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King Drug Co. of Florence v. Cephalon, Inc.

United States District Court, Third Circuit

January 9, 2014

CEPHALON, INC., et al., Defendants.


Mitchell S. Goldberg, J.

The issue before us is whether a finding of fraud on the Patent Office implicates the crime-fraud exception to the attorney-client privilege.

Plaintiffs, the Direct Purchasers, are a putative class of companies that purchased the wakefulness drug Provigil directly from Defendant Cephalon for redistribution. In an opinion dated October 31, 2011, in the related case of Apotex, Inc. v. Cephalon, Inc., No. 06-2768, we concluded that Cephalon had committed inequitable conduct (sometimes called fraud on the Patent Office) in the prosecution of its patent for Provigil (the RE ‘516 patent) through its “complete concealment of another company’s extensive involvement in the product which is the subject of the claimed invention.” Apotex, Inc. v. Cephalon, Inc., 2011 WL 6090696, at *27 (E.D. Pa. Nov. 7, 2011), aff’d 500 Fed.Appx. 959 (Fed. Cir. 2013), cert. denied, 2013 WL 5565876 (Dec. 16, 2013). Direct Purchasers’ motion to compel asserts that the findings in that opinion establish the applicability of the crime-fraud exception to the attorney-client privilege, rendering discoverable thousands of communications between Cephalon and its attorneys relating to the patent prosecution and other events in the years that followed.

Having heard oral argument and after careful review of the written submissions, we conclude that the Direct Purchasers have failed to show that a reasonable basis exists to believe that the communications they identify were made in furtherance of the alleged fraud. In so finding, we also decline to review in camera any of the documents at issue.

I. Factual Background

This is one of numerous consolidated antitrust cases alleging, among other things, that Cephalon and several generic manufacturers of Provigil violated the Sherman Act when they agreed to settle infringement litigation on terms that provided for significant payments from Cephalon to the generics. The facts relevant to this motion are primarily those relating to the prosecution of Cephalon’s Provigil patent, and are recounted at length in our Apotex opinions.

In deciding the questions of invalidity and unenforceability, we made several determinations regarding Cephalon’s conduct in the prosecution of the patent. The patent claimed, most relevantly, a “pharmaceutical composition comprising a substantially homogenous mixture of modafinil [the active ingredient in Provigil] particles, wherein at least 95% of the cumulative total of modafinil particles in said composition have a diameter less than about 200 microns.” We concluded that Cephalon did not invent that pharmaceutical composition. In fact, a French company, Laboratoire L. Lafon, manufactured and shipped to Cephalon several modafinil batches between 1989 and 1993 that fell within the patent claims. Nevertheless, Cephalon filed its initial patent application in October 1994, and filed the application that resulted in the RE ‘516 patent in 1999. In prosecuting the RE ‘516 patent (and its predecessor), Cephalon did not disclose to the Patent Office that another company was the inventor of the drug, or that Cephalon had done nothing to alter the modafinil it received. To the contrary, Cephalon falsely suggested that it had “manipulate[d] the particle size of the drug substance” to reach the levels described by the patent claims. Our opinion determined that Cephalon acted with “specific intent to deceive the PTO, ” and that its misrepresentations and omissions were material. We found that Apotex proved these allegations by clear and convincing evidence.

Direct Purchasers’ ask us to conclude that these findings are sufficient to establish the crime-fraud exception to the attorney-client privilege, and seek an order directing Cephalon to produce all attorney-client communications related to: (1) the prosecution, issuance, and reissuance of the RE ‘516 patent; (2) the listing of the patent in the FDA’s Orange Book; (3) the filing and maintaining of patent infringement litigation against the generics; and (4) the negotiation and making of reverse-payment settlement agreements with the generics. Cephalon responds that, even if its prior misrepresentations and omissions establish fraud with respect to the patent prosecution, there is no justification for concluding that the fraud extended through the other events identified by the Direct Purchasers. Cephalon further contends that the Direct Purchasers have failed to meet their burden to show that any of its communications with its attorneys were made “in furtherance” of the alleged fraud. Because we agree with Cephalon, we will deny the Direct Purchasers’ motion.

II. Discussion

The attorney-client privilege is the oldest confidential communications privilege known to the common law, and one that has long been regarded as “worthy of maximum legal protection.” Haines v. Ligget Grp., 975 F.2d 81, 89 (3d Cir. 1992). For that reason, the decision to pierce the privilege is regarded as an “extreme remedy, ” to be made only after due consideration and caution. Unigene Labs. v. Apotex, Inc., 655 F.3d 1352, 1359 (Fed. Cir. 2011). The United States Court of Appeals for the Third Circuit has emphasized that “where a fact finder undertakes to weigh evidence in a proceeding seeking an exception to the privilege, the party invoking the privilege has the absolute right to be heard by testimony and argument.” Haines, 975 F.2d at 97 (emphasis added).

The privilege is subject to several exceptions. Importantly, as it relates to this case, the privilege does not protect communications made between an attorney and a client in furtherance of a future crime or fraud. As aptly explained by Justice Benjamin Cardozo: “A client who consults an attorney for advice that will serve him in the commission of a fraud will have no help from the law. He must let the truth be told.” Clark v. United States, 289 U.S. 1, 15 (1933). To pierce the privilege, the movant “must demonstrate that there is a reasonable basis to suspect (1) that the privilege holder was committing or intending to commit a crime or fraud, and (2) that the attorney-client communication or attorney work product was used in furtherance of that alleged crime or fraud.” In re Grand Jury, 705 F.3d 133, 155 (3d Cir. 2012).

A. Level of Proof Required

The precise level of proof required to succeed on a motion to compel based on the crime-fraud exception is subject to some debate. The traditional definition requires the party invoking the exception to provide “prima facie evidence that it has some foundation in fact.” Clark, 289 U.S. at 15. But “prima facie” is a slippery standard, and the Supreme Court has since recognized that it has resulted in “some confusion” among the lower courts. United States v. Zolin, 491 U.S. 554, 563 n.7 (1989).

In the civil context, the United States Court of Appeals for the Third Circuit has concluded that the prima facie case requires the movant to “present evidence which, if believed by the fact-finder, would be sufficient to support a finding that the elements of the crime-fraud exception were met.” Haines, 975 F.2d at 95-96. The Haines court also quoted opinions from other circuits interpreting prima facie to mean “probable cause” or a “reasonable basis” to believe that the elements of the exception were met. Id. at 95. The court suggested that these formulations amounted to the “same basic proposition, ” id., and more recent Third Circuit law has adopted the “reasonable basis” language, albeit in the grand-jury context, In re Grand Jury, 705 F.3d at 153-54. Under that formulation, the privilege is destroyed “[w]here there is a reasonable basis to suspect that the privilege holder was committing or intending to commit a crime or fraud and that the attorney-client communications or attorney work ...

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