INSIDE THIS ISSUE
On June 17, 2013, Scott+Scott LLP was appointed as lead counsel in a putative class action pending in the Southern District of New York against SAC Capital Advisors and others concerning the hedge fund’s $276 million insider trading scheme involving Wyeth stock. The class action was filed by Scott+Scott in April on behalf of City of Birmingham Retirement and Relief System, a Wyeth investor.
“Upon consideration of the motion and the memorandum and declaration in support, the court finds good cause to appoint City of Birmingham Retirement and Relief System as lead plaintiff, and the law firm Scott and Scott Attorneys at Law LLP as lead counsel for the class,” Judge Marrero wrote in an order Monday granting the parties’ requests.
The securities class action charges that SAC Capital Advisors together with CR Intrinsic Investors, LLC illegally traded Wyeth shares based on the material non-public information ahead of a July 29, 2008 announcement disclosing disappointing clinical trial results for Wyeth’s bapineuzumab (AAB-001) (“bapi”), an Alzheimer’s disease treatment that was the focus of Wyeth’s drug development efforts.
SAC Capital Advisors, together with its affiliates, was founded by Steven A. Cohen in 1992 and, according to the most recent published information, has over $16 billion in assets under management, making it among the largest 25 U.S. hedge funds. SAC Capital’s investment strategy relies heavily on collecting market information. According to a recent New York Times article, “Cohen and his staff are known for relentlessly digging for information about publicly traded companies to form a ‘mosaic,’ building a complete picture of the company’s prospects that gives the firm an edge over other investors.”
The complaint charges that, SAC Capital analyst Mathew Martoma was the recipient of material non-public information from Sidney Gilman, a professor of neurology at the University of Michigan Medical School, regarding the clinical trials of the drug bapineuzumab (AAB-001) (bapi), an Alzheimer’s disease treatment that was being jointly developed by Wyeth and Elan Corporation, plc. Gilman served as Chair of the Safety Monitoring Committee for bapi clinical trials starting in 2003 and continuing until at least 2011. As Chair of the Safety Monitoring Committee, Gilman had continuing access to material non-public information concerning the Phase II trials of bapi. Based on the inside information obtained by Martoma from Gilman, throughout 2007 and up to July 2008, Defendants CR Intrinsic and SAC Capital established substantial long positions in Wyeth and Elan securities.
In addition to his duties as the Chair of the bapi Safety Monitoring Committee, Gilman agreed to present the bapi Phase II trial results on behalf of Elan and Wyeth at ICAD, a widely anticipated Alzheimer’s disease conference scheduled to be held on July 29, 2008. To perform this function, Gilman was given access to the full Phase II trial results approximately two weeks prior to the July 29 announcement of the Phase II clinical results, which Gilman conveyed to Martoma.
The information proved negative and on the morning of Sunday, July 20, 2008, Martoma sought to speak with Defendant Cohen about the positions in Elan and Wyeth that the CR Intrinsic and SAC Capital portfolios had amassed. The following day, at Cohen’s direction, Cohen’s head trader began selling Elan and Wyeth securities held in the CR Intrinsic and SAC Capital portfolios that Martoma and Cohen controlled. Between July 21, 2008 and July 29, 2008, the CR Intrinsic and SAC Capital portfolios sold over 10.4 million shares of Wyeth for gross proceeds of over $460 million, including over 6.1 million Wyeth shares worth over $270 million during the day of the July 29 announcement. As a result of these sales, the CR Intrinsic and SAC Capital portfolios had a zero balance in Wyeth stock during the trading day on July 29, 2008. Moreover, in order to increase their profits, CR Intrinsic and SAC Capital sold Wyeth stock short.
On July 29, 2008, after the close of U.S. securities markets, Defendant Gilman presented the results of the Phase II trial at ICAD, and Elan and Wyeth issued a press release summarizing the results. The detailed safety and efficacy results of the Phase II clinical trial were strongly, and unexpectedly, negative. On July 30, 2008, the first trading day after the July 29 announcement, Wyeth's stock price fell from $45.11 (the closing price on the day of the announcement) to $39.74 (the closing price the day after the announcement), a decrease of approximately 12%.
In total, by causing liquidating their long positions in Wyeth during the week before the July 29th presentation, Defendants avoided $40.4 million in losses and secured a $16 million profit from the short positions opened during the same week
The conspiracy alleged in the complaint is also the subject of a pending criminal prosecution, United States v. Martoma, No. 12-mj-2985, and an SEC enforcement action, SEC v. CR Intrinsic Investors, LLC, No. 12-cv-8466 (the “SEC Action”), also proceeding in New York federal court. Martoma has denied wrongdoing, while SAC has agreed to a $600 million civil settlement with the SEC without admitting or denying the agency's allegations. Cohen has not been charged. Sydney Gilman struck a non-prosecution agreement and has cooperated with prosecutors.
On June 17, 2013 the Supreme Court of the United States issued an important decision ruling that patent law does not shield “pay-for-delay” settlements from antitrust scrutiny. Such settlements are characterized by branded drug companies paying generic manufacturers large sums of money in order to delay the generic’s entry onto the market. Such deals result in higher prices for patients, insurers, and other entities that must bear the cost of high pharmaceutical prices.
The decision overturned appellate precedent which held that these agreements were generally legal because they fell within the range of exclusive use granted by the patent. Specifically, the Eleventh Circuit Court of Appeals and others had ruled that these reverse payment settlement agreements are “immune from antitrust attack so long as its anticompetitive effects fall within the scope of the exclusionary potential of the patent.” FTC v. Watson Pharmacueticals, Inc., 677 F.3d 1298, 1312 (2012). In breaking from this precedent, the Supreme Court established that reverse payment settlements, such as the agreement alleged in the case before it, can sometimes violate the antitrust laws. Analysts and commentators in the health care industry are hailing the decision as a significant victory for doctors, patients, and purchasers of pharmaceuticals.
Brand-name drugs lose their patent protection generally after 14 1⁄2 years. When a brand-name drug’s patent expires, generic drug manufacturers are able to enter the market and manufacture these drugs. Typically, generic drugs are priced significantly below their brand-name counterparts. Generic drugs cost as much as 90% less than brand-name drugs. Once a generic drug enters the market, it quickly captures market share from the brand-name drug. When a drug has both branded and generic versions available, more than 90% of the prescriptions for that drug are filled with a generic version.
Brand-name drug manufacturers are well aware of generic drugs’ steady erosion of their previously-monopolized markets and, thus, seek to extend their monopolies for as long as possible, sometimes by resorting to anticompetitive practices intended to delay the entry of generic drugs. Brand-name pharmaceutical companies file patent infringement lawsuits against the generic drug manufacturer when a generic version is about to enter the market. Sometimes, the brand name drug manufacturer enters into an anticompetitive agreement with the generic drug manufacturer to settle the patent litigation by delaying the generic drug from entering the market. By entering into these anticompetitive “pay-for-delay” agreements, competition from generic drugs is indefinitely delayed, allowing the brand-name drug manufacturer to continue charging inflated prices. The Federal Trade Commission has sought to have such deals declared illegal for over a decade and has estimated that anticompetitive agreements between brand-name and generic drug manufacturers to delay the entry of generic drugs into the marketplace will cost healthcare payors and consumers $3.5 billion per year in inflated brand name drug costs over the next decade.
The case before the Supreme Court involved the drug AndroGel, a testosterone replacement therapy. The Federal Trade Commission (“FTC”) challenged the patent settlement entered into between the branded drug manufacturer and the manufacturer of generic versions of the drug. The branded manufacturer filed a lawsuit against the generic manufacturers alleging patent infringement, but this suit ended with the branded manufacturer actually paying significant sums of money to the alleged generic infringer in order to keep the generic versions off of the market to allow the branded manufacturer to continue to reap the benefit of monopoly pricing. Several interested parties submitted briefs to the Supreme Court in support of the FTC’s position, including: the American Medical Association, the AARP, the attorney generals of 36 U.S. States, the District of Columbia and the Commonwealth of Puerto Rico, as well as 118 professors of law, economics, and business, among others.
Scott+Scott has been at the forefront of pharmaceutical antitrust law, bringing numerous suits challenging such anticompetitive agreements. Scott+Scott’s Pharmaceutical Litigation practice group provides clients with active monitoring of their purchases from companies in the health care industry and ensures that their interests are being proactively guarded so that losses resulting from fraud are minimized.
On June 27, 2013, Scott+Scott partner Christopher Burke presented on the impact of class action waivers on antitrust cases at the 2013 National Consumer Class Action Litigation & Management Conference in Chicago, Illinois. The presentation, entitled “AT&T Mobility v. Concepcion: Assessing the Impact on Class Action Litigation,” detailed the arc of Supreme Court class arbitration decisions, beginning with Stolt-Nielsen v. Animal Feeds Int’l Corp. and through Oxford Health Plans LLC v. Sutter.
In Concepcion, the Supreme Court held that the Federal Arbitration Act preempts state rules (such as the California judicial rule in Discover Bank) that purport to invalidate class action waivers in consumer arbitration agreements as unconscionable. Mr. Burke framed the discussion of the cases through five potential plaintiff responses in class-waiver cases. The presentation discussed the effect that the Concepcion ruling had on each case.
Finally, Mr. Burke addressed the Supreme Court’s decision last week in American Express Co. v. Italian Colors Restaurant. The Court held that the FAA does not permit courts to invalidate class arbitration waivers, even if the cost of individual arbitration exceeds the potential recovery in a federal statutory claim. This decision, which resolves a circuit split between the Second Circuit and the Ninth Circuit, could have profound effects on both the availability of redress following decisions by arbitrators, as well as the practicality of antitrust suits against companies with class action waivers in their contracts.
On Monday, May 20, 2013, the Honorable Curtis L. Collier of the United States District Court for the Eastern District of Tennessee ruled in favor of all Plaintiffs in an antitrust class action against King Pharmaceuticals LLC (“King”) and Mutual Pharmaceutical Company, Inc. (“Mutual”). The case involves Skelaxin, King’s brand name version of a muscle relaxant containing metaxalone as its active ingredient.
Three groups of Plaintiffs, the Direct Purchasers, the Indirect Purchasers for Resale, and the End Payors, allege that King and Mutual engaged in anticompetitive behavior in violation of Sections 1 and 2 of the Sherman Act, Section 16 of the Clayton Act, and several state laws. This behavior caused Plaintiffs to suffer damages, including being overcharged for metaxalone. Scott+Scott is co-counsel to the End Payor class.
The Court heard oral argument on April 16, 2013. Judge Collier commended the attorneys, noting that “[c]ounsel were very well prepared and did an exemplary job in their arguments. They demonstrated a complete command of the facts, mastery of the applicable law, and an in-depth understanding of the underlying policy reasons and considerations of patent and antitrust law.”
Since 2003, King had the exclusive right to market and sell metaxalone, which it did under the brand name Skelaxin. Preservation of this exclusivity and delaying the entry of generic competition on the market was highly lucrative for King, as it allowed King to maintain a monopoly over all metaxalone products. In an effort to preserve this monopoly, Plaintiffs allege, inter alia, that on December 6, 2005, King and Mutual entered into an agreement under which Mutual agreed not to enter the market with a generic version of metaxalone. Mutual further agreed to aid King in its effort to delay the entry of would-be generic competition. King agreed to pay Mutual $35 million plus at least 10% of the revenue from Skelaxin sales. Plaintiffs allege that King has paid Mutual in excess of $200 million. Plaintiffs allege that King and Mutual performed additional anticompetitive acts, which prevented the entry of generic versions of metaxalone from entering the market until April 2010.
King and Mutual moved to dismiss the action on several grounds, all of which were rejected by Judge Collier. The Court ruled that Plaintiffs plausibly alleged facts that they suffered an antitrust injury, and that Defendants could not avail themselves of immunity under the Noerr-Pennington doctrine. The Court also upheld all of Plaintiffs’ state law causes of action.
King and Mutual also argued that Plaintiffs’ claims were untimely, but the Court soundly rejected these arguments. First, the Court ruled that Plaintiffs adequately alleged that King and Mutual engaged in “continuing antitrust violations.” That is, although much of the allegedly illegal conduct occurred outside of the limitations period, the continuing violations ran late enough such that Plaintiffs’ claims were not time-barred. Furthermore, the Court ruled that Plaintiffs adequately alleged that King and Mutual fraudulently concealed their wrongdoing. Thus, even if they would otherwise have run, the relevant statutes of limitation were tolled.
The parties are now actively engaged in discovery with King and Mutual and will vigorously prosecute the case, which is captioned as In re Skelaxin (Metaxalone) Antitrust Litigation, Case No. 1:12-md-2343 (E.D. Tenn.).
“Facts are stubborn things; and whatever may be our wishes, our inclinations, or the dictates of our passions, they cannot alter the state of facts and evidence.”
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