potassium levels, typically in persons taking heart medications. Depleted potassium levels can cause dangerous cardiac problems. Both K-Dur 20 and K-Dur 10 are marketed as brand name drugs, and both are covered by Schering's U.S. Patent No. 4,863,743 (the '743 patent"), which does not expire until September 5, 2006.

  IV. Upsher's ANDA and the Initiation of Patent Litigation

  On August 6, 1995, and again on November 3, 1995, Upsher filed an ANDA with the FDA to market a generic version of K-Dur 20. Pursuant to the HWA, Upsher submitted a Paragraph IV certification and notified Schering of its ANDA application and Paragraph IV certification. On December 15, 1995 Schering sued Upsher in the District Court of New Jersey, alleging that Upsher's generic drug infringed Schering's '743 patent for K-Dur 20. As the first generic manufacturer to file an ANDA, pursuant to the HWA, Upsher was entitled to the 180-day exclusivity period once it began marketing its generic form of K-Dur 20.

  V. ESI's ANDA and the Initiation of Patent Litigation

  On December 29, 1995 ESI filed an ANDA and Paragraph IV certification with the FDA to market a generic version of K-Dur 20. Schering subsequently sued ESI in the Eastern District of Pennsylvania, alleging that ESI's generic drug infringed Schering's '743 patent for K-Dur 20.

  VI. Settlement of the Patent Litigations

  A. Schering/Upsher Settlement Agreement On June 17, 1997, prior to trial, Schering and Upsher reached an agreement to settle the patent litigation (the "Schering/Upsher Agreement"). The alleged terms of the agreement*fn7 were: 1) Upsher agreed not to enter the market with any generic K-Dur competitor drug until September 2001; 2) Schering agreed to grant Upsher a license to market its generic version of K-Dur 20 in September 2001, five years before the expiration of Schering's patent; 3) Upsher agreed to license to Schering five Upsher products; and 4) Schering agreed to pay Upsher $60 million. The effect of the settlement, pursuant to the HWA, was that Upsher's 180-day exclusivity period would begin to run (and in fact began to run) in September 2001, when Upsher began marketing its generic version of K-Dur. Accordingly, other generic manufacturers would not be able to begin marketing their versions of K-Dur until April 2002, when the 180-day exclusivity period expired.

  B. Schering/ESI Settlement Agreement

  By the end of January 1998, prior to trial, Schering and ESI had reached a tentative agreement to settle (and later did settle) the patent litigation (the "Schering/ESI Agreement"). The alleged terms of the agreement were: 1) ESI agreed to refrain from marketing any generic competitor drug to K-Dur until January 2004; 2) ESI agreed to refrain from marketing more than one generic competitor drug to K-Dur between January 2004 and September 2006, the date of the expiration of the '743 patent;*fn8 3) ESI agreed to not conduct, sponsor, file or support any study of the bioequivalence of any generic drug to K-Dur prior to September 2006;*fn9 4) Schering agreed to grant ESI a license to market its generic version of K-Dur 20 in January 2004; 5) ESI agreed to license to Schering two ESI products under development; and 5) Schering agreed to pay ESI potentially $30 million over seven years (an initial payment of $5 million and another $10 million if ESI could demonstrate that the FDA approved its generic version on or before June 1999*fn10 plus $15 million for the two ESI licenses).

  VII. The Antitrust Litigation

  A. Plaintiffs' Allegations

  Plaintiffs filed various complaints against Defendants alleging violations of federal and state antitrust and unfair competition statutes, and common law claims. The gravamen of Plaintiffs' complaint is that the Schering/Upsher and Schering/ESI settlement agreements were collusive, anti-competitive agreements that had the effect and purpose of allowing Schering to maintain their monopoly in the potassium chloride extended release tab market and continue to set artificially high prices. Plaintiffs allege that the agreements accomplished this because, but for the reverse payments made to Upsher and ESI under the agreements, the generic manufacturers would have settled on different terms and entered the markets sooner, thereby enhancing competition and lowering the price of K-Dur. B. The Motion to Dismiss and for Judgment on the Pleadings

  Presently pending before this Court are Defendants' motions to dismiss and for judgment on the pleadings, as well as the Direct Purchasers' motion to amend their complaint. Defendants' motions raise a number of issues for this Court's consideration including whether Plaintiffs have alleged antitrust conduct, injury, and conspiracy under federal law, and whether such claims are barred by the applicable statute of limitations. This Court must determine whether various Plaintiffs may properly assert claims for damages and/or injunctive relief. This Court is also asked to address whether Plaintiffs have alleged viable state antitrust, unfair competition, and unjust enrichment claims. Finally, this Court must consider whether certain Plaintiffs have standing to assert their claims at all.

  DISCUSSION

  MOTION TO AMEND THE COMPLAINT

  The Direct Purchasers have made a motion to amend their complaint, pursuant to FED. R. CIV. P. 15(a) to detail additional evidence produced in discovery in support of their original allegations, and in response to Defendants' arguments addressed to the adequacy of the Direct Purchasers' pleading.*fn11 The amendments in the proposed Amended Complaint purport to clarify the cause of action by stating that: (1) the payments to Upsher and ESI had the specific purpose and intent of delaying entry of low-cost generic versions of K-Dur 20 into the market (see e.g., Direct Purchasers' 1st Am. Compl. ¶¶ 1,60,61,79), (2) Upsher and ESI's agreement to stay off the market was not based on the objective merits of Schering's patent infringement suits, but rather was to delay purposefully the date of generic entry well beyond the date that would have resulted from a legitimate resolution of the patent suits (see e.g., Direct Purchasers' 1st Am. Compl. ¶¶ 1, 57), (3) Schering's patent suits were without merit, and absent reaching the agreements at issue, Upsher and ESI would have won the suits and entered the market earlier (see e.g.,Direct Purchasers' 1st Am. Compl. ¶¶ 1, 48, 49); (4) Alternatively, absent the illegal payments, the Defendants would have settled the patent suits in a manner that would have permitted earlier generic entry (see e.g., Direct Purchasers' 1st Am. Compl. ¶¶ 59, 72); (5) the Defendants attempted to conceal the anti-competitive nature of their agreements by making it appear that the payments were in large part for products that were cross-licensed from Upsher and ESI to Schering, when in fact the Defendants knew that the cross-licenses were worthless (see e.g. Direct Purchasers' 1st Am. Compl. ¶¶ 1, 58, 69); (6) the agreements violated the Sherman Act whether they are viewed under a per se analysis, or a `rule of reason' analysis (see e.g. Direct Purchasers' 1st Am. Compl. ¶ 117).

  A district court has the discretion to deny a party's request for leave to amend if it is apparent from the record that (1) the moving party has demonstrated undue delay, bad faith or dilatory motives, (2) the amendment would be futile, or (3) the amendment would prejudice the other party. Foman v. Davis, 371 U.S. 178, 182 (1962); Fed. Deposit Insur. Corp. v. Bathgate, 27 F.3d 850, 874 (3d Cir. 1994). A district court has substantial leeway in deciding whether to grant leave to amend.

  Delay, in and of itself, is an insufficient ground upon which to deny a motion to amend. The non-moving party must show that the moving party's delay in seeking the amendment will cause unfair prejudice. Cornell v. Occupational Safety and Health Review Comm'n, 573 F.2d 820, 823 (3d Cir. 1978); DiLoreto v. Borough of Oaklyn, 744 F. Supp. 610, 615 (D.N.J. 1990). Where the non-moving party asserts undue delay, "the obligation of the trial court in its disposition of the motion is to articulate the imposition or prejudice caused by the delay, and to balance those concerns against the movant's reason for delay in asserting the motion." Coventry v. United States Steel Corp., 856 F.2d 514, 520 (3d Cir. 1988). The most important factor in deciding whether to grant leave to amend is whether the non-moving party will suffer prejudice as a result of the amendment. Cornell, 573 F.2d at 823.

  This Court finds no reason to deny the Direct Purchasers' motion for leave to amend the complaint on the basis of unfair prejudice from delay. Defendants do not dispute that they would not be unduly prejudiced by this Court's granting of the motion, but rather seek that this Court defer consideration of the Direct Purchasers' motion until resolution of the pending Rule 12 motions.*fn12 This Court finds the most efficient course to dispose of the Direct Purchasers' motion to amend along with the Rule 12 ...


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