A federal appeals court has overturned a decision certifying a price-fixing class action over a deal to postpone sales of a generic version of GlaxoSmithKline's epilepsy drug Lamictal.

The U.S. Court of Appeals for the Third Circuit's ruling provides a refresher course on a judge's gatekeeper role in class action suits. The panel found the lower court judge granted certification without properly analyzing whether issues common to the class predominate over individual issues.

The appeals court sent the case back for a "redo" after determining the trial court failed to undertake the proper analysis of the facts. The panel, consisting of Judges Thomas Ambro, Cheryl Ann Krause and Peter Phipps, said the trial judge certified the class without resolving factual disputes, assessing competing evidence and weighing expert testimony, all of which bear heavily on the predominance requirement for certification.

GSK and Teva Pharmaceuticals appealed a December 2018 ruling by Senior U.S. District Judge William Walls that granted certification to the class of direct purchasers of the drug. Walls died at age 86 in July 2019.

The suit claimed that a 2005 settlement between GSK and Teva Pharmaceuticals had the effect of curbing competition for the drug, thus driving prices higher. GSK filed a patent infringement suit after Teva began selling a generic version of Lamictal in 2002. The settlement allowed Teva to sell a limited number of Lamictal tablets in June 2005, 37 months before GSK's patent expired, and sell its generic Lamictal without restrictions when the patent ran out in July 2008. GSK also agreed not to sell its own generic version of Lamictal until 2009.

After Walls granted certification of a class of companies that purchased Lamictal directly from GSK or bought the generic version, lamotrigine, from Teva, both GSK and Teva challenged certification of class members who bought Teva's version of the drug, claiming Walls erred in concluding that common questions of law or fact predominate over individual questions, a requirement for certification.

GSK and Teva claimed that certification was not warranted because the direct purchaser class members could not show across-the-board injury because their proof impermissibly relied on averages. That reliance masked the fact that up to one-third of the class likely didn't pay more, or even paid less, for lamotrigine than they would have if GSK had launched an authorized generic version of the drug.

Ambro, writing for the court, agreed that more rigorous analysis is needed.

He wrote that an economic expert for the direct purchasers, Russell Lamb, opined that prices paid by all, or nearly all, members of the proposed class for lamotrigine tablets were artificially inflated by the agreement between GSK and Teva. Lamb cited economic literature showing that, on average, prices of generics are lower when more of them enter the market.

"But, as GSK and Teva accurately point out, that model still relies on an average hypothetical price, which again fails to account for individual negotiations or the effect of GSK's [deal with Teva] on each Direct Purchaser," Ambro wrote.

GSK and Teva's expert, James Hughes, rebutted many of Lamb's findings, criticizing the use of averages. He said Lamb erred by applying an aggregate "actual" price to all class members, which failed to acknowledge that purchasers paid dramatically different prices.

"Here, the District Court abused its discretion when it assumed, absent a rigorous analysis, that averages are acceptable. As is clear from the dueling expert reports, the acceptability of averages depends largely on the answer to several factual predicates, most importantly: 1) whether the market is characterized by individual negotiations; 2) whether Teva preemptively lowered its pricing in response to the Contracting Strategy; and 3) whether and to what extent GSK, absent the settlement agreement, would or could have pursued both the Contracting Strategy and an [Authorized Generic]. The Court did not resolve these factual disputes, which would have required it to weigh the competing evidence and make a prediction as to how they would play out at trial," Ambro wrote.

GSK was represented by Pepper Hamilton in Philadelphia and Lowenstein Sandler of Roseland. Teva was represented by Kirkland & Ellis and Walsh Pizzi O'Reilly Falanga in Newark.

The direct purchaser class was represented by Garwin Gerstein & Fisher of New York; Berger Montague of Philadelphia; Cohn Lifland Pearlman Herrmann & Knopf of Saddle Brook; Faruqi & Faruqi of Philadelphia; Smith Segura Raphael & Leger in Alexandria, Louisiana; and Heim Payne & Chorush of Houston.

Devora Allen of Kirlkland & Ellis, who argued for the appellants, and Caitlin Coslett of Berger Montague, who argued for the class, did not respond to requests for comment.