FTC Notches Win in Fifth Circuit Reverse Payment Patent Settlement Case
The Background: In the Supreme Court's landmark 2013 decision in FTC v. Actavis, the Court determined that large payments by branded drugmakers to potential generic entrants to settle patent disputes could be anticompetitive. It instructed district courts to apply the "rule of reason" standard to analyze whether particular settlements were illegal.
The Development: The Actavis case left many unanswered questions about how courts would apply the rule of reason to settlements in pharmaceutical IP litigation. The recent Impax decision is the first reverse payment case fully litigated by the FTC since Actavis and resulted in a victory for the FTC.
Looking Ahead: While injury and causation issues will continue to be a focus of private litigation, the Fifth Circuit's decision in this case involving a government injunction action sidesteps some of those defenses.
The United States Court of Appeals for the Fifth Circuit recently handed the Federal Trade Commission ("FTC") a major victory in a reverse payment pharmaceutical patent case—the first such case that the FTC fully litigated in eight years.
In a "reverse payment" settlement (in the FTC's vernacular, a "pay-for-delay" settlement), the branded-drug manufacturer settles a challenge to its patent by providing compensation to the generic challenger. In exchange, the generic manufacturer typically agrees to drop its patent challenge and enter the market as a licensee at some later time before the patent expires. The Supreme Court's Actavis decision established that such settlements can sometimes be anticompetitive (see our Jones Day Alert from June 2013, "Supreme Court Holds Reverse Payment Settlements Potentially Anticompetitive—Further Guidance Awaits"). The Actavis court specified that such settlements are subject to antitrust's "rule of reason" balancing test, a tally of pro versus anticompetitive factors. "Large and unjustified" settlement payments were deemed illegal. Follow-on cases after Actavis have all been private actions for damages—until now.
In 2007, Endo International sued Impax for infringing its Opana ER (extended release oxymorphone) patents after Impax requested FDA approval for its generic equivalent. Endo projected $100 million in losses within six months of Impax's entry. (Endo also planned to introduce a new crush-resistant version of Opana ER that would not be therapeutically equivalent to original Opana ER, which Endo planned to remove from the market.) On the eve of their 2010 infringement trial, the parties settled. Impax agreed not to launch until January 1, 2013—8 months prior to the expiration of the patent and thus 8 months earlier than it would have been able to enter if the court ruled the patent infringed and not invalid. Endo promised to pay Impax credits (totaling $102 million) if the introduction of the crush-resistant product diminished sales of the older formulation. Endo also agreed not to market an authorized generic version of Opana ER until expiry of the 180-days of exclusivity Impax would receive as the first patent challenger. The court viewed this as a reverse payment valued at $24.5 million.
In 2017, the FTC challenged the settlement. After balancing the pro and anticompetitive effects, an Administrative Law Judge found it "as a whole" procompetitive because Impax could enter the market before Endo's patent expired. On appeal, the full Commission reversed the ALJ's ruling because (i) any benefits of the settlement must be directly linked to the restraint harming competition (and no such direct benefits existed in this case); and (ii) there must not be less restrictive ways to achieve those benefits (i.e., an earlier generic entry date rather than a higher cash payment). The FTC issued a cease-and-desist order enjoining Impax from entering into similar settlement agreements in the future, but did not impose monetary penalties.
On appeal, the Fifth Circuit affirmed the Commission's decision. It rejected Impax's argument that the rule of reason required the FTC to look at the strength of the patent contested in the underlying infringement suit as the baseline against which to measure any alleged anticompetitive effects. Impax argued that the settlement was procompetitive because it allowed Impax to enter 8 months earlier than if Endo prevailed in the patent lawsuit. The court, however, concluded that "[t]he fact that generic competition was possible, and that Endo was willing to pay a large amount to prevent that risk, is enough to infer anticompetitive effect." The court further found that it did not need to weigh the purported benefits of the settlement against its presumed anticompetitive effects, or determine whether the two were directly related, because the Commission found that there were less restrictive means to resolve the patent dispute (i.e., a settlement consisting of no payment and an earlier entry date). It reached that conclusion even though Impax's lead settlement negotiator testified that Endo was adamant about not allowing earlier entry. The court found that the Commission had sufficiently discredited the witness's testimony as part of its fact analysis.
The Impax decision highlights the differences between an FTC enforcement action, where money is not at stake, and the more common lawsuits in which plaintiffs seek damages. According to the Impax court, it was sufficient for the FTC to show that the settlement (influenced by a large and unjustified payment) eliminated the possibility that the patent case could have resulted in earlier generic entry. But a plaintiff seeking damages from alleged "pay-for-delay" settlements typically must show that they paid for expensive branded products during a time period when they would have paid for inexpensive generics but-for the challenged settlement. To make that showing, plaintiffs must show that the generic products would have launched earlier.
For example, in the First Circuit's 2016 decision in In re Nexium Antitrust Litigation, the court affirmed the jury's decision that a settlement was anticompetitive, and that the settling parties would not have agreed to an earlier licensed entry date, with the result that judgment was entered for defendants. In In re Wellbutrin XL Antitrust Litigation, the Third Circuit likewise stated that private plaintiffs must prove the but-for generic entry date—implicitly requiring that they analyze the strength of the underlying infringement suit—in order to demonstrate a cognizable antitrust injury.
Three Key Takeaways
- The FTC characterized the Impax decision as a "milestone" in its "decades long" effort to stamp out allegedly anticompetitive settlements involving reverse payments in pharmaceutical IP litigation.
- The Impax decision highlights that FTC injunction-only proceedings raise fewer issues than damages cases, where causation and injury take a heightened role.
- The Impax decision assumed, with little discussion, that various contract provisions not involving the immediate payment of cash, including the agreement by Endo not to launch an authorized generic during the term of Impax's first-filer exclusivity were "payments" within the meaning of the Actavis analysis. Further defining what contractual terms constitute "payments" will be an ongoing subject of litigation, but companies considering settlements to resolve Hatch-Waxman actions, particularly those involving first-filers, should familiarize themselves with FTC's position on any terms beyond a simple split of the remaining patent term.
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