Purchasers Win Summary Judgment on Relevant Market in Lidoderm

In November, Judge Orrick in the Northern District of California took an important issue from the jury in the upcoming Lidoderm trial: the definition of the relevant market.  See United Food & Commer. Workers Local 1776 v. Teikoku Pharma USA, No. 14-md-02521-WHO, 2017 U.S. Dist. LEXIS 182940 (N.D. Cal. Nov. 3, 2017).  In doing so, Judge Orrick grappled with a central market definition question in all pharmaceutical antitrust litigation: must a court consider both cross-elasticity of demand and therapeutic substitutes in setting the boundaries of the relevant market?  Judge Orrick answered with a resounding “no” -- a court must be guided solely by economics, not pharmaceutical marketing.  In doing so, Judge Orrick not only followed a long line of antitrust precedent, but also nullified a common tactic used by pharmaceutical manufacturers to muddy the waters in generic delay cases.

Lidoderm concerns a reverse payment agreement between Endo and Teikoku, the manufacturers of the branded Lidoderm (a lidocaine patch), and prospective generic competitor, Watson.  Under the cover of a patent litigation settlement, Watson agreed to delay marketing its less-expensive generic version of Lidoderm for over a year. In exchange, Endo and Teikoku agreed to pay Watson (a) at least $96 million in the form of branded Lidoderm at no cost to Watson, which Watson could then resell; and (b) by forebearing from launching an authorized generic to compete with Watson’s generic Lidoderm until 7½ months after Watson’s generic belatedly entered the market.  The effect of this agreement was to both delay generic competition, and reduce overall competition once a generic entered.  As a result, prices for lidocaine patches were kept artificially high, injuring purchasers.

On summary judgment, plaintiffs moved the court to hold that the relevant market was limited solely to Lidoderm and its equivalent generics.  Plaintiffs argued that there is no cross-elasticity of demand between Lidoderm and any other product (other than generic Lidoderm), i.e., significant price changes for non-Lidoderm products had no impact on Lidoderm demand.  Plaintiffs asserted that such cross-elasticity is a prerequisite for products sharing a relevant market. Defendant manufacturers countered 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.

Judge Orrick began by noting that “numerous cases have recognized the importance of cross-elasticity to determining what products should be included in or excluded from the relevant antitrust market,” dating back to the Supreme Court’s decision in Brown Shoe Co. v. United States, 370 U.S. 294, 325 (1962).  The existence of cross-elasticity is “fundamental” to a determination of whether products are reasonably interchangeable for antitrust purposes.  Defendants attempted to rebut this principle by arguing that “the unique characteristics of the pharmaceutical market” including the prevalence of non-price competition (e.g., promotion of features and effectiveness) made cross-elasticity irrelevant. Instead, defendants argued that therapeutic equivalency with other pharmaceutical products used to treat the conditions Lidoderm should be dispositive.  In other words, in determining reasonable interchangeability, defendants asked the court to think like a doctor (or pharmaceutical sales rep), rather than an economist.

But, the Court held, mere “practical indicia” of interchangeability is insufficient.  To focus only on the function of products would create “a vastly overbroad market that includes a host of different classes and types of drugs that are different” than Lidoderm.  Instead, the court must look to economics to draw relevant market boundaries.  Judge Orrick quotes the Supreme Court: “For every product, substitutes exist. But a relevant market cannot meaningfully encompass that infinite range. The circle must be drawn narrowly to exclude any other product to which, within reasonable variations in price, only a limited number of buyers will turn; in technical terms, products whose ‘cross-elasticities of demand’ are small.” Times-Picayune Pub. Co. v. United States, 345 U.S. 594, 612 (1953).  Since defendants did not, and could not, show that the mere existence of other products potentially usable for the same conditions as Lidoderm forced defendants to constrain Lidoderm’s price, those products could not, as a matter of law, share a relevant market.