This Fall 2019 issue focuses on “Global Considerations for Estate Planning”:

• International Privacy Protections: Closer to Home Than You Might Think, by Michael Reif and Tim Billion
• International Estate Planning: Using a Qualified Domestic Trust (QDOT) for Non-U.S. Citizen Spouses, by Matthew Frerichs
• The Day “La Musique” Died. Let the Litigation Roll. by Shira Shapiro

This issue includes the following:

• JUUL and the Youth Vaping Epidemic
• Doctors Owe A Duty of Care Whenever There is a Foreseeable Risk of Harm to a Patient
• Mass Tort Investigations
• Child Se Abuse Litigation Update
• Results and Recognition & Awards
• Firm Events

Case Name: Bausch Health Cos. v. Actavis Labs. FL, Civ. No. 16-9038 (SRC), 2019 U.S. Dist. LEXIS 118876 (D.N.J. July 17, 2019) (Chesler, J.)

Drug Product and Patent(s)-in-Suit: Relistor® (methylnaltrexone bromide); U.S. Patent No. 8,524,276 (the ’276 patent)

Nature of Case and Issue(s) Presented: Plaintiffs own the ’276 patent, which claims the oral methylnaltrexone bromide tablet formulation sold as the constipation drug Relistor. Actavis filed an ANDA for its own methylnaltrexone bromide tablet, and plaintiffs filed suit. Two issues were presented at trial: (i) whether defendants infringed claim 2; and (ii) whether claims 2 and 5 were invalid as obvious. After a four-day bench trial, the court found that Actavis infringed claim 2 and that claims 2 and 5 were not obvious.

Why Plaintiffs Prevailed: Claim 2 of the ’276 patent requires that sodium dodecyl sulfate (SDS) form an ion pair with methylnaltrexone, or a pharmaceutically acceptable salt thereof. The parties stipulated that SDS is also known as sodium lauryl sulfate (SLS). Plaintiffs argued that the combination of methylnaltrexone and SLS, as the ’276 patent teaches, results in an increased apparent octanol/water partition coefficient (APC) of the methylnaltrexone. This increased APC allows for greater permeability of the constipation drug. Plaintiffs’ expert tested the Actavis ANDA product samples and observed an increased APC. Plaintiffs argued the increased APC of Actavis’s ANDA product evinced ion pairing between methylnaltrexone and SLS as required by claim 2.

In rebuttal, Actavis argued that the APC test run by plaintiffs’ experts was unreliable and unprecedented for determining whether two substances in a tablet from an ion pair in solution. That expert admitted he could not determine whether the increased APC was due to ion pairing or a different interaction. Further, Actavis argued the APC test could not determine whether two substances in a tablet form an ion pair in solution. Another of Plaintiffs’ experts responded that an increase in APC is the standard way to show ion pairing.

The court found that Actavis’s ANDA product combined methylnaltrexone and SLS to form an ion pair as required by claim 2. The court dismissed Actavis’s argument that an increase in APC does not necessarily demonstrate ion pairing. Rather, the court gave significant weight to plaintiffs’ experimental evidence that the APC of methylnaltrexone was significantly greater in Actavis’s ANDA product than a product without SLS. The court also disagreed with Actavis about whether APCs can be determined for ingredients within tablets. The court found that the ’276 patent requires APC determination and rejected all of Actavis’s challenges to plaintiffs’ infringement case with one exception: the general caution that questions remain around the change in the APC of methylnaltrexone where combined with multiple excipients. Examining plaintiffs’ experiments, the court found that ion pairing of methylnaltrexone and SLS caused the increase in the APC of the ANDA product. Thus, plaintiffs proved infringement of claim 2 (the parties stipulated to infringement of claim 5).

Turning to Actavis’s obviousness arguments, claim 5 teaches that at least 50% of the tablet comprising methylnaltrexone, or a pharmaceutically acceptable salt thereof, and SDS dissolves in a dissolution apparatus. Actavis argued that oral formulations containing methylnaltrexone were known in the art at the time FDA approved Relistor, as were the permeability issues surrounding methylnaltrexone. Actavis argued a POSA would have been motivated to develop an oral formulation of methylnaltrexone and would have been motivated to utilize a known permeation enhancer, the excipient SLS, to address those issues. Plaintiffs responded that the prior art recognized that ion pairing was uncommon and controversial, and any ion pairing between methylnaltrexone and SLS could only be known via testing. Further, Plaintiffs showed that increasing partitioning, as shown in prior art, does not necessarily increase permeability. Finally, plaintiffs explained that the formulation of methylnaltrexone and SLS dramatically improved efficacy, yielding much faster clinical laxation results than tablet formulation without SLS. Actavis argued this could not be evidence of objective indicia of non-obviousness because plaintiffs had not shown it to be unexpected as compared to the closest prior art.

In analyzing the obviousness question, the court first disagreed that methylnaltrexone had “poor” permeability. Rather, the court recognized that while the prior art shows methylnaltrexone may have lower lipid-solubility than other antagonists, it does not support that its solubility is deficient or poor. The court found that low bioavailability of methylnaltrexone, as shown by the prior art relating to plasma bioavailability, provided no evidence as to its permeability. Instead, the court determined that hindsight guided Actavis’s theory.

The court also took issue with Actavis’s argument that SLS would have been a POSA’s clear choice to improve permeability and bioavailability of methylnaltrexone. First, the proposition lacked the factual support that methylnaltrexone had poor permeability. Second, Actavis’s expert relied on prior art categorizing, identifying, and formulating approaches for oral bioavailability problems. The court found the prior art taught away from increasing bioavailability. Further, while one of the mentioned “bioavailability problems” was “poor membrane permeation,” a POSA would not even have sought this prior art, because methylnaltrexone was not known to have bioavailability problems. The court similarly found that, because a POSA would not have recognized methylnaltrexone as having poor permeability, it would not be obvious to select SLS in particular as a permeation enhancer. The court also credited plaintiffs’ argument that the prior art taught away from combining SLS with methylnaltrexone.

Case Name: Forest Labs., LLC v. Sigmapharm Labs., LLC, No. 14-1119- MSG (consol.), 2019 U.S. Dist. LEXIS 131304 (D. Del. Aug. 6, 2019) (Goldberg, J.) 

Drug Product and Patent(s)-in-Suit: Saphris® (asenapine maleate); U.S. Patent No. 5,763,476 (“the ’476 patent”)

Nature of the Case and Issue(s) Presented: In September 2014, Forest initiated several lawsuits against ANDA holders alleging infringement of the ’476 patent, which requires that a pharmaceutical composition “disintegrate within 30 seconds in water at 37° C.” Sigmapharm’s first ANDA had a disintegration of “not more than 5 minutes” (0 .1. 409 at 5, 7). In August 2015, FDA rejected that specification because the disintegration time was not “within seconds” as required by the Saphris label. In February of 2016, Sigmapharm amended its disintegration specification to “not more than 75 seconds.” In May 2016, three months before trial was scheduled to start, Sigmapharm again amended its disintegration specification to “35 to 75 seconds.” In order to give Forest time to take additional discovery regarding Sigmapharm’s latest change, the trial date for all defendants was moved from August 2016 to October 2016. In September 2016, the FDA rejected Sigmapharm’s latest specification, reiterating its recommendation that Sigmapharm reformulate its drug product so that it demonstrated “a disintegration time that is in-line with the labeling requirement of ‘within seconds.’” (D.I. 384-1 , Ex. 1 at ,i 32; PTX 629 at 2). As a result, trial on infringement as to Sigmapharm was stayed. The court proceeded to trial in October 2016 on infringement as to the remaining defendants and validity as to all defendants. In March 2017, Sigmapharm amended its specification by changing the single disintegration test to two separate tests and lowered the upper time limit to under one minute: “(1) at 30 seconds ‘fail’ USP (“the 30-Second Test”), and (2) at 55 seconds ‘pass’ USP (“the 55-Second Test”).

The parties proceeded to trial in June 2018. On November 16, 2018, the court issued a trial decision finding that Sigmapharm’s ANDA product literally infringed the ’476 patent. Instead of submitting a proposed form of final judgment, Sigmapharm amended its ANDA specification again, and filed a motion pursuant to Fed. R. Civ. P. 60(b) asking me to change the court’s infringement finding to that of non-infringement and enter final judgment in its favor. (D.I. 411 , Ex. A at 21 ). According to Sigmapharm, its newest specification changes the acceptance criteria under the 30-Second Test such that a batch of its tablets would not disintegrate within 30 seconds. The court denied Sigmapharm’s motion.

Why Forest Prevailed: During claim construction, the Court found that the ’476 patent expressly provided a definition of the term “rapid disintegration” to mean “the pharmaceutical composition is disintegrated within 30 seconds in water at 37° C., and preferably within 10 seconds, as measured according to the procedure described in Remington's Pharmaceutical Sciences, 18th Edition (Ed. A. R. Genaro) 1990 pp 1640-1641; see also US Pharmacopeia, Chapter 1.” Given this construction, it was unreasonable for Sigmapharm to expect that “failing” USP was conclusive proof that its generic product would not literally infringe. For one thing, the aforementioned construction related to claim 9, not claim 1. In addition, the words “pass” or “fail” appear nowhere in the claim construction order.

The court was also mindful of the fact that the Federal circuit has in certain instances approved a district court’s finding of non-infringement based on an ANDA amended after trial. But those cases, in particular the Ferring B.V. v. Watson Labs., Inc. case, are distinguishable.

Finally, although the court declined to enter final judgment in Sigmapharm’s favor, it questioned the value of entering judgment in Forest’s favor given the fact that Sigmapharm’s fourth specification iteration was no longer operative and there hasn’t been a trial on its latest specification. Thus, Sigmapharm has two options: (i) have a final judgment entered based on the November 16, 2018 opinion addressing Specification 4 and appeal that judgment to the Federal Circuit, or (ii) request that the court reinstate discovery litigate the merits of its latest specification.

Case Name: Valeant Pharms. N. Am. LLC v. Zydus Pharms. (USA) Inc., Civ. No. 18-13635, -14305 (PGS)(LHG), 2019 U.S. Dist. LEXIS 151891 (D.N.J. Aug. 13, 2019) (Sheridan, J.) 

Drug Product and Patent(s)-in-Suit: Jublia® (Efinaconazole topical solution 10%); U.S. Patents Nos. 7,214,506 (“the ’506 patent”), 8,039,494 (“the ’494 patent”), 8,486,978 (“the ’978 patent”), 9,302,009 (“the ’009 patent”), 9,566,272 (“the ’272 patent”), 9,662,394 (“the ’394 patent”), 9,861,698 (“the ’698 patent”) and 9,877,955 (“the ’955 patent”)

Nature of the Case and Issue(s) Presented: Plaintiffs sued multiple defendants who have filed ANDAs seeking to market a generic form of Jublia (efinaconazole topical solution, 10%).

Defendant Mylan Pharmaceuticals Inc. (“MPI”) is a corporation organized and existing under the laws of West Virginia, with its principal place of business located in West Virginia. Defendant Mylan Laboratories Ltd. (“MLL”) is a corporation organized and existing under the laws of India, with a place of business in Hyderabad, India. Mylan Inc. is a corporation organized and existing under the laws of Pennsylvania, having a place of business in Pennsylvania. Mylan Inc. is a parent corporation to several subsidiaries, including Agila Specialties Inc., which is located in New Jersey.

Plaintiffs allege infringement and seek declaratory judgments of infringement for each asserted patent. There is an identical, protective suit filed in the Northern District of West Virginia. That matter is stayed pending the D.N.J.’s decision on the propriety of venue. The court granted the Mylan defendants’ motion to dismiss for improper venue.

Why Mylan Prevailed: Plaintiffs had to show “both that Defendants committed acts of infringement in New Jersey, and that Defendants have a regular and established place of business in New Jersey.” Plaintiffs argued that MPI has taken steps to engage in future activities that will be purposefully directed at New Jersey. Specifically: (i) Mylan has committed acts of infringement in New Jersey through its submission of its ANDA; and (ii) Mylan has a regular and established place of business in New Jersey at minimum because its enterprise of related companies, commonly referred to as “One Mylan,” has a physical presence in this Judicial District, including the offices of its subsidiaries, clinical trial sites, and the homes of at least fourteen employees, whom Mylan admits work in New Jersey on behalf of Mylan.

The court found that the Hatch-Waxman Act treats the filing of an ANDA as an act of infringement, and therefore, because MPI electronically submitted the at-issue ANDA in West Virginia, MPI committed an act of infringement in West Virginia. Defendants and Plaintiffs disagree on whether “planned, future acts” of infringement shall be considered in determining whether a party has committed acts of infringement under § 1400(b). The temporal focus of the Hatch-Waxman infringement analysis is the future, not—as is true in essentially all other patent infringement suits—the past, or even the present. In a Hatch-Waxman suit, the subject of the dispute is the generic drug product that the defendant will manufacture and sell and offer for sale in the future. Plaintiffs argue that, should the FDA approve defendant MPI’s ANDA, each defendant will stand to benefit from such approval, and that MPI will direct product sales into New Jersey. But plaintiffs fail to show specifically how MLL and Mylan, Inc., as separate corporate entities, committed any act of infringement in New Jersey. Regarding defendant MPI, the court was not persuaded that the ANDA filer’s future, intended acts were included in the acts of infringement analysis. It was undisputed that defendant MPI submitted its ANDA application in West Virginia, to the FDA in Maryland. None of these actions occurred in New Jersey. Therefore, the court dismissed plaintiffs’ claims of infringement under the Hatch-Waxman Act.

Next, plaintiffs argued that venue was proper in New Jersey over the declaratory judgement claims because "[i]t has long been held that a declaratory judgment action alleging that a patent is invalid and not infringed … is governed by the general venue statutes, not by § 1400(b).” But, the court noted, no party was seeking invalidation of the patents. Instead, plaintiffs seek declaratory judgment that defendants infringed on its patents. Thus, because venue was improper for the infringement claims, the court found that venue was improper for the declaratory judgment claims as well. And even if venue was proper for those claims, it is within the court’s discretion to decline declaratory judgment jurisdiction.

Case Name: Galderma Labs L.P. v. Teva Pharms. USA, Inc., Civ. No. 17-1783-RGA (D. Del. Aug. 21, 2019) (Andrews, J.) 

Drug Product and Patent(s)-in-Suit: Soolantra® Cream 1% (ivermectin); U.S. Patents Nos. 9,089,587 (“the ’587 patent”) and 9,233,117 (“the ’117 patent”)

Nature of the Case and Issue(s) Presented: The asserted patents are directed to methods of treating papulopustular rosacea, which the court has construed as a “chronic inflammatory disorder characterized by facial papules, pustules, persistent erythema, and the presence of inflammatory infiltrates that accompany flares.” Galderma owns the NDA for Soolantra Cream 1% for the treatment of inflammatory lesions of rosacea. Ivermectin is an anti-parasitic drug derivative that has been approved for human use since 1996. Teva filed an ANDA seeking FDA approval for the commercial manufacture, use, and sale of a generic 1% ivermectin cream. Teva’s ANDA label states that the product is “indicated for the treatment of inflammatory lesions of rosacea.” Galderma then filed this action alleging infringement by Teva’s ANDA submission.

A 3-day bench trial was held where the court presided over the issues of validity and infringement of the asserted patents. Galderma asserted infringement of claim 12 of the ’587 patent, claims 2, 3, and 6 of the ’117 patent, and claims 6, 7, 10, and 11 of the ’118 patent. The parties stipulated to infringement of claim 6 of the ’118 patent. Teva argued that each of the asserted claims is invalid for lack of written description, anticipation, and obviousness. The court found each of the asserted claims invalid for anticipation.

Why Teva Prevailed: All of the asserted claims recite the same treatment method and various efficacy limitations relating to the results of the treatment method. The claimed treatment method comprises: “[1] topically administering, [2] once daily, [3] to a skin area affected by the inflammatory lesions of papulopustular rosacea [4] a pharmaceutical composition comprising about 1% by weight ivermectin and a pharmaceutically acceptable carrier.” The McDaniel prior art reference claims an invention relating to “a method for treatment of rosacea (acne rosacea) in humans employing orally-administered or topically-applied ivermectin.” McDaniel defines “Mosacea, originally termed acne rosacea,” as having clinical signs including “papules” and “pustules” which mirrors the court’s claim construction for inflammatory lesions of papulopustular rosacea. Although McDaniel describes its preferred embodiment as using oral ivermectin, it also explicitly discloses an embodiment using topical ivermectin. Therefore, McDaniel discloses every element of the claimed treatment method.

Galderma argues that McDaniel’s disclosure of “about 1-5% ivermectin” is not “sufficiently specific” to anticipate the asserted claims and is not connected to the once-daily dosing frequency. But there is no evidence that 1-5% is a particularly broad range for the purposes of the claimed treatment method. Galderma has made no allegation of criticality or provided any evidence demonstrating any difference across the range.

Aside from the treatment method, the only remaining limitations are those relating to efficacy. Therefore, McDaniel anticipates the asserted claims if the efficacy limitations are inherent to the treatment method. Galderma argued that McDaniel’s treatment of rosacea generally is insufficient for anticipation because it will not necessarily result in treatment of inflammatory lesions of papulopustular rosacea. Both McDaniel and the asserted claims state that the composition is applied to skin “affected by” rosacea. Therefore, both McDaniel and the asserted claims are directed to a method for treating rosacea. The asserted claims consist of the same steps described in McDaniel and are directed to the same use—treating inflammatory lesions of papulopustular rosacea. Using the same composition claimed by Galderma in the same manner claimed by Galderma naturally results in the same claimed skin benefits. Therefore, the claimed efficacies are nothing more than the natural result flowing from the explicit disclosure of the claimed treatment method.

Case Name: Amgen Inc. v. Amneal Pharms. LLC, No. 16-853-MSG (consol.), 2019 U.S. Dist. LEXIS 159358 (D. Del. Sept. 19, 2019) (Goldberg, J.)

Drug Product and Patent(s)-in-Suit: Sensipar® (cinacalcet HCl tablets); U.S. Patent No. 9,375,405 (“the ’405 patent”)

Nature of the Case and Issue(s) Presented: Amgen originally brought claims against different defendants, including Sun in response to Sun’s filing an ANDA for generic cinacalcet HCl tablets. The parties entered into a settlement agreement and stipulated to a dismissal of all claims against Sun. Part of that agreement set forth Amgen’s obligations if other manufacturers of generic cinacalcet entered the market at risk.

After the Amgen-Sun settlement, other defendants proceeded to trial, including Teva. The court found that Teva’s ANDA product would not infringe the ’405 patent, but at that time, Teva did not have approval to market its product. Once approved, Teva launched at risk infiltrating the market with approximately six-weeks-worth of generic cinacalcet. Shortly after its launch, Amgen and Teva reached a settlement whereby Teva acknowledged that its generic product infringed the ’405 patent and agreed that it would immediately cease sales. Importantly, downstream distributors who had received Teva’s generic product were not involved in these negotiations, nor were they parties to the agreement. In response, Sun filed its motion to enforce the settlement agreement, asserting that based on Teva’s market activity and Amgen’s deficient response, the agreement grants a license to Sun and allows it to launch and sell its generic product. Amgen opposed Sun’s motion. The court found that Sun has misconstrued its rights under the agreement, and that the agreement does not entitle Sun to a license to sell and market its generic Cinacalcet product.

Why Amgen Prevailed: The parties raise two issues: (i) Amgen argues that the court does not have subject matter jurisdiction to hear this dispute; and (ii) Sun argues that, based on Amgen’s deficient response to Teva’s market entry, it is entitled to a license to sell its ANDA product.

The court first addressed relevant portions of the settlement agreement. Sun principally relies on Section 5 of its agreement with Amgen that it is entitled to a license. Section 5.1 states that from “the Entry Date through the expiration of the last to expire claim of the Licensed Patents,” Sun will be given a right and license to “make, have made, use, sell, offer to sell, import and distribute the Defendant’s Product in or for the United States.” Section 5.2 defines the “Entry Date” as the earlier of certain events which are set forth in sections 5.2(a) and (b). Section 5.2(b) states that the “Entry Date” could be the earlier of “the Launch of a Generic Cinacalcet Product by a Third Party, Amgen, or an Amgen Affiliate, except as provided under Section 5.5.” Under the agreement, “Launch” means “first sale in the United States, with regard to a Generic Cinacalcet Product.” “Generic Cinacalcet Product” means “an oral drug product containing Cinacalcet HCL that is sold, offered for saleor distributed in the United States as an Authorized Generic or under an FDA finally approved ANDA that refers to and is AB rated with the Amgen Product as the reference-listed drug.” Finally, “Third Party” is defined as “any entity or person that is not a Party or an Affiliate of a Party.” Importantly, the last portion of Section 5.2(b) references Section 5.5. Section 5.5 outlines Amgen’s obligations if a Third Party engages in an “At-Risk Launch.”

With respect to the issue of subject matter jurisdiction, a district court has jurisdiction to enforce a settlement agreement entered into by litigants in a case pending before it. Here, Amgen has asserted its right to prevent Sun from entering the market. In a Jan. 2, 2019, letter, Amgen advised Sun that it had received information about an anticipated launch by Teva, and that subsequently Teva had agreed to cease selling its generic product. Amgen then affirmatively advised Sun that it is not “authorized to launch their Product pursuant to Paragraph 5.5(a), of the Litigation Settlement Agreement.” In response, Sun pressed its rights to a license, which Amgen opposed. Therefore, Sun has a reasonable apprehension of litigation should it choose to act on its interpretation of the agreement. Moreover, the fact that Sun’s counsel informed the court at oral argument that it was prepared to launch “in a couple weeks” further created a reasonable apprehension of litigation necessary to defeat Amgen’s lack of jurisdiction arguments. Finally, section 8.3 of the agreement states, “Defendants and Amgen agree that the United States District Court for the District of Delaware retains jurisdiction over this Settlement Agreement and that the Parties agree that they are subject to personal jurisdiction in District of Delaware and/or venue is proper in the District of Delaware with regard to all disputes concerning the Settlement Agreement.”

With respect to Sun’s argument that it is entitled to a license in view of Teva’s at-risk launch, that depended on whether Amgen was obligated to effectuate a cease and desist not only with Teva, after its brief launch, but also with distributors who had received Teva’s product. Sun argued that the broad definition of “Third Party” in the agreement includes not only Teva, but also third-party distributors who received and distributed the generic cinacalcet for a short period of time. And because Amgen did not enter into a cease and desist agreement with third-party distributors, Amgen has granted Sun a license to distribute its product. The court disagreed. While the definition of “third-party” is broad, it is meant to be read in line with section 5.5. Section 5.5(a)(i)(ii) requires Amgen to enter into a cease and desist with Teva, then Amgen may seek a TRO or PI if Sun enters the market. “Put another way, a license to Sun has not been granted.” There is no language in the agreement relating to third-party distributors nor is there any requirement that Teva police the entire market after its launch and settlement. Moreover, it is undisputed that distributors and resalers did not engage in an at-risk launch—only Teva did.

Case Name: Indivior Inc. v. Dr. Reddy’s Labs., S.A., No. 2017-2587, 2018-1010, -1058, -1062, -1114, -1115, -1176, -1177, -1949, -2045, 2019 U.S. App. LEXIS 20680 (Fed. Cir. July 12, 2019) (Circuit Judges Newman, Mayer, and Lourie presiding; Opinion by Lourie, J.; Dissent by Mayer, J.) (Appeal from D. Del., Andrews, J.)

Drug Product and Patent(s)-in-Suit: Suboxone® (buprenorphine / naloxone) Film; U.S. Patents Nos. 8,603,514 (“the ’514 patent”), 8,900,497 (“the ’497 patent”), 8,017,150 (“the ’150 patent”)

Nature of the Case and Issue(s) Presented: Indivior asserted three patents that cover its sublingually administered Suboxone film product. The ’514 and ’497 claim a method of using only bottom heat to create a uniform distribution of API in a pharmaceutical film. The ’150 patent claims a pharmaceutical film composition comprising API, polyethylene oxide, and hydrophilic cellulosic polymer (“HCP”).

The district court held four bench trials. In the first trial, defendant Watson did not seek construction of the bottom-heat drying limitation of the ’514 patent. The district court found that Watson infringed and that the asserted claims were not invalid as indefinite. In the second and third trials, respectively, Dr. Reddy’s Laboratories (“DRL”) and Alvogen Pine Brook (“Alvogen”) obtained constructions of the ’514 and ’497 patents that excluded drying methods that solely use conventional top drying techniques. Based on this construction, both ANDA products were found not to infringe. The district court ruled that the patents were not invalid as obvious. In the fourth trial, DRL was found not to infringe the ’150 patent under the doctrine of equivalents.

Why defendants DRL and Alvogen Prevailed: On appeal, concerning the district court’s finding of non-infringement of the ’514 and ’497 patents, Indivior made two primary arguments: (i) that the district court incorrectly construed the drying limitation; and (ii) even under this construction, Indivior sufficiently demonstrated infringement. As to the former, the Federal Circuit explained that the district court’s construction was correct because the patent specifications and prosecution history made express statements that repeatedly disparaged conventional top drying methods. As to the latter argument, the Federal Circuit explained that the district court did not err in determining that the sole source of heat in the drying process was hot air coming from above the film and that any bottom drying was merely incidental.

With respect to the district court’s finding that DRL did not infringe the ’150 patent, Indivior argued that the district court erred in finding that DRL’s use of polyvinyl pyrrolidone (“PVP”) did not infringe the HCP limitation under the doctrine of equivalents.  The Federal Circuit disagreed, noting that the specification taught that PVP, an unclaimed embodiment, was an alternative to HCP. In other words, PVP was dedicated to the public, meaning it could not be recaptured through the doctrine of equivalents.

Why Indivior prevailed as against Watson: Watson argued that the district court erred in finding that its product infringed a viscosity limitation of the ‘514 patent. The Federal Circuit concluded that Watson could not demonstrate clear error in the court’s judgment and affirmed.

Finally, the Federal Circuit found that the ‘514 patent was not invalid as obvious. In particular, defendants failed to demonstrate that the prior art taught the claimed API limitations or that the prior art disclosed uniform dried films. The defendants also argued that the ʼ514 patent was invalid as indefinite because it recited a physical impossibility: “a flowable yet solid cast film.” The Federal Circuit disagreed, explaining that the flowable matrix is first flowable and then dried.

As to the ’150 patent, the Federal Circuit found that Indivior demonstrated sufficient written description support to claim priority to its original provisional application, thereby antedating DRL’s asserted art.

In his dissent, Judge Mayer stated that there was “no need for this court to reach the issue of infringement because the three patents … asserted by [Indivior] are invalid as obvious.” According to Judge Mayer, the ’497 and ’514 patents are obvious because before their priority dates, multiple prior art references taught both methods to manufacture sublingual films and techniques for achieving film content uniformity. With respect to the ’150 patent, it is obvious because the district court erred in concluding that it can claim priority to the 2003 filing date of its parent application, the ’902 application. In particular, the ’902 application nowhere conveys possession of the specific polymer component recited in independent claim 1 of the ’150 patent. That claim requires low molecular weight polyethylene oxide (“PEO”), high molecular weight PEO, and a hydrophilic cellulosic polymer (“HCP”), and further specifies that the low molecular weight PEO must be at least 60% of the polymer component and that the HCP can be no more than 25% of the polymer component. But the ’902 application does not suggest possession of a polymer component including at least 60% low molecular weight PEO and at most 25% HCP. For those reasons, the district court erred in concluding that lndivior was entitled to rely on the 2003 priority date of the ’902 application, the asserted claims of the ’150 patent are invalid as obvious.

Case Name: Eli Lilly and Co. v. Hospira, Inc., Nos. 2018-2126, -2127, 2128, 2019 U.S. App. LEXIS 23753 (Fed. Cir. Aug. 9, 2019) (Circuit Judges Lourie, Moore, and Taranto presiding; Opinion by Lourie, J.) (Appeal from S.D. Ind., Pratt, J.) 

Drug Product and Patent(s)-in-Suit: Alimta® (pemetrexed for injection); U.S. Patent No. 7,772,209 (“the ’209 patent”)

Nature of Case and Issue(s) Presented: Lilly markets the compound pemetrexed in the form of a disodium salt as Alimta®, which is indicated, both alone and in combination with other active agents, for treating certain types of non-small cell lung cancer and mesothelioma. Pemetrexed is an antifolate, a class of molecules which, at the time of the invention in 2001, was “one of the most thoroughly studied classes of antineoplastic agents.” Pemetrexed had been known for at least a decade in 2001. By 2001, Lilly had also published the results of several clinical trials investigating the use of pemetrexed disodium as a treatment for different types of cancer. The invention of the ’209 patent is an improved method of treatment with antifolates, particularly pemetrexed disodium, through supplementation with a methylmalonic acid lowering agent and folic acid. Doing so lessens antifolate toxicity without sacrificing efficacy.

DRL, Hospira, and Actavis submitted 505(b)(2) applications relying on Lilly’s clinical data for pemetrexed disodium. DRL and Hospira intended to market pemetrexed ditromethamine. In the DRL case, the district court construed the phrase “administration of pemetrexed disodium” to mean “liquid administration of pemetrexed disodium,” which "is accomplished by dissolving the solid compound pemetrexed disodium into solution.” The district court denied DRL’s motion for summary judgment of non-infringement, holding that prosecution history estoppel does not bar Lilly from asserting that DRL’s proposed pemetrexed ditromethamine product would infringe through the doctrine of equivalents because Lilly amended its claims to distinguish other antifolates and was therefore only tangential to pemetrexed ditromethamine. Following a bench trial, the district court’s opinion largely followed its rationale in the summary judgment decision. In addition, the court found that DRL’s proposed product would be administered in a manner that would meet that portion of the district court’s decision. Actavis agreed to be bound by the district court’s decision in the DRL case.

In the Hospira case, the parties similarly disputed the doctrine of equivalents, but Lilly also asserted literal infringement because Hospira’s proposed product label allows reconstitution of its pemetrexed ditromethamine salt in saline. After the district court issued the DRL summary judgment decision, Hospira conceded that its product would infringe under the relevant claim construction.

The Federal Circuit reversed the district court’s finding of literal infringement in the Hospira decision but affirm its judgment of infringement under the doctrine of equivalents. The judgment of infringement under the doctrine of equivalents in the DRL decision was also affirmed.

Why Lilly Prevailed: Hospira argued that it cannot literally infringe because intravenous administration of pemetrexed ditromethamine dissolved in saline is not “administration of pemetrexed disodium.” Lilly counters that Hospira’s view improperly imposes a “source limitation,” requiring that the pemetrexed disodium salt exist in solid form before administration, even though Hospira’s proposed product label, like that of Alimta, calls for administration of a solution containing pemetrexed anions and sodium cations. Lilly also contends that Hospira’s claim construction arguments are irrelevant because Hospira’s proposed product will be administered intravenously in any event. The Federal Circuit found that it was clearly erroneous for the district court to hold that the “administration of pemetrexed disodium” step was met because Hospira’s pemetrexed ditromethamine product will be dissolved in saline before administration. Pemetrexed disodium no longer exists once dissolved in solution, and, as a corollary, a different salt of pemetrexed dissolved in saline is not pemetrexed disodium. The Federal Circuit concluded that to literally practice the “administration of pemetrexed disodium” step under the district court’s claim construction, the pemetrexed disodium salt must be itself administered. Thus, the district court’s literal infringement finding must be reversed.

But infringement by equivalents was affirmed. Lilly does not dispute that the amendment in question was both narrowing and made for a substantial reason relating to patentability. The parties’ dispute about whether prosecution history estoppel applies is confined to whether Lilly’s amendment narrowing “an antifolate” to “pemetrexed disodium” was only tangentialto pemetrexed ditromethamine, which is the accused compound.

Defendants argued that Lilly failed to explain why it did not pursue a narrower amendment literally encompassing pemetrexed ditromethamine, and they emphasize that the tangential exception is “very narrow.” Moreover, defendants argued that Lilly cannot be said to have lacked the words to describe pemetrexed ditromethamine because Lilly’s previous patents, as well as the European ’209 patent counterpart, claimed pemetrexed salts generally and pemetrexed disodium in a dependent claim. In response, Lilly argues that the district court properly held that the reason for its amendment was to distinguish pemetrexed from antifolates generally and that the different salt type is a merely tangential change with no consequence for pemetrexed’s administration or mechanism of action within the body.

The Federal Circuit found defendants’ view of the tangential exception “too rigid.” The reason for Lilly’s amendment was to narrow original claim 2 to avoid a reference that only discloses treatments using methotrexate, a different antifolate. The particular type of salt to which pemetrexed is complexed relates only tenuously to the reason for the narrowing amendment, which was to avoid prior art. Whether an amendment was merely tangential to an equivalent must be decided in the context of the invention disclosed in the patent and the prosecution history. While an amendment that narrows an existing claim element evinces an intention to relinquish that claim scope, here, the Federal Circuit concluded that this consideration is not dispositive because the rest of the prosecution history, and the ’209 patent itself, show that it is implausible that the reason for Lilly’s amendment was to surrender other pemetrexed salts.

DRL next argued that the disclosure-dedication rule bars Lilly from asserting infringement under the doctrine of equivalents. DRL contends that pemetrexed ditromethamine was dedicated to the public when Lilly declined to claim it. Lilly counters that the disclosure-dedication rule requires express disclosure of the subject matter in question in the specification except in narrow circumstances, such as when that subject matter is disclosed in a priority application, or prior art expressly incorporated by reference. Lilly also argues that the district court correctly determined that the relevant portion of Akimoto discloses only a generic formula from which a skilled artisan would not be able to recognize pemetrexed ditromethamine.

The Federal Circuit held the disclosure-dedication rule inapplicable to this case because the ’209 patent does not disclose methods of treatment using pemetrexed ditromethamine, and, as a result, Lilly could not have dedicated such a method to the public. Moreover, the prior-art reference that Lilly incorporated by reference into the ’209 patent contains only a “generic reference” to pemetrexed ditromethamine, therefore that was not a dedication to the public.

Case Name: Sanofi-Aventis U.S., LLC v. Dr. Reddy’s Labs., Inc., No. 2018-1804, 2019 U.S. App. LEXIS 24141 (Fed. Cir. Aug. 14, 2019) (Circuit Judges Lourie, Moore, and Taranto presiding; Opinion by Lourie, J.) (Appeal from D.N.J., Shipp, J.) 

Drug Product and Patent(s)-in-Suit: Jevtana® (cabazitaxel); U.S. Patents Nos. 8,927,592 (“the ’592 patent”) and 5,847,170 (“the ’170 patent”)

Nature of the Case and Issue(s) Presented: The ’170 and ’592 patents claim the compound cabazitaxel and its method of use. Cabazitaxel treats certain drug resistant prostate cancers and belongs to a family of compounds known as taxanes. Prior to approving Jevtana, FDA had previously approved two other taxanes, including paclitaxel and docetaxel.

While the district court case was pending, the PTAB instituted IPR of the ’592 patent and, after trial commenced, the PTAB held claims 1-5 and 7-30 invalid as obvious. Sanofi appealed the Board’s decision denying its motion to amend, but did not appeal the decision that claims 7, 11, 16-16, and 26 were invalid as obvious. Instead, Sanofi filed a statutory disclaimer of those claims. After the disclaimer was filed, the district court entered its post-trial order, finding (i) that the statutory disclaimer did not divest the court of jurisdiction and that the claims of the ’592 patent were invalid as obvious, and (ii) that the ’170 patent was not invalid as obvious. 

Why Sanofi-Aventis prevailed: First, the Federal Circuit found that Sanofi’s disclaimer mooted any controversy over the ’592 patent. Defendants argued that vacating the district court’s decision would cause them to lose the possible benefit of an issue preclusion defense, should Sanofi obtain amended claims in the PTAB and later assert those claims against defendants. The Federal Circuit was unpersuaded, explaining that: (i) the relevance of the disclaimed claims to a possible issue preclusion defense was speculative; and (ii) even if relevant, defendants could not establish that the judgment pertaining to those claims was material to a possible future suit. The Federal Circuit noted that it could not issue an advisory opinion on a theoretical dispute.

With respect to the ’170 patent, the parties agreed that docetaxel was the closest prior art, but disagreed whether a POSA would have been motivated to replace the C7 and C10 hydroxyl groups of docetaxel with the methoxy groups of cabazitaxel. Defendants cited to literature contemplating this replacement, but the Federal Circuit was unpersuaded. In particular, the references investigated structurally different compounds and did not address taxanes. Further, the Federal Circuit agreed with the district court’s conclusion that Defendants’ expert cherry-picked data in the references and that a POSA would have been motivated to perform the substitution not just at the C7 and C10 position, but at any of C2, C4, C5, C7-C14, C2’, or C3’. Therefore, the district court did not err in rejecting the defendants’ obviousness challenge to the ’170 patent. 

Case Name: Nalpropion Pharms., Inc. v. Actavis Labs. FL, Inc., 934 F.3d 1344 (Fed. Cir. Aug. 15, 2019) (Circuit Judges Prost, Lourie, and Wallach presiding; Opinion by Lourie, J.; Dissent-in-part by Prost, C.J.) (Appeal from D. Del., Andrews, J.)

Drug Product and Patent(s)-in-Suit: Contrave® (bupropion and naltrexone); U.S. Patents Nos. 8,916,195 (“the ’195 patent”), 7,462,626 (“the ’626 patent”), and 7,375,111 (“the ’111 patent”)

Nature of Case and Issue(s) Presented: Contrave is a weight management drug comprised of extended-release bupropion and naltrexone tablets. The ’626 patent claims a method of treating obesity using an effective amount of bupropion and naltrexone. The ’195 patent is also directed to methods of treating obesity using specific dosages of sustained-release naltrexone and bupropion. The ’111 patent is directed to a pharmaceutical composition of sustained-release bupropion and naltrexone.

Nalpropion sued Actavis for infringement of the patents-in-suit after the filing of Actavis’s ANDA. Actavis counterclaimed, alleging a lack of written description in regards to the ’195 patent and obviousness in regards to the ’111 and ’626 patents. The district court found each patent valid and infringed. Actavis appealed and the Federal Circuit held the district court did not clearly err in finding the written description of the ’195 patent adequate. But the Federal Circuit reversed the district court’s holding that the ’111 and ’626 patents were not invalid based on obviousness. Chief Judge Prost dissented in part as to the majority’s written description finding.

Why Nalpropion Prevailed on the ’195 patent: Claim 11 of the ’195 patent claims a dissolution profile achieved using the USP Apparatus 2 Paddle Method, whereas the specification disclosed a profile achieved using the different USP Apparatus 1 Basket Method. Actavis argued the claim lacked written description support based on the differing methodology. The district court found that the difference in methods was irrelevant to whether the inventors possessed the invention. The Federal Circuit found no clear error in the district court’s finding that the specification showed the inventors possessed the invention of treating overweight or obesity with naltrexone and bupropion in particular amounts and adequately described it. The Federal Circuit noted the district court’s fact-finding allowed for the written description to be satisfied by an equivalent disclosure relating to dissolution parameters rather than operative claim steps.

Chief Judge Prost dissented on this issue. She read the USP Apparatus 2 Paddle Method language as limiting and would have found that the ’195 patent disclosure failed to disclose it. Chief Judge Prost declined to follow the substantially equivalent rule adopted by the majority for the written description requirement.

Why Actavis Prevailed on the ’111 and ’626 patents: The asserted claims require the administration of naltrexone and bupropion together or in a single dosage. Actavis argued it would have been obvious for a POSA to combine naltrexone and bupropion given the drugs’ ability to cause weight loss. The district court disagreed, finding that a POSA would not understand bupropion’s mechanism of action and that bupropion’s weight loss effects were modest at best. Further, the district court found a POSA would similarly not have understood naltrexone to have weight loss effects. The district court concluded a POSA would not have known that combination of bupropion and naltrexone would lead to weight loss.

On appeal, the Federal Circuit agreed with Actavis that the claims at issue would have been obvious to a POSA in view of two prior art references, O’Malley and Jain. The Court found that O’Malley disclosed that use of opioid antagonists including naltrexone, alone or with other attenuating agents including bupropion, may minimize weight gain. And it found that Jain, a research paper, taught that studies support the use of bupropion for weight loss. Jain described a double-blind study involving sustained-release bupropion administration for weight reduction. Thus, according to the Federal Circuit, a POSA would have been motivated to combine naltrexone and bupropion to produce the claimed composition in the ’111 patent and the method of the ’626 patent after reading the O’Malley and Jain references. Moreover, according to the Federal Circuit, the prior art showed POSAs already combined the two drugs, understanding bupropion to be safe and well tolerated without an understanding of the mechanism of action.

The Federal Circuit next considered objective indicia of non-obviousness. Nalproprion argued that others tried and failed to find a combination effective for weight loss and that the claimed combination exhibited unexpected results. The Federal Circuit found that the inventors only combined two drugs known to affect weight loss, and that their combined effect of affecting weight loss was not unpredictable.

Case Name: INO Therapeutics LLC v. Praxair Distribution Inc., 2019 U.S. App. LEXIS 25756 (Fed. Cir. Aug. 27, 2019) (Circuit Judges Prost, Newman, and Dyk presiding; Opinion by Prost, C.J.; Dissenting Opinion by Newman, J.) (Appeal from D. Del., Sleet, J.)

Drug Product and Patent(s)-in-Suit: INOmax® (nitric oxide); U.S. Patents Nos. 8,282,966 (“the ’966 patent”), 8,293,284 (“the ’284 patent”), 8,795,741 (“the ’741 patent”), 8,431,163 (“the ’163 patent”), and 8,846,112 (“the ’112 patent”) (collectively, heart failure or “HF” patents); U.S. Patents Nos. 8,573,209 (“the ’209 patent”), 8,776,794 (“the ’794 patent”), 8,776,795 (“the ’795 patent”), 9,265,911 (“the ’911 patent”), and 9,295,802 (“the ’802 patent”) (collectively, the delivery system infrared patents or “DSIR” patents)

Nature of the Case and Issue(s) Presented: Inhaled nitric oxide (“iNO”) is a gas that is well known in the prior art. The FDA approved the NDA for iNO in 1999. Since at least the early 1990s, iNO gas has been used to treat infants experiencing hypoxic respiratory failure. Hypoxic respiratory failure is a condition where oxygen levels in the blood are too low. Nitric oxide functions to dilate blood vessels in the lungs and can thereby improve blood oxygenation. A dose of 20 ppm iNO was also well known in the prior art for treatment of hypoxic respiratory failure in infants. Treatment using iNO was not without its side effects. Neonates with a congenital heart condition-known as left ventricular dysfunction (“LVD”) were at an increased risk of pulmonary edema when treated with iNO gas. Beginning in 2009, INO Therapeutics began pursuing patents based on this observation. Eventually, it obtained the five HF patents. INO Therapeutics also obtained patents related to devices and methods for providing iNO gas to patients via gas cylinders, namely, the DSIR patents. INO Therapeutics and Mallinckrodt ultimately merged and Mallinckrodt is the exclusive supplier of iNO gas in the U.S.

Praxair is an industrial gas company seeking to sell generic iNO gas cylinders. Praxair filed an ANDA seeking approval to market Noxivent, a generic form of nitric oxide gas for inhalation. In addition, Praxair acquired a company that developed a gas delivery system, called the NOxBOXi iNO system.

Mallinckrodt sued Praxair in 2015. The case proceeded to a seven-day bench trial. In September 2017, the district court issued a memorandum and order concluding that the HF patents were ineligible and the DSIR patents were not infringed. Plaintiffs appealed and the Federal Circuit affirmed-in-part, reversed-in-part, and remanded.

Why Praxair Prevailed: Mallinckrodt’s appeal raises three issues: (i) the district court erred by concluding that the asserted claims of the HF patents are ineligible under § 101; (ii) the district court erroneously construed the term “verify” when analyzing whether Praxair’s proposed gas cylinder infringes the DSIR patents; and (iii) the district court improperly entered judgment on certain unasserted claims. The Federal Circuit addressed each in turn.

First, the Federal Circuit affirmed the finding that the HF patents were ineligible. The treatment of infants experiencing hypoxic respiratory failure with iNO gas has existed for decades. The inventors observed an adverse event that iNO gas causes for certain patients. The patent claim does no more than add an instruction to withhold iNO treatment from the identified patients; it does not recite giving any affirmative treatment for the iNO-excluded group, and so it covers a method in which, for the iNO-excluded patients, the body’s natural processes are simply allowed to take place. Thus, the asserted claim is directed to a natural phenomenon. The claim, apart from the natural phenomenon itself, involves only well-understood, routine, and conventional steps.

Second, the DSIR patents require the device to “verify one or more of the gas identification, the gas concentration and that the gas is not expired.” The term “verify” was never formally construed by the district court, which applied its plain and ordinary meaning. It found that the system does not “verify” the gas data when one simply takes a meter from Mallinckrodt’s gas cylinder (containing data about the gas from the manufacturer) and uses it with a Praxair gas cylinder (which does not contain a meter with gas data). Put another way, the district court interpreted the claim term to require that the gas delivery system verify data about the actual gas in the “gas source.” Malinckrodt takes the position that the DSIR patent claims are practiced when any iNO cylinder is combined with a circuit storing gas data even if the data is unrelated to the particular gas in the cylinder. Relying on the claim language itself, the Fedreal Circuit affirms the district court’s infringement analysis. The DSIR patent claim recites a “gas delivery device” with “a gas source” to provide iNO “therapy gas.”  The “gas” throughout the claim consistently refers to the specific contents of the “gas source” administered to the patient. Thus, “gas data” relates to the actual gas inside the cylinder. Moreover, Mallinckrodt’s expert testified that the NOxBOXi’s gas data does not come from the gas source.

Third, the Federal Circuit found that the district court did not limit its ruling to the asserted claims before it. Instead, the district court erroneously made a blanket ruling that each Mallinckrodt patent in its entirety was invalid or not infringed. Therefore, the Federal Circuit remanded the case back to the district court to correct this “clerical” error.

Judge Newman wrote a separate opinion concurring-in-part and dissenting-in-part. Judge Newman concurred in correction of the technical error, but dissented from the majority’s rulings that the HF claims at issue were ineligible under Section 101. The method that is described and claimed does not exist in nature; it was designed by and is administered by humans. According to Judge Newman, the majority improperly separates the claims into old and new steps, describes some claim steps as a “natural phenomenon” and some steps as “well-understood, routine, and conventional steps,” and avoids the requirement that a claimed invention is considered as a whole. Therefore, the majority opinion directly contradicts Federal Circuit precedent applying section 101 to methods of medical treatment. While Judge Newman admits that Mallinckrodt’s method of treatment may or may not pass the tests of sections 102 or 103, the majority’s opinion finding these claims ineligible adds to the inconsistency and unpredictability of this area of patent-supported innovation.

Case Name: Allergan Sales, LLC v. Sandoz, Inc., No. 2018-2207, 2019 U.S. App. LEXIS 26200 (Fed. Cir. Aug. 29, 2019) (Circuit Judges Prost, Newman, and Wallach presiding; Opinion by Wallach, J.; Concurring Opinion by Prost, C.J.) (Appeal from D.N.J., Walls, J.)

Drug Product and Patent(s)-in-Suit: Combigan® (brimonidine tartrate / timolol maleate); U.S. Patents Nos. 9,770,453 (“the ’453 patent”), 9,907,801 (“the ’801 patent”), and 9,907,802 (“the ’802 patent”)

Nature of the Case and Issue(s) Presented to District Court: Combigan is a topical formulation for the treatment of glaucoma and ocular hypertension. The patents-in-suit shared a common specification and representative claim 1 of the ’453 patent recites a method for the treatment of glaucoma or ocular hypertension that included “topically administering twice daily to an affected eye a single composition comprising 0.2% w/v brimonidine tartrate and 0.68% w/v timolol maleate.” The claim also included two “wherein” clauses providing that “the method is as effective as the administration of 0.2% w/v brimonidine tartrate monotherapy three times per day” and that “the method reduces the incidence of one of more adverse events … when compared to the administration of 0.2% w/v brimonidine tartrate monotherapy three times daily.” The district court found the “wherein” clauses to be limiting and granted Allergan’s preliminary injunction.

Why Allergan Prevailed: Sandoz disputed that the “wherein” clauses were claim limitations, arguing instead that the clauses merely state the intended results of administering the drug product and that the recited results are not material to patentability. Stated another way, Sandoz argued that a wherein clause in a method claim is not given weight when it simply expresses the intended result of a process step positively recited.

The Federal Circuit acknowledged that there was “some overlap between the language of the ‘wherein’ clauses and those results,” but nevertheless found that the “wherein” clauses constituted claim limitations. In particular, the Federal Circuit noted that the recited “benefits are described throughout the specification.” Further, “Allergan relied on the efficacy and safety of the claimed methods during prosecution … in responding to the examiner’s rejections.” The Federal Circuit concluded that the “wherein” clauses were material to the examiner’s patentability determination.  As a result, the “wherein” clauses were given patentable weight, and the preliminary injunction was upheld.

The Fall 2019 issue of the GENERICally Speaking email campaign provides you and your company with some of the knowledge beneficial to remaining attentive to the complexity of ANDA patent litigation.

Relevant court decisions highlighted in this issue:

• Allergan Sales, LLC v. Sandoz, Inc.
• INO Therapeutics LLC v. Praxair Distribution Inc.
• Nalpropion Pharms., Inc. v. Actavis Labs FL, Inc.
• Sanofi-Aventis U.S., LLC v. Dr. Reddy’s Labs., Inc.

Relevant ANDA Updates highlighted in this issue:

• ANDA Approvals
• ANDA Litigation Settlements
• Generic Launches
• New ANDA Cases

The issue of whether an insurer has fulfilled its duty to settle in good faith was recently litigated in Georgia. Under Georgia law “[a]n insurance company may be liable for the excess judgment entered against its insured based on the insurer’s bad faith or negligent refusal to settle a personal claim within the policy limits.”¹ However, until recently, it has been unclear exactly when an insurer’s duty to settle is triggered. In March 2019, the Supreme Court of Georgia issued a decision that provides some guidance. In First Acceptance Ins. Co. of Ga. v. Hughes,² the Court examined: (a) whether an insurer has a duty to make an affirmative settlement offer absent an initial offer from an injured party, and (b) the effect of an injured party’s failure to include a time limit in their settlement offer.

The facts of Hughes are summarized as follows: On August 29, 2008, Ronald Jackson was involved in a multi-vehicle collision. At the time of the accident, Mr. Jackson was insured under an automobile policy issued by First Acceptance Insurance Company of Georgia, Inc., which included bodily injury liability limits of $25,000 per person and $50,000 per accident.³ Adjusters performed an investigation and concluded that Mr. Jackson was at fault in connection with the incident and that his exposure exceeded his policy limits. First Acceptance retained counsel to resolve the five related injury claims. In January 2009, First Acceptance’s attorney began to make settlement overtures to the claimants’ attorneys.⁴

On June 2, 2009, counsel for claimants Julie An and Jina Hong sent two letters to counsel for First Acceptance. In the first letter, the attorney stated that his clients were “interested in having their claims resolved within [the] insured’s policy limits, and in attending a settlement conference.”⁵ The letter, however, did not include a demand that First Acceptance respond by a date certain.⁶ The second letter requested that the company provide certain insurance information within 30 days and conditioned settlement upon compliance with that request.⁷ First Acceptance’s attorney reviewed the letters, but did not consider them to impose “any kind of time limit demand.”⁸ The letters were misfiled, and a response was not immediately provided.

Shortly thereafter, counsel for the claimants filed a lawsuit for damages arising out of the automobile accident. Then, on June 13, 2009, the claimants’ attorney sent a letter to counsel for First Acceptance revoking his clients’ settlement offer. Counsel for First Acceptance responded by inviting the claimants to attend a settlement conference – an offer which they declined, along with subsequent settlement offers, including an eventual tender by First Acceptance of the total policy limits.⁹ The matter went to trial in July 2012. The jury rendered a verdict in favor of the claimants, and the trial court entered a judgment against the now-deceased Mr. Jackson’s estate in excess of $5.3 million.¹⁰

In June 2014 the administrator of Mr. Jackson’s estate filed suit against First Acceptance, alleging that it acted negligently and in bad faith by refusing to settle the claim within the policy limits. First Acceptance made a motion for summary judgment, which the trial court granted. The Court of Appeals reversed the trial court’s decision, and First Acceptance petitioned for certiorari – which was granted by the Supreme Court of Georgia.¹¹

As a preliminary matter, the Supreme Court addressed “whether an insurer’s duty to settle arises when it knows or reasonably should know settlement with an injured party within the insured’s policy limits is possible or only when the injured party presents a valid offer to settle within the insured’s policy limits.”¹² The Court observed that other courts had found its prior decisions regarding this issue to be unclear.¹³ To put an end to any speculation, the Court definitively ruled that “an insurer’s duty to settle arises when the injured party presents a valid offer to settle within the insured’s policy limits.”^{14 15}

Next, the Court examined the facts of the underlying action – namely, whether the claimants had made a valid offer that First Acceptance failed to accept either negligently or in bad faith.¹⁶ The administrator of Mr. Jackson’s estate argued that, read together, the two June 2nd letters established a 30-day deadline for First Acceptance to respond to the claimants’ settlement offer. The Court disagreed, observing that the June 2nd letters did not contain a time limit for acceptance of the claimants’ settlement offer – rather, the 30-day deadline applied to counsel’s request for insurance information. As such, First Acceptance “was not put on notice that its failure to accept the offer within any specific period would constitute a refusal of the offer.”¹⁷ In light of these facts, the Court opined that First Acceptance’s actions were reasonable, as an “ordinarily prudent insurer could not be expected to anticipate that, having specified no deadline for the acceptance of their offer, [the claimants] would abruptly withdraw their offer and refuse to participate in the settlement conference.”¹⁸ Accordingly, the Georgia Supreme Court reversed the Court of Appeals’ decision and held that First Acceptance was entitled to summary judgment with regard to the estate’s negligence and bad faith claims.¹⁹

In sum, the Court’s decision in Hughes indicates that, under Georgia law, (a) an insurer’s duty to settle is triggered when an injured party presents a valid offer to settle within policy limits; and (b) if an injured party’s settlement offer does not contain an express time limit for acceptance, an insurer’s failure to accept the offer within any specific period would not constitute a refusal of the offer. While it is too early for the impact of the decision to be fully apparent, Hughes provides valuable guidance for those attempting to engage in settlement negotiations that are compliant with Georgia law.

Over the past few years, California has endured some of the largest catastrophic losses in the state’s history. For example, in July 2018, the Mendocino Complex Fire consumed almost 460,000 acres of land, spreading across four different California counties.¹ Just a few months later, the Camp Fire destroyed almost 19,000 structures in Butte County, including the entire town of Paradise.² In short, declared emergencies stemming from record-breaking fire losses are becoming the new normal in California.

For insurers, these CAT events with area-wide impact often create a shortage of in-state licensed adjusters to handle the influx of claims. This results in hiring many out-of-state adjusters. Recently, in response to the 2017 series of wildfires that caused unprecedented losses, the state legislature has held multiple hearings during which wildfire victims, public adjusters, the California Department of Insurance (the “Department”), and others testified about their concerns relating to the adjustment of fire claims by out-of-state adjusters. For example, they testified as to how “claims were mishandled and delayed because, in part, out-of-state adjusters provided inaccurate information about California law pertaining to the claim.”³“Some witnesses testified that they repeatedly had to deal with new adjusters on the same claim and that the turnover resulted in delays and, in some instances, shifting standards or procedures. ⁴

In response, the California State Legislature unanimously voted in August to pass Senate Bill 240, also known as the Insurance Adjuster Act of 2019 (the “Act”), which the governor signed into law on October 3, 2019.⁵ Because the Act is designated as an urgency statute,⁶ it takes effect immediately, instead of being delayed until January 1, 2020.⁷

As described by Insurance Commissioner Ricardo Lara, the Act is intended to provide the Department “with the authority to ensure that unlicensed adjusters are competent in California’s property claims laws and issues related to adjusting wildfire claims.”⁸ It sets forth a series of new requirements for the Department, insurers, and adjusters as follows:

• New Requirements for the Department: The Act requires the Department to (1) produce an annual bulletin “describing the most significant California laws pertaining to property insurance policies, including those related to a declared state of emergency”;⁹ (2) create an adjuster handbook that includes “information relevant to evaluating damage caused by an emergency, catastrophe, disaster, or other similar occurrence, including wildfires”;¹ (3) post both the annual bulletin and adjuster handbook on the Department’s website; (4) distribute the annual bulletin to every licensed independent adjuster and insurer admitted in California; and (5) take enforcement actions against a licensee or the registered emergency adjuster, including a civil penalty of up to $500, for the misconduct of the adjusters. The Department is not required to investigate the stated employment status of individuals who are adjusting claims under a licensing exemption, such as firm employees and emergency adjusters.¹¹

• New Requirements for Insurers: The Act requires insurers to: (1) provide the annual bulletin to claimants suffering losses in a declared emergency “within 15 calendar days from the date ... [of] notice of the claim”;¹² (2) provide a homeowner submitting a disaster claim with a “primary point of contact” if the adjuster assigned to the claim is changed three times in a six-month period;¹³ and (3) ensure the “primary point of contact” is available to the homeowner and remains assigned to the claim until its completion, and will refer the homeowner to a supervisor upon request of the homeowner.¹⁴

• New Requirements for Adjusters: The Act requires the following: (1) for licensed adjusting firms to ensure that unlicensed employees adjusting disaster claims for the firm have read and understand the annual bulletin and adjuster handbook; (2) for registered emergency adjusters to certify, under penalty of perjury, that they have read the Department’s annual bulletin and adjuster handbook; and (3) for emergency adjusters to register with the Department no later than 15 calendar days instead of “within 15 working days,” as previously required. Licensees are permitted to defer license renewal while actively serving in the military.¹⁵

With the exception of its regulations that relate to the provision of a “primary point of contact” for residential property policies, the Act is generally applicable to all property policies issued to California policyholders, both residential and commercial. The new requirements mark a significant departure from existing law. For example, when an insurer assigns a third or subsequent adjuster to a homeowner’s claim within a six-month period, it can simply provide the insured with a “written status report.”¹⁶ Likewise, annual certification from out-of-state adjusters is now going to be required under the penalty of perjury – a prerequisite never previously imposed.

In sum, annual catastrophic events such as wildfires and other related events – including rainstorms after wildfires, which often result in landslides – are the new normal in California. Due to the volume of claims that these types of events precipitate, it is likely that insurers will continue to retain out-of-state adjusters to assist with claim handling. As such, it will be critical for insurers and adjusters alike to understand and adhere to the provisions of this new law.