In the blue corner… FTC comes out swinging on product-switching

Published On 24/01/2013 | By Louise Beange | Consumer protection, Enforcement, Litigation

Out-manoeuvring generic competitors is big business for originators in the pharmaceutical industry, but the US Federal Trade Commission (FTC) has indicated it thinks some tactics, in this case ‘product hopping’, or ‘product switching’, may be in breach of anti-trust laws. The FTC has issued an ‘amicus brief’  in a law suit between Mylan Pharmaceuticals and Warner Chilcott stating that it believes the conduct Warner Chilcott engaged in could constitute unlawful, monopolist conduct.

Warner Chilcott modified the formulation or dosage of its antibiotic Doryx on three occasions between 2005 and 2012, and each time marketed the new formulation as a replacement for the previous formulation and ceased marketing and distributing the previous formulation just as Mylan was prepared to release a generic version of the previous formulation.  This is commonly referred to as “switching” the market.

Mylan claims that this product switching was intended to thwart generic competitors by ensuring that by the time a generic alternative to the older formulation was released, that formulation was no longer being prescribed (and therefore could not be substituted for a generic). The tactic is used by pharmaceutical companies as one of a range of practices colloquially known as ‘evergreening’ – we’ve written about similar issues on the IP Whiteboard here and here.

The US’s Sherman Act prohibits ‘monopolist behaviour’,  which includes ‘exclusionary conduct’.  Exclusionary conduct is action which impairs the opportunities of a competitor and either:

  1. does not further competition on the merits, or
  2. does so in an unnecessarily restrictive way.

The FTC claims that Warner Chilcott’s switching, as alleged by Mylan, is enough to meet this definition.

Warner Chilcott argues in defence that introducing a ‘variation’ to a product can never be exclusionary because it increases choice and improves competition. Courts have been understandably reluctant to say that product innovation is exclusionary, but the FTC points out that this doesn’t mean they can never be exclusionary. There are already a few US cases which may support the FTC’s view on this very point – such as Tricor, where the US District Court decided it would be appropriate to examine the competitive effects of similar conduct by Abbott Laboratories, rejecting Abbott’s argument that such innovation is ‘per se’ lawful (or see this list of recent pharmaceutical cases for other examples). It’s also worth noting that Mylan has also accused Warner Chilcott and originator Mayne (which licences production and marketing to Warner Chilcott) of making an agreement to restrain generics, which, if proved, would constitute cartel conduct.

In Australia, there may be circumstances where ‘product switching’ could constitute a misuse of market power under section 46 of the CCA – if the originator has substantial power, then a strategy of product switching could be viewed as a use of that power in order to prevent generic entry, even though the originator may be in that position of power because of IP protection it holds in relation to the products.   Notably, the exemption for intellectual property rights in section 51(3) doesn’t apply to section 46.  However, proving that the originator has substantial power, and that its product switching strategy was both a use of that power and engaged in for the purpose of deterring competitors, is likely to be difficult. While the ACCC hasn’t commented on this specific issue, health care is an industry that is on its radar (for example, through considering the Medicines Australia Code of Conduct).

There’s no indication yet whether the Pennsylvania District Court will agree with the FTC, or even consider the amicus brief, but whatever happens is likely to be worth watching.

Image credit: epSos.de at Flikr

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About The Author

is a solicitor in the DR team at KWM. In addition to her commercial practice, Louise volunteers with the Downing Centre Duty Solicitor program and ASK!

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