State of New York v. Actavis , 787 F.3d 638 ( 2015 )

14‐4624‐cv
State of New York v. Actavis
In the
United States Court of Appeals
For the Second Circuit
________
AUGUST TERM, 2014
ARGUED: APRIL 13, 2015
DECIDED: MAY 22, 20151
No. 14‐4624
PEOPLE OF THE STATE OF NEW YORK, by and through ERIC T.
SCHNEIDERMAN, Attorney General of the State of New York,
Plaintiff‐Appellee,
v.
ACTAVIS PLC, FOREST LABORATORIES, LLC,
Defendants‐Appellants.
________
Appeal from the United States District Court
for the Southern District of New York.
No. 14 Civ. 7473 – Robert W. Sweet, Judge.
________
Before: WALKER, RAGGI, and DRONEY, Circuit Judges.
________
This  opinion  was  filed  under  seal  on  May  22,  2015,  and  the  parties  were
1
permitted  to  request  redactions  of  confidential  information.    This  published
version of the opinion indicates the redactions allowed by the court.
2 No. 14-4624-cv
The State of New York brought this antitrust action against
Defendant-Appellant Actavis plc and its wholly-owned subsidiary
Forest Laboratories, LLC (collectively, “Defendants”). New York
alleges that as Namenda IR, Defendants’ twice-daily drug designed
to treat moderate-to-severe Alzheimer’s disease, neared the end of
its patent exclusivity period in July 2015, Defendants introduced a
new once-daily version called Namenda XR. The patents on XR
ensure exclusivity, and thus prohibit generic versions of XR from
entering the market, until 2029. Faced with the prospect of
competition from generic IR, Defendants decided to withdraw
virtually all Namenda IR from the market in order to force
Alzheimer’s patients who depend on Namenda IR to switch to XR
before generic IR becomes available. Because generic competition
depends heavily on state drug substitution laws that allow
pharmacists to substitute generic IR for Namenda IR―but not for
XR, New York alleges that Defendants’ forced-switch scheme would
likely impede generic competition for IR. Moreover, the substantial
transaction costs of switching from once-daily XR back to twice-
3 No. 14-4624-cv
daily IR therapy would likely further ensure that Defendants would
maintain their effective monopoly in the relevant drug market
beyond the time granted by their IR patents.
The United States District Court for the Southern District of
New York (Robert W. Sweet, Judge) issued a preliminary injunction
barring Defendants from restricting access to Namenda IR prior to
generic IR entry. We conclude that the district court did not abuse
its discretion by granting New York’s motion for a preliminary
injunction because New York has demonstrated a substantial
likelihood of success on the merits of its claim under the Sherman
Act, 15 U.S.C. § 2, and has made a strong showing of irreparable
harm to competition and consumers in the absence of a preliminary
injunction. Accordingly, we affirm the district court’s order issuing
a preliminary injunction.
________
LISA S. BLATT, Arnold & Porter LLP, Washington,
D.C. (Sarah M. Harris, Robert A. DeRise, Arnold
& Porter, LLP, Washington, D.C.; George T.
Conway III, Wachtell, Lipton, Rosen & Katz, New
York, N.Y.; J. Mark Gidley, Peter J. Carney, Claire
A. DeLelle, White & Case LLP, Washington, D.C.;
4 No. 14-4624-cv
Jack E. Pace III, Martin M. Toto, White & Case
LLP, New York, N.Y., on the brief), for Defendants-
Appellants.
ANISHA S. DASGUPTA, (Barbara D. Underwood,
Andrew Kent, Eric J. Stock, Elinor R. Hoffmann,
on the brief), for Eric T. Schneiderman, Attorney
General of the State of New York, New York,
N.Y., for Plaintiff-Appellee.
________
JOHN M. WALKER, JR., Circuit Judge:
The State of New York brought this antitrust action against
Defendant-Appellant Actavis plc and its wholly-owned subsidiary
Forest Laboratories, LLC (collectively, “Defendants”). New York
alleges that as Namenda IR, Defendants’ twice-daily drug designed
to treat moderate-to-severe Alzheimer’s disease, neared the end of
its patent exclusivity period in July 2015, Defendants introduced a
new once-daily version called Namenda XR. The patents on XR
ensure exclusivity, and thus prohibit generic versions of XR from
entering the market, until 2029. Faced with the prospect of
competition from generic IR, Defendants decided to withdraw
virtually all Namenda IR from the market in order to force
Alzheimer’s patients who depend on Namenda IR to switch to XR
5 No. 14-4624-cv
before generic IR becomes available. Because generic competition
depends heavily on state drug substitution laws that allow
pharmacists to substitute generic IR for Namenda IR―but not for
XR, New York alleges that Defendants’ forced-switch scheme would
likely impede generic competition for IR. Moreover, the substantial
transaction costs of switching from once-daily XR back to twice-
daily IR therapy would likely further ensure that Defendants would
maintain their effective monopoly in the relevant drug market
beyond the time granted by their IR patents.
The United States District Court for the Southern District of
New York (Robert W. Sweet, Judge) issued a preliminary injunction
barring Defendants from restricting access to Namenda IR prior to
generic IR entry. We conclude that the district court did not abuse
its discretion by granting New York’s motion for a preliminary
injunction because New York has demonstrated a substantial
likelihood of success on the merits of its claim under the Sherman
Act, 15 U.S.C. § 2, and has made a strong showing of irreparable
harm to competition and consumers in the absence of a preliminary
6 No. 14-4624-cv
injunction. Accordingly, we affirm the district court’s order issuing
a preliminary injunction.
BACKGROUND
This case raises a novel question of antitrust law: under what
circumstances does conduct by a monopolist to perpetuate patent
exclusivity through successive products, commonly known as
“product hopping,” 2 violate the Sherman Act, 15 U.S.C. §§ 1 and 2.
This question is an issue of first impression in the circuit courts.
Determining whether Defendants’ actions are unlawfully
anticompetitive requires some understanding of the idiosyncratic
market characteristics of the complex and highly-regulated
pharmaceutical industry, as well as some peculiar characteristics of
treatment for Alzheimer’s disease. We begin by describing several
key features of the pharmaceutical industry.
2The term “product hopping” was coined by Herbert Hovenkamp. See Alan
Devlin, Exclusionary Strategies in the Hatch-Waxman Context, 2007 Mich. St. L. Rev.
631, 658 (2007) (citing Herbert Hovenkamp et al., IP and Antitrust: An Analysis of
Antitrust Principals Applied to Intellectual Property Law (2002)).
7 No. 14-4624-cv
I. FDA Requirements, the Hatch-Waxman Act, and State Drug
Substitution Laws
In compliance with the Federal Food, Drug, and Cosmetic Act,
21 U.S.C. §§ 301-399f, when a pharmaceutical manufacturer seeks to
bring a new drug to market, it must submit a New Drug Application
(“NDA”) for approval by the U.S. Food and Drug Administration
(“FDA”). 21 U.S.C. § 355. An NDA must contain scientific evidence
that demonstrates the drug is safe and effective, which inevitably
requires “a long, comprehensive, and costly testing process.” F.T.C.
v. Actavis, Inc., 133 S. Ct. 2223, 2228 (2013). NDA-approved drugs
are generally referred to as brand-name or brand drugs. An
approved brand drug enjoys a period of patent exclusivity in the
market at the end of which one or more generic drugs, 3 exhibiting
the same characteristics as the brand drug, may enter the market at a
lower price to compete with the brand drug.
In 1984, Congress amended the Federal Food, Drug, and
Cosmetic Act by enacting the Drug Price Competition and Patent
Generic drugs “are copies of brand-name drugs and are the same as those
3
brand name drugs in dosage form, safety, strength, route of administration,
quality, performance characteristics and intended use.” FDA, Understanding
Generic Drugs, http://1.usa.gov/1SjEIso (last visited Apr. 14, 2015).
8 No. 14-4624-cv
Term Restoration Act (the “Hatch-Waxman Act” or “Hatch-
Waxman”), Pub. L. No. 98-417, 98 Stat. 1585. Hatch-Waxman was
designed to serve the dual purposes of both encouraging generic
drug competition in order to lower drug prices and incentivizing
brand drug manufacturers to innovate through patent extensions.
To incentivize innovation, Hatch-Waxman grants brand
manufacturers opportunities to extend their exclusivity period
beyond the standard 20-year patent term: it allows a brand
manufacturer to seek a patent extension of up to five years to
compensate for time that lapsed during the FDA regulatory process,
35 U.S.C. § 156, and an additional six-month period of “pediatric
exclusivity” if the manufacturer conducts certain pediatric studies,
21 U.S.C. § 355a. Defendants applied for, and received, both
extensions for Namenda IR.
Hatch-Waxman also promotes competition from generic
substitute drugs. It permits a manufacturer that seeks to market a
generic version of an NDA-approved drug to file what is known as
an Abbreviated New Drug Application (“ANDA”). See 21 U.S.C.
9 No. 14-4624-cv
§ 355(j); see also In re Adderall XR Antitrust Litig., 754 F.3d 128, 130 (2d
Cir. 2014). An ANDA allows a generic manufacturer to rely on the
studies submitted in connection with the already-approved brand
drug’s NDA to show that the generic is safe and effective, provided
that the ANDA certifies that the generic drug has the same active
ingredients as and is “biologically equivalent” or “bioequivalent” to
the already-approved drug. 4 21 U.S.C. § 355(j)(2)(A)(iv); see also
Caraco Pharm. Labs., Ltd. v. Novo Nordisk A/S, 132 S. Ct. 1670, 1676
(2012) (citing 21 U.S.C. §§ 355(j)(2)(A)(ii), (iv)).
A generic drug is bioequivalent to a brand drug if “the rate
and extent of absorption” of the active ingredient is the same as that
of the brand drug. 21 U.S.C. § 355(j)(8)(B)(i). In other words, two
drugs are bioequivalent if they deliver the same amount of the same
active ingredient content into a patient’s blood stream over the same
amount of time. By enabling generic manufacturers to “piggy-
back” on a brand drug’s scientific studies, Hatch-Waxman “speeds
the introduction of low-cost generic drugs to market, thereby
4An ANDA also requires a manufacturer to demonstrate other measures of
equivalence between the brand and generic drugs, which are not relevant here.
21 U.S.C. § 355(j)(2)(A).
10 No. 14-4624-cv
furthering drug competition.” Actavis, 133 S. Ct. at 2228 (internal
quotation marks, alteration, and citation omitted); see also H.R. Rep.
No. 98-857, pt. 2, at 9 (1984) (stating the Hatch-Waxman Act’s
“policy objective” was to “get[] safe and effective generic substitutes
on the market as quickly as possible after the expiration of the
patent”).
By the time Congress enacted the Hatch-Waxman Act, many
states had enacted drug substitution laws to further encourage
generic competition. 5 Today, all 50 states and the District of
Columbia have drug substitution laws. 6 Although the specific terms
of these laws vary by state, drug substitution laws either permit or
require pharmacists to dispense a therapeutically equivalent, lower-
cost generic drug in place of a brand drug absent express direction
from the prescribing physician that the prescription must be
5 See Alison Mason & Robert L. Steiner, Fed. Trade Comm’n, Generic
Substitution and Prescription Drug Prices: Economic Effects of State Drug Product
Selection Laws 1 (1985), available at http://1.usa.gov/1IS44Ju (“FTC, Generic
Substitution”).
6 Michael A. Carrier, A Real-World Analysis of Pharmaceutical Settlements: The
Missing Dimension of Product Hopping, 62 Fla. L. Rev. 1009, 1017 (2010) (“Carrier,
A Real-World Analysis”); see also Jessie Cheng, Note, An Antitrust Analysis of
Product Hopping in the Pharmaceutical Industry, 108 Colum. L. Rev. 1471, 1479-80
(2008) (“Cheng, Product Hopping”).
11 No. 14-4624-cv
dispensed as written. 7 For example, New York’s drug substitution
law requires a pharmacist to “substitute a less expensive drug
product containing the same active ingredients, dosage form and
strength as the drug product prescribed” provided certain
conditions are met. N.Y. Educ. Law § 6816-a(1).
All state drug substitution laws prohibit pharmacists from
substituting generic drugs that are not therapeutically equivalent to
the brand drug, but state laws do not all define therapeutic
equivalence in the same way. 8 Thirty states, including New York
and the District of Columbia, adopt the FDA’s definition of
therapeutically equivalent and only allow generic substitution if the
FDA designates the generic as “AB-rated” in a publication
commonly referred to as the “Orange Book.” 9 N.Y. Education Law
7The FTC, like the district court, has found that only a “modest[]”
difference in the frequency of substitution rates exists between states with
mandatory substitution laws and states with permissive substitution laws. See
FTC, Generic Substitution, at 99.
8 See Jesse C. Vivian, Generic-Substitution Laws, U.S. Pharmacist (June 19,
2008), http://www.uspharmacist.com/content/s/44/c/9787; see also FTC, Generic
Substitution, at 3 (Vivian, Generic-Substitution Laws).
9 Some states explicitly require generic drugs to have an AB-rating, some
states adopt the requirements of an AB-rating without using the term, some
states develop formularies that list permissible or impermissible drug
substitutes, and some states give discretion to individual pharmacists as long as
12 No. 14-4624-cv
§ 6816-a(1); N.Y. Public Health Law § 206(1)(o). To receive an AB-
rating, a generic must not only be bioequivalent but
pharmaceutically equivalent to the brand drug, meaning it has the
same active ingredient, dosage form, strength, and route of
administration as the brand drug. U.S. Dep’t of Health & Human
Servs., FDA, Approved Drug Products with Therapeutic Equivalence
Evaluations vii-x (35th ed. 2015), available at http://1.usa.gov/1PzbMxF
(the “Orange Book”). The AB-rating requirement is designed to
provide guidance regarding which drugs are therapeutically
equivalent, but, as has been observed, it also provides an
opportunity for brand manufacturers to “game” the system. 10 S.A.
28.
the drugs are pharmaceutically equivalent. See Vivian, Generic-Substitution Laws
tbl.2.
10 See, e.g., Stacey L. Dogan & Mark A. Lemley, Antitrust Law and Regulatory
Gaming, 87 Tex. L. Rev. 685, 709 (2009) (explaining that the regulatory framework
that governs the pharmaceutical industry “presents a perfect storm for
regulatory gaming”); Cheng, Product Hopping, at 1494 (“Product hopping itself
amounts to little more than a thinly disguised scheme to game the
pharmaceutical industry’s regulatory system.”); Intellectual Property and
Antitrust Professors Amicus Brief in Support of Appellee (“IP and Antitrust Prof.
Br.”) at 3 (explaining that product hopping “presents a paradigmatic case of a
regulatory game. . . . [It] exploits the product-approval process precisely because
of its exclusionary effects and converts it into a tool for suppressing competition”
(alterations in original)); American Antitrust Institute Amicus Brief in Support of
13 No. 14-4624-cv
Hatch-Waxman and state substitution laws were enacted, in
part, because the pharmaceutical market is not a well-functioning
market. In a well-functioning market, a consumer selects and pays
for a product after evaluating the price and quality of the product.
In the prescription drug market, however, the party who selects the
drug (the doctor) does not fully bear its costs, which creates a price
disconnect. Moreover, a patient can only obtain a prescription drug
if the doctor writes a prescription for that particular drug. The
doctor selects the drug, but the patient, or in most cases a third-party
payor such as a public or private health insurer, pays for the drug.
As a result, the doctor may not know or even care about the price
and generally has no incentive to take the price into account. See
American Antitrust Institute Amicus Brief in Support of Appellee
(“AAI Br.”) at 6; see also Intellectual Property and Antitrust
Professors Amicus Brief in Support of Appellee (“IP and Antitrust
Prof. Br.”) at 12. As the Federal Trade Commission has explained:
Appellee (“AAI Br.”) at 6, 10-11 (explaining that branded manufacturers can
game the system by changing the form of the brand product before generics
enter the market).
14 No. 14-4624-cv
The basic problem is that the forces of competition do
not work well in a market where the consumer who
pays does not choose, and the physician who chooses
does not pay. Patients have little influence in
determining which products they will buy and what
prices they must pay for prescription.
Fed. Trade Comm’n Bureau of Consumer Prot., Drug Product
Selection 2-3 (1979), available at http://bit.ly/1JqKd4G. (“FTC, Drug
Product Selection”). State substitution laws are designed to correct
for this price disconnect by shifting drug selection, between brand
drugs and their corresponding generics from doctors, to pharmacists
and patients, who have greater financial incentives to make price
comparisons. 11 See AAI Br. at 8-9.
II. The Relevant Market
The relevant market, undisputed on appeal, is the memantine-
drug market in the United States. Defendants manufacture
11Perhaps counter-intuitively, pharmacists have an incentive to dispense
lower-cost generic drugs because pharmacies typically realize higher profit
margins on generic drugs due to health plan incentives. See Antitrust
Economists Amicus Brief in Support of Appellants (“Antitrust Economists Br.”) at
12; see also Carrier, A Real-World Analysis, at 1017 (“[State drug product selection]
laws carve out a role for pharmacists, who are much more sensitive to prices
than doctors.”).
15 No. 14-4624-cv
Namenda, a memantine hydrochloride-based 12 (“memantine”) drug
designed to treat moderate-to-severe Alzheimer’s disease.
Namenda is currently available in two formulations: a twice-daily
immediate-release drug, Namenda IR, and a once-daily extended-
release drug, Namenda XR. When Forest introduced Namenda IR
tablets in January 2004, Namenda IR was the first medication
approved for individuals suffering from moderate-to-severe
12 Memantine is an N-Methyl D-Aspartate (“NMDA”) receptor antagonist
that affects the glutamate pathway in the brain. As expert Dr. Alan Jacobs, a
neurologist in private practice, explained at the preliminary injunction hearing:
Neurons in the brain communicate by signaling each other. Some
of these signals are transmitted through an influx of calcium into a
molecule on the surface of neurons called the NMDA receptor.
This influx of calcium is triggered when glutamate, an excitatory
neurotransmitter, docks at the NMDA receptor, causing the
calcium influx. When patients enter the moderate stage of
Alzheimer’s disease, there can be overexcitation of the NMDA
receptor by glutamate.
S.A. 16. Memantine-based drugs, like Namenda, partially block the brain’s
NMDA receptor in order to prevent “overexcitation” of that receptor, “which can
cause toxicity to neurons in the brain.” S.A. 17.
In contrast, the three other FDA-approved drugs on the market to treat
Alzheimer’s disease―Aricept, Exelon, and Razadyne―are all
acetylcholinesterase inhibitors (“CIs”). CIs reduce the breakdown of
acetylcholine, a chemical messenger that transmits information between nerve
cells, in the brain. Rather than work on the glutamate pathway, like Namenda,
CIs work on the acetylcholine pathway. CIs are generally prescribed to patients
experiencing the early stage of Alzheimer’s disease, and are prescribed in
conjunction with―but not independently of―Namenda during the moderate-to-
severe stages of Alzheimer’s disease.
16 No. 14-4624-cv
Alzheimer’s disease. 13 Namenda IR became one of Forest’s best-
selling drugs―generating approximately $1.5 billion in annual sales
in 2012 and 2013. The FDA approved Namenda XR in June 2010,
and Forest began marketing XR in 2013. The two drugs are the only
memantine therapies in their class―N-Methyl D-Aspartate
(“NMDA”) receptor antagonists―currently on the market. 14
Namenda IR and Namenda XR have the same active
ingredient and the same therapeutic effect. The relevant medical
difference between the two is that IR, which is released immediately
into the bloodstream, is taken twice a day while XR, which is
released gradually, is taken once a day. 15 All other Alzheimer’s
disease treatments are administered once a day.
The non-medical difference between IR and XR relates to their
patent protection. Defendants’ patents on Namenda IR prohibit any
13 Defendants also introduced a twice-daily liquid version of Namenda IR in
2005.
14Because CIs perform different functions, Aricept, Exelon, and Razadyne are
not substitutes for Namenda.
15 Additionally, Namenda IR and Namenda XR have different dosage forms.
J.A. 673 n.57. Namenda IR is marketed in tablet form, whereas Namenda XR is
marketed in capsule form. Id.; see also Dosing for Patients Currently Taking
NAMENDA, http://www.namendaxrhcp.com/patients-currently-taking-
namenda.aspx (last visited Apr. 16, 2014).
17 No. 14-4624-cv
manufacturer from marketing a generic version of IR until July 11,
2015 (Namenda IR’s “exclusivity period”). 16 The exclusivity period
for Namenda XR does not expire until 2029. A brand drug’s
exclusivity period is significant because when that period ends and
generic versions enter the market, the brand drug often loses more
than 80 to 90% of the market within six months. This period
following the end of patent exclusivity has been referred to in this
litigation and throughout the industry as the “patent cliff.”
III. Defendants’ Introduction of Namenda XR and Withdrawal
of Namenda IR
Namenda IR and Namenda XR currently occupy the entire
memantine-drug market. However, five generic versions of IR have
tentative FDA approval to enter the market on July 11, 2015, and
seven others may enter the market as early as October 2015. Because
Namenda XR has a different strength and daily dosage
regimen―Namenda IR involves two immediate-release tablets of
10mg each and Namenda XR involves one 28mg extended-release
Defendants’ patents on Namenda IR prohibit generic entry until October
16
2015. But in 2009 and 2010, in order to resolve patent litigation, Forest entered
into licensing agreements permitting ten generic competitors to enter the market
three months before Namenda IR’s official exclusivity period ends.
18 No. 14-4624-cv
capsule 17―the generic IR versions that are poised to enter the
market will be therapeutically equivalent under FDA regulations to
Namenda IR, but not to Namenda XR. Therefore, pharmacists are
prohibited from substituting generic IR for Namenda XR under
most, if not all, state drug substitution laws.
When Defendants brought Namenda XR to market in July
2013 (approximately three years after it was approved), they
adopted so-called “product extension” strategies to convert patients
from Namenda IR to Namenda XR and, thus, to avoid the patent
cliff. Initially, Defendants sold both Namenda IR and XR but
stopped actively marketing IR. During that time, they spent
substantial sums of money 18 promoting XR to doctors, caregivers,
patients, and pharmacists. They also sold XR at a discounted rate,
making it considerably less expensive 19 than Namenda IR tablets,
and issued rebates to health plans to ensure that patients did not
have to pay higher co-payments for XR than for IR. The parties have
17See Dosing for Patients Currently Taking NAMENDA, Namenda XR,
http://www.namendaxrhcp.com/patients-currently-taking-namenda.aspx (last
visited Apr. 16, 2014).
18
The original numbers have been redacted.
19
The original numbers have been redacted.
19 No. 14-4624-cv
referred to Defendants’ efforts to transition patients to XR while IR
was still on the market as the “soft switch,” and we will adopt that
term.
In early 2014, Defendants decided on a more direct approach.
They were concerned that they would be unable to convert a
significant percentage of Alzheimer’s patients dependent upon
memantine therapy from IR to XR prior to the entry of generic IR.
Defendants’ internal projections estimated that only 30% of
Namenda IR users would voluntarily switch prior to July 2015. On
February 14, 2014, Defendants publicly announced that they would
discontinue Namenda IR on August 15, 2014, notified the FDA of
their plans to discontinue Namenda IR, and published letters on
their websites urging caregivers and healthcare providers to
“discuss switching to Namenda XR” with their patients. S.A. 51-52.
Defendants also sought to convert Namenda IR’s largest customer
base, Medicare patients, to XR by sending a letter to the Centers for
Medicare & Medicaid Services requesting that the agency remove IR
from the formulary list, so that Medicare health plans would not
20 No. 14-4624-cv
cover it. Their planned discontinuance was delayed by a disruption
in XR production, and in June 2014, Defendants announced that
Namenda IR would be available until the fall of that year.
But before Defendants withdrew IR entirely, intervening
events again prompted them to modify their plans. In September
2014, New York State filed a complaint alleging that Defendants’
planned withdrawal of Namenda IR violated the antitrust laws.
Defendants subsequently entered into an agreement with
Foundation Care, a mail-order-only pharmacy, to provide for
limited access to Namenda IR if medically required. Under the
terms of the agreement, Foundation Care is authorized to dispense
Namenda IR tablets only after receiving a form from a doctor stating
that it is “medically necessary” for the patient to take Namenda IR.
Defendants estimated internally that less than 3% of current
Namenda IR users would be able to obtain IR through Foundation
Care. S.A. 67. Although the agreement with Foundation Care
makes IR available to a limited number of patients, Defendants’
actions effectively withdrew Namenda IR from the market. The
21 No. 14-4624-cv
parties have referred to Defendants’ efforts to withdraw Namenda
IR from the market as the “hard switch” or “forced switch,” terms
we also adopt. The hard switch began on February 14, 2014 with the
announcement of Defendants’ intention to withdraw Namenda IR
and was suspended in September 2014 when Defendants agreed to a
“standstill” during the litigation proceedings described below.
Because a manufacturer does not simply withdraw a drug at once,
absent pressing safety concerns, announcing the imminent
discontinuation of a drug is tantamount to withdrawal.
IV. Procedural History
In September 2014, New York State filed a complaint in the
District Court for the Southern District of New York (Robert W.
Sweet, Judge) alleging that Defendants were violating the Sherman
Antitrust Act, 15 U.S.C. §§ 1 and 2, as well as New York’s Donnelly
Act, N.Y. Gen. Bus. Law § 340 et seq., and seeking a permanent
injunction and damages. New York also sought a preliminary
injunction barring Defendants from restricting access to Namenda
IR during the course of the litigation.
22 No. 14-4624-cv
New York’s theory of antitrust liability, in substance, is as
follows. As Namenda IR neared the end of its exclusivity period,
Defendants introduced Namenda XR and, before generic IR was
available, withdrew Namenda IR in order to force patients to switch
from IR to XR (for which generic IR will not be substitutable under
most states’ laws). In doing so, Defendants intended to thwart
generic entry into and competition in the memantine-drug market in
order to maintain their monopoly in that market.
The district court held a five-day hearing on the preliminary-
injunction motion, during which it received testimony from 24
witnesses and reviewed over 1,400 exhibits. After considering that
evidence, the district court made several key findings.
(1) Withdrawing Namenda IR from the market prior to generic entry
forces Alzheimer’s patients dependent on memantine therapy to
switch to Namenda XR because it is the only available alternative;
(2) The generic versions of IR poised to enter the market in July and
October of 2015 will not be AB-rated to XR because they have
different strengths and dosages; (3) Pharmacists will not be
23 No. 14-4624-cv
permitted to substitute generic IR for Namenda XR under New York
and many other states’ substitution laws because generic IR is not
therapeutically equivalent to Namenda XR; (4) If Defendants forced
Alzheimer’s patients to switch to Namenda XR prior to generic
entry, those patients would be very unlikely to switch back to twice-
daily IR therapy even after less-expensive generic IR becomes
available, due to the high transaction costs associated with
Alzheimer’s patients first switching from one formulation of a drug
to a new formulation and then back to the original formulation
(“reverse commuting”); (5) Preventing generic IR from competing
under state drug substitution laws would likely thwart generic entry
into and competition in the memantine-drug market; and (6) In
withdrawing Namenda IR from the market, Defendants’ explicit
purpose was to impede generic competition and to avoid the patent
cliff―which occurs at the end of a drug’s exclusivity period when
generics gain market share through state substitution laws.
Based on those findings, the district court granted New York’s
request for a preliminary injunction. The district court concluded
24 No. 14-4624-cv
that New York raised serious questions regarding the merits of its
claims under Sections 1 and 2 of the Sherman Act and the Donnelly
Act, demonstrated the potential for irreparable harm, and concluded
that the balance of the equities favored an injunction. The injunction
states:
1. During the Injunction Term . . . the Defendants shall
continue to make Namenda IR (immediate-release)
tablets available on the same terms and conditions
applicable since July 21, 2013 . . .
2. Defendants shall inform healthcare providers,
pharmacists, patients, caregivers, and health plans of
this injunction . . . and the continued availability of
Namenda IR . . .
3. The Defendants shall not impose a “medical
necessity” requirement or form for the filling of
prescriptions of Namenda IR during the Injunction
Term.
S.A. 137-38. The injunction is effective from the date of issuance,
December 15, 2014, until “thirty days after July 11, 2015 (the date
when generic memantine will first be available) (the ‘Injunction
Term’).” S.A. 138. Defendants timely appealed the grant of the
preliminary injunction, and we granted expedited review.
25 No. 14-4624-cv
DISCUSSION
We review a district court’s grant of a preliminary injunction
for abuse of discretion. Faiveley Transp. Malmo AB v. Wabtec Corp.,
559 F.3d 110, 116 (2d Cir. 2009). A district court has abused its
discretion if it based its ruling on an error of law or a clearly
erroneous assessment of the evidence, or if its “decision . . . cannot
be located within the range of permissible decisions.” Id. (internal
quotation marks omitted). We review legal conclusions, such as the
appropriate standard for relief, de novo. See Somoza v. N.Y.C. Dep't of
Educ., 538 F.3d 106, 112 (2d Cir. 2008).
On appeal, Defendants argue that (1) the district court applied
the wrong legal standard for a preliminary injunction; (2) product
hopping is not anticompetitive or exclusionary under § 2 of the
Sherman Act; (3) Defendants’ patent rights foreclose antitrust
liability; (4) the agreement with Foundation Care does not violate § 1
of the Sherman Act; (5) New York failed to show irreparable harm;
and (6) the injunction is vague and overbroad.
26 No. 14-4624-cv
I. The Applicable Preliminary Injunction Standard
Defendants argue that the district court erred by applying the
ordinary standard for a preliminary injunction, rather than a
heightened standard, because the injunction provides New York
with “substantially all the relief sought.” Defendants’ Brief (“Defs.
Br.”) at 25. We agree that a heightened standard applies.
Section 16 of the Clayton Act entitles a party to obtain
injunctive relief “against threatened loss or damage by a violation of
the antitrust laws.” California v. Am. Stores Co., 495 U.S. 271, 280
(1990) (quoting 15 U.S.C. § 26). A party seeking a preliminary
injunction must ordinarily establish (1) “irreparable harm”; (2)
“either (a) a likelihood of success on the merits, or (b) sufficiently
serious questions going to the merits of its claims to make them fair
ground for litigation, plus a balance of the hardships tipping
decidedly in favor of the moving party”; and (3) “that a preliminary
injunction is in the public interest.” Oneida Nation of New York v.
Cuomo, 645 F.3d 154, 164 (2d Cir. 2011) (internal quotation marks
omitted).
27 No. 14-4624-cv
We have held the movant to a heightened standard where: (i)
an injunction is “mandatory,” or (ii) the injunction “will provide the
movant with substantially all the relief sought and that relief cannot
be undone even if the defendant prevails at a trial on the merits.”
Tom Doherty Assocs., Inc. v. Saban Entm't, Inc., 60 F.3d 27, 33-34 (2d
Cir. 1995). When either condition is met, the movant must show a
“clear” or “substantial” likelihood of success on the merits, Beal v.
Stern, 184 F.3d 117, 123 (2d Cir. 1999), and make a “strong showing”
of irreparable harm, Doe v. N.Y. Univ., 666 F.2d 761, 773 (2d Cir.
1981), in addition to showing that the preliminary injunction is in
the public interest.
The injunction issued by the district court in this case remains
in place until 30 days after generics enter the market, and therefore
“grant[s] plaintiffs substantially all the relief they ultimately sought,
in effect, as if the injunction had been permanent.” Eng v. Smith, 849
F.2d 80, 82 (2d Cir. 1988). The district court found that Defendants’
plan is contingent on switching patients to Namenda XR before
generic IR enters the market. S.A. 20. The injunction, however, bars
28 No. 14-4624-cv
Defendants from withdrawing IR, and thus forcing a switch, “until
thirty days after July 11, 2015 (the date when generic memantine will
first be available).” S.A. 138. Because the injunction prevents
Defendants’ hard switch from succeeding, the injunction “render[s]
a trial on the merits largely or partly meaningless.” Tom Doherty
Assocs., 60 F.3d at 35. 20 Accordingly, the heightened standard
applies.
That conclusion, however, is of little import in this case
because New York has satisfied the heightened standard. The
district court did not abuse its discretion in granting a preliminary
injunction because New York has demonstrated a substantial
likelihood of success on the merits of its monopolization and
attempted monopolization claims under § 2 of the Sherman Act, see
Beal, 184 F.3d at 123, and has made a strong showing that
Defendants’ conduct would cause irreparable harm to competition
in the memantine-drug market and to consumers, Doe, 666 F.2d at
773. The district court’s factual findings, which were based, for the
Although New York also seeks a permanent injunction, disgorgement, civil
20
penalties, and damages, the preliminary injunction is the gravamen of the
complaint.
29 No. 14-4624-cv
most part, on Defendants’ own internal documents, cannot be said
to be clearly erroneous, and its injunction prohibiting Defendants
from withdrawing Namenda IR prior to generic entry was not an
abuse of discretion as being outside the range of permissible
decisions.
II. Monopolization and Attempted Monopolization Under § 2
of the Sherman Act
Section 2 of the Sherman Act makes it an offense to
“monopolize, or attempt to monopolize . . . any part of the trade or
commerce among the several States.” 15 U.S.C. § 2; see also Geneva
Pharm. Tech. Corp. v. Barr Labs. Inc., 386 F.3d 485, 495 (2d Cir. 2004).
To establish monopolization in violation of § 2, a plaintiff must
prove not only that the defendant possessed monopoly power in the
relevant market, but that it willfully acquired or maintained that
power “as distinguished from growth or development as a
consequence of a superior product, business acumen, or historic
accident.” Verizon Commc'ns Inc. v. Law Offices of Curtis V. Trinko,
LLP, 540 U.S. 398, 407 (2004) (quoting United States v. Grinnell Corp.,
384 U.S. 563, 570-71 (1966)). “To safeguard the incentive to innovate,
30 No. 14-4624-cv
the possession of monopoly power will not be found unlawful
unless it is accompanied by an element of anticompetitive conduct.”
Id. In order to show attempted monopolization, the plaintiff must
prove: “(1) that the defendant has engaged in predatory or
anticompetitive conduct with (2) a specific intent to monopolize and
(3) a dangerous probability of achieving monopoly power.”
Spectrum Sports, Inc. v. McQuillan, 506 U.S. 447, 456 (1993).
Attempted monopolization, unlike monopolization, requires a
finding of specific intent. See, e.g., Delaware & Hudson Ry. Co. v.
Consol. Rail Corp., 902 F.2d 174, 180 (2d Cir. 1990).
Defendants’ patents on Namenda IR indisputably grant them
a legal monopoly in the U.S. memantine-drug market until July 11,
2015. 21 The parties do not dispute the district court’s factual
findings that the relevant market is the memantine-drug market in
the United States and that Namenda IR and XR represent 100% of
that market. S.A. 108-10. Consequently, the parties do not dispute
that Defendants possess monopoly power. See Geneva Pharm., 386
See Precision Instrument Mfg. Co. v. Auto. Maint. Mach. Co., 324 U.S. 806, 816
21
(1945) (“[A] patent is an exception to the general rule against monopolies and to
the right to access to a free and open market.”).
31 No. 14-4624-cv
F.3d at 500 (monopoly power can be “proven directly through
evidence of control over prices or the exclusion of competition,” or
“inferred from a firm’s large percentage share of the relevant
market”).
Given that Defendants’ monopoly power has been
established, this case turns on whether Defendants willfully sought
to maintain or attempted to maintain that monopoly in violation of
§ 2. In United States v. Microsoft Corp., 253 F.3d 34, 58-60 (D.C. Cir.
2001) (en banc), the D.C. Circuit, sitting en banc, established a
helpful framework for determining when a product change violates
§ 2 based on the rule-of-reason test articulated by the Supreme Court
in Standard Oil Co. v. United States, 221 U.S. 1 (1911), and generally
applied to antitrust claims. See also Paycom Billing Servs., Inc. v.
Mastercard Int'l, Inc., 467 F.3d 283, 289-90 (2d Cir. 2006) (explaining
that courts analyze most antitrust claims under the rule of reason). 22
See also Mid-Texas Commc'ns Sys., Inc. v. Am. Tel. & Tel. Co., 615 F.2d 1372,
22
1389 n.13 (5th Cir. 1980) (“It is clear, however, that the analysis under section 2 is
similar to that under section 1 regardless whether the rule of reason label is
applied per se.” (citing Byars v. Bluff City News Co., 609 F.2d 843, 860 (6th Cir.
1979))); Cal. Computer Prods., Inc. v. Int'l Bus. Machs. Corp., 613 F.2d 727, 737 (9th
Cir. 1979) (“[U]nder § 2 attempt as with § 1 monopolization individual conduct is
32 No. 14-4624-cv
Under the Microsoft framework, once a plaintiff establishes that a
monopolist’s conduct is anticompetitive or exclusionary, the
monopolist may proffer “nonpretextual” procompetitive
justifications for its conduct. 253 F.3d at 58-59. The plaintiff may
then either rebut those justifications or demonstrate that the
anticompetitive harm outweighs the procompetitive benefit. Id.
a. Anticompetitive and Exclusionary Conduct
“As a general rule, courts are properly very skeptical about
claims that competition has been harmed by a dominant firm’s
product design changes.” Microsoft, 253 F.3d at 65; see also Foremost
Pro Color, Inc. v. Eastman Kodak Co., 703 F.2d 534, 544-45 (9th Cir.
1983). Product innovation generally benefits consumers and inflicts
harm on competitors, so courts look for evidence of “exclusionary or
anticompetitive effects” in order to “distinguish ‘between conduct
that defeats a competitor because of efficiency and consumer
satisfaction’” and conduct that impedes competition through means
other than competition on the merits. Trans Sport, Inc. v. Starter
measured against the same ‘reasonableness’ standard governing concerted and
contractual activity under § 1.”).
33 No. 14-4624-cv
Sportswear, Inc., 964 F.2d 186, 188-89 (2d Cir. 1992) (quoting U.S.
Football League v. Nat’l Football League, 842 F.2d 1335, 1359 (2d Cir.
1988)).
Well-established case law makes clear that product redesign is
anticompetitive when it coerces consumers and impedes
competition. 23 The leading case in our circuit for § 2 liability based
23Our emphasis on consumer coercion in evaluating a monopolist’s product
redesign is in accord with several of our sister circuits. See Allied Orthopedic
Appliances Inc. v. Tyco Health Care Grp. LP, 592 F.3d 991, 994 (9th Cir. 2010) (“A
monopolist’s discontinuation of [an old product] may violate § 2 if it effectively
forces customers to adopt its new [product].”); Microsoft, 253 F.3d at 65
(explaining that Microsoft’s redesign of its operating system was anticompetitive
because the redesign impeded competition “not by making Microsoft’s own
browser more attractive to consumers but, rather, by discouraging
[manufacturers] from distributing rival products”); cf. Multistate Legal Studies,
Inc. v. Harcourt Brace Jovanovich Legal & Prof'l Publ’ns, Inc., 63 F.3d 1540, 1550
(10th Cir. 1995) (noting that illegal tie-ins under Section 1 may “qualify as
anticompetitive conduct for Section 2 purposes”). Similarly, the other district
courts that have considered product hopping cases also examined consumer
coercion. And those district courts that have ruled in favor of plaintiffs alleging
antitrust violations stemming from product hopping have found consumer
coercion. See In re Suboxone (Buprenorphine Hydrochloride & Naloxone) Antitrust
Litig., No. 13-MD-2445, 2014 WL 6792663, at *12 (E.D. Pa. Dec. 3, 2014) (plaintiffs
alleged exclusionary conduct under § 2 where the brand manufacturer coerced
patients into switching from the tablet form of a drug―for which their patent
was set to expire―to a new film version of the drug by raising allegedly false
safety concerns about the tablet and announcing that it would soon be
withdrawn from the market); Abbott Labs. v. Teva Pharm. USA, Inc., 432 F. Supp.
2d 408, 430 (D. Del. 2006) (plaintiffs alleged antitrust violations where the
defendants introduced new drug formulations and withdrew the prior versions
whose exclusivity period would soon expire). In contrast, in cases in which
there is no evidence of coercion, district courts have rejected such claims. See
Mylan Pharm. Inc. v. Warner Chilcott PLC et al., No. Civ. 12-3824, 2015 WL
34 No. 14-4624-cv
on product redesign is Berkey Photo, Inc. v. Eastman Kodak Co., 603
F.2d 263 (2d Cir. 1979). In that case, Kodak simultaneously
introduced its new Kodacolor II film and new Kodak 110 camera,
which was designed so that it could only be used with the
Kodacolor II film (the “110 system”). Id. at 277-78. Kodak, which
possessed a lawful monopoly in film but not in cameras, heavily
advertised Kodacolor II film as “a remarkable new film,” and for 18
months, Kodak made Kodacolor II film only for the 110 camera. Id.
at 278. Berkey Photo, Inc. (“Berkey”), a smaller camera
manufacturer, alleged that Kodak unlawfully used its monopoly in
film to increase camera sales and monopolize the camera market. Id.
We rejected that claim and held that the introduction of the 110
system and advertising of the Kodacolor II film did not violate the
1736957, at *13 (E.D. Pa. Apr. 16, 2015) (noting that because generics had already
entered the market at the time of defendants’ product reformulation, “doctors
remained free to prescribe generic Doryx; pharmacists remained free to
substitute generics when medically appropriate; and patients remained free to
ask their doctors and pharmacists for generic versions of the drug”); Walgreen Co.
v. AstraZeneca Pharm. L.P., 534 F. Supp. 2d 146, 151 (D.D.C. 2008) (dismissing a
case alleging attempted market monopolization because unlike in Abbott Labs,
“there is no allegation that AstraZeneca eliminated any consumer choices.
Rather, AstraZeneca . . . introduced a new drug to compete with already-
established drugs―both its own and others’―and with the generic substitutes
for at least one of the established drugs”).
35 No. 14-4624-cv
Sherman Act because “[Kodak’s] success was not based on any form
of coercion.” Id. at 287. But, of significance to the case before us, we
cautioned that “the situation might be completely different if, upon
the introduction of the 110 system, Kodak had ceased producing
film in the 126 size, thereby compelling camera purchasers to buy a
Kodak 110 camera.” Id. at 287 n.39. 24
In this case, Defendants argue that withdrawing a product is
not anticompetitive or exclusionary conduct, especially when the
new product is superior to the old product. 25 Certainly, neither
product withdrawal nor product improvement alone is
anticompetitive. But under Berkey Photo, when a monopolist
combines product withdrawal with some other conduct, the overall
effect of which is to coerce consumers rather than persuade them on
the merits, id. at 287, and to impede competition, id. at 274-75, its
24We also noted that restricting Kodacolor II to the 110 format for 18 months
may have been anticompetitive conduct, but we did not decide the question
because there was no proof of injury to Berkey. Berkey Photo, 603 F.2d at 290.
25 Whether XR is superior to IR is not significant in this case. When there is
coercion, “the technological desirability of the product change . . . bear[s] on the
question of monopolistic intent,” id. at 287 n.39, rather than the permissibility of
the defendant’s conduct. Here, there is no genuine dispute that Defendants
intended to avoid the patent cliff. See, e.g., J.A. 132, 155.
36 No. 14-4624-cv
actions are anticompetitive under the Sherman Act. 26 Cf. Cont'l Ore
Co. v. Union Carbide & Carbon Corp., 370 U.S. 690, 699 (1962) (noting
that when an antitrust conspiracy involves multiple acts, “[t]he
character and effect of [the] conspiracy are not to be judged by
dismembering it and viewing its separate parts, but only by looking
at it as a whole” (internal quotation marks omitted)). Here,
Defendants’ hard switch―the combination of introducing Namenda
XR into the market and effectively withdrawing Namenda
IR―forced Alzheimer’s patients who depend on memantine therapy
to switch to XR (to which generic IR is not therapeutically
equivalent) and would likely impede generic competition by
precluding generic substitution through state drug substitution
laws.
Several other courts have held that product redesign violates § 2 when
26
combined with other conduct and the combined effect is anticompetitive or
exclusionary. See Allied Orthopedic, 592 F.3d at 1000 (explaining that § 2 is
violated when “some conduct of the monopolist associated with its introduction
of a new and improved product design constitutes an anticompetitive abuse or
leverage of monopoly power, or a predatory or exclusionary means of
attempting to monopolize the relevant market” (internal quotation marks
omitted)); In re Suboxone, 2014 WL 6792663, at *10 (“The key question is whether
the defendant combined the introduction of a new product with some other
wrongful conduct, such that the comprehensive effect is likely to stymie
competition, prevent consumer choice and reduce the market’s ambit.”).
37 No. 14-4624-cv
i. Consumer Coercion
Defendants’ hard switch crosses the line from persuasion to
coercion and is anticompetitive. As long as Defendants sought to
persuade patients and their doctors to switch from Namenda IR to
Namenda XR while both were on the market (the soft switch) and
with generic IR drugs on the horizon, patients and doctors could
evaluate the products and their generics on the merits in furtherance
of competitive objectives.
By effectively withdrawing Namenda IR prior to generic
entry, Defendants forced patients to switch from Namenda IR to
XR―the only other memantine drug on the market. 27 S.A. 49; Tr.
183:22-184:17 (Stitt) (“So the unique thing [about the Namenda IR
hard switch] I think is that there’s really no place for prescribers to,
to go with a drug to treat that condition.”). In fact, the district court
found that Defendants devised the hard switch because they
projected that only 30% of memantine-therapy patients would
voluntarily switch to Namenda XR prior to generic entry. S.A. 56-
As previously noted, the other available Alzheimer’s drugs, all CIs, are not
27
substitutes for Namenda because they perform different medical functions and
are not designed to treat moderate-to-severe Alzheimer’s disease.
38 No. 14-4624-cv
57. Defendants’ hard switch was expected to transition 80 to 100%
of Namenda IR patients to XR prior to generic entry, S.A. 81, and
thereby impede generic competition.
Defendants argue that courts should not distinguish between
hard and soft switches. But this argument ignores one of Berkey
Photo’s basic tenets: the market can determine whether one product
is superior to another only “so long as the free choice of consumers
is preserved.” 603 F.2d at 287. Had Defendants allowed Namenda
IR to remain available until generic entry, doctors and Alzheimer’s
patients could have decided whether the benefits of switching to
once-daily Namenda XR would outweigh the benefits of adhering to
twice-daily therapy using less-expensive generic IR (or perhaps
lower-priced Namenda IR). By removing Namenda IR from the
market prior to generic IR entry, Defendants sought to deprive
consumers of that choice. In this way, Defendants could avoid
competing against lower-cost generics based on the merits of their
redesigned drug by forcing Alzheimer’s patients to take XR, 28 with
28 Alternatively, patients could discontinue memantine-therapy entirely.
39 No. 14-4624-cv
the knowledge that transaction costs would make the reverse
commute by patients from XR to generic IR highly unlikely.
ii. Impedes Competition
As the district court concluded, Defendants’ hard switch
would likely have anticompetitive and exclusionary effects on
competition in the memantine market, creating a “dangerous
probability” that Defendants would maintain their monopoly power
after generics enter the market. Spectrum Sports, 506 U.S. at 456.
Based on careful consideration of the unique characteristics of the
pharmaceutical market, the district court found that “[p]rice
competition at the pharmacy, facilitated by state substitution laws, is
the principal means by which generics are able to compete in the
United States.” S.A. 26.
We agree with the district court’s analysis. Forcing patients to
switch to XR would prevent generic substitution because generic
versions of IR are not AB-rated to Namenda XR. And if, as
Defendants’ own internal predictions estimate, the hard switch
successfully converted 80 to 100% of IR patients to XR prior to
40 No. 14-4624-cv
generic entry, there would be “few to no prescriptions” left for
which generics would be eligible to compete. S.A. 82. Because
Defendants’ forced switch “through something other than
competition on the merits[] has the effect of significantly reducing
usage of rivals’ products and hence protecting its own . . .
monopoly, it is anticompetitive.” Microsoft, 253 F.3d at 65.
Defendants and their amici argue that generics can
successfully compete by persuading third-party payors and
prescription-benefit managers to promote generic IR through the use
of formularies, tiered-drug structures, step programs, and prior-
authorization requirements. 29 But, as the district court determined,
competition through state drug substitution laws is the only cost-
Formularies, tiered-drug structures, step programs, and prior-authorization
29
requirements are all tools that third-party payors may use to incentivize patients
to take less-expensive drugs. A formulary is a list of approved drugs that a
health plan will pay for, either in whole or in part. S.A. 19. A tiered-drug
structure divides the drugs listed on a plan’s formulary into categories or “tiers.”
S.A. 20. Typically, health plans use a three-tiered system, which reserves tier 1
for generic drugs, tier 2 for preferred branded drugs, and tier 3 for non-preferred
branded drugs. The portion of the cost of the drug that the patient is responsible
for paying, known as the “co-payment” or “co-pay,” increases with each tier. A
step program requires a patient to first try a preferred, and usually less
expensive, drug. Only if that treatment is unsuccessful will the health plan pay
for the patient’s drug of choice. S.A. 20. A prior authorization policy requires a
patient to obtain the third-party payor’s approval for payment prior to taking a
particular drug. Antitrust Economists Br. at 14.
41 No. 14-4624-cv
efficient means of competing available to generic manufacturers.30
S.A. 78. For there to be an antitrust violation, generics need not be
barred “from all means of distribution” if they are “bar[red] . . . from
the cost-efficient ones.” Microsoft, 253 F.3d at 64; see also United States
v. Dentsply Int'l, Inc., 399 F.3d 181, 191 (3d Cir. 2005) (“The test is not
total foreclosure, but whether the challenged practices bar a
substantial number of rivals or severely restrict the market’s
ambit.”). Moreover, as the district court found, additional
expenditures by generics on marketing would be impractical and
ineffective because a generic manufacturer promoting a product
would have no way to ensure that a pharmacist would substitute its
product, rather than one made by one of its generic competitors.
Although in theory, Alzheimer’s patients would be free to
switch back to IR therapy after generic entry, the district court found
The district court found that the regulatory context makes it impractical
30
and uneconomical for generic manufacturers to market their products to doctors
or pharmacists because, among other reasons, marketing costs severely impact
generic manufacturers’ ability to offer the lower prices upon which they
compete. S.A. 78. Two other district courts confronted with product hopping
cases concluded that plaintiffs plausibly alleged that the unique characteristics of
the pharmaceutical industry “make generic substitution the cost-efficient means
of competing for companies selling generic pharmaceuticals.” In re Suboxone,
2014 WL 6792663, at *12; see also Abbott Labs., 432 F. Supp. 2d at 423 (same).
42 No. 14-4624-cv
that, in practice, such a reverse commute would be a highly unlikely
occurrence. As one of Defendants’ own executives explained during
a January 21, 2014 earnings call: “if we do the hard switch and we
convert patients and caregivers to once-a-day therapy versus twice a
day, it’s very difficult for the generics then to reverse-commute
back.” S.A. 51. This is because there are high transaction costs
associated with reverse commuting. Any patient who wants to
switch back to twice-daily IR therapy must first obtain a new
prescription from a doctor. But, as the district court found, the
nature of Alzheimer’s disease makes moderate-to-severe
Alzheimer’s patients especially vulnerable to changes in routine,
and makes doctors and caregivers very reluctant to change a
patient’s medication if the current treatment is effective. As a result,
if Defendants forced patients to switch from twice-daily Namenda
IR to once-daily XR, those patients would be very unlikely to switch
back to twice-daily generic IR even if generic IR is more cost-
effective. 31 Moreover, third-party payors are reluctant to require
31 The Department of Health and Human Services (“HHS”) reached this same
43 No. 14-4624-cv
patients to switch from a drug they are currently taking to a new
drug, so health plans would be unlikely to require patients to switch
to less-expensive generic IR.
Defendants and their amici argue that the district court’s focus
on AB-ratings is misplaced because up to 20 states do not impose an
AB-rating requirement and thus “may let pharmacists unilaterally
substitute generic IR for Namenda XR.” Defs. Br. at 13 (emphasis
added). Defendants’ argument, however, exaggerates the variance
in state substitution laws. Many states that do not explicitly require
generic drugs to have the same AB-rating effectively require the
same degree of therapeutic equivalence. For example, Defendants
cite Iowa Code § 155A.32 as an example of a state law that “do[es]
not rely on the Orange Book.” Defs. Br. at 13. Section 155A.32(1)
conclusion, explaining:
The unique nature of this patient population―Alzheimer’s
patients with moderate-to-severe dementia―makes it likely that a
switch from the twice-daily Namenda IR to the once-daily
Namenda XR would be a permanent one for practical purposes, as
providers, patients, and families would be reluctant to switch
back to twice-a-day therapy even if they believed that it
represented a better value.
HHS, Office of the Assistant Sec’y for Planning and Evaluation, Some
Observations Related to the Generic Drug Market 5 (2015), available at
http://aspe.hhs.gov/sp/reports/2015/GenericMarket/ib_GenericMarket.pdf (HHS,
Some Observations).
44 No. 14-4624-cv
permits pharmacists to substitute a generic drug if it has the same
“demonstrated bioavailability” as the brand drug, Iowa Code Ann.
§ 155A.32(1), but Section 155A.3(9) clarifies that a generic is only
considered to have the same “demonstrated bioavailability” if it has
the same “rate and extent of absorption of a drug or drug ingredient
from a specified dosage form,” Iowa Code Ann. § 155A.3(9).
Because the dosage and absorption rates of generic IR differ from
that of XR, the drugs are not bioequivalent under Iowa law.
Moreover, because generic IR is manufactured in tablet form and
Namenda XR is marketed in capsule form, they do not have the
same dosage form. 32 As a result, as in New York and the 29 other
states that require an AB-rating, Iowa pharmacists will not be
permitted to substitute generic IR for XR. 33
32Generic IR is manufactured in 5 and 10 mg tablet dosage formulations
whereas Namenda XR is marketed in 7, 14, 21, and 28 mg capsule dosage
formulations. J.A. 673 n.57. As Dr. Ernest R. Berndt, Ph.D. explains in his
declaration, “tablets and capsules are not the same ‘dosage form.’” Id.
33 Defendants argue that up to 20 states may allow pharmacists to substitute
generic IR for Namenda XR; however, throughout their briefs, Defendants and
their experts point to 21 different states. Of the states identified by Defendants
and their experts, 16 require the same dose and/or dosage form and thus will not
allow generic IR to be substituted for Namenda XR. See Ala. Code § 34-23-8;
Alaska Stat. Ann. §§ 08.80.295(a), 08.80.480(11); Ark. Code Ann. §§ 17-92-
503(a)(1), 17-92-101(6), (11); Cal. Bus. & Prof. Code §§ 4073(a), 4052.5(a), (f); Colo.
45 No. 14-4624-cv
Defendants argue that their conduct was not anticompetitive
because preventing “free riding” is a legitimate business purpose.
But what Defendants call “free riding”―generic substitution by
pharmacists following the end of Namenda IR’s exclusivity
period―is authorized by law; is the explicit goal of state substitution
laws; and furthers the goals of the Hatch-Waxman Act by promoting
drug competition, Actavis, 133 S. Ct. at 2228, and by preventing the
“practical extension of [brand drug manufacturers’] monopoly
Rev. Stat. Ann. §§ 12-42.5-122(1)(a), as amended by 2015 Colo. Legis. Serv. Ch. 77
(S.B. 15-071), 12-42.5-102(40); Conn. Gen. Stat. Ann. § 20-619(b); Fla. Stat. Ann.
§§ 465.025(2), (1)(b); Ga. Code Ann. § 26-4-81(a); Mo Ann. Stat. § 338.056(1);
Mont. Code Ann. § 37-7-505(1); Neb. Rev. Stat. §§ 71-5403(1), 71-5402(1), (5), (6),
as amended by 2015 Nebraska Laws L.B. 37; N.C. Gen. Stat. Ann. §§ 90-85.28(a), 90-
85.27(1); Or. Rev. Stat. Ann. § 689.515(2)(a); R.I. Gen. Laws Ann. §§ 21-31-16.1(a),
5-19.1-2(k); S.C. Code Ann. § 39-24-30a. Mich. Comp. Laws Ann. § 333.17755(1)
allows for substitution of “generically equivalent” drugs, which courts in
Michigan have interpreted to require “chemical equivalence,” meaning that the
drugs “contain the same active ingredients and are identical in strength, dosage
form and route of administration.” Pennwalt Corp. v. Zenith Labs., Inc., 472 F.
Supp. 413, 417 (E.D. Mich. 1979). Oklahoma prohibits substitution “without
authority of the prescriber or purchaser,” so we cannot determine whether
generic IR will be substituted for Namenda XR under Oklahoma law. See Okla.
Stat. Ann. tit. 59, § 353.13(D). Of the states that allow pharmacists to substitute
generic drugs without consulting the prescribing physician, four states may―but
will not necessarily―allow substitution of generic IR for Namenda XR. See
Minn. Stat. Ann. § 151.21 Subd. 3; Minn. R. 9505.0340 Subp.3(H); N.D. Cent. Code
Ann. §§ 19-02.1-14.1(3), (1)(g); Vt. Stat. Ann. tit. 18, § 4605(a), 4601(4); Wash. Rev.
Code Ann. § 69.41.120; 69.41.110(4). Those four states account for less than 6% of
the U.S. population. J.A. 673.
46 No. 14-4624-cv
. . . beyond the expiration of the[ir] patent[s],” H.R. Rep. No. 98-857,
pt. 2, at 4 (1984).
Defendants also argue that antitrust law is not a vehicle for
enforcing the “spirit” of drug laws. Defs. Br. at 46. But the Supreme
Court has made clear that “[a]ntitrust analysis must always be
attuned to the particular structure and circumstances of the industry
at issue.” Trinko, 540 U.S. at 411. Leading antitrust authorities have
encouraged courts to acknowledge market defects, such as a price
disconnect and the exclusivity of patents, in their antitrust analysis. 34
And in other Hatch-Waxman contexts, this court has recognized that
efforts to manipulate aspects of the Hatch-Waxman incentive
structure to exclude competition could state an antitrust claim. See,
e.g., Arkansas Carpenters Health & Welfare Fund v. Bayer AG, 604 F.3d
34 See IIIB Phillip E. Areeda & Herbert Hovenkamp, Antitrust Law: An Analysis
of Antitrust Principles and Their Application ¶ 776c, at 297 (3d ed. 2008); Herbert
Hovenkamp et al., IP and Antitrust: An Analysis of Antitrust Principles Applied to
Intellectual Property Law § 15.3, at 25 (2012); C. Scott Hemphill, Paying for Delay:
Pharmaceutical Patent Settlement as a Regulatory Design Problem, 81 N.Y.U. L. Rev.
1553, 1557 (2006) (“A particular regulatory regime sets the boundaries of feasible
anticompetitive conduct.”); Jonathan Jacobson, et al., Predatory Innovation: An
Analysis of Allied Orthopedic v. Tyco in the Context of Section 2 Jurisprudence, 23 Loy.
Consumer L. Rev. 1, 8 (2010) (“There are two scenarios where an exclusionary
redesign may be especially harmful: (a) in the context of networked markets
. . . and (b) in pharmaceutical markets . . . .”).
47 No. 14-4624-cv
98, 106 (2d Cir. 2010) (“[A] plaintiff can have antitrust claims” where
a pharmaceutical manufacturer “manipulate[s] the [Hatch-Waxman-
conferred] 180-day exclusivity period in a manner that bars
subsequent challenges to the patent or precludes the generic
manufacturer from marketing non-infringing products unrelated to
the patent.”), abrogated on other grounds by Actavis, 133 S. Ct. at 2231.
Therefore, we conclude that the district court appropriately
considered the unique market characteristics of the pharmaceutical
industry in concluding that antitrust law “requires [Defendants] to
allow generic competitors a fair opportunity to compete using state
substitution laws.” S.A. 95-96.
b. Procompetitive Justifications
All of Defendants’ procompetitive justifications for
withdrawing IR are pretextual. The record is replete with evidence
showing that Defendants were, in the words of Defendants’ own
CEO, “trying to . . . put up barriers or obstacles” to generic
competition. J.A. 132; see also S.A. 49 (“We need to transition
volume to XR to protect our Namenda revenue from generic
48 No. 14-4624-cv
penetration in 2015 when we lose IR patent exclusivity.”); J.A. 155
(“[W]hat we’re trying to do is make a cliff disappear and rather have
a long―a prolonged decline. And we believe that by potentially
doing a forced switch, we will hold on to a large share of our base
users.”); S.A. 49 (“Our mission is to convert to Namenda XR and lift
the franchise . . . . We need to convert as much IR business to
Namenda XR as quickly as possible.”). Based largely on
Defendants’ own documents, New York has rebutted Defendants’
procompetitive justifications.
c. Procompetitive Benefits v. Anticompetitive Harms
Because we have determined that Defendants’ procompetitive
justifications are pretextual, we need not weigh them against the
anticompetitive harms. But in any event, New York has shown that
whatever procompetitive benefits exist are outweighed by the
anticompetitive harms. Defendants argue that their conduct is
procompetitive because “[l]aunching a new product . . . advances
competition by adding a better product to the market and by paving
the way for further innovation.” Defs. Br. at 51. While introducing
49 No. 14-4624-cv
Namenda XR may be procompetitive, that argument provides no
procompetitive justification for withdrawing Namenda IR.
Defendants argue that withdrawing IR was procompetitive
because it would maximize their return on their investment in XR.
But in deciding to take IR off the market, Defendants were willing to
give up profits they would have made selling IR―Forest’s best-
selling drug. This “willingness to forsake short-term profits to
achieve an anticompetitive end” is indicative of anticompetitive
behavior. In re Adderall, 754 F.3d at 135 (internal quotation marks
omitted). Moreover, Defendants fail to explain why the potential
in additional XR sales that they stood to earn―which
is less than the approximately $1.5 billion in annual sales they have
made from Namenda IR in recent years―makes economic sense in
the absence of the benefit derived from eliminating generic
competition. See id. at 133 (stating that anticompetitive effects could
be shown where defendants’ conduct “makes sense only because it
eliminates competition”). As a result, we agree with the district
court that:
50 No. 14-4624-cv
Defendants’ short-term loss of in IR sales,
translating to in income, is most rationally
construed as an investment in moving the memantine
market in [their] favor [through impeding generic
competition], yielding [D]efendants
in income over the course of the next years.
S.A. 74.
Finally, Defendants have presented no evidence to support
their argument that antitrust scrutiny of the pharmaceutical industry
will meaningfully deter innovation. To the contrary, as the
American Antitrust Institute amici argue, immunizing product
hopping from antitrust scrutiny may deter significant innovation by
encouraging manufacturers to focus on switching the market to
trivial or minor product reformulations rather than investing in the
research and development necessary to develop riskier, but
medically significant innovations.
In sum, we conclude that the combination of withdrawing a
successful drug from the market and introducing a reformulated
version of that drug, which has the dual effect of forcing patients to
switch to the new version and impeding generic competition,
51 No. 14-4624-cv
without a legitimate business justification, violates § 2 of the
Sherman Act.
III. Patent Rights as a Defense to Liability
Defendants argue that their patent rights under Namenda IR
and Namenda XR shield them from antitrust liability. To be sure,
there is tension between the antitrust laws’ objective of enhancing
competition by preventing unlawful monopolies and patent laws’
objective of incentivizing innovation by granting legal patent
monopolies. See In re Adderall, 754 F.3d at 133; see also SCM Corp. v.
Xerox Corp., 645 F.2d 1195, 1205 (2d Cir. 1981).
But in its recent landmark antitrust case, F.T.C. v. Actavis, Inc.,
the Supreme Court made clear that “patent and antitrust policies are
both relevant in determining the scope of the patent monopoly—and
consequently antitrust law immunity—that is conferred by a
patent.” 133 S. Ct. at 2231 (internal quotation marks omitted); see also
United States v. Gypsum Co., 333 U.S. 364, 390–91 (1948) (indicating
that courts must “balance the privileges of [the patent holder] and its
52 No. 14-4624-cv
licensees under the patent grants with the prohibitions of the
Sherman Act against combinations and attempts to monopolize”).
The Court’s decision in Actavis reaffirmed the conclusions of
circuit courts that a patent does not confer upon the patent holder an
“absolute and unfettered right to use its intellectual property as it
wishes,” Microsoft, 253 F.3d at 63, and “[i]ntellectual property rights
do not confer a privilege to violate the antitrust laws,” In re Indep.
Serv. Orgs. Antitrust Litig., 203 F.3d 1322, 1325 (Fed. Cir. 2000). See
also Allied Orthopedic Appliances Inc. v. Tyco Health Care Grp. LP, 592
F.3d 991, 998 (9th Cir. 2010) (“[C]hanges in product design are not
immune from antitrust scrutiny and in certain cases may constitute
an unlawful means of maintaining a monopoly under Section 2.”).
Defendants argue that their conduct does not violate antitrust
law because they have merely “exercised rights afforded by the
Patent Act.” Defs. Br. at 34. But patent law gives Defendants a
temporary monopoly on individual drugs―not a right to use their
patents as part of a scheme to interfere with competition “beyond
the limits of the patent monopoly.” United States v. Line Material Co.,
53 No. 14-4624-cv
333 U.S. 287, 308 (1948). Defendants have essentially tried to use
their patent rights on Namenda XR to extend the exclusivity period
for all of their memantine-therapy drugs. As explained above, it is
the combination of Defendants’ withdrawal of IR and introduction of
XR in the context of generic substitution laws that places their
conduct beyond the scope of their patent rights for IR or XR
individually.
IV. The Sherman Act § 1 and the Donnelly Act
In light of New York’s substantial likelihood of success on the
merits of its monopolization and attempted monopolization claims,
we need not address the merits of its Sherman Act § 1 or Donnelly
Act claims, which are based on the agreement between Defendants
and Foundation Care. We do note, however, that an agreement
related to a party’s violation of § 2 does not trigger liability under § 1
unless the agreement itself unreasonably restrains trade, Geneva
Pharm., 386 F.3d at 506, and there is mutual anticompetitive intent,
see id. at 507 (“[L]ack of intent by one party . . . precludes a
conspiracy to monopolize.”). Conduct that satisfies the
54 No. 14-4624-cv
unreasonable restraint prong under § 2 does not necessarily violate
§ 1 absent evidence that the agreement furthers the anticompetitive
conduct. Id. at 506.
V. Irreparable Harm
New York has made a “strong” showing that competition and
consumers will suffer irreparable harm in the absence of the
injunction. Doe, 666 F.2d at 773. Irreparable harm is “injury that is
neither remote nor speculative, but actual and imminent and that
cannot be remedied by an award of monetary damages.” Forest City
Daly Hous., Inc. v. Town of N. Hempstead, 175 F.3d 144, 153 (2d Cir.
1999) (internal quotation marks omitted). To obtain injunctive relief
under § 16 of the Clayton Act, that injury must be an injury “of the
type the antitrust laws were designed to prevent and that flows from
that which makes defendants’ acts unlawful.” Consol. Gold Fields
PLC v. Minorco, S.A., 871 F.2d 252, 257 (internal quotation marks
omitted), amended by 890 F.2d 569 (2d Cir. 1989).
As the district court concluded, “[p]ermanent damage to
competition in the memantine market can . . . result from
55 No. 14-4624-cv
Defendants’ planned hard switch strategy.” 35 S.A. 131. If generics
cannot compete with Defendants’ drugs via state substitution laws,
they “cannot compete effectively for sales of a branded drug in the
same class, such as Namenda XR, even if the price of the generics is
much lower than the brand.” S.A. 80-81; see also IP and Antitrust
Prof. Br. at 13-14 (explaining that absent substitution at the
pharmacy, “the market for generics will collapse”). Moreover,
generics cannot simply move into the market for generic XR. To
become substitutable for Namenda XR, generic manufacturers must
develop new once-daily Namenda tablets, begin the ANDA-
approval process all over again, and await the end of XR’s patent
exclusivity period in 2029. Because Defendants’ conduct does not
simply harm a competitor or two, but threatens to “reduce
competition in the [memantine-drug] market[,] . . . [it] is precisely
See also LePage's Inc. v. 3M, 324 F.3d 141, 159 (3d Cir. 2003) (“When a
35
monopolist’s actions are designed to prevent one or more new or potential
competitors from gaining a foothold in the market by exclusionary, i.e.
predatory, conduct, its success in that goal is not only injurious to the potential
competitor but also to competition in general.”).
56 No. 14-4624-cv
the type that the antitrust laws were designed to protect against.”
Consol. Gold, 871 F.2d at 257-58.
The district court also found that, in addition to harming
consumer choice, Defendants’ hard switch would cause economic
harm to consumers. Based on Defendants’ own data, the district
court found that consumers would pay almost $300 million more
and third-party payors would pay almost $1.4 billion more for
memantine therapy if Defendants were permitted to switch patients
to Namenda XR before generic IR entry. And HHS reports that
Defendants’ withdrawal of Namenda IR prior to generic entry
would cost Medicare and its beneficiaries a minimum of $6 billion
over the next ten years. 36 “Threaten[ed] economic harm to . . .
consumers . . . is plainly sufficient to authorize injunctive relief.”
Am. Stores Co., 495 U.S. at 283. 37
Defendants argue that the district court erred in finding
irreparable harm because any increase in costs to consumers and
HHS, Some Observations, at 7.
36
Given that we conclude that the district court did not abuse its discretion in
37
granting a preliminary injunction based on the harm to competition and
economic harm to consumers, we need not consider whether the district court’s
findings related to medical harm to patients provided a basis for injunctive relief.
57 No. 14-4624-cv
third-party payors is “compensable and readily quantifiable.” Defs.
Br. at 26. But compensating the approximately 500,000 Alzheimer’s
patients who take Namenda IR tablets, and an unknown number of
public and private third-party payors, for an ongoing harm would
impose “the task of disentangling overlapping damages claims
[which] is not lightly to be imposed upon potential antitrust
litigants, or upon the judicial system.” Blue Shield of Va. v. McCready,
457 U.S. 465, 475 n.11 (1982); see also Salinger v. Colting, 607 F.3d 68,
81 (2d Cir. 2010) (“Harm might be irremediable, or irreparable, for
many reasons, including that a loss is difficult to replace . . . .”). 38 In
38Defendants also argue that the district court erred in discounting the harm
that they will suffer as a result of the injunction. We need not consider the
balance of the hardships given that New York has demonstrated a substantial
likelihood of success on the merits. In any event, we agree with the district court
that the balance of the hardships tips decidedly in New York’s favor.
Defendants argue that they will be injured if they cannot convert patients
to Namenda XR prior to July 2015, but that argument begets the question of
whether their conduct is lawful. Certainly, courts do not consider the harm a
party suffers from being prevented from violating the law.
Defendants also argue that they “had stopped making IR batches and
ha[d] been implementing plans to limit distribution for months.” Defs. Br. at 25.
Ordering Defendants to manufacture IR, Defendants argue, impedes production
of XR and delays the development of Namzaric, an even newer Alzheimer’s
drug, because the FDA has only certified one plant to produce IR, XR, and
Namzaric. This argument is belied by the record. At the preliminary injunction
hearing, one of Defendants’ executives testified that the plant could manufacture
IR while manufacturing XR. J.A. 533. Defendants also informed the district
court that there was no cap on the amount of IR that would be supplied through
58 No. 14-4624-cv
addition, many of the victims of Defendants’ hard switch, such as
patients and health plans, may be prevented from direct recovery for
their antitrust losses because of the “indirect purchaser” rule, which
bars those who do not directly purchase a product from recovering
antitrust damages, thus further supporting New York’s claim of
irreparable injury. See Illinois Brick Co. v. Illinois, 431 U.S. 720, 745-46
(1977).
Additionally, we agree with the district court, and the parties
do not dispute, that the preliminary injunction serves the public’s
interest in a competitive market for memantine drugs. See United
States v. Siemens Corp., 621 F.2d 499, 506 (2d Cir. 1980) (finding that
the government represents the public’s interest in a competitive
marketplace in seeking to enjoin a merger under § 7 of the Clayton
Act); see also Register.com, Inc. v. Verio, Inc., 356 F.3d 393, 424 (2d Cir.
Foundation Care and that the supply could be “adjusted as necessary based on
demand.” J.A. 904. Another of Defendants’ experts testified that the “biggest
problem [Defendants] have with [manufacturing both IR and XR] is the labor
force,” but “the equipment is completely different equipment.” J.A. 202.
Defendants’ expert clarified that they need skilled labor but, at most, he
explained that there might be some delay caused by training employees to use
the new XR equipment where employees who had manufactured IR would be
able to transition more quickly. J.A. 203.
59 No. 14-4624-cv
2004) (“[G]overnment action taken in furtherance of a regulatory or
statutory scheme . . . is presumed to be in the public interest”).
VI. The Preliminary Injunction
Defendants argue that the injunction provision requiring them
to make Namenda IR tablets available on the same terms and
conditions applicable since July 21, 2013 is vague because the terms
and conditions have shifted over the past 17 months. We disagree.
The injunction plainly prohibits Defendants from charging more for
Namenda IR than it did during the specified timeframe and from
restricting access to IR. If Defendants need additional clarification,
they can seek it in the district court.
Defendants also argue that the injunction is overbroad
because there is no antitrust violation in the 20 states in which drug
substitution laws might allow pharmacists to substitute generic IR
for Namenda XR. Defendants did not raise this argument before the
district court, and therefore have forfeited it. See, e.g., Zalaski v. City
of Hartford, 723 F.3d 382, 395 (2d Cir. 2013) (“[P]laintiffs failed to
raise the argument in the district court, thereby forfeiting it on
60 No. 14-4624-cv
appeal.”). In any event, that argument is not persuasive because, as
explained above, it exaggerates the extent to which state substitution
laws differ. Defendants have not brought to our attention a single
state in which drug substitution laws will definitively allow
pharmacists to submit generic IR for Namenda XR, and have thus
failed to identify any state for which there is no antitrust violation.
CONCLUSION
For the reasons stated above, we AFFIRM the District Court’s
order granting New York’s motion for a preliminary injunction.