Second Circuit Allows Direct Purchasers to Sue Pharmaceutical Companies for Antitrust Claims Based on a Prior Finding of Inequitable Conduct before the PTO
The Second Circuit’s recent opinion In re DDAVP Antitrust Litigation* marks the first federal appeals court decision to grant standing to a customer, rather than a competitor, to bring monopolization claims based on enforcement of a patent allegedly procured by fraud on the U.S. Patent and Trademark Office (PTO) (a so-called Walker Process antitrust claim). Although the Second Circuit declined to adopt a per se rule that all purchasers have standing to raise Walker Process claims and limited its holding to antitrust claims brought following a finding of inequitable conduct, the court’s reasoning may embolden customers to bring antitrust-based claims challenging the enforceability or validity of patents in other circumstances. The court’s upholding of a complaint that might have been found wanting by the Federal Circuit, moreover, may encourage potential antitrust plaintiffs to assert theories designed to avoid that court and instead secure jurisdiction in the regional courts of appeals.
Plaintiffs comprise direct purchasers of tablets of the antidiuretic desmopressin acetate, sold under the name DDAVP. They sued DDAVP manufacturer and patent-holder Ferring B.V. and Ferring Pharmaceuticals (Ferring), and Ferring’s exclusive licensee and the holder of the FDA-approved New Drug Application to market DDAVP tablets, Aventis Pharmaceuticals (Aventis), in the U.S. District Court for the Southern District of New York, charging an anticompetitive scheme to delay generic DDAVP competition. Prior to the antitrust suit, the same district judge found, and the Federal Circuit affirmed, that Ferring’s DDAVP patent was unenforceable due to inequitable conduct before the PTO (involving failure to disclose the potential bias of several declarants whose testimony helped to surmount obviousness objections). Based on the same facts that supported the prior inequitable conduct determination, plaintiffs brought monopolization claims challenging: (i) enforcement of a patent procured by fraud (the Walker Process claim); (ii) sham litigation; and (iii) false listing of a patent in the FDA’s Orange Book. Plaintiffs additionally claimed that defendants filed in the FDA a sham “Citizens’ Petition” prior to the unenforceability ruling; that is, an objectively baseless submission filed solely for the purpose of delaying generic competition (here, by Barr Labs).
The district court dismissed plaintiffs’ complaint in its entirety. The district court held that the plaintiffs lacked antitrust standing to challenge fraudulent procurement of Ferring’s patent because they were not competitors against whom the patent had been enforced, but rather customers who otherwise would lack standing to challenge patent validity. The court also held plaintiffs’ allegations of anticompetitive conduct were not pled with the particularity required by Federal Rule of Civil Procedure 9(b) when claiming fraud, and therefore insufficient to state a claim for relief. Finally, the district court held that plaintiffs failed to allege claims against Aventis because plaintiffs’ allegations failed to aver that Aventis was complicit in Ferring’s misconduct before the PTO.
The Second Circuit’s Opinion
The Second Circuit reversed and remanded for further proceedings. The Second Circuit rendered holdings that merit attention on appellate jurisdiction, standing to assert Walker Process claims, and the sufficiency of anticompetitive conduct allegations in the context of a prior inequitable conduct determination.
Appellate Jurisdiction. The Second Circuit initially rejected defendants’ contention that the Federal Circuit had exclusive jurisdiction over the appeal because the plaintiffs’ right to relief “necessarily depend[ed]” on resolution of a substantial question of federal patent law, the applicable jurisdictional test (Slip Op. 12). Although plaintiffs’ first three antitrust theories hinged on fraud before the PTO, and thus presented patent-law issues, the court held that the final theory – the sham Citizens’ Petition – did not. That theory, the court observed, posited anticompetitive action to delay generic entry because Ferring failed to withdraw the Citizen’s Petition even after the patent was held unenforceable, at which point there was no further question of patent law (id. at 17). That the Citizens' Petition was but one component of a broader monopolization scheme did not deprive the court of jurisdiction. Because jurisdiction requires focusing on “claims, not theories” (id. at 18), and because plaintiffs’ antitrust claims could be sustained on a theory that would not fall within the Federal Circuit’s jurisdiction, the Second Circuit properly asserted jurisdiction over the case.
Antitrust Standing. The Second Circuit also disagreed with the district court’s conclusion that plaintiffs lacked standing to sue because they were customers rather than competitors. The court held that customers who, like the plaintiffs before it, challenge exclusionary conduct that causes high prices are presumptively “efficient enforcers” of the antitrust laws. The court rejected defendants’ argument that direct purchasers should be deemed inefficient enforcers merely because competitors arguably were superior enforcers, reasoning that customers plainly were well motivated to sue, purchasers seek different antitrust damages than competitors, and generic competition might be demonstrated to have benefits (id. at 22).
Although holding that the direct purchaser “plaintiffs would be efficient enforcers under any formulation” of that standing factor (id. at 23), the court had greater difficulty dispatching defendants’ patent-based argument for denying standing – an issue on which prior federal district courts had divided. Specifically, defendants contended that permitting direct purchasers – parties not threatened with a patent infringement action and thus ordinarily without standing to challenge patent validity – to bring Walker Process and related claims would end-run limitations courts have placed on which parties can bring declaratory judgment actions challenging validity. The Second Circuit, wary of potentially leaving an antitrust violation unremedied – particularly in light of competitor incentives to settle infringement claims – and observing that Walker Process itself noted that allowing antitrust recovery “accorded” with long-recognized limits on challenging validity (id. at 26), rejected defendants’ argument. The court, however, limited its holding to the circumstances before it, which involved a patent already held unenforceable for the very inequitable conduct challenged as Walker Process fraud, leaving open the possibility that standing could be denied in other circumstances.
Allegations Sufficiently Pled. Finally, the court rejected the district court’s conclusion that plaintiffs’ allegations insufficiently pled each antitrust theory asserted. The court acknowledged that Walker Process differed from the prior inequitable conduct determination in two respects: a Walker Process plaintiff must allege fraud, not merely intent to mislead the PTO; and Walker Process requires demonstrating that, but for the fraud, no patent would have issued (id. at 30). The court nonetheless held that plaintiffs' allegations of the same facts that supported the inequitable conduct determination sufficed to allege fraud because, “[g]ranting plaintiffs all favorable inferences,” plaintiffs’ "pleadings could plausibly lead to additional findings” that would support an antitrust claim (id. at 31-32). The court further held that the plaintiffs sufficiently alleged “but for” causation even though “plaintiffs do not address patentability directly in their complaint” (id. at 33; emphasis added); in the circumstances presented, where a prior court found the misrepresentations made to the PTO “absolutely critical” in overcoming a prior obviousness objection, the court held, “the fact of non-disclosure is sufficient to properly allege materiality” (id.).
The court did not address whether its analysis of the allegations’ sufficiency comported with the Supreme Court’s recent decisions in Twombly and Iqbal, which require that a complaint allege sufficient facts plausibly to support a claim for relief. Nor did the court address whether the “favorable inferences” it permitted met the Rule 9(b) standard, the applicable pleading standard for Walker Process claims, as recently interpreted by the Federal Circuit in Exergen Corp. v. Wal-Mart Stores, Inc., 575 F.3d 1312 (Fed. Cir. 2009). In the context of pleading inequitable conduct, the Federal Circuit held that Rule 9(b) requires “sufficient allegations of underlying facts from which a court may reasonably infer … specific intent to deceive,” id. at 1328-29, even though Rule 9(b) states that “knowledge” may be “averred generally.”
Having held the plaintiffs’ Walker Process theory sufficiently pled, the court readily upheld the sufficiency of the plaintiffs’ other antitrust theories that involved the same underlying misconduct (sham litigation and false Orange Book listings). The court also upheld the sufficiency of the plaintiffs’ sham Citizens’ Petition because the plaintiffs alleged that the petition was without basis, and another court had suggested that the petition might have been “nothing more than a hardball litigation tactic, motivated by a desire to keep out competition for as long as possible” and thus raise a generic entrant’s costs (id. at 35). Finally, the Second Circuit upheld the sufficiency of the allegations against Aventis. Although Ferring personnel were found to have misled the PTO, allegations that Aventis and Ferring had a long-standing relationship and that Aventis made no effort independently to investigate the patent’s validity following obviousness objections during its prosecution before the PTO, but rather went ahead and listed the patent in the Orange Book, sufficed to state a monopolization claim against Aventis in conformity with Rule 9(b).
In re DDAVP Direct Purchaser Antitrust Litigation marks a significant decision in the Antitrust/Intellectual Property intersection. The court decisively rejected the notion that customers in monopolization cases are generally inefficient enforcers, thereby putting the breaks on courts’ use of the “efficient enforcer” doctrine to deny customers or competitors standing to challenge exclusionary conduct on the ground that an even more efficient enforcer exists.
The Second Circuit’s conclusion that direct purchasers face no patent-based defense to Walker Process standing is also significant, and may engender future customer class actions seeking to challenge patent validity through antitrust claims. Although the court limited its decision to Walker Process claims brought following a determination of unenforceability for inequitable conduct, the court’s reasoning – which leaves the possibility of standing open in other circumstances – may spur Walker Process claims even in the absence of any prior inequitable conduct determination.
Finally, in sustaining allegations in a complaint that admittedly might not be sufficient to state a claim absent discovery of other facts, the Second Circuit arguably applied a more liberal test than the Federal Circuit for determining whether allegations of fraud and causation meet with Rule 9(b). It remains to be seen whether subsequent courts take an approach similar to the Second Circuit’s in light of not only the Federal Circuit’s recent case law, but also the Supreme Court’s decisions in Twombly and Iqbal, which send a message that inferences necessary to sustain a complaint must be found in the facts actually alleged. But whether what divides the Federal and Second Circuits is the substantive test or merely the outcome under it (here, unlike in Exergen, sustaining the allegations), the Second Circuit’s upholding of the plaintiffs’ complaint may lead antitrust plaintiffs, as those in In re DDAVP itself, to allege antitrust theories that arguably do not implicate substantial patent law issues and thus might suffice to avoid the Federal Circuit’s exclusive jurisdiction.
If you would like to learn more about the Second Circuit's decision, please contact your regular Ropes & Gray advisor.
* In re DDAVP Direct Purchaser Antitrust Litig., 06-5525-CV, 2009 WL 3320504 (2nd Cir. Oct. 16, 2009) (Slip Op.).