The decision confirms that district courts must resolve at class certification factual contentions that contradict proffered common proof of antitrust injury.
On April 22, 2020, the United States Court of Appeals for the Third Circuit vacated and remanded the district court’s decision to certify a class of direct purchasers of a generic drug used to treat epilepsy. The Third Circuit’s opinion in In re: Lamictal Direct Purchaser Antitrust Litigation, reaffirmed the rule, set forth in its 2009 Hydrogen Peroxide decision, that in order to determine whether the putative class has met the requirements for class certification, the district court cannot avoid conducting a “rigorous analysis” of the evidence and arguments presented at the class certification stage, even if they touch on the merits of the case. The district court’s failure to conduct such an analysis required that the certification ruling be vacated and remanded.
The “Reverse Payment Agreement”
The plaintiffs in Lamictal are companies that purchased an anti-epilepsy drug called Lamictal and its generic equivalent, lamotrigine. GlaxoSmithKline (GSK) produces Lamictal and Teva Pharmaceuticals produces lamotrigine. The complaint alleges that the two manufacturers entered into a “reverse payment agreement” to settle patent litigation arising out of Teva’s introduction of lamotrigine. Reverse payment agreements, also known as “pay-for-delay” agreements, involve a payment of some type by the branded manufacturer to the generic company in return for the generic company’s agreement to delay market entry of the generic product. In this case, GSK’s alleged “payment” was its promise not to launch its own generic version of Lamictal (called an “authorized generic”) in return for Teva’s agreement to delay entry of lamotrigine. The plaintiffs allege that the agreement artificially inflated the price of lamotrigine in violation of the antitrust laws.
The Predominance Requirement
The district court held hearings on the class certification issue, with each side presenting expert testimony to support their arguments. The main issue was the “predominance” requirement for class certification. In order to certify a class, the district court must determine that there are common questions of law or fact among the class members, and that those common questions predominate over individual questions, such that plaintiffs could establish their injury from the alleged illegal agreement through common proof at trial.
Plaintiffs presented expert testimony that they could establish their injury through common proof that consisted of hypothetical average prices demonstrating that, on average, prices for lamotrigine would have been lower but for the reverse payment agreement. In response, the defendants’ expert argued that plaintiffs could not show that their injury was capable of common proof at trial because their proof impermissibly relied upon averages, which do not account for individualized negotiations and aggressive competition for lamotrigine. The defense expert argued further that, in reality, up to one-third of the class likely paid no more, or even less, for lamotrigine than they would have without the agreement.
The District Court Avoids Factual Disputes and Certifies the Class
The district court decided that it was unnecessary to resolve several disputed factual issues, including (1) whether the market is characterized by individualized negotiations; (2) whether Teva preemptively lowered its pricing in response to GSK’s “contracting strategy,” in which GSK competed aggressively with generics by offering discounts on Lamictal to targeted pharmacies; and (3) whether and to what extent GSK, absent the settlement agreement, would or could have pursued both the contracting strategy and the launch of an authorized generic. Resolving these questions would have required the court to weigh the competing evidence and predict how the issue would play out at trial, which the court declined to do. The court simply accepted the testimony of the plaintiffs’ expert and certified the class.
The Third Circuit Vacates and Remands
On appeal, defendants argued that the district court erred in accepting plaintiffs’ expert testimony that relied on average hypothetical prices without conducting a rigorous analysis of the competing expert reports and resolving the disputed factual issues on which the reports rely, as the court had held in In re Hydrogen Peroxide Antitrust Litigation, 552 F.3d 305 (3d Cir. 2009). Plaintiffs, on the other hand, argued that such an analysis was not required because the case was not controlled by Hydrogen Peroxide. Relying on a comment by the U.S. Supreme Court in its 2016 Tyson Foods decision, a Fair Labor Standards Act (FLSA) case, plaintiffs argued that all they needed to show was that their evidence of classwide antitrust injury could sustain a jury finding.
The Third Circuit rejected the plaintiffs’ argument, noting that the only two circuit decisions that subsequently relied upon the comment in Tyson Foods were FLSA cases. The court held that the comment in Tyson Foods was not applicable in this case, and “does not overturn our longstanding rule announced in Hydrogen Peroxide, and reiterated in many a case, that a putative class must demonstrate that its claims are capable of common proof at trial by a preponderance of the evidence.” The court stated further that “contrary to the District Court’s belief, addressing the micro-level analysis here, even though it touches on the merits, was necessary in order to determine whether the [plaintiffs], in light of the competing expert reports and evidence, could show that common issues predominated by a preponderance of the evidence.”
The Third Circuit also faulted the district court for applying the wrong standard by conflating injury with damages. While every plaintiff must be able to show antitrust injury through evidence that is common to the class, some courts have held that proof of damages (the value of the injury) need not be susceptible to measurement across the entire class at the class certification stage. The district court’s application of the more lenient standard for damages claims was another reason for the remand.
Conclusion: Hydrogen Peroxide Is Alive and Well
There are three major takeaways from the Third Circuit’s decision in In re: Lamictal:
- The court reaffirmed—outside the FLSA context— the standard for the “predominance” requirement of class certification set forth in Hydrogen Peroxide: a putative class must demonstrate, by a preponderance of the evidence, that each element of its claims is capable of proof at trial through evidence that is common to the class rather than individual to its members.
- In assessing predominance, the district court must conduct a “rigorous analysis” of the facts and expert opinions, even if that analysis overlaps with the merits. Where there are competing expert opinions that each rely upon disputed facts, the court must scrutinize the opinions and determine the disputed facts.
- The decision confirms that district courts must resolve at class certification factual contentions that contradict proffered common proof of antitrust injury. Reliance on industry average prices for common proof of injury in markets with individualized negotiations and active price competition was not deemed rigorous analysis, as averages arguably did not address the pricing impact confronted by each member of the class. Thus, common proof of injury may be a significant issue at the certification stage, requiring resolution of disputed factual issues.
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