The FTC Is at It Again

by McDonnell Boehnen Hulbert & Berghoff LLP
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Federal Trade Commission (FTC) SealIn a move that will surprise almost no one (except perhaps members of the Supreme Court majority in FTC v. Actavis), the Federal Trade Commission has filed an amicus curiae brief with the District Court of New Jersey in In re Effexot XR Antitrust Litigation. This time the issue is not that the parties, Wyeth (branded) and Teva (generic) have entered into a reverse payment settlement agreement in their ANDA litigation under the Hatch-Waxman Act. Rather, the agreement the FTC now objects to involves Wyeth committing not to launch a so-called "authorized generic" form of its branded Effexor XR extended-release product. As a consequence, Teva will forego entering the market with its generic product for two years, but will enter the market several years before it would otherwise be able to do so.

The FTC makes three arguments:

• The Supreme Court's Actavis controls and the District Court should apply "traditional" antitrust principles under the rule of reason to this agreement.

• The "no authorized generics" agreement as economic effects that will harm consumers.

• These economic effects amount to a restraint on trade that raises the same economic concerns as reverse payments and has an adverse effect on competition.

Ignoring the now standard incendiary language of the brief (replete with references, some of which the Commission gratuitously adds to language from the Court's Actavis opinion, to "monopoly profits" as if we were still living in the days of the oil barons), the FTC's argument comes down to whether the Supreme Court in Actavis banned cash settlement agreements or more generally ruled that settlement agreements in ANDA litigation should always garner antitrust scrutiny. According to the FTC's brief, the Supreme Court "rejected a legal rule that conferred 'near automatic antitrust immunity' on patent settlements when the alleged anticompetitive restraints do not extend beyond the patent's expiration date." (It should be noted that the "scope of the patent" test used by the Second, Eleventh, and Federal Circuits, and rejected by the Actavis majority, was significantly more detailed and nuanced than the FTC's characterization of it.) The Commission in its argument bootstraps the Court's rejection of antitrust immunity for settlement agreements involving "large cash payments" to any exchange of other consideration, thus ignoring the reality that parties don't settle ANDA litigation (or any other kind) without some form of consideration.

One aspect of the agreements under consideration by the District Court is that Teva will get something it couldn't get in litigation: an agreement that Wyeth will not launch a competitive authorized generic. But this is just part of the consideration Teva will obtain for dropping its patent challenge, a challenge that represents a much bigger threat to Wyeth than winning the challenge presents for Teva. That should not make the settlement seem nefarious but, applying the FTC's standards, it is sufficiently suspicious to warrant antitrust scrutiny because it is not limited to the Commission's narrow view of what should be permissible.

While the Commission is correct that the type of licensing agreement at issue in the Effexor case has economic implications, the Court did not decide in Actavis that such considerations were sufficient to raise antitrust scrutiny, and the FTC's position is certainly not mandated by the Court's Actavis opinion. Indeed, Justice Breyer specifically envisioned that settlements in ANDA litigation would not be barred by his decision:

[T]he fact that a large, unjustified reverse payment risks antitrust liability does not prevent litigating parties from settling their lawsuit. [ANDA litigation can be settled in] other ways, [] by allowing the generic manufacturer to enter the patentee's market prior to the patent's expiration, without the patentee paying the challenger to stay out prior to that point.

The Court's concern was not with settlements, but with excessive payments:

Where a reverse payment reflects traditional settlement considerations, such as avoided litigation costs or fair value for services, there is not the same concern that a patentee is using its monopoly profits to avoid the risk of patent invalidation or a finding of noninfringement. In such cases, the parties may have provided for a reverse payment without having sought or brought about [] anticompetitive consequences.

And the Court expressly rejected the FTC's position that reverse payment settlement agreements should be presumptively illegal, stating that "the likelihood of a reverse payment bringing about anticompetitive effects depends upon its size, its scale in relation to the payor's anticipated future litigation costs, its independence from other services for which it might represent payment, and the lack of any other convincing justification." A fortiorari a settlement that does not involve a large cash settlement should be even less suspect for antitrust purposes.

Such agreements are not, as the FTC alleges in its brief, an attempt to "easily circumvent" the Court's decision in Actavis, but rather are a rational (and predictable) effort to comply with the Court's admonition that ANDA cases be settled in ways that do not involve large cash payments from branded to generic drug companies for dropping their patent challenge. The extent of the Commission's fixation on preventing transfer of anything of "value" is illustrated by the brief's equation of the licensing agreement here to "gold bullion, stocks or real estate," but that is not what the Court said raised legitimate antitrust concerns in reverse payment settlements of ANDA litigation. What for the Commission is merely a means of "avoiding" a ban on settlements (that does not exist in the Court's opinion) can be at least equally seen as an agreement that falls within the scope of the "alternative" settlement arrangements that the Court impliedly sanctioned.

There is, apparently, one type of agreement that the Commission would sanction: where "the parties in Hatch-Waxman patent litigation settle with an agreement that merely sets a date for the generic patent challenger's market entry before the patent expiration date, without more." If this is what the Commission wanted, it had a ready way to get it: it could have asked the Court to make this limitation plain and explicit. Instead, it asked that the Court rule these agreements of any type to be presumptively illegal, a position the Court rejected (and, moreover, in a decision that suggests that settlement agreements of much broader scope should survive antitrust scrutiny).

The Federal Trade Commission, as many expected, cannot be trusted to adopt any reasonable interpretation of the antitrust laws when it comes to applying them in the Hatch-Waxman context. Despite arguing to the Supreme Court that the problem was reverse payment agreements involving excessive settlement amounts from branded to generic companies, it is clear that the Commission will only be happy when all grounds for settlement in ANDA litigation have been eliminated. As the Chief Justice warned in dissent in the Actavis case:

The irony of all this is that the majority's decision may very well discourage generics from challenging pharmaceutical patents in the first place. Patent litigation is costly, time consuming, and uncertain. . . . Generics "enter this risky terrain only after careful analysis of the potential gains if they prevail and the potential exposure if they lose.". . . Taking the prospect of settlements off the table -- or limiting settlements to an earlier entry date for the generic, which may still be many years in the future -- puts a damper on the generic's expected value going into litigation, and decreases its incentive to sue in the first place. The majority assures us, with no support, that everything will be okay because the parties can settle by simply negotiating an earlier entry date for the generic drug manufacturer, rather than settling with money. . . . But it's a matter of common sense, confirmed by experience, that parties are more likely to settle when they have a broader set of valuable things to trade. [citations omitted.]

Sadly, the likely outcome of this ideological crusade against any settlement agreements in this type of litigation will be to reduce rather than promote generic drug competition. When an agency puts on such blinders to practical reality it is hard to understand how they can believe they are acting in the public interest.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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