[Ip-health] Abbott Labs. v. Teva -- blocking the introduction of generic fenofibrate by changing the product

[James Love]

Can a drug company remove a product from the market in favor of a
slightly revised version, in order to deter generic entry?  Maybe
not.  This US competition case also illustrates why Microsoft and BSA
monitor activities in the pharmaceutical area, and why some drug
companies monitor activities in the copyright or software area...
Jamie

"a monopolist is not free to take certain actions that a company in a
competitive (or even oligopolistic) market may take, because there is
no market constraint on a monopolist's behavior. . .  By removing the
old products from the market and changing the NDDF code, Defendants
allegedly suppressed competition by blocking the introduction of
generic fenofibrate. . .

Begin forwarded message:

From: "Balto, David A." <DBalto@RKMC.COM>
Date: May 28, 2006 11:17:22 PM EDT
To: AT-CONVERSATION@MAIL.ABANET.ORG
Subject: Re: Important decision on anticompetitive "innovation"

Abbott Labs. v. Teva,  Civil Action No. 02-1512-KAJ (D. Del. May 26,
2006)

One of the most intriguing and difficult areas of antitrust law is
when a dominant firm can be liable for a change in a product.  An
alteration to a product may be a significant innovation or it may be
a effort to extend market dominance.  When a dominant firm makes a
significant product change it may be challenged under Section 2, as
exclusionary conduct.  Not surprisingly these claims are frequently
unsuccessful:  courts are ill equipped to second guess the whether a
product change is a true innovation.  But on the other hand, the
courts have not declared product changes per se legal.

These issues were developed through a series of cases in the 1970s
involving software and telecom interfaces.  Now the battle has turned
to pharmaceuticals where generic firms and purchasers have claimed
that brand name firms make minor innovations late in patent life to
secure new patents and extend the exclusivity period over the drug,
forestalling generic entry.  Some commentators call this practice
=93product hopping.=94    (Less one think that these claims are
imaginary, concerns over product hopping were implicitly at issue in
the FTC=92s challenge to the Cima/Cephalon merger).

But there are no decided cases in the pharmaceutical area.  That is,
there were no cases until last Friday afternoon when Judge Kent
Jordan, rejected several motions to dismiss in Abbott Labs v. Teva.,
involving antitrust claims by Teva, Impax, and several groups of
buyers alleging that Abbott=92s changes to the drug Tricor violated
Section 1 and 2 of the Sherman Act.  The decision is a sweeping
victory for the plaintiffs and provides a thoughtful roadmap for the
adjudication of these product hopping claims in the pharmaceutical
industry.

One does not have to have a vivid imagination to understand why Teva,
Impax and the buyers were concerned about the conduct of Abbott.
Tricor is an almost billion dollar drug used to lower cholesterol.
Teva and Impax battled for three years starting in 1999 challenging
Abbott=92s patents over the capsule version of Tricor.  And according
to their allegations they prevailed on all their patent claims and
were poised to enter in 2003.  Ready to enter =96right?

But then Abbott changes the product from a capsule to a tablet
version.  Although the argument that the switch to tablet was an
improvement might be hard to swallow (sorry), the tablet version did
not have to be taken with food and there were some other
improvements.  And then further patent litigation ensued (again Impax
and Teva prevailed)

But Abbott did not only change their product.    After the NDA for
the tablet formulation was approved, Defendants stopped selling
TriCor capsules and also bought back the existing supplies of those
capsules from pharmacies. In addition, Abbott changed the code for
TriCor capsules in the National Drug Data File ("NDDF") to
"obsolete." The NDDF is a private database that provides information
about FDA-approved drugs.  Changing the code to "obsolete" removed
the TriCor capsule drug formulation from the NDDF, which prevented
pharmacies from filling TriCor prescriptions with a generic capsule
formulation.

  Abbott and the other defendants moved to dismiss the case.  They
argued that their (1) conduct in changing the TriCor formulation and
implementing those changes in the market did not violate federal
antitrust law; (2) that any actions taken in the  patent cases  were
immune under the antitrust laws because Plaintiffs did not adequately
plead that those lawsuits were a sham; (3) that the overall scheme
claims must be dismissed because the individual components of the
scheme faiedl to state a claim; (4) that Plaintiffs did not plead
antitrust injury for some of the claims; (5) that Plaintiffs did not
adequately plead Abbott's or Fournier's involvement in portions of
the alleged scheme; and (6) that the state law allegations failed to
state a claim.   The decision dismissed each of these claims.  This
note will focus on the first argument.


Can Product Changes Be challenged under the Antitrust Laws?


The crucial issue surrounded the product changes.  They argued the
claims should be dismissed because the Plaintiffs conceded in their
complaints that the TriCor formulation changes were improvements, and
that any product change that introduces an improvement, however
minor, is per se legal under the antitrust laws. Second, they argued
that they have not violated the antitrust laws because Teva and Impax
have not been completely foreclosed from the Tricor market. Third,
they argued that their withdrawal of old TriCor formulations and
changes to the NDDF codes do not amount to antitrust violations,
because they had no obligation to help their rivals.  The court
rejected each of these claims on factual and legal grounds.

The court stated the difficult task of analyzing a product innovation
claim

=93Because, speaking generally, innovation inflicts a natural and
lawful harm on competitors, a court faces a difficult task when
trying to distinguish harm that results from anticompetitive conduct
from harm that results from innovative competition. "[T]he error
costs of punishing technological change are rather high [and] . . .
[c]ourts should not condemn a product change, therefore, unless they
are relatively confident that the conduct in question is
anticompetitive." Hovenkamp & Lemley, IP & Antitrust =A7 12.1. If
consumers are free to choose among products, then the success of a
new product in the marketplace reflects consumer choice, and
"antitrust should not intervene when an invention pleases customers."
Areeda =B6 776d. If the new product is not successful, then there will
be no significant injury to competitors and no need for antitrust
intervention. Id. Based on those general principles, the Defendants
argue that an antitrust claim premised on the introduction of new
products must be supported by evidence that "the innovator knew
before introducing the improvement into the market that it was
absolutely no better than the prior version, and that the only
purpose of the innovation was to eliminate the complementary product
of a rival." (D.I. 384 at 10-1 1 (quoting Areeda =B6 776d).)=94

The defendants fundamentally claimed that a product improvement was
per se legal.  They relied extensively on the Second Circuit analysis
in Berkey Photo in which the court said "If a monopolist's products
gain acceptance in the market . . . it is of no importance that a
judge or jury may later regard them as inferior, so long as that
success was not based on any form of coercion.".

But the critical difference between this case and Berkey was whether
the market was open.

=93A major logical underpinning of the Second Circuit's reluctance to
inquire into the alleged anticompetitive effect of Kodak's new
products was the success of those products in an open market, and the
related conclusion that the harm to Kodak's competitors was a matter
of consumer choice. See Areeda =B6 781 b ("[I]f buyers want it, is an
antitrust court entitled to say that buyers should not have it? We
doubt that the court has any choice but to accept consumer
sovereignty, especially in the absence of any criteria or calculus
for deciding otherwise."). Consumers who are free to choose among
various products enjoy the presence of competition rather than its
absence.=94

Here the critical element was the other conduct Abbott engaged in
that limited consumer choice.  Indeed that was a key factor absent in
Berkey.  The court noted that consumers in that case were "not
compelled" to purchase the new film, in part because "Kodak did not
remove any other films from the market when it introduced the new
one." 603 F.2d at 287. Indeed, "the situation [in that case] might be
completely different if, upon introduction of the [new] system, Kodak
had ceased producing film in the [old] size, thereby compelling
camera purchasers to buy [the new] camera."  Id. at 287 n.39.  Thus
the court concluded  in =93.the absence of free consumer choice, the
basis for judicial deference is removed.=94

Rather than adopting the rule of per se legality suggested by the
defendants, the court said the rule of reason balancing approach of
the D.C. Circuit in US v. Microsoft was appropriate:

=93The nature of the pharmaceutical drug market, as described in
Plaintiffs' allegations, persuades me that the rule of reason
approach should be applied here as well. The per se standard proposed
by Defendants presupposes an open market where the merits of any new
product can be tested by unfettered consumer choice. But here,
according to Plaintiffs, consumers were not presented with a choice
between fenofibrate formulations. Instead, Defendants allegedly
prevented such a choice by removing the old formulations from the
market while introducing new formulations. Hence, an inquiry into the
effect of Defendants' formulation changes, following the rule of
reason approach, is justified. Cf. IP & Antitrust =A7 12.5 (inquiry as
to product- switching conduct such as is alleged in this case is
justified because that conduct "seems clearly to be an effort to game
the rather intricate FDA rules to anticompetitive effect").

Therefore, in this case, an antitrust inquiry into the benefits
provided by Defendants' product changes is appropriate. Contrary to
Defendants' assertion, Plaintiffs are not required to prove that the
new formulations were absolutely no better than the prior version or
that the only purpose of the innovation was to eliminate the
complementary product of a rival. Rather, as in Microsoft, if
Plaintiffs show anticompetitive harm from the formulation changes,
that harm will be weighed against any benefits presented by Defendants.=94

The remaining aspects of the motion to dismiss on product innovations
were dealt with in a straightforward fashion.  As to the argument
that the plaintiffs admitted the capsule version was an improvement,
the court held that  Plaintiffs need not prove that the new
formulations had absolutely no benefit. The =93so-called admissions=94
cited by Defendants the plaintiffs did not  concede that any  changes
accurately reflected actual improvements in the drug.

The defendants also claimed that the plaintiffs were not excluded
from the market because they were not totally precluded from
marketing the old versions of Tricor.   The court rejected that claim.

To show that conduct has an anticompetitive effect, "it is not
necessary that all competition be removed from the market. The test
is not total foreclosure, but whether the challenged practices bar a
substantial number of rivals or severely restrict the market's
ambit.'' United States v. Dentsply Int'l, Inc., 399 F.3d 181, 191 (3d
Cir. 2005).  Competitors need not be barred "from all means of
distribution," if they are barred "from the cost-efficient ones."
Microsoft, 253 F.3d at 64.


Finally, the defendants argued that the other conduct --- withdrawing
the product from the market and changing the NDDF code=97was not an
antitrust violation because a monopolist does not have any duty to
assist its competitors.

Not quite according to the court:

"a monopolist is not free to take certain actions that a company in a
competitive (or even oligopolistic) market may take, because there is
no market constraint on a monopolist's behavior." LePage=92s Inc. v.
3M, 324 F.3d 141, 151 -52 (3d Cir. 2003) (citing Aspen Skiing Co. v.
Aspen Highlands Skiing Corp., 472 U.S. 585, 601-04 (1985)). Contrary
to Defendants' assertion (D.I. 384 at 15), Plaintiffs allege harm to
competition rather than simply harm to Teva and Impax.  By removing
the old products from the market and changing the NDDF code,
Defendants allegedly suppressed competition by blocking the
introduction of generic fenofibrate.  The Court in Berkey Photo noted
that such conduct, which results in consumer coercion, is potentially
anticompetitive.  See 603 F.2d at 287 & n.39 'finding no liability
but stating that "the situation might be completely different" if the
defendant stopped producing old products or removed them from the
market). Thus, the allegations of product removal and NDDF code
changes, like the allegations related to the product changes
themselves, support Plaintiffs' antitrust claims.=94

The remaining aspects of the decision, especially the discussion of
the sham litigation claims are interesting.  But generally it was a
near complete victory for the plaintiffs

If you would like a copy of the decision let me know

many thanks

David Balto
Robins Kaplan Miller & Ciresi