Second Circuit Appellate Court Weighs In on Pharmaceutical “Product Hopping”
As the first court of appeals to address the issue of product hopping, the U.S. Court of Appeals for the Second Circuit affirmed the district court’s grant of a preliminary injunction, finding that product hopping is anticompetitive and exclusionary under Section 2 of the Sherman Act. People of the State of New York v. Actavis PLC, Case No. 14-4624 (2d Cir., May 22, 2015) (Walker, J.).
The case involves “product hopping,” a practice by which brand name pharmaceutical companies reformulate their products with allegedly little or no therapeutic advantage, impeding generic manufacturers’ ability to take advantage of abbreviated new drug applications and state generic substitution laws as a means to extend the branded manufacturer’s period of legal monopoly. Product-hopping cases arise where the brand-name drug maker performs either a “hard switch”—eliminating the old formulation from the market completely—or a “soft switch”—changing focus to a new formulation, but leaving the old formulation on the market. In Actavis, the district court granted a preliminary injunction against Actavis’ plan to make a “hard switch” from its old formulation of Namenda to a new formulation, requiring Actavis to continue selling its old formulation of Namenda. Actavis appealed to the 2d Circuit.
On appeal, Actavis claimed that removal of the older inferior product would maximize Actavis’ return on investment in the new version and that the new version of Namenda was a substantial improvement over the older version. The 2d Circuit disagreed, finding that the procompetitive justification for the hard switch did not outweigh its anticompetitive effects. Ultimately, the Court believed Actavis’ motive in removing the old formulation from the market was to “forsake short-term profits to achieve an anticompetitive end.” The 2d Circuit concluded that while product improvements or product withdrawals alone are not anticompetitive, in this case Actavis’ plan to engage in both, simultaneously, would impede competition by coercing consumers to switch to the improved product, rather than persuading them on the merits of the product. The 2d Circuit condemned the “hard switch” as anti-competitively eliminating patients’ ability to access the generic version of the older formulation under state automatic substitution laws.
Practice Note: Consider involving antitrust counsel in your client’s pharmaceutical product life-cycle planning, especially if the client’s drug has a large share in its market. This issue will likely continue to develop, as an appeal in a second product hopping case has arisen in the U.S. Court of Appeals for the Third Circuit. In the 3d Circuit case, the Federal Trade Commission (FTC) has filed an amicus brief strongly supporting the pursuit of antitrust Section 2 cause of action against companies that choose to product hop and prevent generic competition. For now, however, the 2d Circuit’s decision provides insight as to one method by which courts may evaluate product hopping cases, i.e., by distinguishing between “soft switching” and “hard switching.”