Case Brief: Federal Trade Commission v. Watson Pharmaceuticals

by McDonnell Boehnen Hulbert & Berghoff LLP

[Ed. The Supreme Court heard oral argument today in Federal Trade Commission v. Watson Pharmaceuticals.  While Patent Docs will provide analysis regarding the oral argument in a subsequent post, we provide the following analysis of the case for the benefit of our readers.]


Are reverse-payment settlement agreements in ANDA litigation per se lawful unless the underlying patent litigation was a sham or the patent was obtained by fraud, or instead presumptively anticompetitive and unlawful?


Under the Federal Food Drug and Cosmetic Act (FDCA), a manufacturer of a new drug must seek approval from the U.S. Food and Drug Administration (FDA) before taking the drug to market.  21 U.S.C. § 355(b).  This approval is obtained via a new drug application (NDA).  A drug approved by the NDA process is generally referred to as a "brand-name" drug and is listed in the Approved Drug Products with Therapeutic Equivalence and Evaluations book, a.k.a., the "Orange Book."  Under the Hatch-Waxman Act, any drug manufacturer may seek approval of a generic version of a brand-name drug, subject to certain periods of exclusivity, via an abbreviated new drug application (ANDA).  21 U.S.C. § 355(j).  As part of the ANDA review process, the brand-name manufacturer must identify to the FDA patents that could reasonably be asserted against someone making, using, or selling its drug.  21 U.S.C. § 355(b).  In turn, the manufacturer of the generic version of the drug must explain how its generic drug can be marketed without infringing those patents.  One way in which the generic manufacturer can comply with this requirement is to file what is called a Paragraph IV certification, which states that a given patent identified by the brand-name manufacturer "is invalid or will not be infringed by the manufacture, use, or sale of the drug."  21 U.S.C. § 355(j)(2)(A)(vii)(IV).  Filing an ANDA is a statutory act of infringement under 35 U.S.C. 271(e)(2) and a brand-name drug manufacturer is given 45 days to file a patent infringement suit after receipt of notice from the ANDA applicant that a Paragraph IV certification was made.  Occasionally, settlement agreements of such litigation are reached between brand-name manufacturers and generic manufacturers, which confer payment to the generic manufacturer in return for a delay in introducing their generic product into the marketplace (but generally sooner than if the patentee had prevailed in litigation).  These are referred to as "reverse payment agreements."

SolvaySolvay Pharmaceuticals, Inc. (Solvay) and Besins Healthcare, S.A. (Besins) are the co-owners of U.S. Patent No. 6,503,894 (the '894 patent), claiming a formulation of AndroGel, which is a topical gel containing synthetic testosterone which is used to treat the symptoms of low testosterone in men.  This formulation is listed in the Orange Book and expires on August 30, 2020.  Soon after grant of the '894 patent, two other drug manufacturers, Watson Pharmaceuticals, Inc. (Watson) and Paddock Laboratories, Inc. (Paddock) developed generic versions of AndroGel and filed ANDAs on the formulations.  Both companies made Paragraph IV certifications stating that their generic versions of AndroGel did not infringe the '894 patent or that the patent was invalid.  Solvay then filed suit against Watson, Paddock, and Par Pharmaceuticals Companies (Par; Par purchased all rights to Paddock's ANDA in September 2006) alleging patent infringement.  The suit triggered the 30-month stay of the FDA's approval process for Watson's and Par/Paddock's generic versions of AndroGel, which expired in January 2006.  See 21 U.S.C. § 355(j)(5)(B)(iii).  When the stay expired, the litigation was still ongoing, and the FDA promptly approved Watson's ANDA.  This approval, as well as the prospect of losing its monopoly in the AndroGel market, motivated Solvay to settle.  Under the terms of the agreements reached, Watson, Paddock, and Par agreed not to market generic AndroGel until August 31, 2015, unless another manufacturer entered the market before then, and also agreed to provide to Solvay certain marketing and manufacturing assistance.  In return, Solvay agreed to pay Par/Paddock $10 million/year for six years and an additional $2 million/year for backup manufacturing assistance.  Solvay also agreed to share some of its AndroGel profits with Watson through September 2015 (projected to be $19 million to $30 million per year).

Federal Trade Commission (FTC) SealThe parties reported the settlement agreements to the Federal Trade Commission (FTC) as required by 21 U.S.C. § 355 note (2003) (Federal Trade Commission Review).  In response, the FTC filed an antitrust lawsuit against Solvay, Watson, Par and Paddock in the U.S. District Court for the Central District of California.  (In light of the fact that the same agreement had been the subject of an earlier lawsuit in the Eleventh Circuit, the California court transferred the matter to the District Court for the Northern District of Georgia.)  The FTC alleged that Solvay's promises to pay Watson, Par, and Paddock in exchange for those companies not selling generic AndroGel until 2015 were unlawful under § 5(a) of the Federal Trade Commission Act, 15 U.S.C. § 45(a)(1), which forbids "[u]nfair methods of competition in or affecting commerce, and unfair or deceptive acts or practices in or affecting commerce."  The FTC specifically alleged that the settlement agreements were attempts to defer generic competition with branded AndroGel by postponing the entry date of the generic drugs, thereby maintaining Solvay's monopoly and allowing the parties to share monopoly profits "at the expense of the consumer savings that would result from price competition."  The FTC's complaint hinged on its allegation that Solvay probably would have lost the underlying patent infringement action.  More specifically, the complaint argued that "Solvay was not likely to prevail" in the patent litigation because "Watson and Par/Paddock developed persuasive arguments and amassed substantial evidence that their generic products did not infringe the ['894] patent and that the patent was invalid and/or unenforceable" (emphasis added).  The FTC concluded that because the '894 patent "was unlikely to prevent generic entry," Solvay's payments to the generic drug producers continued and extended a monopoly that the patent laws did not authorize, and therefore, the reverse payment agreements unlawfully restrained competition.  The District Court dismissed the complaint under Fed. R. Civ. P. 12(b)(6), agreeing with the four defendants that the appellate court's earlier precedent (Valley Drug Co. v. Geneva Pharmaceuticals, Inc., 344 F.3d 1294 (11th Cir. 2003)) immunizes reverse payment settlements from antitrust attack unless a settlement "imposes an exclusion greater than that contained in the patent at issue."  The District Court concluded that the FTC did "not allege that the settlements exceed the scope of the '894 patent."  The FTC then appealed to the U.S. Court of Appeals for the Eleventh Circuit.

The Eleventh Circuit affirmed the District Court's decision relying on its Valley Drug Co. precedent, which held that parties to reverse payment settlement agreements in ANDA litigation are immune from antitrust liability if the anticompetitive effects of their settlement fall "within the scope of the exclusionary potential of the patent."  The Court stated that the proper analysis "requires an examination of: (1) the scope of the exclusionary potential of the patent; (2) the extent to which the agreements exceed that scope; and (3) the resulting anticompetitive effects."  According to the Court, the key to this analysis is an evaluation of whether the settlement agreements contain provisions that restrict competition beyond the scope of the exclusionary potential of the patent.  In affirming, the Court specifically rejected the FTC's "likely to fail" rationale, stating that its decisions focus on the potential exclusionary effect of the patent, not the likely exclusionary effect.

The FTC then petitioned for certiorari, which was granted by the Supreme Court.  The Valley Drug decision is consistent with decisions in other Circuits (Second and Federal).  However, in the interim the Third Circuit agreed with the FTC's position of presumptive illegality, creating a circuit split that the Supreme Court agreed to resolve in granting certiorari here.


Watson PharmaceuticalsThe parties in this case ask the Supreme Court to establish a rule to analyze reverse payments in the context of antitrust violations.  The FTC supports the use of an analysis that deems reverse payment agreements as per se unlawful, while Watson advocates for the "scope-of-the-patent" approach adopted by most Circuit Courts which states that a reverse payment settlement is immune from antitrust attack so long as its anticompetitive effects fall within the scope of the exclusionary potential of the patent absent sham litigation or fraud in obtaining the patent.

The FTC asks the Court to rule that reverse payment agreements are presumptively unlawful under a "quick look" rule of reason analysis.  Under this approach, a reverse payment agreement is presumed to be anticompetitive, and the antitrust defendants bear the burden of procompetitive justification by showing, for example, some countervailing procompetitive virtue.  See In re K-Dur Antitrust Litig., 686 R.3d 197 (3rd Cir. 2012).  Therefore, if the plaintiff establishes the existence of a reverse payment agreement, then the burden shifts to the defendants to establish an affirmative defense that justifies their agreement's deviation from the operations of a free market.  The FTC presents two primary ways in which the presumption of illegality could be rebutted.  First, the parties could show that any money that changed hands was for something other than a delay.  Second, the defendants in the antitrust suit could rebut the presumption by showing that the payment was commensurate with the litigation costs that the brand-name manufacturer avoided by settling.  The FTC contends that a rule treating reverse payments as presumptively unlawful will preserve incentives for brand-name and generic manufacturers to resolve Paragraph IV litigation in alternative ways that do not undo the manufacturers' competitive relationship.

Additionally, the FTC argues that treating reverse payment agreements as presumptively unlawful serves the purposes of competition law.  The FTC supports its contention by stating that reverse payment agreements resemble other agreements between competitors that are per se unlawful because, from an economic perspective, such agreements directly restrict output and raise price and thus are anticompetitive.  Specifically in the context of Paragraph IV litigation, the FTC argues that by agreeing to a later date of generic entry, the brand-name and generic manufacturers can extend the period of monopoly pricing and thereby increase total profits, while harming consumers.

The FTC also argues that treating reverse payment agreements as presumptively unlawful serves the purposes of patent law.  The FTC alleges that the Court has never suggested that the bundle of rights a patent provides to its holder includes the right to share the patentee's monopoly profits to induce potential competitors to abandon their efforts to compete or stay out of the market altogether.  The Commissioner argues further that since reverse payments lack support in the Patent Act and traditional settlement practice, they raise concerns about the integrity of competition-restricting features of the settlement.  The FTC alleges that the "scope-of-the-patent" approach inappropriately insulates reverse payment agreements from meaningful antitrust scrutiny.  The FTC argues, therefore, that the judgments in cases using its preferred methodology would reflect determinations as to the actual exclusionary force of the relevant patents.  An additional benefit to this method, the FTC contends, is the elimination of invalid patents.

Finally, the FTC argues that reverse payment agreements frustrate the procompetitive policy of the Hatch-Waxman Act (promoting generic competition at the earliest appropriate time) by short-circuiting the Act's procedures in a way that tends to result in later generic entry than would otherwise occur.  The Commissioner contends further that Congress established the Paragraph IV litigation framework to facilitate early and definitive resolution of patent disputes, and although the Amendments do not compel parties to litigate to judgment, nothing in the Amendments contemplates that a patentee will pay an accused infringer in order to escape Paragraph IV litigation.

Watson counters the FTC's suggested use of the quick look rule of reason, first stating that per se treatment is appropriate "only if courts can predict with confidence that [a patent] would be invalidated in all or almost all instances under the rule of reason."  Leather Prods. Inc. v. PSKS, Inc., 551 U.S. 877, (2007).  Thus, the quick look analysis is only applicable "when the great likelihood of anticompetitive effects can be easily ascertained."  California Dental Ass'n v. FTC, 526 U.S. 756 (1999).  Watson argues further that the FTC's position is inconsistent with the well settled principles of antitrust law, patent law, and the law of settlement.  It arguea specifically that the proposed test lacks a sound basis in the Court's antitrust precedent, and reflects an improper effort to shift the burden of persuasion to defendants to justify settlement of litigation.  Watson states that the proposed test would lead to consumer harm in the form of fewer generic patent challenges and reduced innovation.  Furthermore, Watson argues that it would burden the judicial system by forcing parties to litigate their patent disputes to conclusion when they would prefer to settle.  Watson continues its rebuke of the FTC's proposed method by contending that permitting a plaintiff to state a prima facie case for "payment" without demonstrating an actual net value transfer, and of "delay" with the simple allegation that the parties agreed that generic entry would occur at some time in the future sets an alarmingly low and speculative bar for pleading an antitrust violation.

In response to the FTC's competition arguments, Watson argues that the FTC cannot demonstrate actual anticompetitive effects, and instead substitutes a proxy that merely assumes them, i.e., it infers that if Paragraph IV patent litigants were prohibited from settling with payment, they would reach a settlement with a deferred entry date that roughly corresponds to the parties' assessments of their likelihood of success in the litigation.  Watson contends that this assumption is unwarranted and unproven, and presents several examples of what Watson alleges to be flawed empirical analyses cited by the FTC in support of its position.

Watson responds to the FTC's patent law contentions by arguing that the effect of the quick look test is to treat the patent as though it were presumptively invalid even though the Patent Act provides that a patent is "presumed valid."  35 U.S.C. § 282(a).  Watson states that the FTC explicitly takes the position that the patent has no scope until the courts have established its validity and coverage in litigation.  Watson concludes that recognition of the patent's lawful exclusionary potential is crucial to the correct antitrust analysis, and therefore, the FTC's disregard of the patent is itself a reason to reject its proposed test.

Watson responds to the FTC's Hatch-Waxman arguments by stating that a rule that too severely restricts settlement options will chill settlements and result in continued litigation.  In other words, the uncertainty flowing from such a rule could lead to fewer Paragraph IV ANDA challenges and reduced incentives to innovate.

Watson asks the Court to adopt the scope-of-the-patent approach adopted by the Eleventh Circuit in affirming the holding below.  Watson contends that this approach can be viewed as a structured rule-of-reason inquiry whereby the court, upon finding that the settlement's terms do not exceed the patent's exclusionary scope, may deem the agreement reasonable and lawful.  It states further that this approach provides Hatch-Waxman litigants with a bright-line metric for determining the legality of their conduct at the time of settlement.


The facts of this case place it squarely at the intersection of antitrust law, patent law, and the pharmaceutical industry.  The incentives for developing a drug can only be described as "no risk, no reward" and "more risk, more reward."  FTC v. Watson Pharmaceuticals, Inc. 677 F.3d 1298 (11th Cir., 2012).  Only one in every 5,000 drugs tested for treatment of illness is eventually approved for use, and the average drug takes 10 to 15 years to develop at a cost of more than $1.3 billion.  Therefore, incentives must exist for drug companies to incur the cost and time that it takes to develop and bring a drug to market, i.e., they must be afforded some period of exclusivity that will allow them to recoup their cost as well as to receive profits from the sale of the drug.  The patenting process as well as the NDA process has afforded drug makers with a means to these ends.  However, the need to provide affordable drugs to the public is equally important.  Therefore, the Hatch-Waxman Act and ANDA applications allow for generic options to enter the marketplace.

If the Court adopts Watson's proposed analysis method, it could lead to an increase in reverse payment settlement agreements (although agreements of these types have been trending a bit downward recently).  If the FTC's proposed method is accepted, it could effectively eliminate settlements in Paragraph IV litigations because if any "pay" or "delay" is determined, the consequences could be dire for the patent holder.

A patent confers on its owner the right to exclude others from practicing its invention.  It also provides the owner with the right to allow the invention to be practiced by others in return for whatever fee they deem reasonable for the right.  In this vein, a reverse payment should be viewed no differently from a licensing agreement.  The alleged infringer has agreed not to use the invention for a fee just as a licensee would agree to use the invention for a fee.  Such are the rights of the patent owner.  The courts have routinely held that valid patents are outside the scope of antitrust law because by their mere existence they confer monopoly rights of sorts to their owners.  It is difficult to see the use of reverse payment agreements as anticompetitive since they are so closely tied to rights that already exist based on a valid patent.  The FTC seems to think that any patent holder that would enter into such an agreement knows its patent is "bad" and thus preventing reverse payment settlement agreements is good.  If anything, this appears to be a public policy issue that may be better addressed by Congress and seems outside the prevue of the FTC and its role in eliminating anticompetitive business practices.


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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