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The Wide-Ranging Effects of the Federal Circuit’s Assault on Skinny Labels

December 4, 2020

Authors: Amy L. Baker, William Tolin Gay, Tawana B. Johnson

The U.S. Federal Circuit Court of Appeals recently issued an opinion that effectively strips generic drug manufacturers of the ability to avoid inducement lawsuits through the use of skinny drug labels. The opinion may have a significant negative effect on the generic drug industry because it seemingly creates new liability exposure where none previously existed. It is important for anyone involved in the generic drug market to understand the effect that this opinion will have on their business interests.

The Hatch-Waxman Act
Generic drugs have an abbreviated pathway for Food and Drug Administration (FDA) approval under the Drug Price Competition and Patent Term Restoration Act of 1984 (Hatch-Waxman Act), which was intended to expedite the process of bringing generic drugs to market. Under the Act, the manufacturer of a generic drug can file an abbreviated new drug application (ANDA) that relies on the safety information submitted to the FDA by the manufacturer of the brand-name drug. Instead of proving the drug’s safety, the generic manufacturer only needs to prove to the FDA that its product is bioequivalent to the brand-name drug. The generic drug must have the same active ingredient, dosage form, strength, route of administration and labeling as the FDA-approved brand-name drug.

Congress was mindful of the delicate balance between expediting the arrival of low-cost generic drugs on the market and incentivizing innovation by protecting the patent rights of the brand-name drug manufacturers. The Hatch-Waxman Act requires a generic manufacturer to certify that its generic drug will not infringe the patents covering the brand-name drug, and permits a brand manufacturer to sue a generic manufacturer for infringement based on the information contained in the generic’s ANDA and proposed label. In exchange, Congress created a pathway for a generic manufacturer to seek FDA approval and subsequently market and sell a generic drug for the uses that are not patent-protected. In other words, if a brand-name drug is indicated for three different types of use but only one of those uses is covered by a patent, the generic manufacturer can seek FDA approval just for the non-patented uses. To do this, the generic would “carve out” from its label the indications for use that are patent protected (referred to as a Section iii carveout). The resulting label often is referred to as a “skinny label” because it is shorter than the branded drug’s label. Thus, under the Act, a generic drug that is bioequivalent to a branded drug can market non-patented indications for use without infringing any remaining patents covering the brand-name drug.

Case Background
Given the clear statutory authority to bring a generic drug to market with a skinny label, it is more than a little confusing that the Federal Circuit upheld a jury verdict finding that a skinny label infringed the patented use that had been omitted from the label. The case involved an effort to bring a generic beta blocker to market through the procedures authorized by the Hatch-Waxman Act. The brand-name beta blocker was approved by the FDA for treatment of hypertension, congestive heart failure, and later for treatment of post‒heart attack left ventricular dysfunction. All three indications for use were patented.

The generic drug obtained FDA approval for the treatment of hypertension and left ventricular dysfunction after the brand patents for those uses expired. The generic drug used a skinny label that carved out the indication for use to treat congestive heart failure. In approving the generic beta blocker, the FDA determined that the generic was “AB rated,” which means that it was bioequivalent to the brand-name drug.

The generic manufacturer published prescribing references and listed the generic in a product catalogue. The generic drug was listed either as the AB-rated equivalent to the brand-name drug or as the generic of the brand-name drug. The generic did not advertise or recommend use for congestive heart failure.

Four years after approving the generic drug, the FDA directed the generic manufacturer to change its label to include the indication for use in congestive heart failure. The generic manufacturer complied but did not change any of its product descriptions or otherwise alter the manner in which the generic drug was sold.

Three years later, the brand manufacturer sued the generic manufacturer for induced infringement of the patent for use in congestive heart failure. The brand manufacturer alleged that marketing the generic drug under a skinny or full label as the AB-rated equivalent or as the generic version of the brand-name drug encouraged physicians to prescribe the generic drug for treatment of congestive heart failure. The jury agreed and found that the generic drug manufacturer had induced infringement of the patent.

After the trial, the district court granted the generic’s motion for judgment as a matter of law because the brand manufacturer had not introduced evidence that the generic manufacturer advertised or promoted the drug for use in congestive heart failure during the period that the skinny label was used, and that physicians had not relied on (or even read) the full label. The brand manufacturer appealed to the Federal Circuit, which reversed the district court and reinstated the jury’s verdict.

The Federal Circuit’s Rationale for Finding Evidence of Inducement to Infringe
The Federal Circuit’s opinion essentially nullified the Section iii carveout permitted by the Hatch-Waxman Act without so much as acknowledging that it was doing so. Although the jury separately found induced infringement on the basis of the skinny and full labels, the Federal Circuit’s analysis does not distinguish between the skinny and full labels.

The Federal Circuit noted that the criteria for induced infringement are met when the provider of an identical product knows of and markets the product for intended direct infringing activity. It further noted that the content of an FDA-approved label can establish the inducement to infringe. In so holding, the Federal Circuit relied on Vanda Pharmaceuticals, Inc. v. West-Ward Pharmaceuticals International Ltd., and Sanofi v. Watson Laboratories, Inc., neither of which involved the use of a skinny label.

The Federal Circuit apparently determined that sufficient evidence of inducement could be found in the generic manufacturer’s acknowledgement that it still would receive sales where the physician prescribed the generic drug for treatment of congestive heart failure, despite the skinny label carving out this use. The Federal Circuit’s analysis focused heavily on the generic manufacturer’s description of its drug as an AB-rated equivalent or a generic of the branded drug, which could cause physicians or pharmacists to elect to substitute the generic for any indication of the brand-name drug, including congestive heart failure.

However, as noted by the district court as well as by Chief Judge Prost in her lengthy dissent, the AB rating reports that the generic drug is therapeutically equivalent only “if the generic drug is used in accordance with the label.” Thus, the generic manufacturer could not have induced infringement by virtue of describing its drug as an AB-rated equivalent during the time that it used a skinny label, which did not discuss the use for congestive heart failure. Physicians have the right to prescribe medication “off label” (for uses other than what is described in the label), and manufacturers generally are not liable for this conduct unless they somehow encouraged the off-label use. The Federal Circuit’s decision holds a manufacturer liable simply for knowing that a physician might prescribe a drug in an off-label manner, without any active encouragement of the physician’s behavior directly or indirectly.

Effect of the Federal Circuit’s Decision on the Use of Skinny Labels
The potential effect of the Federal Circuit’s decision could prove to be enormously problematic for generic drug manufacturers. As Judge Prost described, “[b]y finding inducement based on [a] skinny label, which was not indicated for – and did not otherwise describe – the patented method, the Majority invites a claim of inducement for almost any generic that legally enters the market with a skinny label.” If a generic drug manufacturer can be held liable for induced infringement by doing nothing other than complying with the statutory scheme to bring a drug to market using a Section iii carveout, this may reduce the incentive to use the carveout provision. Thus, the Federal Circuit’s decision might substantially limit the ability of generic drug manufacturers to bring a generic to market for non-patented uses if there are any remaining patented uses for the branded drug.

Even reading the decision narrowly, to find inducement to infringe only where a skinny label is used in conjunction with advertising the AB rating of the generic drug, the decision still affects the vast majority of skinny labels. Most of the generic drugs currently on the market are AB-rated equivalents of the brand-name drug to which they relate, and the AB rating is the standard method of identifying a generic drug. Even with a narrow interpretation, the Federal Circuit’s opinion imposes onerous requirements on a generic using a skinny label – to not have knowledge that the generic could be substituted for the branded drug for a patented use, and to not identify the nature of the generic to prescribing physicians or pharmacists.

Affirmatively advising prescribers that a drug is not approved for carved out indications does not seem to be a viable solution to the problem that the Federal Circuit has created. It is understood within the industry that drugs are approved by the FDA only for the uses listed on the label. Likewise, it is understood that the AB rating means that the FDA has determined a generic drug to be therapeutically equivalent to a branded drug. To affirmatively advise physicians or pharmacists of either point would be stating the obvious. An affirmative message to physicians or pharmacists with this information is unlikely to change their prescribing habits or their willingness to substitute a generic drug with a skinny label for a brand-name drug. Consequently, an affirmative message would not avoid the knowledge by the generic manufacturer that their generic will continue to be substituted for the branded drug even for off-label, patented uses.

Immediate Steps for the Industry
This decision dramatically changes the risk exposure for generic manufacturers that have a drug on the market with a skinny label. The Federal Circuit has paved the way for a potential finding of induced infringement against every skinny-label drug. In many instances, these generic drugs have been on the market for years, and therefore have years of potential exposure. In other situations, generic manufacturers may have expended significant resources preparing to bring a generic drug to market under the reasonable belief that the generic can use a skinny label, only to be faced with the potential for inducement if they proceed to bring the generic to market before all of the method-of-use patents have expired (and assuming none are reissued), resulting in an additional delay of years.

Generic drug manufacturers should consider strategies to protect themselves from this new liability, particularly for past actions that cannot at this point be altered. This can be explored through maintaining additional liquidity or procuring insurance that may cover induced infringement claims. For drugs currently on the market with a skinny label, a generic manufacturer may consider reviewing their product labeling and marketing materials for language that could suggest that a generic would be a therapeutic substitute for the brand-name drug for a patented use. Although it is not clear that disclaimer language would be sufficient to preclude a finding of inducement, manufacturers should consider whether a disclaimer is appropriate based on the content of their advertising.

Because this decision has a significant effect on the liability exposure of generic manufacturers, any due diligence involving the generic manufacturer should take this ruling into consideration. Merger and acquisition activity and private equity buyouts are common in the generic drug industry. The due diligence analysis for this type of activity should include a specific analysis of any drugs that are currently or have been on the market using a skinny label in the past six years to determine the potential for induced infringement for those drugs. On the sell side, the seller may wish to carve out the effect of this decision in their response to the buyer’s due diligence request. By the same token, a seller’s counsel may wish to include a corresponding exception in any legal opinion letter given at closing. The analysis also needs to include the potential liability for drugs that are about to enter the market under a skinny label.

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