FTC Asks Supreme Court to Play Favorites in Reverse Payment Settlement Agreement Cases

by McDonnell Boehnen Hulbert & Berghoff LLP

[author: Kevin E. Noonan]

Federal Trade Commission (FTC) SealReinvigorated by its triumph in convincing a three-judge panel of the Third Circuit to adopt its view that reverse payment settlement agreements in ANDA cases are presumptively illegal (in the K-Dur case, In re K-Dur Antitrust Litigation, which was a relaxation of the Commission's former position that such agreements were per se illegal), the Federal Trade Commission has petitioned for certiorari in the Androgel case, FTC v. Watson (Federal Trade Commission v. Watson Pharmaceuticals, Inc. (11th Cir. 2012).  In an apparent attempt to bootstrap the circuit split it achieved in the K-Dur case into Supreme Court review of a case it considers better positioned to achieve what a decade of litigation and legislative lobbying did not, the Commission's certiorari petition makes several arguments trying to convince the Court that the Watson case, not the K-Dur case, is the right vehicle for consideration of the legality vel non of reverse payment settlement agreements.

To recap, the underlying litigation involved a reverse payment settlement between NDA holder Solvay Pharmaceuticals and ANDA filers Watson Pharmaceuticals and Paddock Pharmaceuticals over AndroGel®, a prescription testosterone formulation prescribed for treating hypogonadism.  Unimed (acquired by Solvay and later acquired by Abbott) and Besins Healthcare S.A. held the NDA, as well as Orange Book-listed U.S. Patent No. 6,503,894 directed to the formulation; this patent will expire in August 2020.  Watson and Paddock filed separate ANDAs having Paragraph IV certifications that the '894 patent was invalid or unenforceable, and Unimed/Besins timely filed suit pursuant to 35 U.S.C. § 271(e)(2) in the U.S. District Court for the Northern District of Georgia.  The lawsuit was pending longer than the statutory 30-month stay, and the FDA approved Watson's ANDA, but neither Watson nor Paddock launched "at risk" (i.e., before the lawsuit had been decided).  However, before the Court could rule on defendants' summary judgment motions after a Markman hearing the parties settled; the District Court entered a Stipulation of Dismissal against Watson and a permanent injunction against Paddock.

In addition to these actions by the District Court, the parties agreed that the § 271(e)(2) defendants would "respect" the '894 patent, and that both were entitled to launch in August 2015, five years before the '894 patent was scheduled to expire.  In addition, Watson and Paddock agreed that their sales forces would promote Unimed's (later Solvay's) AndroGel® product until the agreed time for their own product launch, and that Unimed (later Solvay) would pay the parties (~$20-30 million to Watson, ~$10 million to Par/Paddock) annually; in addition, Par/Paddock agreed to supply AndroGel® to Unimed (later Solvay) in a "backup capacity" for an additional $2 million annually.

The FTC investigated this settlement agreement, pursuant to 21 U.S.C. § 355 note (2003).  The FTC alleged violations of Section 5a of the Federal Trade Commission Act under 15 U.S.C. § 45(a)(1).  The suit was transferred from the Central District of California (in the Ninth Circuit, which had not found these agreements lawful) to the Northern District of Georgia (where the Eleventh Circuit had ruled these agreements to be lawful absent "sham" litigation, in Valley Drug Co. v. Geneva Pharmaceuticals, Inc., 344 F.3d 1294 (11th Cir. 2003); Schering-Plough Corp. v. Federal Trade Commission, 402 F.3d 1056 (11th Cir. 2005)).  The District Court granted defendants' motion to dismiss pursuant to Fed. R. Civ. Pro. 12(b)(6) (failure to state a claim).  In doing so, the District Court rejected the FTC's contentions in its complaint "(1) that the settlement agreement between Solvay and Watson is an unfair method of competition; (2) that the settlement agreement among Solvay, Paddock, and Par is an unfair method of competition; and (3) that Solvay engaged in unfair methods of competition by eliminating the threat of generic competition to AndroGel and thereby monopolizing the market."  The decision was based on the earlier 11th Circuit precedent that reverse payments did not constitute anticompetitive behavior "so long as the terms of the settlement remain within the scope of the exclusionary potential of the patent, i.e., do not provide for exclusion going beyond the patent's term or operate to exclude clearly noninfringing products, regardless of whether consideration flowed to the alleged infringer."

The 11th Circuit affirmed.  The opinion focused on what it considered the economic realities (instead of the FTC's economic theories), specifically that new drugs are produced in the U.S. under the maxims "no risk, no reward" and "more risk, more reward," and that "no rational actor" (the economists' archetype) "would take [the] risk" of investing more than "$1.3 billion" on a potential drug where "[o]nly one of every 5,000 medicines tested . . . is eventually approved for patient use" "without the prospect of a big reward."  Under this system, the Court recognized that the successful drug maker who patents its drug will "usually[] recoup its investment and make a profit, sometimes a super-sized one."  The Court also noted that "more money, more problems" is the result, with the profits "frequently attract[ing] competitors in the form of generic drug manufacturers that challenge or try to circumvent the pioneer's monopoly in the market."  The Court recognized the FTC's position to be that reverse payments are per se anticompetitive as "unlawful restraints on trade" and hence violations of Section 1 of the Sherman Act.

The Court stated that "[t]he lynchpin of the FTC's complaint is its allegation that Solvay probably would have lost the underlying patent infringement action" and 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 in original).  "The difficulty," according to the Court, "is [in] deciding how to resolve the tension between the pro-exclusivity tenets of patent law and the pro-competition tenets of antitrust law," a difficulty that "is made less difficult [] by []'[o]ur earlier decisions.'"  While noting that generally agreements between competitors that keep one competitor from the market to the benefit of the other (and that increase costs to the public) would be barred under the antitrust laws, reverse payment cases were "atypical cases because 'one of the parties [owns] a patent'," citing Valley Drug.  This "makes all the difference" to the Court, because the patent holder "has a lawful right to exclude others" from the marketplace.  Said another way, "[t]he anticompetitive effect is already present" due to the existence of a patent," according to the opinion, citing Schering Plough.  Further citing Valley Drug, the Court said that even subsequent invalidation of the patent would not render the agreement unlawful, since its lawfulness must be considered at the time of settlement, where the patentee "had the right to exclude others."  What counts is the "potential exclusionary power" of the patent at the time of the reverse payment settlement, not its "actual exclusionary power" unless a court had rendered a negative judgment of invalidity or unenforceability prior to the settlement (an unlikely but not impossible scenario).  But the Court noted that the mere existence of a patent did not give the parties to a reverse payment settlement carte blanche; the settlement cannot "exclude[] more competition that the patent has the potential to exclude."  Such agreements remain "vulnerable to antitrust attack" according to the opinion, and are subject to a "three-prong analysis" that requires an evaluation 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," citing Valley Drug.

The Court then synthesized the rule from its cases:  "absent sham litigation or fraud in obtaining the patent, 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."  The Court assessed the FTC's allegations under this standard, noting those allegations to be:  (1) that Solvay was "unlikely to prevail" in the underlying patent infringement litigation; (2) that accordingly the patent has "no exclusionary potential" (emphasis in original); and (3) if a patent has no exclusionary potential, the reverse payment arrangement "necessarily" exceeds its "potential exclusionary scope" and thus is tantamount to "'buying off' a serious threat to competition."  The FTC urged the Court, according to the opinion, "to adopt 'a rule that an exclusion payment is unlawful if, viewing the situation objectively as of the time of the settlement, it is more likely than not that the patent would not have blocked generic entry earlier than the agreed-upon entry date.'"

The Court "decline[d] the FTC's invitation and reject[ed] its argument," saying that to adopt either would "equate[] a likely result (failure of an infringement claim) with an actual result."  In this context, according to the Court, if Solvay was "likely" to fail to survive litigation that meant its chances were 51% to 49%; under these circumstances "as many as 49 out of 100 times that an infringement claim is 'likely' to fail it actually will succeed and keep the competitor out of the market."  Under these circumstances the Court reasoned that "rational parties settle to cap the cost of litigation and to avoid the chance of losing," noting that "[o]ne side or the other almost always has a better chance of prevailing, but a chance is only a chance, not a certainty."  The rationality of settling was evident to the Court:  "[w]hen both sides of a dispute have a substantial chance of winning and losing, especially when their chances may be 49% to 51%, it is reasonable for them to settle" without incurring antitrust liability for doing so.  The FTC's concerns are likely to be overstated, according to the Court, because of "the reality that there usually are many potential challengers to a patent, at least to drug patents" and other generic competitors will arise to challenge the patent.

The Question Presented in the FTC's certiorari petition is prefaced by a long prelude, and (eventually) reads as follows:

Federal competition law generally prohibits an incumbent firm from agreeing to pay a potential competitor to stay out of the market.  See Palmer v. BRG of Ga., Inc., 498 U.S. 46, 49-50 (1990).  This case concerns agreements between (1) the manufacturer of a brandname drug on which the manufacturer assertedly holds a patent, and (2) potential generic competitors who, in response to patent-infringement litigation brought against them by the manufacturer, defended on the grounds that their products would not infringe the patent and that the patent was invalid.  The patent litigation culminated in a settlement through which the seller of the brand-name drug agreed to pay its would be generic competitors tens of millions of dollars annually, and those competitors agreed not to sell competing generic drugs for a number of years.  Settlements containing that combination of terms are commonly known as "reverse payment" agreements.  The question presented is as follows:  Whether reverse-payment agreements are per se lawful unless the underlying patent litigation was a sham or the patent was obtained by fraud (as the court below held), or instead are presumptively anticompetitive and unlawful (as the Third Circuit has held).

The Commission's brief recites many of the same reasons supporting a certiorari grant that have been raised by the parties and amici in the certiorari petition in the K-Dur case:  the circuit split, the importance of the issues to healthcare and the drug industry, and the substantive question of whether the Third Circuit's approach of presumptive illegality, or the Second, Eleventh and Federal Circuits' approach of legality within the boundaries of the "scope of the patent," is the correct basis for assessing these agreements.  But the Commission brings its own unique perspective to each question.

With regard to the circuit split, the Commission argues, with no apparent irony, the likelihood of forum shopping should the Court not step in to resolve the circuit split it tried very hard to create by forum shopping itself.  The petition also bemoans that "[t]he near certainty of facing judicial review in a circuit that applies the scope-of-the-patent approach has effectively disabled the FTC from proceeding administratively against any reverse-payment agreement," in the face of the Commissioner affirmatively stating that the FTC will be filing all its reverse payment cases in district courts in the Third Circuit.  The "important question" argument is based entirely on the FTC's views of the economics of the branded and generic drug marketplace, citing only academic studies and its own Reports in support of its argument.  In this regard it also cites some dated (vintage 1992-2000) statistics to the effect that generic drug manufacturers prevail ~75% of the time in ANDA litigation.  And its arguments regarding the "scope of the patent" test and its purported legal error are based predominantly on cases that relate to "naked" restraints of trade and that ignore the exclusionary rights of the patent holder and the regulatory framework imposed on Hatch-Waxman litigation.

Their principal new argument is that this case provides a "superior vehicle" for Supreme Court review, supported by four arguments.  First, the brief argues, the K-Dur case is a private cause of action (no matter how encouraged and supported by the FTC) and the Watson case is an FTC enforcement action, brought by the government agency "charged by Congress with challenging unfair methods of competition, see 15 U.S.C. 45, and responsible for reviewing agreements settling litigation under the Hatch-Waxman Amendments."  "The Court would benefit from the experienced presentation that the FTC, represented by the Solicitor General, would offer as a party" rather than an amicus, the brief argues.  Unmentioned are the procedural advantages of being a petitioner rather than an amicus in framing and presenting the arguments to the Court; the private plaintiffs were useful in the matter below but now that policy is to be decided the government wants to control how the case is presented to the Court.

The FTC's second argument is that this case has a "simpler" procedural history, arising from a motion to dismiss under Fed. R. Civ. Pro. 12(b)(6) rather than from a grant of a summary judgment motion.  Of course, unmentioned in the brief is the consequence that this case is devoid of the extensive record that exists in the K-Dur case, both before the Commission as well as in the District Court and the Third Circuit, and also the proceedings in parallel litigation in the 11th Circuit where the Court came to the contrary conclusion.

The third argument set forth by the FTC is that the K-Dur case is about post hoc damages (the agreements expired long ago), whereas the Watson case is about injunctive relief on agreements that will keep the generic parties off the market until 2015.  "That makes this case the more attractive vehicle because whatever uncertainties may arise in fixing the damages caused by a reverse-payment agreement -- a question no court of appeals has confronted or passed upon -- the FTC unquestionably will be entitled to the remedy of an injunction if it proves that the reverse-payment agreements here are unfair methods of competition," is the way the brief summarizes the FTC's position.

The FTC's fourth and final argument is that the K-Dur case does not involve a Paragraph IV allegation of invalidity, which at first blush appears to provide an attractive reason for the Court to preferentially consider these issues by granting certiorari in the Watson case.  However, the grounds for deciding whether the agreement is anticompetitive and thus illegal should not depend on whether the product does not infringe or the patent is invalid; those considerations are only relevant to the type of arguments FTC petitioner wants to make, which at root are that the litigation is based on a "bad" patent and thus the patent should not be entitled to the presumption of validity.

In its conclusion, the FTC decides to hedge its bets, suggesting in the alternative that the Court grant both petitions and hear the cases together.

The Court is expected to decide whether to grant certiorari in the Watson case and the K-Dur case later this term.


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McDonnell Boehnen Hulbert & Berghoff LLP

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