On April 13, 2021, the U.S. Court of Appeals for the Fifth Circuit issued an opinion in Impax Laboratories, Inc v. Federal Trade Commission, affirming the Federal Trade Commission's (FTC) unanimous decision that Endo Pharmaceuticals, Inc.'s settlement with Impax Laboratories, Inc. constituted a reverse payment and violated Section 5 of the FTC Act. In so doing, the Fifth Circuit reiterated the rule-of-reason burden-shifting framework for reverse payment cases, and also granted considerable deference to the FTC.
Background and Procedural History
In the underlying patent litigation, Endo Pharmaceuticals, Inc. (Endo) sued first-filer Impax Laboratories, Inc. (Impax) in 2008. At that time, Endo planned to introduce a new crush-resistant formulation of Opana ER (extended-release oxymorphone) and allegedly wanted to delay Impax's generic entry until after the new formulation launched. In June 2010, right before the patent trial was about to begin, Impax agreed to enter the Opana ER market in January 2013 and, in exchange: 1) Endo agreed not to launch an authorized generic ("no-AG" agreement) during the first 180 days after Impax's launch; 2) Impax would receive a portion of sales for the original Opana ER if sales fell below a certain amount; 3) Endo granted Impax a license to future patents for extended-release oxymorphone; and 4) the parties entered into a collaboration agreement for a new Parkinson's treatment, where Endo paid $10 million immediately and up to $30 million more based on certain milestones. After this settlement, Endo introduced its new formulation and paid Impax $102 million in credits. Ultimately, Endo voluntarily withdrew the new formulation due to safety concerns raised by the U.S. Food and Drug Administration (FDA), leaving Impax's generic Opana ER as the only oxymorphone ER product on the market.1
In 2017, the FTC filed an administrative complaint against Impax, arguing that Impax entered into an anticompetitive reverse payment with Endo.2 An administrative law judge (ALJ) ruled for Impax, finding that, on balance, the settlement was procompetitive. The ALJ concluded that "[t]he evidence support[ed] the conclusion that Impax would not have launched its generic Opana ER at risk," since it would have been "economically disadvantageous" given Impax's size. The ALJ further noted that the settlement agreement granted Impax "a broad patent license covering Endo's existing and subsequently-acquired Opana ER-related patents," thus enabling Impax to sell generic Opana ER without interruption since its January 2013 entry. The ALJ noted that the "largely theoretical" anticompetitive effects did not outweigh the procompetitive effects of the settlement. Finally, the ALJ looked at the actual behavior of the parties to determine whether a less restrictive alternative would have been possible. The ALJ noted that "Impax twice proposed a simple settlement with a 2011 entry date and no reverse payment, which Endo rejected."
The FTC commissioners unanimously reversed this ruling, concluding that there was sufficient evidence that "Impax could have launched a generic product before the agreed-upon date, had it not entered into the reverse payment settlement with Endo." Notably, the FTC did not prove that earlier entry would have likely happened but simply that it could have happened. The FTC further determined that Impax had failed to show that the alleged procompetitive benefits arose from the specific agreements at issue. The FTC issued a cease-and-desist order against Impax, prohibiting Impax from entering into "any type of reverse payment that defer[ed] or restrict[ed] generic entry." Impax was not required to pay any damages or restitution.
Deference to the FTC
In its review of the FTC's ruling, the Fifth Circuit granted the commission significant deference, signaling that it would be highly deferential to factual findings by the commission. First, in its assessment of the findings of law, the court stated that it would review legal conclusions de novo, although it would give some deference to the FTC's "informed judgment that [a] particular commercial practice [was] to be condemned as unfair" (internal citations omitted). The court further explained that it would not overturn the commission's findings of fact if they were supported by "substantial evidence," that is, "such relevant evidence as a reasonable mind might accept as adequate to support a conclusion." The court made clear that such a standard required the court to accept FTC findings supported by the substantial evidence, "even if alternative conclusions [might have been] equally or even more reasonable and persuasive." (internal citations omitted).
Burden-Shifting Framework and Findings
After determining the standard of review, the Fifth Circuit affirmed the FTC's approach that a burden-shifting framework should apply. First, the court determined that the FTC needed to show the anticompetitive effects of the agreement. Second, the defendants needed to show the procompetitive effects of the agreement. If the defendants demonstrated such procompetitive effects, then the FTC needed to demonstrate that the procompetitive effects could have been achieved through less anticompetitive means. Finally, if the FTC failed to show that there was a less restrictive alternative, the court would then balance the procompetitive and anticompetitive effects. If the anticompetitive harms outweighed the procompetitive benefits, then the agreement would be unlawful.
The court then applied the framework to the case at issue. Although Impax did not challenge the ALJ's original finding that a "large reverse payment helped induce its settlement," Impax did challenge whether the payment was in fact anticompetitive. The court spent considerable time assessing the first prong of the test—"whether the agreement caused anticompetitive effects or created the potential for anticompetitive effects." (internal citations omitted). The court discussed certain factors that would render a payment anticompetitive, such as the size of the payment relative to other legitimate expenses (i.e., patent litigation costs) and found that the provisions described above constituted a "large and unjustified" payment.3 The court further noted that the FTC did not need to fully assess the likelihood that Endo would have won the patent litigation because Actavis allowed an unexplained reverse payment to serve as a surrogate for a full patent inquiry. The Fifth Circuit also noted that the competitiveness of the agreement should be measured at the time entered, thus barring any ex post assessment.
Next, rather than resolving whether there were procompetitive effects arising from the agreement, the court assumed arguendo that there were.
The court then considered whether there were less restrictive means to achieve such procompetitive effects. The court found that there were, in fact, less restrictive means to achieve the same outcome and, in support of this finding, cited the commission's reliance on "industry practice, credibility determinations about settlement negotiations, and economic analys[es]." In particular, the court found that the parties could have settled without a "no-AG" agreement and that Impax may have entered earlier but for the payment made to it. The court also noted, in dicta, that a "no-AG" agreement may be inherently anticompetitive, even if it did not delay generic entry, as there would be less generic competition and higher pricing. Although expressing some skepticism, the Fifth Circuit fully accepted the FTC's findings regarding the less restrictive alternative as conclusive. The court noted, "The existence of a viable less restrictive alternative is ordinarily a question of fact … [s]o the substantial deference we owe the Commission's factfinding kicks in, in particular on its determination that a no-payment settlement was feasible." (internal citations omitted) (emphasis added). Thus, the court held that the anticompetitive effects outweighed any procompetitive benefits because the parties could have achieved those benefits through less anticompetitive means.
Implications of This Decision
There have been many alleged "reverse payment" cases brought since the U.S. Supreme Court decided Actavis. As predicted by Justice Roberts, the lower courts have at times issued inconsistent opinions as to what agreements constitute a payment, how the underlying patent litigation should be evaluated, and how a court should weigh any procompetitive benefits arising from patent litigation settlements. The Impax decision demonstrates that FTC findings of fact will be granted substantial deference, and this may make it difficult for companies to challenge an agency finding of a less restrictive alternative. As an example, the Fifth Circuit found acceptable the FTC's proof on this prong, even though such proof consisted only of a "strong showing" of the possibility of a less restrictive settlement. The court justified this approach by noting, "our question is not whether the Commission could have reached a different result on the less-restrictive-alternative question. It is whether there was evidence that would allow a reasonable factfinder to conclude that a no-payment settlement was feasible."
Ultimately, the decision may make it more difficult for manufacturers to defend patent litigation settlements challenged by the FTC containing arguable "reverse payments" by pointing to other provisions that are procompetitive. This, in conjunction with some other court holdings expanding the scope of what is considered a payment, will continue to impact patent litigation settlements and ultimately may reduce parties' ability to settle.4 Additionally, we anticipate that the FTC and private plaintiffs will continue to bring antitrust claims in this area, making it important to involve antitrust counsel at early stages in patent litigation. Finally, when assessing compliance and potential settlements, parties also need to consider the recently-passed California law governing patent litigation settlements, which may categorize "anything of value" provided by a brand to a generic as a "reverse payment" and includes a presumption of illegality.5
[1] In January 2021, the FTC sued Endo Pharmaceuticals, Inc., Impax Laboratories, LLC, and Amneal Pharmaceuticals, Inc. (Impax’s owner) for entering into an allegedly anticompetitive agreement in which Endo agreed not to enter the oxymorphone ER market and the companies agreed to preserve Impax’s monopoly. Fed. Trade Comm’n, FTC Again Charges Endo and Impax with Illegally Preventing Competition in U.S. Market for Oxymorphone ER (2021), https://www.ftc.gov/news-events/press-releases/2021/01/ftc-again-charges-endo-impax-illegally-preventing-competition-us. In 2017, Endo and Impax settled a breach of contract action arising out of their 2010 patent settlement agreement. The breach of contract claim settlement included terms that would require Impax to pay Endo a percentage of its Opana ER profits provided that Endo would not sell an oxymorphone ER product, as well as additional restraints that are currently non-public. The FTC now alleges that such agreements were unlawful.
[2] In 2016, the FTC sued Endo, its partner Teikoku Pharma, Watson, its owner Allergan, and Impax challenging settlements between the companies regarding the generic entry Opana ER and Lidoderm in the Eastern District of Pennsylvania. The agency ultimately re-filed its Lidoderm claims in the Northern District of California, and Endo agreed to settle the charges and therefore was not included in the instant case. See Fed. Trade Comm’n v. Endo Pharms. Inc. et al, No. 2:16-cv-01440 (E.D. Pa. filed Mar. 30, 2016). The FTC then filed this claim against Impax in a Part 3 administrative hearing.
[3] Fed. Trade Comm’n v. Actavis, Inc. 579 U.S. 136 (2013).
[4] See e.g., Staley, et al., v. Gilead Sci., Inc., No. 19-cv-02573-EMC (N.D. Ca. filed May 14, 2019) (reverse payment alleged based on most favored nation and most favored nation plus clause); In re Loestrin 24 FE Antitrust Litig., Case No. 1:13-md-02472 (D.R.I. filed Oct. 3, 2013) (reverse payment alleged based on side deals and no-AG agreements).
[5] Preserving Access to Affordable Drugs, Cal. Health and Safety Code §§ 134000 – 134002.
