Patent Litigation and Generic Drug Companies: How to Avoid Becoming an “Exceptional Case”

2013 brought generic drug companies increased financial and legal hurdles when it came to marketing their products in the U.S. First, substantial new GDUFA “user fees” got levied on generics for access to the FDA. Then, the Supreme Court returned its decision in Actavis, which allows the FTC to sue generics if the generics structure pharma-litigation settlements so as to receive unjustified value from the brand owner.

2014 has not been much better. In April, the Supreme Court handed down two essentially unanimous rulings regarding “exceptional case” attorney fee awards in patent-litigation actions. In Octane Fitness, LLC v. Icon Health & Fitness, Inc. and Highmark Inc. v. Allcare Health Mgmt. Sys, the Court rejected as overly strict Federal Circuit requirements for awarding fees and costs in patent litigation—and announced a more lenient, if less clear, new standard.[1] As a result, brands may now have an easier time getting exceptional case fees and costs from generics in unsuccessful Hatch-Waxman patent litigation.

If generics want to make the most of their limited budgets, they need to learn how to put this latest development to work for them. This article provides the background of the exceptional-case provision, and concludes with best practices for companies to use when facing potential exceptional-case fee exposure.

The makings of an exceptional case

The statutory standard for an “exceptional case” is quite simple: “The court in exceptional cases may award reasonable attorney fees to the prevailing party.”[2]  

This provision overrides the traditional “American Rule,” whereby each party bears its own fees and costs. Instead, it aligns with the “English Rule” where the prevailing party receives its fees and costs. That concept, however, is at odds with the goals of the Hatch-Waxman Act, which was enacted is to encourage generics to challenge vulnerable brand patents.[3]

To balance the various, competing interests, the Court of Appeals for the Federal Circuit adopted a set of requirements for finding an “exceptional case” where fees should be awarded. The Federal Circuit’s standard required:

(1) Grievous misconduct during litigation, or
(2) Litigation (i) brought in subjective bad faith (ii) that is objectively baseless (in which no reasonable litigant could expect success).[4]

Historical Hatch-Waxman exceptional cases

With the above requirements in place, courts awarded attorney fees—sometimes substantial ones—to both brand drug companies and generic challengers in Hatch-Waxman litigation.

For example, in Takeda Chemical Indus. Ltd. v. Mylan Labs, Inc., the court awarded an amount equaling $16.8m to the brand holder as exceptional fees and costs against the two generic defendant-challengers.[5] In reaching this decision, the court found:

• A rush by defendant Mylan to obtain first-to-file exclusivity despite not having received a legal opinion for its notice-letter theories.
• Objectively baseless pre-suit notice letters by Mylan and Alphapharm (the other defendant). The letters contained errors and failed to address commercial-success secondary considerations relevant to obviousness.
• “Ever-shifting” litigation positions (both Mylan and Alphapharm abandoned their original invalidity theories, for instance adopting a new lead compound for obviousness).[6]

But generic patent challengers have also successfully used the exceptional-case provision. In AstraZeneca AB v. Dr. Reddy’s Labs., Ltd.,  a generic company challenged a patented process for making omeprazole magnesium having 70 percent crystallinity in its final product.[7] In the litigation, brand Astra had tested the generic’s samples itself and had found no evidence of infringement.

Despite that fact, Astra kept pushing on additional fronts for more discovery. It argued that such a large amount of discovery was de rigueur in Hatch-Waxman cases. Moreover, Astra concocted a baseless claim that the intrinsic patent record directly contradicted, solely as a means of avoiding summary judgment.[8]

In its ruling awarding costs, the court stated, “It was obvious from very early that plaintiffs had brought and were maintaining this lawsuit in a desperate effort to keep any competing product from hitting the shelves―even if the competing product was not an infringing product.”[9] Finding the case exceptional (i.e., “frivolous”), the court awarded attorney fees and costs to the generic.[10]  

The Supreme Court’s new “exceptional case” standard

The Supreme Court’s April rulings has two immediate impacts on “exceptional case” standards. First, the standards announced in Octane Fitness and Highmark replace the existing standard for finding an exceptional case previously used in the Hatch-Waxman cases. Second, the Court lowered the quantum of proof from clear-and-convincing to preponderance-of-the-evidence. Now, an “exceptional case” is one that “simply… stands out from others with respect to the substantive strength of a party’s litigating position . . . or the unreasonable manner in which the case was litigated.”[11] Obviously, replacing “exceptional” with “stands out” creates a less-clear standard. Even so, the rulings appear to expand what could qualify as an exceptional case subject to an award of attorneys’ fees for the prevailing party.

Also of note are the Court’s rejection of the subjective/objective framework and the appellate application of de novo/clear-error review. The Court said that, instead, “an appellate court should apply an abuse-of-discretion standard in reviewing all aspects of a district court’s § 285 determination.”[12]  This new level of deference will likely allow more trial-court awards of “exception case” fees and costs to stand. 

Shire’s guidance for generics

The rule of the day is now quite simple: don’t “stand out.” But what limits does this kind of create for Hatch-Waxman cases?

Shire LLC v. Amneal Pharms., LLC provides some guidance.[13] In Shire, the brand moved for exceptional case-fees and failed. In reaching its decision to deny the requested fees, the court made two initial findings:

• The filing of an ANDA was merely a technical act of infringement; and
• The safe-harbor provision of the Hatch-Waxman Act was broad.[14]

The court then found that all substantive and procedural activities were “the kinds of things Defendants in these cases typically do when they seek to market a generic version of a pharmaceutical protected by patents.”[15] Notably, the court contrasted the conduct in a seminal willful-infringement case, which involved “a wholly unjustified ANDA certification and misconduct during the litigation . . .”[16]

In sum, it appears that not “standing out” means “keeping it typical.”

Best practices: Avoiding becoming an “exceptional case”

So what is a generic company to do in light of these recent developments? Analysis of best practices established in pre-2014 cases provides important guidance. Those cases teach:

• Research and prepare the notice letter and all supporting opinions in a timely manner.
• Adequately and accurately provide the required detailed fact and legal bases—in particular, courts will wonder about additional prior art that the defendant ought to have known about as part of pre-suit due diligence.
• Address secondary considerations if there is an obviousness theory up front—do not take the position that such discussions are not appropriate prior to discovery.
• Mind your adversary’s (mis)conduct—if the brand does not abandon a position once there is a decision or discovery that is fatal to a material part of its case, a court can see continuing that position as misconduct (and the generic can get its fees and costs).
• Do not be quick to switch legal theories—if you must do so, provide a good explanation of why the abandoned theory was reasonable pre-suit.
• Do not beat a dead horse—if the Markman ruling is damaging, reassess: you may only incur further exceptional-case exposure by continuing forward.

Conclusion

Generic companies continue to face an uphill battle in the U.S. New developments continue to arise that make marketing and selling generics more difficult. Some developments, however, can provide great opportunity if you know how to turn them in your favor. Keep a lookout for best practices from all sources. And, when in doubt, DON’T stand out!