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United Food and Commercial Workers Local 1776 v. Teikoku Pharma USA

United States District Court, N.D. California

November 3, 2017

UNITED FOOD AND COMMERCIAL WORKERS LOCAL 1776 & PARTICIPATING EMPLOYERS HEALTH AND WELFARE FUND, et al., Plaintiffs,
v.
TEIKOKU PHARMA USA, et al., Defendants.

          ORDER ON PENDING MOTIONS

          WILLIAM H. ORRICK UNITED STATES DISTRICT JUDGE

         Currently before me are the parties' motions for summary judgment and motions to exclude expert testimony. Defendants move for summary judgment as to all of plaintiffs' claims, but as described below plaintiffs have significant evidence that Watson could have (if not would have) ultimately prevailed in the `529 litigation and a cognizable (if not disputed) theory of alternate injury in a but-for world. Defendants' motion is DENIED.[1] Plaintiffs more narrowly move for partial summary judgment that they have satisfied the “contract, combination, or conspiracy” element of their Section 1 and Section 2 claims (defendants do not oppose) and also to define the relevant antitrust market as the market for generic and brand 5% lidocaine patches. Rejecting defendants' arguments in support of an essentially unlimited market for pain relief products, I agree that plaintiffs have shown on undisputed material facts that the relevant market is the market for 5% lidocaine patches and GRANT their motion.[2]

         The general background and history of this litigation is well known and laid out in my prior orders. Dkt. Nos. 117, 670. The facts material to the determination of these motions, both undisputed and disputed, will be addressed below.

         LEGAL STANDARD

         Summary judgment on a claim or defense is appropriate “if the movant shows that there is no genuine dispute as to any material fact and the movant is entitled to judgment as a matter of law.” Fed.R.Civ.P. 56(a). In order to prevail, a party moving for summary judgment must show the absence of a genuine issue of material fact with respect to an essential element of the non-moving party's claim, or to a defense on which the non-moving party will bear the burden of persuasion at trial. See Celotex Corp. v. Catrett, 477 U.S. 317, 323 (1986). Once the movant has made this showing, the burden then shifts to the party opposing summary judgment to identify “specific facts showing there is a genuine issue for trial.” Id. The party opposing summary judgment must then present affirmative evidence from which a jury could return a verdict in that party's favor. Anderson v. Liberty Lobby, 477 U.S. 242, 257 (1986).

         On summary judgment, the court draws all reasonable factual inferences in favor of the non-movant. Id. at 255. In deciding a motion for summary judgment, “[c]redibility determinations, the weighing of the evidence, and the drawing of legitimate inferences from the facts are jury functions, not those of a judge.” Id. However, conclusory and speculative testimony does not raise genuine issues of fact and is insufficient to defeat summary judgment. See Thornhill Publ'g Co., Inc. v. GTE Corp., 594 F.2d 730, 738 (9th Cir.1979).

         DISCUSSION

         I. DEFENDANTS' MOTIONS FOR SUMMARY JUDGMENT

         A. Defendants' Motion for Summary Judgment on All Claims

         Plaintiffs' case rests on two theories of antitrust injury causation: (i) absent the large reverse payment, Watson would have launched at-risk; and (ii) absent the large reverse payment the parties would have reached an alternative “no payment settlement” giving Watson early entry into the market. Pls. Oppo. to MSJ [Dkt. No. 819] at 1. Defendants argue that summary judgment must be granted in their favor on plaintiffs' first theory because Watson's infringement of the `529 patent breaks the “chain of causation” as illegal activity and cannot support an antitrust claim. Plaintiffs counter that under Ninth Circuit case law, the chain cannot be broken by the `529 patent, but even it if could, plaintiffs have ample evidence from which a reasonable juror could determine that Watson would have prevailed in the patent litigation. As to plaintiffs' second theory, defendants argue that the “hypothetical” settlement proposed by plaintiffs is not legally cognizable and not supported by evidence in the record. Plaintiffs counter that numerous courts have recognized that hypothetical settlements are an acceptable basis for causation and that there is significant evidence in the record that a reasonable juror could rely on to find that, absent the reverse-payment settlement agreed-to in this case (hereafter Settlement), another settlement would have been reached to allow Watson early-entry to the market.

         1. At-Risk Launch Theory

         a. Necessity to Address Watson's Chances of Success in the `529 Patent Litigation

         Plaintiffs argue that they need not show that Watson would have likely won the `529 patent litigation in order to prevail at trial in this case. They rely primarily on the Supreme Court's decision in F.T.C. v. Actavis, Inc., 133 S.Ct. 2223 (2013). There, the Court explained that “it is normally not necessary to litigate patent validity to answer the antitrust question (unless, perhaps, to determine whether the patent litigation is a sham . . . . An unexplained large reverse payment itself would normally suggest that the patentee has serious doubts about the patent's survival.” Id. at 2236; see also 3 Philip E. Areeda & Herbert Hovenkamp, Antitrust Law ¶ 2046d2 (Supp. 2016) (“The size of the payment operates as a surrogate for direct patent-law-based questions about patent quality. Indeed, payment size may actually be a more reliable indicator to the extent it reflects the settling parties' market-based judgment about the patent's prospects in a fully litigated infringement suit.”). According to plaintiffs, that is exactly the shape of this case; the reverse settlement payments are unexplained by legitimate factors (such as avoidance of litigation costs or the provision of other services) and are indisputably large. Plaintiffs also rely on their expert, Professor Einer Elhauge, who opined that if Endo thought it had more than a 15.1% chance of winning, Endo would not have rationally agreed to the Settlement because its expected profits from continuing to litigate would have exceeded its profits from the settlement. Elhauge Report, Declaration of Dena Sharp [Dkt. No. 819] Ex. 1 [Dkt. No. 819-2] ¶¶ 6, 8, 147-48.

         Recent decisions have limited the use of sole reliance on a large and unexplained reverse payment as a proxy for the weakness of the underlying patents to cases, like Actavis, that are brought by the FTC. In a detailed analysis, the district court in In re Wellbutrin XL Antitrust Litig., 133 F.Supp.3d 734 (E.D. Pa. 2015), as affirmed by the Third Circuit, concluded that the Supreme Court's admonition in Actavis that “it is normally not necessary to litigate patent validity to answer the antitrust question” was limited to the context of an action brought by the FTC under the FTC Act's “more relaxed” “likely to” causation standard. 133 F.Supp.3d at 764. The court concluded that where private litigants are proceeding under the Clayton Act, that Act's more stringent “proximate cause” standard requires showing that it was the settlement that precluded competition and not the patents. Id. If that could not be proved, the patent protection provided to the brand manufacturer (and that manufacturer's right to exclude) cuts off the chain of causation. “In other words, if an agreement only replicates the effect of the underlying patent litigation, any exclusion resulting from that agreement must be caused by the underling patent.” Id. at 765; see also In re Wellbutrin Xl Antitrust Litig. Indirect Purchaser Class, 868 F.3d 132, 169 (3d Cir. 2017) (recognizing what while the “size of a reverse payment may have some relevance in determining how confident a litigant is in the strength of its case” it could not standing along provide a “surrogate” for the weakness of the challenged patent).[3]

         Similarly, the First Circuit in In re Nexium (Esomeprazole) Antitrust Litig., 842 F.3d 34 (1st Cir. 2016) rejected plaintiffs' contention that they were impermissibly prevented from putting on evidence regarding multiple theories of causation, including a theory based on an assertion that the generic manufacturer would have won the Paragraph IV patent litigation, by the district court's summary judgment ruling. In reaching that conclusion, the First Circuit accepted the proposition that “the plaintiffs did not present such evidence that the brand-name's patents would have been declared invalid or that an at-risk launch would not have infringed the patents. And without such evidence, the ‘patent served as an independent regulatory bar to [a generic's] launch.'” Id. at 63 (quoting In re Wellbutrin XL Antitrust Litig., 133 F.Supp.3d at 767); see also id. (“The district court thus did not err by requiring some evidence of the patents' invalidity or noninfringement before allowing the plaintiffs to pursue an at-risk launch theory.”); cf. Apotex, Inc. v. Cephalon, Inc., No. 2:06-CV-2768, 2017 WL 2473148, at *8 (E.D. Pa. June 8, 2017) (“The clear import of Nexium and Wellbutrin is that a plaintiff must offer some evidence of non-infringement or patent invalidity in order to proceed on an at-risk launch theory of causation. The fact that the patent in question has been found to be invalid and non-infringed is relevant evidence on that required proof. Against this backdrop, I agree with Plaintiffs that evidence of a patent's subsequent invalidation is highly probative to the lawful launch question.”).[4]

         Plaintiffs respond, first, that these cases are inapposite under binding Ninth Circuit case law and that the existence of the `529 patent does not make the but-for at-risk sales of Watson illegal. Plaintiffs point out that under the Hatch-Waxman Act and Paragraph IV litigation scheme, generic entrants are allowed into the market prior to patent expiration or invalidity. They need only secure an ANDA approval and have made the Paragraph IV certification that the patent is invalid, unenforceable, or will not be infringed. See Anesta AG v. Mylan Pharm., Inc., No. CV 08-889-SLR, 2014 WL 3976456, at *2 (D. Del. Aug. 14, 2014) (“although their launch was at risk, it was not illegal when it took place”).

         Plaintiffs then rely on Memorex Corp. v. Int'l Bus. Machines Corp., 555 F.2d 1379 (9th Cir. 1977). There, Memorex brought antitrust claims against IBM who in turn asserted as a defense that Memorex's own wrongful acts (theft of IBM's trade secrets) barred Memorex's antitrust claims. The Ninth Circuit held “that illegality is not to be recognized as a defense to an antitrust action when the illegal acts by the plaintiff are directed against the defendant. A wrongful act committed against one who violates the antitrust laws must not become a shield in the violator's hands against operation of the antitrust laws.” Id. at 1382. That concept, however, was “particularly true when the defendant has other remedies available, ” namely a counterclaim against Memorex for the alleged misappropriation. Id. Plaintiffs argue that the principle recognized in Memorex is particularly relevant here because there is no allegation that plaintiffs committed any wrong, only a thin allegation that one of the alleged antitrust violators may have (if the patent was ultimately held to have been valid) been making sales that would expose it to damages and an injunction. However, I do not find Memorex as persuasive as plaintiffs contend. Here, it is not defendants' attempting to use plaintiffs' illegal conduct, or even Watson's conduct, as a shield against antitrust liability. Instead, the question is what amount of evidence (if any) must plaintiffs present to substantiate their assertion that defendants' reverse settlement was motivated by Endo and Teikoku's concerns that their patent rights were at serious risk in light of Watson's patent litigation.[5]

         More persuasive are plaintiffs' criticisms of the Wellbutrin and Nexium decisions, and also their argument that they have, nevertheless, met the burdens imposed on plaintiffs in those cases. I agree that those courts' reliance on the FTC being the plaintiff in Actavis to discount the “large and unexplained” reverse payment proxy for patent weakness standard adopted by the Actavis majority is not supported by anything said by the Actavis majority. So does the California Supreme Court, which in a thorough analysis of the Actavis decision concluded that “nothing in the United States Supreme Court's discussion of the legal rules at the boundary between antitrust and patent law hinged on the happenstance that the case under review involved a public prosecutor.” In re Cipro Cases I & II, 61 Cal.4th 116, 142 (2015), reh'g denied (July 8, 2015).

         The In re Cipro court pointed out that the if a reverse payment settlement “only replicates the likely average result of litigation, any exclusion is a function of the underlying patent strength; if it extends exclusion beyond that point, this further exclusion from the marketplace-and the attendant anticompetitive effect-is attributable to the agreement.” 61 Cal.4th at 150. In discussing a defendant's burden to demonstrate that a reverse payment settlement was procompetitive, the court later explained that “consideration of whether the agreement is justified as procompetitive will not turn on whether the patent would ultimately have been proved valid or invalid” because “[a]greements must be assessed as of the time they are made . . . at which point the patent's validity is unknown and unknowable.” Id. at 158 (recognizing that “[j]ust as later invalidation of a patent does not prove an agreement when made was anticompetitive . . . later evidence of validity will not automatically demonstrate an agreement was procompetitive.”). The court then acknowledged the Court's explanation in Actavis that an unexplained large reserve payment could provide a workable surrogate for a patent's weakness. Id. at 159. In sum, in explaining how the rule of reason analysis should play out in a reverse-payment settlement scenario under the Cartwright Act, the Cipro court recognized that evidence regarding the strength of the patent - assessed as of the time of the settlement - was important and also recognized that the existence of a large and unexplained reverse payment was, likewise, relevant evidence of a patent's weakness.

         The In re Cipro court's conclusion, that patent validity and potential enforceability (e.g., strength and potential infringement) needs to be considered but that it is not necessary for a plaintiff to show that the patents would ultimately be declared invalid or the generic determined not to infringe, is not inconsistent with In re Nexium. In Nexium the First Circuit concluded the district court did not err by requiring plaintiffs to put forth “some evidence of the patents' invalidity or noninfringement before allowing the plaintiffs to pursue an at-risk launch theory.” In re Nexium, 842 F.3d at 63 (emphasis added). “Some evidence” is not the same as requiring plaintiffs to prove that the generic defendant would have won, only that it could have. See also Wellbutrin, 868 F.3d at 169 (“On this record, then, no reasonable jury could conclude that Anchen would have been more likely than not to prevail.”); In re Opana ER Antitrust Litig., 162 F.Supp.3d 704, 720 (N.D. Ill. 2016) (rejecting contention on a motion to dismiss that plaintiffs “must plead that the Endo patents would ultimately have been invalidated or found uninfringed” as contrary to Actavis); In re Aggrenox Antitrust Litig., 94 F.Supp.3d 224, 241 (D. Conn. 2015) (in a motion to dismiss, the “salient question” as “not whether the fully-litigated patent would ultimately be found valid or invalid-that may never be known-but whether the settlement included a large and unjustified reverse payment leading to the inference of profit-sharing to avoid the risk of competition.”).[6]

         Taken together, these cases stand for the proposition that a plaintiff must have “some evidence” that the generic could have won the patent litigation, a burden that plaintiffs have satisfied as discussed below. That showing will be weighed by the trier of fact, along with the other factors recognized as relevant by the Supreme Court in Actavis, such as the large and unexplained nature of the reverse payment itself.

         In sum, I disagree that plaintiffs need to prove in this case that Watson would have won its patent litigations. That turducken is not only unappetizing as a matter of judicial efficiency, it is not required (or even suggested) by the Actavis opinion.[7] Instead, to put their at-risk launch theory of antitrust causation to the jury, plaintiffs must show “some evidence” that Watson could have won at trial before Judge Sleet or on appeal at the Federal Circuit. As discussed below, they have made that showing.

         b. Watson's Chance of Success in the `529 Patent Litigation

         Plaintiffs argue that significant evidence exists that a reasonable juror could rely on to find that Watson was likely to succeed in the `529 litigation including: (i) the large reverse payments themselves; (ii) Watson's positions in its Paragraph IV certification and during the '529 litigation; (iii) defendants' contemporaneous assessments that the '529 patent was weak; (iv) the testimony of the parties' respective experts that Watson would have won on appeal on invalidity defenses (as well as defendants' own experts concession that Watson would have won in the district court on infringement); and (v) the evidence of record in the '529 litigation.

         No one disputes that the record in the `529 patent litigation was closed at the time of the parties' settlement. There had been a six day bench trial and the parties had submitted post-trial briefing. All that remained was for the Judge Sleet to issue his findings of fact and conclusions of law. As discussed below, for purposes of ruling on this motion, I conclude that plaintiffs have put forth significant evidence that Watson could have prevailed in the `529 litigation. While there is “some evidence” that Watson could have won on invalidity with respect to anticipation and non-infringement, I need not consider that evidence in-depth, because plaintiffs present stronger evidence on invalidity due to obviousness and unenforceability due to inequitable conduct.

         i. Contemporaneous Evidence from Defendants

         Plaintiffs note that in filing its ANDA application, Watson was required to and did certify that the `529 patent was invalid, unenforceable, and would not be infringed by Watson's planned generic. Watson spent over two years actively litigating the issues, contrary to defendants' current characterizations of Watson's chances of success.

         The parties' contemporaneous statements, according to plaintiffs, also support a finding that Watson would have prevailed, including:

(i) Watson CEO's November 2011 earning call statements about its “strong litigation stance” and intent to start sales in 2012, Sharp Decl., Ex. 3 at 7. Defendants argue that these statements - made before the patent trial started - are irrelevant because they ignore the key question here, what would have happened at and after trial and on appeal;
(ii) A July 2012 Watson memorandum that “the patents covering Lidoderm are not valid, ” that “Watson's legal assessment” was that the patents were weak, and that as such Watson had been preparing for launch upon FDA approval in July or August of 2012. Id., Ex. 4 at 1. The same memorandum described “Watson's legal assessment of the patent held by Endo as being weak.” Id. at 3. Defendants note that the provenance of this “draft” disclosure statement is in dispute, as the purported author, Joe DosSantos denied having knowledge of it;
(iii) A February 2012 email from Endo General Counsel Caroline Manogue characterizing the patent as “very weak” and deposition testimony from Teikoku's outside counsel characterizing Endo's “negative impression” of the strength of the patent. Sharp Decls., Exs. 5 (email) and 6 (Shimoda Depo. Tr.) at 267-269. Defendants again downplay the significance of these documents, as they too were drafted before the patent trial, which they believe is the relevant point of focus; and
(iv) Draft Endo accounting letters from July 2012 that, “[w]hile the settlement with Watson was reached prior to the court's ruling, it was the view of [Endo's] management that there was a significant probability that the courts may find one or more of the patents to be invalid” and that “Watson and potentially other Companies may be able to launch a generic version of Lidoderm.” Id., Ex. 7 at 11. Endo also admitted that it “believed a ruling in favor of Watson was very plausible, thus furthering our desire to settle.” Id. Ex. 8 at 15. Defendants characterize these as having been written by individuals without knowledge of the `529 patent litigation and were prepared for review by others with actual knowledge “to fill in the gaps.”

         This evidence is relevant. Although its implications and importance are clearly disputed, it is significant enough - in combination with the expert opinions discussed below - to defeat defendants' motion for summary judgment.

         ii. Expert Analysis

         Plaintiffs rely most heavily - and defendants dispute most vigorously - on the testimony of plaintiffs' patent experts. After reviewing the trial record in the `529 litigation, those experts opine that Watson would have prevailed, if not in trial court then on appeal, on the issues of invalidity due to anticipation and obviousness, as well as unenforceability due to inequitable conduct before the PTO.

         Anticipation

         Plaintiffs argue that Watson would have won on anticipation, maybe at trial but definitely on appeal, based on Watson's argument and evidence at trial that the `529 claims were anticipated by the “Takeda reference” that disclosed a lidocaine hydrogel patch.[8] Defendants challenge that assertion, arguing - as they did in the underlying `529 trial - that because the Takeda reference did not sufficiently disclose use of lidocaine in the patch, it did not “enable” a lidocaine patch. Defendants also argue that because Takeda did not disclose a particular concentration of lidocaine that could be used in the patch, the Takeda disclosure cannot support the “adequate description” requirement of an anticipation defense. Plaintiffs, in turn, dispute those contentions, arguing that the record below shows and arguments on appeal would have established that lidocaine was sufficiently disclosed. More particularly, as the Takeda reference discusses various embodiments, the teaching to use “expected clinical effect” was sufficient in conjunction with the fact that the Takeda concentration ranges overlap with the 5% lidocaine concentration claimed in the `529 patent, even if a 5% concentration was not expressly identified within Takeda for lidocaine. Id.[9]

         For support, plaintiffs rely on Professor Martin Adelman who opines that based on the record before the trial court, Watson would have won on anticipation in light of the Takeda reference. Adelman Report (Declaration of Dena Sharp [Dkt. No. 819-1], Ex. 12 [Dkt. No. 819- 13]) ¶¶ 22-37.[10] Reviewing the evidence admitted at trial and the argument made by both Watson and Endo, Adelman opines that “a reasonable factfinder would conclude that Takeda discloses both lidocaine and discloses the use of lidocaine in a soft patch formulation in [the various disclosed ranges of concentration].” Adelman Report ¶ 37.[11]

         Defendants counter with patent litigator Robert S. Frank, Jr., who disputes Adelman's conclusions and opines that Judge Sleet would have not found Takeda anticipating. Frank Report (Declaration of Daniel B. Asimow [Dkt. No. 786-1], Ex. [Dkt. No. 786-12], ¶¶ 48-49. Frank argues that in order for Watson to have won on anticipation, Judge Sleet would have had to credit Watson's expert (Walters) over Endo's expert (Lane), which he was unlikely do given Judge Sleet's statements in closing argument suggesting that he found Lane credible over Walters. Id. ¶¶ 41-47;[12] see also Report of David L. Schwartz (Asimow Decl., Ex. 25 [Dkt. No. 786-13] ¶ 177 (no anticipation because Takeda disclosure does not contain a disclosure regarding the concentration of lidocaine, but merely disclosed ranges).

         In their briefs, the parties spend significant time debating whether and how persuasively various arguments were made in the trial court, relying on transcripts as well as Judge Sleet's comments in closing argument about who he might find credible. However, Judge Sleet had not yet ruled and there was significant, if disputed, evidence in the record to support both sides. Reviewing the record and arguments as a whole, plaintiffs have produced “some” evidence that Watson would have won on anticipation, if not at the district court, then on appeal.

         Obviousness

         Plaintiffs rely again on Adelman, who opines that even if anticipation was not shown, “the Takeda reference presented a strong case for obviousness, especially when combined with the Teikoku Hydrogel Art and Topical Lidocaine Art.” Adelman Report ¶ 108; see also id. ¶¶ 39-81.[13] Plaintiffs note that Endo's expert in the `529 trial admitted that the only distinction between the `529 claims and Teikoku's own prior-disclosed hydrogel art was lidocaine, and Watson showed through its expert that Takeda disclosed a lidocaine hydrogel patch that made the `529 claims obvious.[14]

         Defendants argue that plaintiffs have failed to adduce evidence that Watson was likely to succeed on both prongs of the obviousness test: to show person of ordinary skill in the art had (a) the motivation to make the invention and (b) a reasonable expectation of success in doing so. Defendants point out at that at trial Endo spent much time arguing through its expert that the art was unpredictable and even Watson's expert had not made a lidocaine hydrogel patch (although he had formulated other lidocaine patches). As to motivation, defendants acknowledge that there was “conflicting testimony” in the trial court, but again rely on Judge Sleet's comments during closing that he would credit Endo's expert over Watson's, and that Endo's expert (Lane) made an extensive argument that prior art “taught away” from putting lidocaine in a hydrogel patch because all prior lidocaine patches were water-free. Closing Argument Tr. at 44.[15]

         Reviewing the evidence in this record as a whole, plaintiffs have made a strong showing that Watson could have won on obviousness sufficient to defeat defendants' motion for summary judgment.

         Unenforceability

         Plaintiffs also argue, again relying heavily on Adelman, that Watson was likely to prevail at trial and on appeal because the `529 patent was unenforceable as a result of Teikoku's inequitable conduct. Adelman Report ¶¶ 82-92.[16] The inequitable conduct at issue is whether Teikoku and the `529 inventor (Ono) affirmatively misled the PTO by failing to disclose specific “Teikoku Hydrogel” prior art references. Adelman Report ¶¶ 83-88.

         Defendants assert that this defense rises and falls to the same extent as the obviousness defense above, as both rely on the Teikoku Hydrogel prior art. As to intent to deceive, defendants point to Judge Sleet's questions and comments in closing, attempting to distinguish where intent lies when an inventor simply signs whatever disclosures are given to him without review (as Ono testified), and Judge Sleet's comments that he found Ono credible and believed him. Closing Argument Tr. at 45, 108-09. Plaintiffs respond that Judge Sleet's inclinations cannot be deciphered solely from the comments identified by defendants and point out that Judge Sleet also referred to the importance of full disclosure to the PTO from a factual and policy perspective and noted he was free to draw reasonable inferences based on Watson's attempt to show specific intent to deceive. Closing Argument Tr. at 23 105-107.

         Plaintiffs also argue that there was sufficient evidence and supporting argument in the record so show that Teikoku engaged in an inequitable “failure to disclose” because the declarations submitted to the PTO asserted only “fictional distinctions” over prior art and its experts (and Watson's at the `529 trial) asserted that the non-disclosure was material and Ono's failure to disclose the prior art was egregious. Defendants respond that because Watson did not assert affirmative misrepresentations (based on omissions) in the `529 trial itself, plaintiffs cannot rely on that theory to show Watson could have won on that ground in this case. However, the evidence underlying this theory is in the `529 record and even if not expressly argued at closing, could have formed a basis of either the trial court or Federal Circuit's decisions.

         Plaintiffs have presented strong evidence that Watson could have succeeded on unenforceability.

         Other Grounds

         Defendants argue that in light of an erroneous claim construction by Judge Sleet (as subsequently confirmed by the Federal Circuit in Multilayer Stretch Cling Film Holdings, Inc. v. Berry Plastics Corp., 831 F.3d 1350 (Fed. Cir. 2016)), Watson would have lost its appeal on infringement. Plaintiffs do not really dispute this position, although they rely on an expert for the essentially-agreed-to position that Watson would have won on non-infringement at the trial court level. Instead, plaintiffs argue in passing that Endo bears the burden to show infringement on summary judgment here - because they bore that burden in the `529 litigation - and they failed to do so. Pls. Oppo. to Defs. MSJ at 22. Defendants dispute this, contending that because it is plaintiffs' burden here to show antitrust injury premised on non-infringement or invalidity, they bear the burden to show non-infringement by Watson. Plaintiffs have not introduced “some evidence” that a reasonable juror could rely on to find that Watson would have ultimately won on non-infringement.

         Similarly, defendants also move for “summary judgment” on the “derivation defense, ” arguing plaintiffs cannot establish a genuine issue of material fact that Watson could have proven in the `529 litigation that a third-party conceived of the `529 invention. Defs. MSJ at 12. Plaintiffs do not address this defense in their Opposition.

         Accordingly, under Rule 56(g), the material facts that Watson could not have won on non-infringement and derivation are established for trial.

         iii. `529 Litigation Record

         Plaintiffs also rely on three categories of evidence introduced by Watson in the `529 litigation that a reasonable juror could rely on to determine that Watson would have won at trial and on appeal without regard to plaintiffs' experts' analyses. That evidence concerns: (i) anticipation by Takeda; (ii) obviousness in light of the Teikoku Hydrogel prior art and teachings to use lidocaine in those patches; and (iii) inequitable conduct before the PTO. Pls. Oppo. to Defs. MSJ at16-18. This evidence is the same as that relied upon by its experts above and, as noted, helps plaintiffs meet the “some evidence” mark.[17]

         Defendants' motion for summary judgment on the ground that the `529 patent broke the chain of antitrust causation is DENIED.

         2. Plaintiffs' Alternative Theory of Causation

         Plaintiffs have a second theory of causation; that absent the reverse-payment Settlement, the parties still would have agreed to an anticompetitive settlement, but one where no payment was made and only early generic entry was allowed. Defendants argue that this theory is not legally viable (and move to exclude the expert testimony submitted in support of it). Even if legally viable, defendants argue that it is purely speculative as there is no evidence in the record to support it.

         a. Whether the Theory is Cognizable

         Defendants argue this alternate theory is not cognizable as a matter of law and (at least with respect to the Cartwright Claims) is barred by the California Supreme Court's decision in In re Cipro Cases I & II, 61 Cal.4th at 153. There, in determining the elements of a prima facie case under the Cartwright Act and who bears the burdens, the court noted that: “Unless a challenged settlement agreement includes both a restraint on generic competition and a reverse payment to the generic in excess of both brand litigation costs and generic collateral products and services, there is no reason to assume the settlement includes any element of purchased freedom from competition, as opposed to a limit on competition flowing naturally, and lawfully, from the perceived strength of the brand's patent.” Id. at 153 (emphasis added). The court explained that the relevant “baseline” is the “average period of competition that would have obtained in the absence of settlement.” Id. at 158.

         As plaintiffs point out, however, the Cipro court was not analyzing causation - the critical issue here - but whether a Cartwright antitrust claim could be asserted in face of a patent defense, essentially considering the same issue that was before the Supreme Court in Actavis. Moreover, the Cipro court's comments do not foreclose an argument that antitrust injury could have been nonetheless caused in absence of a reverse-payment if there is evidence in the but-for world that the parties would have reached an agreement to drop the patent litigation in exchange for early generic entry into the market.

         The district court in Wellbutrin recognized the viability of the “alternate settlement” method of proving causation, In re Wellbutrin XL Antitrust Litig., 133 F.Supp.3d 734, 757 & n.2 (E.D. Pa. 2015), but rejected the theory on the facts of that case where there were “no facts in the summary judgment record” to support it. Id. at 757. The evidence there was expressly to the contrary; the record was replete with evidence that the generic manufacturer would not settle absent a no authorized generic (AG) agreement. Id.[18] On appeal, the Third Circuit agreed that alternate settlement scenarios can support causation, but that evidence was required to support such a theory and it could not rest on “pure speculation.” Wellbutrin, 868 F.3d at 167 & n.57.

         Relatedly, defendants argue that plaintiffs' alternate theory - that some other settlement would have been reached - is an impermissible attempt to show cognizable harm by arguing “that the parties might have elected a different settlement agreement more favorable to competition and consumers.” In re Cipro Cases I & II, 61 Cal.4th at 150 n.10. But plaintiffs are not attempting to require (or show) that defendants should have settled on terms that are the most favorable to consumers. Instead, they are positing an alternative settlement scenario that shows but-for the reverse-payment agreement, the parties would have reached a settlement that was still anticompetitive and caused unjustified harm to consumers.[19]

         In addition to Cipro, defendants rely on other cases (arising primarily in the legal malpractice context, not in reverse-payment cases) to argue that “alternative settlement” scenarios are generally not cognizable. See Defs. MSJ at 26-27. Those cases are inapposite. In the antitrust context, where but-for worlds are considered and profit-maximizing goals assumed, there is by necessity second-guessing involved, although that second-guessing has to be supported by evidence as discussed below.[20] A similar concept has been adopted in patent litigation, where reasonable royalties have to be constructed based on hypothetical negotiations. See, e.g., Fujifilm Corp. v. Motorola Mobility LLC, No. 12-CV-03587-WHO, 2015 WL 1737951, at *2 (N.D. Cal. Apr. 8, 2015) (“The hypothetical negotiation is a legal construct that ‘attempts to ascertain the royalty upon which the parties would have agreed had they successfully negotiated an agreement just before infringement began.'” (quoting Lucent Technologies, Inc. v. Gateway, Inc., 580 F.3d 1301, 1324 (Fed.Cir. 2009)).

         b. Whether There is Sufficient Evidence to Survive Summary Judgment

         Plaintiffs' experts identify various “no payment” settlements providing Watson with early access at different dates that would still have been in defendants' favor and still have caused plaintiffs injury (i.e., could not be justified by procompetitive reasons); the Retailer Plaintiffs rely on the economic analysis of Dr. Keith B. Leffler and the remaining plaintiffs rely on Professor Einer Elhauge. Elhauge concludes that the hypothetical licensed entry date would have been October 26, 2012. Elhauge Report [Dkt. No. 783-2] ¶ 139. Leffler concludes that January 3, 2013 is the hypothetical early-entry date to which defendants would have agreed. Leffler Report [Dkt. No. 278-2] ¶ 37.

         Defendants argue that Elhauge's opinions - based on estimated bargaining strength (tied to the actual Settlement terms) that is then applied to the hypothetical negotiation - are based on unreasonable assumptions about finances and risk. In particular, defendants challenge Elhauge's use of the actual Settlement to estimate bargaining power in a “very different” hypothetical settlement.

         Defendants challenge Leffler's different approach - calculating entry dates by valuing the parties' expectation of profits from an early-entry only settlement as opposed to continued litigation - as based only on an inference that otherwise unjustified delay exists from the existence of the unjustified large reverse payment. Such an inference was found to be insufficient in Wellbutrin, 133 F.Supp.3d at 757-58.

         Finally, defendants challenge both Elhauge's and Leffler's lack of experience with real world negotiations in general and HWA settlement negotiations in particular as grounds to find their testimony speculative and insufficient to support summary judgment.

         Plaintiffs respond that Elhauge's analyses are based on the accepted-in-antitrust law proposition that parties are profit-maximizing, meaning that no party would agree to a settlement unless the settlement payoff exceeded its litigation payoff. Starting from this proposition, and using the terms of the Settlement agreed to and the companies' own profit projections, Elhauge calculated that if Endo thought it had more than a 15.1% chance of winning, it would not have rationally agreed to the actual Settlement. Elhauge Report ¶¶ 6, 147. Then he considered the various possible strengths each party could have rationally had with respect to the litigation, to produce a range of feasible no-reverse-payment-settlement early entry dates that still would have provided each party with a payoff exceeding its litigation payoff. Plaintiffs explain that Leffler's analyses, while different, are also firmly rooted in economic theory and tied to the facts in this case. Leffler used economic literature analyzing settlements, but then also calculated Endo's profits from winning versus losing the patent litigation and weighted those expectations based on the objective expectations provided by Adelman.

         Both of these case-based analyses - applying accepted principles in antitrust law and settlement analysis to evidence in this case - are different than what happened in Wellbutrin. There, the expert provided no testimony that an alternate settlement would have been reached nor described what that settlement would have looked like. 133 F.Supp.3d at 757-58. Here, as noted above, both experts' approaches are fully consistent with the principles applied in but-for damage calculations. See, e.g., Dolphin Tours, Inc. v. Pacifico Creative Serv., Inc., 773 F.2d 1506, 1511 (9th Cir. 1985) (plaintiffs “must presume the existence of rational economic behavior in the hypothetical free market.”); see also Murphy Tugboat Co. v. Crowley, 658 F.2d 1256, 1262 (9th Cir. 1981) (“economic rationality must be assumed for all competitors, absent the strongest evidence of chronic irrationality”).[21]

         Defendants do not point to any specific evidence considered or assumptions made by the experts that are contrary to evidence in the record. See, e.g., In re Online DVD-Rental Antitrust Litig., 779 F.3d 914, 924 (9th Cir. 2015) (“Subscribers' experts' testimony is contrary to the undisputed market facts.”); Pennsylvania Dental Ass'n v. Med. Serv. Ass'n of Pennsylvania, 745 F.2d 248, 261 (3d Cir. 1984) (expert affidavit that expressed opinion based on specific factual assertions for which no support was provided, could not defeat summary judgment). At most defendants criticize plaintiffs' experts for failing to consider or adequately consider certain points they believe are significant (e.g., risk adversity); those sorts of disagreements are the subject for cross-examination.[22]

         Plaintiffs, through their experts, have applied evidence from the record in this case to posit alternative early entry settlement dates in support of their second causation theory. While defendants challenge their methodologies, defendants have not shown that their conclusions are contradicted by undisputed evidence in the record. Defendants' motion for summary judgment on the second causation theory is DENIED.

         II. DEFENDANTS' MOTION FOR PARTIAL SUMMARY JUDGMENT RE CAUSATION/MANUFACTURING

         In the alternative, defendants move for partial summary judgment arguing that undisputed evidence demonstrates that Watson could not have launched its generic earlier than December 17, 2012, and defendants' conduct (if anticompetitive) could not have caused plaintiffs any alleged injury before that date. Defs. Mot. for PSJ [Dkt. No. 794].

         Plaintiffs do not oppose and do not intend to argue or show that they suffered any injury prior to December 17, 2012. Pls. Oppo. to Mot. for PSJ at 1 [Dkt. No. 814]. Accordingly, I GRANT defendants' partial motion under Rule 56(g) finding that: (i) Watson could not have launched generic Lidoderm any earlier than December 17, 2012, and (ii) defendants' alleged conduct could not have caused plaintiffs injury prior to that date. Dkt. No. 794-21.

         Plaintiffs ask me to go further to find that there is no genuine dispute under Rule 56(a) or (g) that: (i) Watson had 23 million patches manufactured by March 26, 2013 in the actual world (i.e., the world with the reverse payments), and thus it would have had at least that many patches by that date in the but-for world (i.e., the hypothetical world absent the delay caused by the reverse payments), and (ii) 23 million patches is what Watson contemporaneously considered to be the number with which it would launch its generic Lidoderm patches. Id.

         Defendants oppose plaintiffs' request as procedurally improper and also argue that disputes of material fact preclude the findings plaintiffs seek. Defs. Reply ISO MPSJ at 2 [Dkt. No. 850].

         First, defendants argue that there are disputes of fact whether Watson would have manufactured generic Lidoderm in the but-for world at the same rate as it did in the actual world. According to defendants, Watson's manufacturing difficulties required Watson to pause its production of generic Lidoderm in June 2012; after technical and operational fixes, it resumed production in September 2012. Plaintiffs' position is that absent the Settlement, Watson would not have paused to make those fixes and continued production. Defendants respond that even if that is correct, the level of production would have continued to be slow (much slower than it was in the actual world after the fix) and Watson would not have had 23 million patches until July 21, 2013. Amended Expert Report of Benoit Cossart [Dkt. No.794-10] ¶¶ 95-97; see also Depo. Tr. of John Spigiel [Dkt. No. 850-4] at 242-243 (production of 23 million patches by March 2013 was due in part to the ability to fix technical issues). The Cossart and Spigiel testimony raise a dispute of material fact precluding a finding under Rule 56(g).

         As to the amount of patches Watson wanted to have at launch, 23 million patches (launch quantities plus 4 weeks of inventory) or 35 million patches (launch quantities plus 12 weeks inventory), plaintiffs rely on testimony from Watson's plant General Manager Spigiel that “sufficient quantities” for launch, 23 million patches, were not achieved until March 2013 and that Watson documents show that 23 million patches was the forecasted launch quantity. Pls. Oppo. to Defs. MSJ re Causation at 4-6. Defendants respond that a “typical” launch would have required 12 weeks of supply, relying on the testimony of then-Assistant Director of Materials Lee Lamborn, who also testified that he could not recall a launch where Watson had less product on hand. The documents plaintiffs rely on, according to defendants, address a reduced launch supply and show that the launch target for Lidoderm was a moving target. Again, the differing interpretations of the documents at issue and related testimony raise a material dispute of fact for the jury precluding a finding under Rule 56(g).

         Defendants' motion for partial summary judgment on this limited issue is GRANTED and plaintiffs' attempted-cross motion is DENIED.

         III. PLAINTIFFS' MOTION FOR PARTIAL SUMMARY JUDGMENT

         Plaintiffs move for partial summary judgment seeking to establish: (i) the “contract, combination, or conspiracy” elements of their Section 1, Section 2, and state law conspiracy to monopolize claims is satisfied by the Agreement; and (ii) the composition of the relevant antitrust product and geographic markets is lidocaine 5% patches (both in branded and generic forms) sold in the United States. In the alternative, plaintiffs move under Rule 56(g) to establish the same facts for trial.

         A. Agreement, Conspiracy, or Combination Element

         Plaintiffs argue that the Settlement Agreement, signed by all three defendants, satisfies the “contract, combination, or conspiracy” elements of their Section 1, Section 2, and state law conspiracy to monopolize claims. Defendants do not dispute this, although they do dispute the significance, lawfulness, and effect of the various provisions in that Agreement. Def. Oppo. to MSJ [Dkt. No. 812] at 25. Plaintiffs' motion is GRANTED on this issue.

         B. Antitrust Product Market[23]

         Plaintiffs seek summary judgment defining the relevant antitrust product market as limited to lidocaine 5% patches; in other words, Lidoderm and its generics. Defendants oppose and contend that the market should include a host of other pain medications that come in various forms including nonsteroidal anti-inflammatory drugs (NSAIDs) like ibuprofen and Celebrex, anticonvulsants like Lyrica, antidepressants like Cymbalta, muscle relaxers like Flexeril, opiods like tramadol, and topical anesthetic creams and gels like Qutenza.

         Plaintiffs argue that there is no cross-elasticity of demand between Lidoderm and any other product (other than generic Lidoderm), and that therefore as a matter of law the relevant market is limited to Lidoderm and its generics. They contend that defendants' experts did not consider the key and necessary legal issue of cross-elasticity of demand at all. Defendants counter that cross-elasticity of demand is relevant but not required to determine the relevant product market, and that other considerations - including evidence that other products are therapeutically similar and evidence about non-price competition in the pharmaceutical industry - are relevant to the determination of the product market to be decided by the jury. Even if cross-elasticity is a required element, defendants argue their expert made evidence-based inferences about cross-elasticity that likewise raise material issues of fact precluding summary judgment on the product market definition.

         1. In General

         “The elements of a cause of action for an unreasonable restraint of trade under the rule of reason analysis” are: “(1) An agreement among two or more persons or distinct business entities; (2) Which is intended to harm or unreasonably restrain competition; (3) And which actually causes injury to competition.” Kaplan v. Burroughs Corp., 611 F.2d 286, 290-91 (9th Cir. 1979) (citing Times-Picayune Publishing Co. v. United States, 345 U.S. 594, 615 (1953)). “Proof that the defendant's activities had an impact upon competition in a relevant market is an absolutely essential element of the rule of reason case.” Id. at 291. Defining the appropriate market is key because “[i]t is the impact upon competitive conditions in a definable product market which distinguishes the antitrust violation from the ordinary business tort.” Id.

         Determination of the relevant market is typically a fact-intensive inquiry, involving “identification of the field of competition: the group or groups of sellers or producers who have actual or potential ability to deprive each other of significant levels of business. . . . This definitional process is a factual inquiry for the jury; the court may not weigh evidence or judge witness credibility.” Thurman Indus., Inc. v. Pay 'N Pak Stores, Inc., 875 F.2d 1369, 1374 (9th Cir. 1989).[24] Here, however, plaintiffs contend summary judgment is warranted because defendants cannot show that a material dispute of fact exists on a necessary element; cross- elasticity of demand between 5% lidocaine patches and the products defendants contend should be included in the relevant market.

         2. Cross-Elasticity of Demand

         Plaintiffs' motion hinges on the position that cross-elasticity of demand must be present between a defendant's product and other products for those other products to be “reasonably interchangeable” and included in the antitrust product market. Cross-elasticity of demand occurs where “an increase in the price of one product leads to an increase in demand for another, both products should be included in the relevant product market.” Olin Corp. v. F.T.C., 986 F.2d 1295, 1298 (9th Cir. 1993). “The determination of what constitutes the relevant product market hinges, therefore, on a determination of those products to which consumers will turn, given reasonable variations in price.” Lucas Automotive Engineering, Inc. v. Bridgestone/Firestone, Inc. (9th Cir. 2001) 275 F.3d 762, 767 (9th Cir. 1997); see also Forsyth v. Humana, Inc., 114 F.3d 1467, 1483 (9th Cir. 1997), aff'd, 525 U.S. 299 (1999), overruled on other grounds by Lacey v. Maricopa Cty., 693 F.3d 896 (9th Cir. 2012) (“A high cross elasticity of demand indicates that products are close substitutes, and should probably be treated as part of the same market. A low or zero cross elasticity of demand is evidence that products do not compete in the same relevant market.”).

         Numerous cases have recognized the importance of cross-elasticity to determining what products should be included in or excluded from the relevant antitrust market. See, e.g., Gorlick Distribution Centers, LLC v. Car Sound Exhaust Sys., Inc., 723 F.3d 1019, 1025 (9th Cir. 2013) (“Instead, products must be reasonably interchangeable, such that there is cross-elasticity of demand.” (citing Brown Shoe Co. v. United States, 370 U.S. 294, 325 (1962))[25]; Spindler v. Johnson & Johnson Corp., No. C 10-01414 JSW, 2011 WL 12557884, at *2 (N.D. Cal. Aug. 1, 2011) (“Using these factors, products may be considered ‘reasonably interchangeable, ' where there is cross-elasticity of demand, i.e. if customers would switch to alternatives in response to a price increase in the alleged monopolist's product.” (citing Rebel Oil, Co. v. Atlantic Richfield Co., 51 F.3d 1421, 1436 (9th Cir. 1995)); Pinnacle Sys., Inc. v. XOS Techs., Inc., No. C-02-03804- RMW, 2003 WL 21397845, at *7 (N.D. Cal. May 19, 2003) (“‘alleged product market must (1) include all products reasonably interchangeable, determination of which requires consideration of cross-elasticity of demand'”) (quoting Intellective, Inc. v. Massachusetts Mut. Life Ins. Co., 190 F.Supp.2d 600, 609 (S.D.N.Y. 2000)); see also Unitherm Food Sys., Inc. v. Swift-Eckrich, Inc., 375 F.3d 1341, 1364 (Fed. Cir. 2004), rev'd on other grounds by 546 U.S. 394 (2006) (“Nothing in the record addresses whether potential customers of the patented process faced with a price increase would shift to other processes offering different combinations of benefits. [] This determination, however, lies at the heart of market definition in antitrust analysis.”); Telecor Commc'ns, Inc. v. Sw. Bell Tel. Co., 305 F.3d 1124, 1131 (10th Cir. 2002) (“The basic relevant product market test is ‘reasonable interchangeability.' . . . . Interchangeability may be measured by, and is substantially synonymous with, cross-elasticity.”); United States v. Microsoft Corp., 253 F.3d 34, 53-54 (D.C. Cir. 2001) (“The test of reasonable interchangeability, however, required the District Court to consider only substitutes that constrain pricing in the reasonably foreseeable future, and only products that can enter the market in a relatively short time can perform this function.”); Brookins v. Int'l Motor Contest Ass'n, 219 F.3d 849, 854 (8th Cir. 2000) (“But that assertion requires proof there is no cross-elasticity of demand between this game and other games that modified car racers might choose to play.”); Thurman Indus, 875 F.2d at 1374 (“a product market is typically defined to include the pool of goods or services that qualify as economic substitutes because they enjoy reasonable interchangeability of use and cross-elasticity of demand.”); Oltz v. St. Peter's Cmty. Hosp., 861 F.2d 1440, 1446 (9th Cir. 1988) (“The product market includes the pool of goods or services that enjoy reasonable interchangeability of use and cross-elasticity of demand.”); Hayden Pub. Co. v. Cox Broad. Corp., 730 F.2d 64, 70-71 (2d Cir. 1984) (“There is persuasive authority for interpreting du Pont as requiring consideration of cross-elasticity of demand in determining an appropriate market definition. . . . We are persuaded that, as a general rule, the process of defining the relevant product market requires consideration of cross-elasticity of demand.”).

         The Ninth Circuit has specifically acknowledged that “[t]he principle most fundamental to product market definition is ‘cross-elasticity of demand' for certain products or services. Commodities which are ‘reasonably interchangeable' for the same or similar uses normally should be included in the same product market for antitrust purposes.” Kaplan, 611 F.2d at 291. The ABA's Model Jury Instruction in Civil Antitrust Cases (2016) uses the same concept:

To determine whether products are reasonable substitutes for each other, you must consider whether a small but significant and non-transitory increase in the price of one product would result in enough customers switching from that product to another product such that the price increase would not be profitable. In other words, will customers accept the price increase or will so many switch to alternative products that the price increase will be withdrawn? Generally speaking, a small but significant and non-transitory increase in price is approximately a 5 percent increase in price not due to cost factors [but you may conclude in this case that some other percentage is more applicable to the product at issue]. If you find that customers would switch and that the price increase would not be profitable, then you must conclude that the products are in the product market. If, on the other hand, you find that customers would not switch, then you must conclude that the products are not in the product market.

         Instruction 4: Relevant Product Market, Model Jury Instructions in Civil ...


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