Written by Jonathan Rubin, Partner and Co-Founder of MoginRubin LLP
The Second Circuit U.S. Court of Appeals has reinstated an antitrust complaint brought by pharma firm, Regeneron Pharmaceuticals, Inc., against the Swiss pharmaceutical giant, Novartis Pharma AG, and outside fulfillment firm, Vetter Pharma International GmbH. The appeals court held that it was error for the district court to reject Regeneron’s antitrust claims. The district court should have credited the plaintiff’s product market definition and the complaint should not have been dismissed, the Second Circuit decided.
Both Regeneron and Novartis market treatments for an eye disease in which the body over-produces a protein called vascular endothelial growth factor (VEGF). Regeneron sells its anti-VEGF medicine as ‘Eylea,’ while Novartis calls its product ‘Lucentis.’ Both products were initially marketed in vials, from which the physician would withdraw a quantity of liquid with a syringe and inject it into the patient’s eye.
The dispute between the two pharma companies dates back to 2005, when Regeneron engaged Vetter Pharma to help it develop a syringe pre-filled with Eylea, which the company recognized as superior to delivery in vials because it reduces the risk of infection. The 2005 agreement between Regeneron and Vetter stipulated that Regeneron would have an ownership interest in any patent resulting from the development of a pre-filled syringe (PFS) for the injection of an anti-VEGF therapeutic.
Unbeknownst to Regeneron, Vetter began working with Novartis in 2009 to develop a PFS version of Lucentis. In 2015, Novartis was issued a patent for a PFS anti-VEGF. Novartis did not disclose that Vetter Pharma was a co-inventor on the patent application, as required by the patent law. According to Regeneron’s complaint, the issuance of Novartis’ PFS anti-VEGF patent significantly compromised Regeneron’s development of its own Eylea PFS, delaying the commercialization of its competing product until 2019.
Regeneron Alleges Monopolization by Novartis
Regeneron brought five claims against Novartis and Vetter. The first two charge Novartis with having obtained its PFS anti-VEGF patent through fraud on the patent office, which under the seminal decision in Walker Process Equip., Inc. v. Food Mach. & Chem. Corp., 382 U.S. 172 (1965), may constitute unlawful monopolization under Section 2 of the Sherman Act. Regeneron also sued the defendants for unlawfully attempting to monopolize the market for PFS anti-VEGF under a non-Walker Process antitrust theory and for entering into an agreement in restraint of trade in violation of Section 1 of the Sherman Act. It also sued Novartis for tortious interference with its contract with Vetter.
The District Court’s Dismissal
In alleging its monopolization claims, Regeneron claimed that Novartis and Vetter had monopolized the market for “anti-VEGF PFSs.” Thus, the plaintiff had alleged a market definition that was co-extensive with the scope of Novartis’ patent. Regeneron had alleged that more than 80% of physicians that had used the vials had switched to PFS once the PFS product became available. They alleged that a small but significant non-transitory increase in the price of PFS would not drive sufficient numbers to switch back to vials to make such a price increase unprofitable. And it alleged that physicians do not regard a vial of anti-VEGF to be substitutable with a PFS for a number of practical reasons, including the materially lower risk in delivery.
Nonetheless, positing that it would be “strange” to limit the relevant product market to anti-VEGF PFSs “when the same drug comes in a vial as well,” the district court concluded that Regeneron’s alleged product market definition was implausibly narrow. The district court appeared to believe that an antitrust product market definition cannot be co-extensive with the scope of a patent. Accordingly, the court found the allegations in the complaint failed to plausibly allege any of the antitrust violations.
Market Definition is About Demand, Not Supply
The district court committed the common error of evaluating market definition by looking at the supply side rather than the demand side. Particularly in monopolization cases, market definition plays an important role in the legal analysis. A commonly quoted expression is that the market definition consists of “the area of effective competition.” Thus, whether two products should be regarded in the same market depends on whether there is real (effective) competition between them. This, in turn, requires that buyers can switch from one to the other without excessive cost. If a real, practical choice between two products is not available, it is not likely that the two products belong in the same product market.
A plaintiff bringing a complaint for monopolization must clearly allege the geographic scope and the mix of products in the market allegedly monopolized. All else being equal, it is more difficult for a plaintiff to prove monopolization of a broad market with many products (or even kinds of products) than a narrow market with only a few products. In some cases, a single brand of a product or service occupies a market all its own, because, for at least a well-defined cohort of buyers, there is no other choice. For example, when the Kodak company stopped supporting copier repairs by independent service organizations, it prevented all providers except itself from providing services for Kodak copiers. For Kodak copier owners the relevant product market—servicing for Kodak copiers—consisted of a single brand.
In its Regeneron decision, the Second Circuit clarified that products that serve the same or similar function may nonetheless still not occupy the same product market. This is because the products in a defined market must be both functionally and economically substitutable. Whether, in theory, buyers demanding product A can instead use product B is not the relevant inquiry. What matters is whether buyers actually will substitute B for A. As the court of appeals put it, “the applicable analysis is whether or not the products are economic substitutes, not whether they appear to be functionally similar.”
Thus, market definition depends on the preferences of those that generate economic demand for one product in relation to their demand for a second product. The magnitude known as the cross-elasticity of demand measures how a change in market demand for one product affects the market demand for a second product.
The Ninth Circuit noted that the district court not only placed improper weight on the functional, rather than economic, similarities between anti-VEGF PFSs and vials, but it also “misconstrued the relationship between a patent and a proposed antitrust market.” The two concepts are indeed quite different. Although it is commonly thought that a patent confers a “monopoly,” this is not necessarily the case unless the scope of the patent also describes a relevant antitrust market.
Thus, a patent on a product or service that competes in a competitive market with other patented or non-patented products does not entail the grant of a monopoly in any market. The patentee can certainly exclude others from practicing the patent without a license, but it has no monopoly power in a market that includes other, non-infringing technologies against which it must compete.
In Regeneron v. Novartis, however, the Second Circuit correctly found that the plaintiff has sufficiently alleged that no other patented or non-patented products effectively compete with anti-VEGF PFS. Accordingly, the case has been returned to the Northern District of New York with instructions to permit Regeneron’s claims to proceed.
