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In re Propranolol Antitrust Litigation

United States District Court, S.D. New York

April 6, 2017

In re PROPRANOLOL ANTITRUST LITIGATION

          OPINION AND ORDER

          JED S. RAKOFF, U.S.D.J.

         Plaintiffs FKW Holdings and Cesar Castillo (the "Direct Purchasers") and Sergeants Benevolent Association Health & Welfare Fund and American Federation of State, County and Municipal Employees District Council 37 Health & Security Plan (the "End-Payors") bring putative nationwide class actions alleging that defendants illegally conspired to fix the price of the generic drug, propranolol hydrochloride ("Propranolol"). By bottom-line Order dated February 27, 2017 (the "Bottom-Line Order"), the Court denied the motion by defendants Heritage Pharmaceuticals Inc. ("Heritage") and Upsher-Smith Laboratories, Inc. ("Upsher-Smith") to dismiss the Direct Purchasers' original complaints for lack of personal jurisdiction. See ECF No. 108. Defendants now jointly move to dismiss the Direct Purchasers' and End-Payors' consolidated amended complaints. For the reasons set forth below, this Opinion and Order denies defendants' instant motions, except for part of their motion to dismiss certain state law claims in the End-Payors' action. This Opinion and Order also explains the reasoning for the previous Bottom-Line Order.

         On a motion to dismiss, the Court accepts all well-pleaded factual allegations as true and draws all reasonable inferences in favor of the non-moving party. See Goldstein v. Pataki, 516 F.3d 50, 56 (2d Cir. 2008). In the antitrust context, stating a claim under Section 1 of the Sherman Act "requires a complaint with enough factual matter (taken as true) to suggest that an agreement was made. Asking for plausible grounds to infer an agreement does not impose a probability requirement at the pleading stage; it simply calls for enough fact to raise a reasonable expectation that discovery will reveal evidence of illegal agreement." Bell Atl. Corp. v. Twombly, 550 U.S. 544, 556 (2007) .

         Propranolol is the generic version of Inderal and comes in two forms: capsules and tablets. Direct Purchasers' Consolidated Amended Complaint ("DPP") ¶¶ 81-83, ECF No. 109; End-Payors' Consolidated Amended Complaint ("EPP") ¶¶ 1-2, 46-51, Dkt. No. 17-cv-01039, ECF No. 60. The pleadings allege two conspiracies, with one overlapping defendant, to manipulate the price of both forms of the drug. DPP ¶¶ 8-9; EPP ¶¶ 1-2, 46-51. The defendants in the "Capsules Conspiracy" are Actavis Elizabeth, LLC ("Actavis"), Breckenridge Pharmaceuticals, Inc. ("Breckenridge"), and Upsher-Smith (collectively, the "Capsules Defendants"). DPP ¶¶ 46-62; EPP ¶¶ 19-31. The defendants in the "Tablets Conspiracy" are Mylan Inc., Mylan Pharmaceuticals Inc., and UDL Laboratories, Inc. (collectively, "Mylan"), Teva Pharmaceuticals USA, Inc., and Pliva, Inc. (collectively, "Teva"), Endo International PLC, Par Pharmaceuticals Holdings, Inc., and Qualitest Pharmaceuticals, Inc. (collectively, "Par"), Heritage, and Actavis (collectively, the "Tablets Defendants"). Id.

         The well-pleaded allegations of the complaints here at issue show the following facts:

         Prior to 2013, the price of Propranolol had steadily declined since it entered the market in 1967. DPP ¶ 82; EPP ¶ 40; see DPP ¶¶ 78-79; EPP ¶ 67. This was not unusual in the case of generic drugs. In particular, because federal law requires each generic to be "readily substitutable for another generic of the same brand drug, the products behave like commodities, with pricing being the main differentiating feature and the basis for competition among manufacturers." Id. As a result, prices in a "mature generic market, such as the market for [P]ropranolol" will fall until they stabilize at the generic manufacturers' marginal costs of production. DPP ¶ 82; EPP ¶ 40.

         Accordingly to the complaints, the prices of various dosages of Propranolol capsules had either consistently declined or somewhat stabilized prior to the Capsules Conspiracy. DPP ¶¶ 154; EPP ¶¶ 48-52. In either March or November of 2013, [1] however, the C apsules Defendants abruptly began increasing their effective prices by significant amounts, DPP ¶¶ 114, 124, 126; EPP ¶¶ 2, 42, and continued to raise prices until approximately May 2014. EPP ¶¶ 153-173. Prices then remained relatively stable for a period of months until slightly falling to amounts still above pre-conspiracy levels. Id.

         Several months later, a similar occurrence developed with regard to Propranolol tablets. After years of stable or declining prices, the Tablet Defendants abruptly raised the effective price of all dosages of Propranolol tablets in early 2015. Defendant Heritage increased effective prices by 102%-151% in January 2015, and, a few weeks later, defendants Teva and Actavis increased their own prices in March 2015 by 566%-898% and 395%-638%, respectively, DPP ¶ 186; EPP ¶¶ 49-52. Defendants Mylan and Par began increasing their prices soon after, in April and June, by amounts ranging from 55% to 607% and 52% to 216%, respectively. DPP ¶¶ 193-194, 199-201; EPP ¶¶ 49-52.[2] Defendants' prices continued to increase over the next year by as much as 1, 736%. DPP ¶¶ 136-213; EPP ¶¶ 49-52; see DPP ¶ 202 ("Between December 2014 and November 2015, Actavis raised the price of 80mg propranolol tablets by 1, 736% (from $0.03 per tablet to $0.46 per tablet).").

         Economic factors make the Propranolol market susceptible to collusion, including industry concentration, barriers to entry, lack of substitutes, demand inelasticity, and interchangeability. See DPP ¶¶ 225-245; EPP ¶¶ 53-68. In addition, during the period of these price increases, there was no significant increase in production costs, no significant decrease in supply, and no significant increase in demand. DPP ¶¶ 214, 254-255; EPP ¶43. Federal law further requires drug manufacturers to report potential drug shortages to the Food and Drug Administration ("FDA"), and no supply disruption was reported during the duration of the alleged conspiracies. DPP ¶¶ 222-224.[3]

         Finally, state and federal agencies are conducting large-scale investigations of the generic drug industry for alleged price fixing. DPP ¶¶ 10-23, 38-45, 92-94, 241; EPP ¶¶ 5-6, 103, 108. Defendant Mylan disclosed in October 2016 that it had received a subpoena from the Department of Justice ("DOJ") seeking information relating to the "marketing, pricing and sale" of several generic drugs, "including Propranolol." DPP ¶ 43; EPP ¶ 103. Two months later, on December 14, 2016, the DOJ charged the former chief executive officer ("CEO") and former president of defendant Heritage for criminal violations of the Sherman Act in connection with the generic drugs Glyburide and Doxycycline Hyclate DR. DPP ¶¶ 15-16; EPP ¶ 5, 104. The two individuals, Jason Malek and Jeffrey Glazer, subsequently plead guilty and are cooperating. Id.

         Plaintiff FWK Holdings LLC filed suit against defendants on December 23, 2016 on behalf of direct purchasers of Propranolol for violations of § 1 of the Sherman Act. Plaintiff Cesar Castillo Inc. filed a largely identical class action approximately two weeks later on January 5, 2017. The Court consolidated the two complaints by Order dated January 11, 2017, and defendants filed two motions to dismiss on January 27, 2017: the first, joined by all defendants, sought dismissal for failure to state a claim; the second, joined by defendants Heritage and Upsher-Smith, sought dismissal for failure to plead personal jurisdiction.

         Before defendants' motions could be fully briefed, however, the Government moved to intervene on January 30, 2016, and, upon consent of the parties, the Court granted the Government leave on February 7, 2017. Three days later, on February 10, 2017, the End-Payors filed class action complaints on behalf of end purchasers of Propranolol seeking injunctive relief under § 1 of the Sherman Act, damages under the antitrust laws and consumer protection laws of numerous states, and restitution for common law unjust enrichment. The Court subseguently held a scheduling conference on February 21, 2017, during which the Government moved for a stay of discovery in both actions because of the "overlap" between the civil cases and "the Government's ongoing criminal investigation." See Transcript dated February 21, 2017 at 12, ECF No. 112. The Court denied the motion but granted leave for the Government to file an ex parte motion for reconsideration, id. at 14, and the Government timely filed its submission. See Memorandum of Law in Support of the United States' Motion for Reconsideration of Its Motion for a Limited Stay of Certain Discovery ("Government's Mot. for Recons."), ECF No. 102.[4]

         The Court held oral argument on the motions to dismiss the Direct Purchasers' actions on February 24, 2017 and, at the conclusion of the hearing, issued a bench ruling denying the motion by defendants Heritage and Upsher-Smith to dismiss the Direct Purchasers' complaints for lack of personal jurisdiction. The Court subsequently issued its Bottom-Line Order on February 27, 2017, dismissing with prejudice the Direct Purchasers' capsules claim against defendant Mylan (on consent of the parties), confirming its bench ruling denying defendants' personal jurisdiction motion, and postponing ruling on the merits motion so as to allow the Direct Purchasers to file amended complaints. See ECF No. 108. The same day, the Court also issued an Order granting in part and denying in part the Government's motion for reconsideration of its request for a partial stay of discovery. See ECF No. 107.

         The Direct Purchasers and End-Payors filed consolidated amended complaints on February 27, 2017 and March 3, 2017, and defendants timely filed supplemental briefing in the Direct Purchasers' action and moved to dismiss the End-Payors' action for lack of standing and failure to state a claim.[5] On March 9, 2017, the Court issued an Order consolidating the actions of the End-Payors and ordering that the End-Payor and Direct Purchaser actions be coordinated for pre-trial and trial purposes on a master docket styled In re Propranolol Antitrust Litigation and bearing the case number 1:16-cv-09901-JSR. ECF No. 79. The Court held oral argument on the defendants' instant motions to dismiss the Direct Purchasers' and End-Payors' respective consolidated amended complaints on March 24, 2017.

         With this factual background in mind, the Court first turns to defendants' motions to dismiss the counts brought under § 1 of the Sherman Act of the Direct Purchasers' and End-Payors' consolidated amended complaints. The Sherman Act prohibits "[e]very contract, combination in the form of trust or otherwise, or conspiracy, in restraint of trade or commerce." 15 U.S.C. § 1. To plead a plausible price-fixing conspiracy, plaintiffs are "not required to mention a specific time, place or person involved in each conspiracy allegation." See Starr v. Sony BMG Music Entm't, 592 F.3d 314, 325 (2d Cir. 2010). Instead, a conspiratorial agreement "may be inferred on the basis of conscious parallelism, when such interdependent conduct is accompanied by circumstantial evidence and plus factors." Mayor & City Council of Baltimore, Md. v. Citigroup, Inc., 709 F.3d 129, 136 (2d Cir. 2013) (internal citations omitted). These plus factors traditionally include: (1) "a common motive to conspire"; (2) "evidence that shows that the parallel acts were against the apparent individual economic self-interest of the alleged conspirators"; and (3) "evidence of a high level of interfirm communications." Gelboim v. Bank of Am. Corp., 823 F.3d 759, 781 (2d Cir. 2016) (quoting Citigroup, 709 F.3d at 136). However, this list is "neither exhaustive nor exclusive, but rather illustrative of the type of circumstances which, when combined with parallel behavior, might permit a jury to infer the existence of an agreement." Id. (quoting Citigroup, 709 F.3d at n. 6) .

         Plaintiffs here allege the presence of four plus factors: (1) defendants had a motive to increase prices because they operate in an oligopolistic market characterized by falling prices; (2) the price increases were against defendants' self- interest because in a competitive market, defendants should have tried to undercut each other's prices to increase their market share; (3) defendants frequently communicated at trade association meetings; and (4) there are ongoing state and federal investigations for price manipulation of generic drugs, including Propranolol.

         The Court begins with motive. Defendants are correct that the bare allegation that defendants operate in an oligopolistic market is insufficient to establish a common motive to conspire. See Citigroup, 709 F.3d at 139 (allegations that "defendants operate in an oligopolistic market . . . may simply restate the (legally insufficient) fact that market behavior is interdependent and characterized by conscious parallelism."). Instead, a plaintiff must allege facts, specific to the market at issue, suggesting that the defendants had an incentive to manipulate prices. Id.; see Gelboim, 823 F.3d at 766 (plaintiffs sufficiently plead motive to manipulate LIBOR where the complaint alleged that defendants were "reeling from the 2007 financial crisis, [and] a high LIBOR submission could signal deteriorating finances to the public and the regulators").

         Plaintiffs here have alleged such market specific factors. The pleadings set forth that because federal law requires each generic to be "readily substitutable for another generic of the same brand drug, " competition will cause pricing in a "mature generic market, such as the market for [P]ropranolol" to fall until it nears the generic manufacturers' marginal costs of production. DPP ¶ 82; EPP ¶ 40; see DPP ¶¶ 78-79; EPP ¶ 67. The data cited in the pleadings confirm this trend, and show that prior to the alleged conspiracies, the prices of Propranolol capsules and tablets either were falling or had finally stabilized. DPP ¶ 154; EPP ¶¶ 48-52.[6] This gradual devaluation of Propranolol also caused defendants' profits to decline and level out over time, giving them a common motive to conspire. See Starr, 592 F.3d at 324 (finding that the "continuing devaluation" of digital music gave defendant distributors a common motive to conspire to raise prices).[7]

         Defendants' characterization of these industry specific factors as a bare allegation that defendants wanted to "make more money" is unconvincing. So too is their reliance on In re Baby Food Antitrust Litiq., 166 F.3d 112, 137 (3d Cir. 1999), which is not binding on this Court and factually distinguishable from the present dispute. There, plaintiffs submitted an expert report in support of their motion for summary judgment that "never made any reference to the evidence in this case" and "never analyzed the pricing conduct of any of the defendants." Id. at 134. Instead, the expert made "an abstract statement based on 'economic theory' that the interest in enhancing profits motivated the defendants to conspire" to raise the price of baby food in the United States, id. at 134, and the Third Circuit found that such "bare opinion of an obvious fact" (common to all companies in a capitalist economy) was insufficient to establish motive. Id. at 137-38. The pleadings here, on the other hand, set forth in detail a regulatory regime that has historically pushed the price of Propranolol downwards and gradually reduced defendants' profits, thereby giving them a common motive to conspire.

         The Court next turns to whether plaintiffs have alleged that defendants' price increases were against their self-interest. Plaintiffs argue that defendants could not have sustained their market-wide price increases absent an unlawful agreement because, "[i]n a competitive industry ... a firm would cut its price with the hope of increasing its market share if its competitors were setting prices above marginal costs." See Starr, 592 F.3d at 324. This is particularly so given the magnitude of defendants' price increases (upwards of 1, 736%) and the fact that Propranolol is identical across manufacturers. A rational competitor therefore should have kept its prices stable and vastly increased its market share.

         Defendants respond that this analysis oversimplifies economic markets because, "so long as prices can be easily readjusted without persistent negative consequences, one firm can risk being the first to raise prices, confident that if its price is followed, all firms will benefit." In re Musical Instruments & Equip. Antitrust Litig., 798 F.3d 1186, 1195 (9th Cir. 2015). This argument may be true in theory, but defendants' application here suffers from a foundational flaw. Defendants condemn the pricing data in the pleadings as not reflective of their actual prices, but fail to identify any other data that they believe is accurate. See Transcript dated March 24, 2017 at 22 .[8] Defendants have thus left themselves with no pricing data that they can say they have followed.

         This situation distinguishes the present case from Musical Instruments (which is not binding on this Court in any event) and Citigroup, where the complaints alleged that each defendant engaged in a single instance of anticompetitive activity and clearly set forth the common impetus for each defendant's conduct. In Musical Instruments, the Ninth Circuit (in a split decision) affirmed the dismissal of the case because "the complaint itself . . . provide[d] ample independent business reasons why each of the [defendants] adopted and enforced [the minimum prices] even absent an agreement." .Id. In particular, each defendant was responding to "similar demands made by a common, important customer." Id. Likewise, in Citigroup, the Second Circuit held that defendants' collective decision to exit the market for auction rate securities ("ARS") was not against their self-interest where "the complaints vividly demonstrate[d]" that "the market as a whole was essentially holding its breath waiting for the inevitable death spiral of ARS auctions, " 709 F.3d at 138, and one of the defendants subsequently disclosed that it would no longer support such auctions. Mayor & City Council of Baltimore, Md. v. Citigroup, Inc., No. 08 CV. 7746 (BSJ), 2010 WL 430771, at *2 (S.D.N.Y. Jan. 26, 2010). Here, on the other hand, the pleadings here allege a pattern of price fixing spanning several years and no clear mechanism through which the defendants could legitimately and consistently monitor each other's pricing activity.[9]

         Defendants' additional explanations for their price increases, albeit more grounded in the pleadings, do not render plaintiffs' allegations implausible. With respect to the Capsules Conspiracy, the pleadings admit that defendant Mylan ceased selling Propranolol capsules prior to the price increases in 2013, which, in defendants' view, establishes that the increases were simple supply-demand economics. At the motion to dismiss stage, however, plaintiffs need not "offer evidence that tend[s] to rule out the possibility that the defendants were acting independently." Starr, 592 F.3d at 321. Instead, plaintiffs "need only allege enough factual matter (taken as true) to suggest that an agreement was made." Id.[10] Here, plaintiffs plausibly allege that because the FDA did not report a shortage of Propranolol capsules following Mylan's exit, there was no "shift" in the total supply of Propranolol that would rationally increase prices. Additionally, because defendants cite no contemporaneous publications reporting Mylan's exit, they cannot explain when or how they learned of this development and whether it was responsible for their price increases.[11]Furthermore, while it is true that defendants' price increases did not always align on a monthly basis, defendants consistently raised prices on a bi-monthly and quarterly basis, which is consistent with an illegal agreement. See, e.g., United States v. Socony-Vacuum Oil Co., 310 U.S. 150, 222-23 (1940) ("Nor is it important that the prices paid by the combination were not fixed in the sense that they were uniform and inflexible .... An agreement to pay or charge rigid, uniform prices would be an illegal agreement under the Sherman Act. But so would agreements to raise or lower prices whatever machinery for price-fixing was used.").

         Defendants' alternative explanations for the increases in prices of Propranolol tablets are similarly unpersuasive. The pleadings admit that six months after the alleged Tablet Conspiracy began, an organization known as the American Society of Health-System Pharmacists ("ASHP") began reporting shortages of Propranolol tablets. DPP ¶ 244. The reports consist solely of statements from the various defendants concerning the purported development, including that Activis and Teva "cannot provide a reason for the shortage, " that defendant Heritage was having a "raw materials issue, " that defendant Mylan "discontinued Propranolol unit-dose tablets, " and that defendant Qualitest refused to provide any reason. While discovery may substantiate some of these explanations, defendants' self-serving statements, made months after the onset of the price increases, and during a period in which the FDA did not issue a shortage notification, are insufficient to render plaintiffs' allegations of price fixing implausible at this stage of the litigation.[12]

         The Court accordingly finds that plaintiffs have plausibly alleged that the price increases in Propranolol capsules and tablets were against defendants' self-interest.

         The Court next turns to whether the plaintiffs have alleged a high level of interfirm communications. The pleadings extensively recount defendants' participation in trade association meetings taking place over a number of years and list the dates of such conferences, the names of the attendees from each defendant, and their respective job titles. See EPP ¶¶ 71-83; DPP ¶¶ 113-134. The pleadings further allege that the defendants' representatives had "discussions" at these meetings, DPP ¶ 9, and, quoting a recent civil complaint brought by 20 state attorney generals, that "generic drug manufacturer representatives who attend these functions, . . . use these opportunities to discuss and share upcoming bids, ...


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