On Friday, August 25, 2023, the U.S. Court of Appeals For The District Of Columbia Circuit affirmed dismissal of an antitrust action brought by the Federal Trade Commission regarding Endo Pharmaceuticals’s grant of an exclusive patent license for its opioid, Opana ER (extended release oxymorphone), to Impax Laboratories.1 We last wrote about the FTC’s lawsuit in April 2022, when D.C. District Judge Royce C. Lamberth granted the drug makers’ motions to dismiss, finding that the exclusive patent licenses at issue do not violate federal antitrust law.2 Writing for the panel at the court of appeals, Circuit Judge J. Michelle Childs upheld Judge Lamberth’s decision.
Endo began selling Opana ER in 2006 and continued to sell the drug until 2017. In 2007, Impax sought to launch a competing generic version of Opana ER and Hatch-Waxman patent litigation ensued. Endo and Impax settled the litigation in 2010.3 Per the 2010 settlement and license agreement, (1) Endo provided Impax a license that would cover all of Endo’s Opana ER patents, including any patents acquired after the agreement’s effective date; (2) Impax agreed not to launch its generic until January 2013; and (3) following expiration of Impax’s “Exclusivity Period,” Impax and Endo would negotiate in good faith the terms of a license to any additional patents that had not yet issued.
As contemplated by the 2010 agreement, Endo obtained additional patents for Opana ER in 2012. Endo successfully litigated several other patent infringement cases against other would-be generic competitors, leaving Impax as the sole competitor for Opana ER.
In October 2015, Endo requested that Impax pay it an eighty-five percent royalty to license these patents; Impax refused. Endo sued again, alleging that Impax breached the 2010 agreement. During the litigation, in June 2017, Endo pulled Opana ER from the market following FDA’s scrutiny of Endo’s reformulation of a crush-resistant version of Opana ER, leaving Impax’s generic as the only extended release oxymorphone product on the market. After Endo’s market exit, the average price of Impax’s 40 mg tablet of oxymorphone ER increased. Endo’s suit survived Impax’s motion to dismiss and the parties settled a few months later.
The 2017 agreement clarified Impax’s license to all of Endo’s Opana ER patents in exchange for a monetary payment and royalties on Impax’s gross oxymorphone ER profits. The parties also agreed that Impax’s royalty obligations would terminate if Endo took various actions, including by reentering the market or licensing other generics. Accordingly, Endo in essence forfeited a possible relaunch of Opana ER and foreclosed the likelihood of additional licensees, with Impax functionally “pa[ying] Endo for the exclusive right to use the patent licenses for oxymorphone ER[.]” Even if the terms of the 2017 agreement left room for an “option to compete,” the agreement was essentially an “exclusive licensing agreement and a patent monopoly.”4
The FTC brought suit, alleging that Endo and Impax violated Sections 1 and 2 of the Sherman Act and § 5(a) of the FTC Act by agreeing that Endo would not to reintroduce Opana ER in exchange for a royalty on Impax’s generic. The 2017 agreement, the FTC alleged, allowed Impax to maintain monopoly power by eliminating competition.
D.C. Circuit’s Opinion
The panel boiled down the question presented: “Does a valid patent holder’s grant of a nearly exclusive license to a single potential competitor in exchange for royalty payments violate antitrust law when that nearly exclusive license restrains trade only to an extent traditionally recognized by patent law as reasonable?”5 The panel found it does not.
Considering Supreme Court precedent, the panel found that “certain exercises of patent rights are lawful despite the Sherman Act’s dictates” including that the “‘owner of a patent may assign it to another and convey . . . the exclusive right to make, use, and vend the invention.’”6 The panel further confirmed that “‘[t]here is nothing unlawful in the requirement that a licensee should pay a royalty to compensate the patentee for the invention and the use of the patent.’”7
The panel further considered the import of the Supreme Court’s FTC v. Actavis, Inc.8 There, the Supreme Court held that large and unexplained reverse payment (or “pay-for-delay”) patent settlements may be subject to rule-of-reason antitrust scrutiny, but the Court did not disturb the long-standing principle that a patentee may grant, and set conditions in granting, licenses of valid patents.9 Indeed, the Supreme Court in Actavis instructed lower courts to strike a balance “between the lawful restraint on trade of the patent monopoly and the illegal restraint prohibited broadly by the Sherman Act[,]” stating that if the Patent Act “‘specifically gives a right’ to restrain competition in the manner challenged,” or if the Court has “previously approved as reasonable” a given practice, lower courts must defer to those judgments.10 The panel thus found that, “unlike in Actavis, the Patent Act expressly authorizes behavior that closely resembles the 2017 Agreement,” i.e., an exclusive license, and that the FTC failed to “offer any support for its assertion that an exclusive licensing agreement is different if the parties are potential competitors. That, after all, describes the facts of General Electric[.]”11
The panel rejected the FTC’s argument that the 2017 Agreement “is not a standard exclusive licensing agreement because the 2010 Agreement had already given Impax a license to Endo’s present and future patents.”12 The panel noted that Impax had failed to dismiss Endo’s breach-of-contract suit, such that Endo could convey “the right to practice its patents unclouded by a plausible claim for infringement backed by the threat of treble damages.”13 The panel further criticized the FTC for failing to explain how the 2017 agreement “meaningfully differs from a standard exclusive license.” The FTC failed to explain why an “otherwise permissible exclusive license somehow became impermissible if it was preceded by a non-exclusive license . . . especially since the 2017 Agreement appears to have been a straightforward and bona-fide settlement of ongoing litigation.”14 The panel noted that the FTC “has not alleged that the 2017 Agreement was an ‘unusual’ settlement in which Endo paid Impax to drop a legitimate challenge against potentially weak or invalid patents” or “that the 2017 Agreement gave Endo undue economic power to control a different market beyond the one it already controlled through its patents.”15
The panel also rejected the FTC’s reliance on Palmer v. BRG of Georgia, 498 U.S. 46 (1990), where the Court found an exclusive license agreement designed to allocate markets to be a per se violation of the Sherman Act. The panel explained that in Palmer “an exclusive licensing agreement was a pretext for a noncompete agreement between two competitors, because the parties in Palmer did not require one another’s intellectual property to participate in the market,” whereas “Impax’s ability to compete was completely contingent on the clarity of its license to use Endo’s patents[.]”16
In sum, the D.C. Circuit sided with the drug makers, finding that “[n]either precedent nor the Commission’s allegations permit this court to conclude that the 2017 Agreement meaningfully differs from a standard exclusive license, which both the Supreme Court and the Patent Act have blessed as lawful” and “in the absence of any allegations of antitrust harms extending beyond those explicitly sanctioned by Congress in the Patent Act and by the Supreme Court in Actavis, there is no basis on which to find Sherman Act liability on this record.”
In the ten years since the Supreme Court decided Actavis, Plaintiffs’ theories of what constitutes an anticompetitive settlement have expanded considerably.17 The panel’s opinion, finding against the FTC on a motion to dismiss, sets an important precedent in outlining the outer limits of Actavis. The panel confirms that—beyond the context of a large and unexplained reverse payment (or other established anticompetitive conduct)—the Patent Act immunizes exclusive licensing of valid patents, and royalty payments therefrom, as a reward for the innovative process.
1 FTC v. Endo Pharm. Inc., No. 22-5137, __ F.4th__, 2023 U.S. App. LEXIS 22428 (D.C. Cir. Aug. 25, 2023).
3 The 2010 settlement lead to its own barrage of antitrust litigation by both the FTC and private plaintiffs. See, e.g.,
Impax Labs., Inc. v. FTC, 994 F.3d 484 (5th Cir. 2021), cert. denied, 142 S. Ct. 712 (2021); In re Opana ER Antitrust Litig., MDL No. 2580, No. 1:14-cv-10150 (N.D. Ill.). Both cases went to verdict, with the FTC’s case ending in a judgment
against Impax, while the private plaintiffs’ case ended in a trial victory for Endo.
4 Endo Pharm., 2023 U.S. App. LEXIS 22428, at *6-7.
5 Id. at *13.
6 Id. at *12 (citing United States v. Gen. Elec. Co., 272 U.S. 476, 489 (1926)).
7 Id. (citing United States v. Line Material Co., 333 U.S. 287, 315 (1948)). The panel also appeared to reject any notion
that antitrust scrutiny should be applied to the declining nature of the royalty (i.e., that the royalty would decline to zero if Endo were to reintroduce a competing product), stating that the 2017 Agreement is “legally indistinguishable from (and
technically less restrictive than) a standard exclusive license.” Id. at *17.
8 570 U.S. 136, 141 (2013).
9 See id. at 150.
10 Id. at 148 (quoting Line Material Co., 333 U.S. at 310-311).
11 Endo Pharm., 2023 U.S. App. LEXIS 22428, at *14-15.
12 Id. at *15.
13 Id. at *15-16.
14 Id. at *16.
15 Id. at *17-18. The panel did not foreclose the FTC from pursuing similar actions in the future, noting that “the
Commission is free to plead that a licensing agreement results in unjustifiable competitive harms, so long as it explains how those harms exceed what the Patent Act and settled precedent permit, which it has failed to do here.” Id. at *18.
16 Id. at *17, n.1.
17 See, e.g., Value Drug Co. v. Takeda Pharm., U.S.A., Inc., No. 21-3500, 2022 U.S. Dist. LEXIS 58574, at *5-6 (E.D. Pa. Mar. 30, 2022) (denying motion to dismiss, crediting allegations that brand drug manufacturer “conspired to order market
entry and restrict output through. . . separate settlement agreements” with three generic drug manufacturers, which “are part of a larger antitrust conspiracy to order market entry and restrict output” and “share the supracompetitive profits for an extended period of time. . . . by staggering the Generics’ entry and conspiring to hold off the ‘third wave’ of Generics
consisting of generic drug manufacturers who had not yet filed ANDA applications from entering the market for as long as possible to prevent the incremental price collapse which occurs with each generic entrant.”).