Case Name: FTC v. Cephalon, Inc., Civ. No. 2:08-cv-2141, 2014 U.S. Dist. LEXIS 102958 (E.D. Pa. July 29, 2014) (Goldberg, J.)

Drug Product and Patent(s)-in-Suit: Provigil® (modafinil); U.S. Patent No. RE37,516 (“the ’516 patent”)

Nature of the Case and Issue(s) Presented: The issue in this case is not whether the validity of the ’516 patent should be litigated in the antitrust trial, but rather, how the court’s previous finding of invalidity and inequitable conduct will shape the antitrust trial. The FTC sought an order preventing Cephalon from introducing evidence at trial related to the potential validity, enforceability, or infringement of the ’516 patent at the time that Cephalon entered into settlement agreements with the generic manufacturers. Cephalon sought to introduce this evidence to refute the assertion that the settlement agreements violated antitrust laws. The FTC argued that Cephalon should be estopped from arguing about the litigation uncertainty and perceived strength of the ’516 patent at the time of the agreements because (i) the Supreme Court’s decision in Actavis stated that the merits of the underlying patent dispute are irrelevant to the antitrust analysis; (ii) collateral estoppel from the Court’s previous ruling concerning invalidity/unenforceability precludes Cephalon from not claiming that its infringement case had merit; and (iii) under summary-judgment principles, undisputed facts establish the invalidity of the ’516 patent under the on-sale bar and derivation.

Cephalon argued that it should not be estopped from presenting evidence on litigation uncertainty at the time of the settlement agreements because that analysis is proper in the antitrust context. In addition, the parties could not have anticipated that five years after the agreements were entered the ’516 patent would be found invalid. Lastly, Cephalon argues that it did not know or appreciate that, at the time of the invalidity trial, the results would have a preclusive effect against Cephalon at a later antitrust trial. The court found in favor of the FTC.

Why the FTC Prevailed: The court declined to grant the FTC’s motion based on the language in Actavis, which according to the FTC, precludes consideration of the ’516 patent. Instead, the court granted FTC’s motion on the basis of collateral estoppel. Collateral estoppel would apply here if the court found that the issues determined in the patent case are identical to any issues yet to be decided in the FTC’s antitrust case. Cephalon stated that it appreciated this distinction. It did not seek to litigate patent invalidity, but, instead, to “introduce evidence showing that there was uncertainty and risk on both sides of the patent litigation when it negotiated the settlements with the Generic Defendants.” Litigation uncertainty, Cephalon argued, was not at issue in the patent case. Nonetheless, the court found that the collateral estoppel applied because it had earlier found that the ’516 patent was unenforceable due to inequitable conduct. Because patents obtained by fraud do not provide a defense under antitrust laws, the determination at the validity trial presents the same issues in the antitrust case.

The determination of fraudulent procurement precluded Cephalon from now raising the argument of litigation uncertainty because the ’516 patent was always unenforceable due to the fraud. The court rejected the statements of two high-ranking Cephalon officials that at the time Cephalon negotiated the settlement agreements, they believed the patent was enforceable and were unaware of the fraud. Because knowledge of all agents of a corporation, including those who committed the fraud, is imputed to the corporation, Cephalon knew of the fraud at the time it entered the settlement agreements.

Lastly, the court rejected Cephalon’s argument that applying collateral estoppel in this instance would violate its due-process rights, because prior to Actavis there was “well-established precedent making clear that a finding of invalidity or unenforceability in Apotex’s patent case would not be relevant to the antitrust analysis of the earlier-entry settlement agreements Cephalon reached with the Generic Defendants.” The Court reasoned that Cephalon knew its conduct was fraudulent the entire time and that case law plainly recognizes an exception to immunity for fraudulently-obtained patents. Thus, Cephalon knew of the issue the entire time, and had a full and fair opportunity to present its case.