On May 22, 2015, the Second Circuit upheld a preliminary injunction requiring Actavis to continue manufacturing and distributing an older version of its Namenda drug. The case is the first pharmaceutical "product hopping" case to reach the appellate courts and so provides important guidance on monopolization standards. The case has also attracted attention because of the lower court's unusual requirement that a manufacturer continue to offer a product the company wanted to discontinue. The court found this rare injunctive relief appropriate here because the combination of a new product introduction and a product withdrawal in the unique market characteristics of the pharmaceutical industry could constitute illegal monopolization.
Understanding how product hopping might create antitrust issues requires some understanding of the regulation and marketing of pharmaceuticals. A branded drug manufacturer must obtain Food and Drug Administration approval of a drug's efficacy and safety through extensive clinical trials. A generic manufacturer also must obtain FDA approval but need only show that its drug is a bioequivalent to an already approved "reference" drug. A bioequivalent generic of identical dosage, strength, and form is a branded drug's "AB-rated" equivalent.
Under many state laws, a pharmacist filling a prescription for a branded drug may — or, in some states, must — substitute an AB-rated generic version unless the prescribing doctor specifically objects. As a result, the lower-price generic is sold more often than it otherwise would be and with little if any marketing by the generic manufacturer. If the branded drug is altered and a doctor is convinced to prescribe the new version, then the generic of the old version can no longer be easily sold to fill the prescription. Branded manufacturers are accused of encouraging or forcing patients to "product hop" from an older, previously patented version of a drug to the new version so the manufacturer can stay one step ahead of the generic competition.
In September 2014, the New York Attorney General sued Actavis to stop the company's plan to pull its twice-a-day immediate-release version of Namenda, which was about to face generic competition, in favor of its new once-a-day, extended-release version. Because of the suit and supply issues with the new version, Actavis later decided to keep the older version available but only through a specialty mail-order pharmacy with a doctor's statement that it was medically necessary. In December 2014, the district court issued a preliminary injunction requiring Actavis to keep producing and fully marketing the older version for thirty days after the introduction of the generic competitors (expected mid-July 2015). Actavis appealed to the Second Circuit.
The Second Circuit upheld the preliminary injunction, finding that plaintiff met the appropriate injunctive standard because it had "demonstrated a substantial likelihood of success on the merits of its monopolization and attempted monopolization claims" and "has made a strong showing that Defendants' conduct would cause irreparable harm to competition." The court found that neither product improvement nor withdrawal, alone, is anticompetitive; however, "when a monopolist combines product withdrawal with some other conduct, the overall effect of which is to coerce consumers . . . and to impede competition," it is monopolizing. Here, the combination seems to be the introduction of the new product and the effective withdrawal of the old one because it reduced customer choice by precluding generic competitors from the most effective means of marketing their products: the state automatic substitution laws.
The court also found that plaintiff made a "strong showing that competition and consumers will suffer irreparable harm in the absence of the injunction." Preventing the automatic substitution of generics under state law would effectively prevent competition from generics because of "the unique market characteristics of the pharmaceutical industry." The result would be an increase in the amount spent on the drugs by consumers and third party payors.
Lower courts have struggled with selecting the proper standard when typically pro-competitive conduct (like low prices or product innovation) is combined with conduct often viewed as exclusionary. In those situations, courts often have applied a version of the traditional "rule of reason" test to balance the pro-competitive aspects against the anticompetitive effects of the more exclusionary actions. This and other product hopping cases suggest that courts will be similarly careful before analyzing and condemning activities seen as pro-competitive and beneficial to consumers, such as product innovation. Plaintiffs likely will need to allege and show that the challenged product innovation was accompanied by additional, more typically "anticompetitive" conduct (such as stopping the sale of the old version and buying back supplies) that reduces the choices available to consumers. Counsel for pharmaceutical companies and all competition law practitioners interested in the development of monopolization standards should keep an eye on future product hopping cases.