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F.T.C. v. MYLAN LABORATORIES

July 7, 1999

FEDERAL TRADE COMMISSION, PLAINTIFF,
v.
MYLAN LABORATORIES, INC., CAMBREX CORP., PROFARMACO S.R.L., AND GYMA LABORATORIES OF AMERICA, INC., DEFENDANTS. THE STATE OF CONNECTICUT, ET AL., PLAINTIFFS, V. MYLAN LABORATORIES, INC., CAMBREX CORP., PROFARMACO S.R.L., GYMA LABORATORIES OF AMERICA, INC., AND SST CORP., DEFENDANTS.



The opinion of the court was delivered by: Thomas F. Hogan, District Judge.

            MEMORANDUM OPINION

The above-captioned cases are actions by the Federal Trade Commission (FTC) and thirty-two States against Mylan Laboratories and other drug companies for various federal and state law antitrust violations. Pending before the Court are defendants' motions to dismiss the complaints in both cases. There are three motions to dismiss pending in FTC v. Mylan and three pending in State of Connecticut v. Mylan. Defendants argue both that plaintiffs have not stated a claim upon which relief can be granted, and that this Court lacks subject matter jurisdiction over certain aspects of the complaints. For the reasons set forth below, defendants' motions will be granted in part and denied in part.

I. BACKGROUND

A. Legal Framework

The first action is brought by the Federal Trade Commission ("FTC") under § 13(a) of the Federal Trade Commission Act, 15 U.S.C. § 53(a) ("FTC Act"), to secure a permanent injunction and other relief against the defendants. Defendants are Mylan Laboratories, Inc., Cambrex Corporation, Profarmaco S.R.L. and Gyma Laboratories of America, Inc. The FTC alleges that the defendants engaged and are engaging in unfair methods of competition in or affecting commerce in violation of § 5(a) of the FTC Act, 15 U.S.C. § 45(a). The Complaint contains eight counts of unfair competition.*fn1 The relief sought by the FTC is for the Court to (1) find that the defendants have violated § 5(a) of the FTC Act; (2) permanently enjoin the defendants from engaging in such conduct; (3) rescind the defendants' unlawful licensing arrangements; and (4) order other equitable relief, including the disgorgement of $120 million plus interest.

The second case, State of Connecticut v. Mylan Labs, is an action brought by thirty-two states against defendants for violations of §§ 1 and 2 of the Sherman Act, 15 U.S.C. § 1 and 2, as well as various state antitrust laws. Plaintiffs bring the action as parens patriae on behalf of natural persons; on behalf of their state's general economies in their sovereign capacities; and as injured purchasers or as reimbursers under state Medicaid and other programs. The defendants are the same as in FTC v. Mylan Labs, except that the State complaint names an additional defendant, SST Corporation. The substantive allegations contained in the State complaint are identical to those in the FTC complaint, except that the State complaint contains an additional ninth count alleging that Mylan and SST entered into an illegal price-fixing agreement. As relief, the States are requesting that the Court (1) find that the defendants have violated §§ 1 and 2 of the Sherman Act; (2) permanently enjoin the defendants from engaging in such conduct; (3) rescind the defendants' unlawful licensing arrangements; and (4) award treble damages; (5) award appropriate relief under the state statutes; and (6) order other equitable relief under federal law, including disgorgement and restitution.

The defendants have filed motions to dismiss in both cases.*fn2 The six motions are:

1. Defendants' motion to dismiss the FTC's amended complaint pursuant to Federal Rules of Civil Procedure 12(b)(1) and 12(b)(6);

2. Defendants' motion to dismiss the FTC's amended complaint in part pursuant to Fed.R.Civ.P. 12(b)(6);

3. Gyma Corporation's motion to dismiss the FTC's amended complaint pursuant to Fed.R.Civ.P. 12(b)(6);

4. Defendants' motion to dismiss the States' amended complaint pursuant to Fed.R.Civ.P. 12(b)(1) and 12(b)(6);

5. Defendants' motion to dismiss the States' amended complaint pursuant to Fed.R.Civ.P. 12(b)(6);

6. Gyma Corporation's motion to dismiss the FTC's amended complaint pursuant to Fed.R.Civ.P. 12(b)(6).

After briefly reviewing the factual background of these cases, the Court will address each of defendants' motions.

B. Facts

For purposes of the instant motions to dismiss, the allegations of the complaints are taken as true. The facts below are presented accordingly, and do not constitute factual findings.

These cases concern the generic drug industry. Generic drugs, which are chemically identical versions of branded drugs, cannot be marketed until after the patent on the branded drugs has expired. Firms that manufacture and market generic drugs often specialize in such drugs, although Mylan manufactures both generic and branded drugs. Generic drugs are sold at substantial discounts from the price of branded drugs.

Mylan and other generic drug manufacturers require the approval of the Food and Drug Administration (FDA) to market a generic product in the United States. For each generic drug, the manufacturer must file an Abbreviated New Drug Application (ANDA) with the FDA to establish that its version of the drug is therapeutically equivalent to the branded drug. FDA approval of an ANDA takes an average of about 18 months..

Typically, the generic manufacturer purchases the Active Pharmaceutical Ingredient (API) from a specialty chemical manufacturer (API Supplier). The generic manufacturer combines the API with inactive filters, binders, colorings and other chemicals to produce a finished product. To sell an API in the United States, the API supplier must file a Drug Master File (DMF) with the FDA. The DMF explains the processes that the API supplier uses to make the API and to test chemical equivalence and bioequivalence to the brand product. To use an API, the generic manufacturer's ANDA must refer to the API supplier's DMF filed with the FDA. More than one drug manufacturer can reference the DMF of the same API supplier. A generic manufacturer that wants or needs to change its API supplier must obtain FDA approval of an ANDA supplement which includes a reference to the new supplier's DMF and test results regarding the generic manufacturer's product using the new API. This process averages about 18 months, though it can take as long as three years.

Profarmaco (which is a wholly owned subsidiary of Cambrex) manufactures APIs in Italy. Profarmaco holds DMFs for lorazepam API and clorazepate API, and has supplied such APIs to drug manufactures in the United States. Foreign firms, like Profarmaco, that supply APIs to the United States typically have distributors in the United States who purchase APIs and resell them to generic drug manufacturers in the United States. Mylan purchases its lorazepam and clorazepate API from Gyma, Profarmaco's U.S. distributor of these products. Several other drug manufacturers have purchased API from SST Corporation, another U.S. distributor of this product.

The plaintiffs in these two cases allege the following anti-competitive conduct on the part of the defendants. Mylan sought from its API suppliers long-term exclusive licenses for the DMFs of certain APIs selected because of limited competition. If Mylan obtained such an exclusive license, no other generic drug manufacturer could use that supplier's API to make the drug in the U.S. Mylan sought exclusive licenses for the DMFs for lorazepam API and clorazapate API as well as one other drug not the subject of these lawsuits.

Mylan entered into contracts with Profarmaco and Gyma such that these companies would license exclusively to Mylan for 10 years. The exclusive licenses would provide Mylan with complete control over Profarmaco's entire supply of lorazepam API and clorazapate API entering the U.S. With complete control of Profarmaco's supply of these products and by refusing to sell to any of its competitors, Mylan would deny its competition access to the most important ingredient for producing lorazepam and clorazapate tablets.

In return for the 10-year exclusive licenses, Mylan offered to pay Cambrex, Profarmaco and Gyma a percentage of gross profits on sales of lorazepam and clorazapate tablets, regardless of who Mylan purchased the API from. Mylan also tried to execute an exclusive licensing arrangement with SST for control of its lorazepam supply. This is significant because Mylan was not authorized by the FDA to sell lorazepam manufactured with SST API (i.e. Mylan's ANDA did not reference SST's DMF). Thus, the States allege that Mylan was entering into a deal for exclusive rights even though it would not have been able to use SST API until after an ANDA Supplement had been completed, which usually takes around 18 months. The plaintiffs' argue that Mylan's attempt to obtain control over SST's supply, when Mylan could not even use SST API, demonstrates the anti-competitive nature of Mylan's actions.

On or around January 12, 1998, Mylan raised its price of clorazepate tablets to State Medicaid programs, wholesalers, retail pharmacy chains and other customers by amounts ranging approximately from 1,900 percent to over 3,200 percent, depending on the size of the bottle and the strength. On March 3, 1998, Mylan raised its price of lorazepam tablets by amounts ranging from approximately 1,900 to 2,600 percent. Shortly thereafter, SST raised the price of lorazepam API by approximately 19,000 percent. SST sold the lorazepam API to Geneva, one of Mylan's competitors, which raised its prices to approximately the price of Mylan's tablets.

II. DISCUSSION

A. Standard of Judgment

Under Fed.R.Civ.P. 12, a claim should not be dismissed "unless it appears beyond doubt that the plaintiff can prove no set of facts in support of his claim which would entitle him to relief." Conley v. Gibson, 355 U.S. 41, 45-46, 78 S.Ct. 99, 2 L.Ed.2d 80 (1957). In evaluating plaintiffs' complaints, the Court must accept the factual allegations as true and draw reasonable inferences therefrom in favor of plaintiffs. Square D. Co. v. Niagara Frontier Tariff Bureau, Inc., 476 U.S. 409, 411, 106 S.Ct. 1922, 90 L.Ed.2d 413 (1986).

B. FTC v. Mylan Labs

  1. Defendants' Motion to Dismiss Under Rules 12(b)(1) and
    12(b)(6)

Defendants have moved to dismiss the complaint in the FTC Action because of a lack of subject matter jurisdiction. See Fed.R.Civ.P. 12(b)(1). According to defendants, this Court lacks subject matter jurisdiction under § 13(b) of the FTC Act for two reasons: (1) § 13(b) does not authorize the FTC to seek a permanent injunction in an antitrust case such as this one; and (2) § 13(b) does not permit monetary relief such as the disgorgement of profits sought in this case. These claims are addressed in turn.

a. Permanent Injunction

The first issue is whether § 13(b) of the FTC Act permits the FTC to seek a permanent injunction in an antitrust case. Section 13(b) states:

Temporary restraining orders; preliminary injunctions

(b) Whenever the Commission has reason to believe-

  (1) that any person, partnership or corporation is
  violating, or is about to violate any provision of
  law enforced by the Federal Trade Commission, and
  (2) that the enjoining thereof pending the issuance
  of a complaint by the Commission and until such
  complaint is dismissed by the Commission or set aside
  by the court on review, or until the order of the
  Commission made thereon has become final, would be in
  the interest of the public-
  the Commission by any of its attorneys designated by
  it for such purpose may bring suit in a district
  court of the United States to enjoin any such act or
  practice. Upon a proper showing that, weighing the
  equities and considering the Commission's likelihood
  of ultimate success, such action would be in the
  public interest, and after notice to the defendant, a
  temporary restraining order or a preliminary
  injunction may be granted without bond: Provided,
  however, That if a complaint is not filed within
  such period (not exceeding 20 days) as may be
  specified by the court after issuance of the
  temporary restraining order or preliminary
  injunction, the order or injunction shall be
  dissolved by the court and be of no further force and
  effect: Provided further, That in proper cases the
  Commission may seek, and after proper proof, the
  court may issue, a permanent injunction. Any such
  suit shall be brought in the district in which such
  person, partnership, or corporation resides or
  transacts business . . .

The FTC's authority to pursue an injunction in antitrust cases was considered by this Court in FTC v. Abbott Laboratories, 1992 WL 335442, 1992-2 Trade Cas. ¶ 69,996 (D.D.C. 1992) (Gesell, J.) dismissed on other grounds, 853 F. Supp. 526 (D.D.C. 1994). In that case, the Court permitted the FTC to pursue a permanent injunction in an antitrust case and rejected the argument that preliminary relief only was available under § 13(b). Id. at 68,833. The Court held that the permanent injunction proviso applies to "any provision of law" enforced by the Commission and then concluded that the antitrust case at issue, involving a price fixing conspiracy, "fell squarely within the jurisdiction of the Commission's law enforcement responsibilities" under § 5 of the FTC Act. Id.

This Court can find no reason to depart from the Abbott Labs holding. Defendants attempt to distinguish Abbott Labs on the ground that it involved a per se antitrust violation (i.e. a price fixing agreement), instead of a "rule of reason" antitrust violation, but this argument is unconvincing. Although the permanent injunction proviso speaks of "proper cases," there is nothing in the statute, regulations or case law restricting the statutory term "proper cases" to per se violations of the antitrust laws. Indeed, several courts have explicitly rejected such narrowing constructions. See, e.g., FTC v. Evans Products Company, 775 F.2d 1084, 1087 (9th Cir. 1985) (holding that the FTC may proceed under § 13(b) for any violation of a statute administered by the FTC); FTC v. H.N. Singer, 668 F.2d 1107, 1111 (9th Cir. 1982) (stating that "the district court has the power to issue a permanent injunction to enjoin acts or practices that violate the law enforced by the Commission."); FTC v. Virginia Homes Mfg. Corp., 509 F. Supp. 51, 54 (D.Md.) aff'd, 661 F.2d 920 (4th Cir. 1981). Accordingly, this Court finds that the permanent injunction proviso may be used to enjoin violations of "any provision of law" enforced by the FTC. 15 U.S.C. § 53(b)(1). Because § 5 of the FTC Act is a "provision of law enforced by the Federal Trade Commission," § 13(b) allows this Court to issue a permanent injunction. Defendants' motion is therefore denied on this issue.

b. Monetary Relief

The second issue is whether the FTC may pursue monetary relief in this action. In addition to an injunction prohibiting defendants' conduct and rescission of defendants' unlawful licensing arrangements, the FTC asks this Court to "order other equitable relief, including the disgorgement of $120 million plus interest." FTC Compl. at 22, ¶ 4. Defendants object to the FTC's request on the ground that § 13(b) does not authorize disgorgement or any other form of monetary relief.

It is true that the plain language of § 13(b) does not authorize the FTC to seek monetary remedies. See 15 U.S.C. § 53(b). The FTC argues, however, that monetary relief is a natural extension of the remedial powers authorized under § 13(b). Although courts are generally disinclined to find remedies beyond those that Congress has expressly granted, the equitable jurisdiction of a federal agency such as the FTC must be read in light of the principles articulated in Porter v. Warner Holding Co., 328 U.S. 395, 66 S.Ct. 1086, 90 L.Ed. 1332 (1946). In that case, the Supreme Court upheld the district court's authority to refund the illegal rent overcharges pursuant to § 205(a) of the Emergency Price Control Act of 1942, which expressly granted only the power to enjoin illegal practices. The Court wrote:

  [u]nless otherwise provided by statute, all the
  inherent equitable powers of the District Court are
  available for the proper and complete exercise of
  that jurisdiction. And since the public interest is
  involved in a proceeding of this nature,

  those equitable powers assume an even broader and
  more flexible character than when only a private
  controversy is at stake. Power is thereby resident in
  the District Court, in exercising this jurisdiction,
  "to do equity and to mould each decree to the
  necessities of the particular case."

Id. at 398, 66 S.Ct. 1086 (quoting Hecht Company v. Bowles, 321 U.S. 321, 329, 64 S.Ct. 587, 88 L.Ed. 754 (1944)) (citation omitted). The Porter Court went on to state:

  [T]he comprehensiveness of this equitable
  jurisdiction is not to be denied or limited in the
  absence of a clear and valid legislative command.
  Unless a statute in so many words or by a necessary
  and inescapable inference restricts the court's
  jurisdiction in equity, the full scope of that
  jurisdiction is to be recognized and applied. "The
  great principles of equity, securing complete
  justice, should not be yielded to light inferences or
  doubtful conclusions."

Id. (quoting Brown v. Swann, 35 U.S. (10 Pet.) 497, 9 L.Ed. 508). The Supreme Court affirmed the Porter principle in Mitchell v. Robert DeMario Jewelry, Inc., 361 U.S. 288, 291-92, 80 S.Ct. 332, 4 L.Ed.2d 323 (1960). The Court wrote:

  When Congress entrusts to an equity court the
  enforcement of prohibitions contained in a regulatory
  enactment, it must be taken to have acted cognizant
  of the historic power of equity to provide complete
  relief in light of the statutory purposes. As this
  Court long ago recognized, `there is inherent in the
  Courts of Equity a jurisdiction to . . . give effect
  to the policy of the legislature.' Clark v. Smith,
  38 U.S.(13 Pet.) 195, 203, 10 L.Ed. 123.

Id.

Based on the principle of statutory construction set forth in Porter and reaffirmed in DeMario, five courts of appeals and numerous district courts have permitted the FTC to pursue monetary relief under § 13(b). See FTC v. Febre, 128 F.3d 530, 534 (7th Cir. 1997); FTC v. Gem Merchandising, 87 F.3d 466, 470 (11th Cir. 1996); FTC v. Pantron, 33 F.3d 1088, 1102 (9th Cir. 1994); FTC v. Security Rare Coin, 931 F.2d 1312 (8th Cir. 1991); FTC v. Southwest Sunsites, Inc., 665 F.2d 711 (5th Cir. 1982); see also Federal Trade Commission v. R.A. Walker & Assocs., No. 83-2138, 1991 WL 185162, 1991 U.S. Dist. LEXIS 14114 (D.D.C. July 26, 1991). Although the precise form of monetary relief differs among the cases, compare Security Rare Coin, 931 F.2d at 1316 (restitution) with Southwest Sunsites, 665 F.2d at 718 (asset freeze pending further proceedings), at least one court has upheld the FTC's ability to seek disgorgement in the courts. See Gem Merchandising, 87 F.3d at 470 ("We conclude that section 13(b) permits a district court to order a defendant to disgorge illegally obtained funds"). As defendant cites no relevant case law that prohibits the FTC from seeking disgorgement or any other form of equitable ancillary relief, the Court denies defendants' motion on this issue.

C. State of Connecticut v. Mylan Labs

  1. Defendants' Motion to Dismiss Under Rules 12(b)(1) and
    12(b)(6)

This motion seeks to dismiss the State complaint insofar as the complaint asserts improper legal theories and requests for relief. Defendants' claims are that: (1) the States' request for monetary relief based on purchases from suppliers other than Mylan is not authorized under federal antitrust law; (2) the States' request for restitution and/or disgorgement should be dismissed because it is not authorized by Section 16 of the Clayton Act and it conflicts with the detailed scheme of antitrust remedies enacted by Congress, as well as the principles enunciated in Illinois Brick v. Illinois, 431 U.S. 720, 97 S.Ct. 2061, 52 L.Ed.2d 707 (1977); and (3) many of the supplemental state law claims must be dismissed because the state statutes do not permit injunctive and/or monetary relief under the facts of this case. These claims are considered in turn.

a. "Umbrella Liability"

The State complaint seeks to recover damages not only for direct purchases from Mylan, but also for purchases from Mylan's competitors. See State Compl. ¶ 50. The premise of the States' request is that Mylan's competitors in the generic drug industry, though not parties to the exclusive licenses nor members of the alleged conspiracy, raised their prices as a consequence of Mylan's actions. The States argue that defendants should be liable for the difference between the prices charged by Mylan's competitors and what those prices would have been had Mylan not raised its prices pursuant to an illegal agreement.

The "price umbrella" theory of antitrust liability presented by the States has not been considered by this Circuit or the Supreme Court. Three circuits have addressed this theory. In Mid-West Paper Products Co. v. Continental Group Inc., 596 F.2d 573 (3d Cir. 1979), the Third Circuit held that the antitrust plaintiffs in that case did not have standing to seek relief for purchases from non-conspirators. The court rejected the umbrella theory for three reasons. First, the court found that ascertaining damages under such a theory would be "highly conjectural," as the court would need to estimate what portion of the non-conspirators' price increases was attributable to market forces and what portion was fueled by the defendants' anti-competitive conduct. Id. at 584-85 ("it cannot readily be said with any degree of economic certitude to what extent, if indeed at all, purchasers from a competitor of the price-fixers have been injured by the illegal overcharge."). Second, the court found that determining the effect of defendants' overcharges upon their competitors' prices would transform the litigation into the sort of complex economic proceeding that the Supreme Court in Illinois Brick v. Illinois, 431 U.S. 720, 97 S.Ct. 2061, 52 L.Ed.2d 707 (1977), counseled courts to avoid.*fn3 Id. at 585. Finally, the court wrote that permitting a purchaser from a competitor of the defendants to sue the defendants for treble damages was incompatible with the antitrust goal of maintaining a competitive economy. Id. at 586. For these reasons, the court held that purchasers from competitors of price-fixing defendants may not seek damages under an umbrella theory of liability.

The Fifth Circuit reached the opposite conclusion regarding umbrella liability in In re Beef Industry Antitrust Litigation, 600 F.2d 1148 (5th Cir. 1979), cert. denied, 449 U.S. 905, 101 S.Ct. 280, 66 L.Ed.2d 137 (1980). The Beef Industry court addressed the umbrella theory in a footnote, which states that an umbrella-type injury (i.e. paying higher prices due to "price following" by non-conspirators) "satisfies the test for proximate causation." Id. at 1166 n. 24. Accordingly, the Beef Industry court held that the antitrust plaintiffs in that case had standing to sue the defendants for purchases from non-conspirators.

The second basis of the Petroleum Products decision was that claims based on umbrella liability are "unacceptably speculative and complex." Id. at 1341. Echoing the Mid-West Paper decision, the court found that "any attempt to ascertain with reasonable probability whether the non-conspirators' prices resulted from the defendants' purported price-fixing conspiracy or from numerous other considerations" would be necessarily speculative.*fn6 Id.

In light of Mid-West Paper and Petroleum Products, the Court will grant defendants' motion to dismiss the States' complaint insofar as it seeks umbrella damages. The main difficulty with the umbrella theory is that, even in the context of a single level of distribution, ascertaining the appropriate measure of damages is a highly speculative endeavor. There are numerous pricing variables which this Court would be bound to consider to approximate the correct measure of damages, including the cost of production, marketing strategy, elasticity of demand, and the price of comparable items (i.e. the brand versions of lorazepam and clorazepate). See Gross v. New Balance Athletic Shoe, 955 F. Supp. 242, 246 (S.D.N.Y. 1997). (dismissing umbrella liability claims as "the causal connection between the alleged injury and the conspiracy is attenuated by significant causative factors (i.e. independent pricing decisions of non-conspiring retailers)"). The interaction of these variables is uncertain. As noted in Hanover Shoe, 392 U.S. at 492-93, 88 S.Ct. 2224, "[a] wide range of factors influence a company's pricing policies. Normally the impact of a single change in the relevant conditions cannot be measured until after the fact; indeed a businessman may be unable to state whether, had one fact been different . . . he would have chosen a different price." A judicial ...


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