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Drug maker sues insurer over denial of coverage

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PHILADELPHIA—GlaxoSmithKline P.L.C. is suing one of its liability insurers for denying coverage for a series of disputes in which the pharmaceutical giant has been charged with trying to restrain generic competitors of its antidepressant drug Paxil.

GSK unit SmithKline Beecham Corp. filed its complaint last week in federal court in Philadelphia against Lumbermens Mutual Casualty Co.

Lumbermens, a Kemper Insurance Cos. subsidiary now in runoff, wrote general liability coverage with a $5 million (€3.8 million) per occurrence and annual aggregate limit for GSK from 1992 until 2001.

The complaint charges that Lumbermens wrongly denied defense and indemnity obligations for numerous lawsuits in which GSK is accused of filing frivolous patent infringement actions to block cheaper generic alternatives to Paxil.

Generic drug makers brought several of these suits, while "end payers"—including the City of New York, and Blue Cross Blue Shield of Minnesota—sued separately to recover the increased cost of antidepressant medication caused by Glaxo's alleged anticompetitive behavior.

Representatives for both Long Grove, Illinois-based Lumbermens and Brentford, U.K.-based GSK declined to comment on the litigation.

Large pharmaceutical companies have routinely filed patent infringement lawsuits when rival drug makers have sought federal regulatory approval to market generic alternatives by claiming that existing patents are unenforceable.

Such lawsuits stay regulatory approval for up to 30 months or until patent litigation is resolved, whichever comes first.

Some generic drug makers have gone ahead with marketing after the stay period but while litigation is still pending, taking the risk that they might lose and become liable to the original patent holder for lost profits.

GSK, though, is one of the few—if not the only—major drug company to sue an insurer in federal court for coverage in patent-related litigation, court records indicate.

GSK, which generated 2005 sales of £21.66 billion (€32.18 billion), has seen its Paxil revenues plummet in recent years as generic competitors have come on the market. Paxil sales last year fell 42% to £615 million (€914 million) in large part because of generic competition, according to the company's annual report.

As competition increased, GSK filed a barrage of patent infringement lawsuits starting in 1999 against several rival drug manufacturers, according to its suit against Lumbermens.

Lawsuit shams

The rival drug companies responded with counterclaims charging, among other things, that Glaxo's patent lawsuits were shams intended only to restrain generic competitors and maintain a Paxil monopoly.

Half a dozen other parties that paid for Paxil, meanwhile, filed their own suits. New York City, for example, sued to recover its share of Medicaid payments for the drug, charging that GSK fraudulently manipulated Paxil's patents to extend its monopoly and that it filed groundless patent infringement suits to hinder competitors.

GSK has settled two of these suits, including New York City's, earlier this year, court records show. The amount of the New York settlement was not disclosed, but GSK settled a second consolidated "end payer" case-Nichols v SmithKline Beecham Corp.—for an amount "substantially in excess" of Lumbermens' policy limit, Glaxo's coverage complaint says.

GSK notified Lumbermens of the Nichols case in December 2002, asserting that it was entitled to defense and indemnity coverage under its liability policies' personal and advertising injury section. That section defines personal injury to include damages arising from "malicious prosecution." Because the Nichols suit alleges that GSK pursued baseless patent litigation to keep generic versions of Paxil off the market, the policies' personal injury coverage is triggered, GSK argued.

Barely five weeks after receiving notice, though, Lumbermens denied liability in the Nichols case. The insurer maintained, among other things, that the personal injury section does not cover the Nichols allegations and that Glaxo's conduct was intentional and therefore not insurable, court filings show.

More than three years later, in April 2006, lawyers for GSK reiterated the demand for coverage of the Nichols case and notified Lumbermens of the numerous other generic drug maker and "end payer" lawsuits over Paxil.

Lumbermens again denied coverage for all of the Paxil litigation claims in June. Lawyers for the insurer argued that under Pennsylvania and other state laws, GSK would first have to lose its underlying patent infringement suits against the generic drug makers before the rival drug companies could pursue malicious prosecution charges. None of the underlying patent cases has been resolved, the lawyers said in a letter that GSK filed with its complaint.

In addition, malicious prosecution is a specific tort under state statutes, and the suits against GSK do not actually charge malicious prosecution, Lumbermens' lawyers argued. The Nichols case, for example, levels charges related only to abuse of monopoly power and unjust enrichment. In its coverage complaint, filed December 4 in the U.S. District Court in Philadelphia, GSK asserts that Lumbermens' coverage positions are wrong.

The complaint notes that Apotex won one of the patent infringement suits GSK filed against it and that the judgment has already been upheld on appeal.

Charging Lumbermens with breach of contract and bad faith, GSK is demanding $10 million (€7.5 million) in damages for defense costs and $15 million (€11.3 million) for indemnity costs, along with unspecified punitive damages.

SmithKline Beecham Corp. v Lumbermens Mutual Casualty Co., U.S. District Court for the Eastern District of Pennsylvania, No. 2:06-cv-05300.