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FTC Champions Inconsistent Positions on the Reverse Payment Settlement Debate

Intellectual Property Today
November 2012

Main Ph.D., Denise , Sommers Ph.D., Erin M.


Authored by Robert A. Pollock, Ph.D.; Denise Main, Ph.D.; and Erin M. Sommers, Ph.D.

Patent litigation in the pharmaceutical industry puts at risk billions of dollars in pharmaceutical sales each year. Many such cases involve efforts by innovative pharmaceutical companies to protect patented products from premature generic competition. Rather than risk the uncertainty of trial, accused patent infringers sometimes agree to delay generic entry and withdraw their patent challenge in exchange for monetary compensation. For over a decade, the Federal Trade Commission ("FTC") has campaigned to limit these so called "pay for delay" settlements, which reverse the traditional flow of settlement funds from alleged infringer to patentee. The FTC argues that the economies favoring these "reverse payments" make them inherently anticompetitive. But those opposing this view argue that the FTC's policy pits the antitrust protections of the Sherman Act against the right to exclude enjoyed by any U.S. patent holder.

Courts have long grappled with these conflicting policies, and recently, the Eleventh and Third Circuits staked positions on opposites sides of the debate. Earlier this year, the Eleventh Circuit in Watson upheld a patentee's payments to generic drug manufacturers in exchange for delayed market entry, applying the "scope of the patent" test. FTC v. Watson Pharms., Inc., 677 F.3d 1298, 1312 (11th Cir. 2012). This approach permits pay-for-delay arrangements as long as (1) the exclusion does not exceed the patent's scope, (2) the patent holder's claim of infringement was not objectively baseless, and (3) the patent was not procured by fraud on the PTO. The Eleventh Circuit's analysis was consistent with the Federal Circuit's 2008 Cipro decision and prior Eleventh and Second Circuit decisions. See In re Ciprofloxacin Hydrochloride Antitrust Litig., 544 F.3d 1323, 1336 (Fed. Cir. 2008); Andrx Pharms., Inc. v. Elan Corp., PLC, 421 F.3d 1227, 1235 (11th Cir. 2005); Schering-Plough Corp. v. FTC, 402 F.3d 1056, 1066 (11th Cir. 2005); Valley Drug Co. v. Geneva Pharms., Inc., 344 F.3d 1294, 1306 (11th Cir. 2003); In re Tamoxifen Citrate Antitrust Litig., 466 F.3d 187, 212-213 (2d Cir. 2006).

The Third Circuit, however, adopted an entirely different approach, holding that a reverse settlement arrangement was presumptively illegal under a modified ("quick look") Rule of Reason standard. In re K-Dur Antitrust Litig., 686 F.3d 197, 218 (3d Cir. 2012). In the Third Circuit's analysis, economic realities of the reverse payment settlements make them presumptively anticompetitive and thus, such settlements are prima facie evidence of an unreasonable restraint of trade. Such evidence, however, can be rebutted by showing that the payment (1) was for a purpose other than delayed entry or (2) offers some pro-competitive benefit.

Although the Supreme Court has denied review of several reverse settlement cases in the past, the Eleventh and Third Circuit have now issued irreconcilable holdings based on the same underlying evidence. Watson, 677 F.3d at 1312; K-Dur, 686 F.3d at 218. This clear conflict among the circuits almost surely requires the Supreme Court to clarify the appropriate standard to analyze the legality of reverse settlement agreements.

Equally interesting are the FTC's arguments in these two circuits. Despite its consistent opposition of reverse settlement agreements, the FTC has taken seemingly inconsistent positions concerning the role the underlying patent and its merits should play in evaluating the legality of such agreements; alternatively arguing that an antitrust analysis should—or should not—take into account the strength of the underlying patent. At the very least, the FTC's contradictory arguments highlight that reverse payment agreements fall outside the traditional framework for antitrust analysis. As the Eleventh Circuit noted in Valley Drug, a typical antitrust analysis is insufficient because "one of the parties own[s] a patent." Valley Drug, 344 F.3d at 1304.

The Statutory Framework Leading to Pay-for-Delay Settlements

To legally market or sell a new drug in the United States, a pioneer drug manufacturer submits a New Drug Application ("NDA"), which includes extensive clinical data demonstrating the safety and efficacy of the drug. 21 U.S.C. § 355(b)(1)(A). The NDA applicant must also identify any patent that covers the drug or its stated indication. The FDA publishes this patent information in the Approved Drug Products with Therapeutic Equivalence Evaluations, otherwise known as the "Orange Book."

Upon expiration of the NDA holder's statutory exclusivity period, a potential generic entrant can file an Abbreviated New Drug Application ("ANDA") to market a bioequivalent copy of a branded drug. See 21 U.S.C. § 355(j). The ANDA applicant, as the second entrant, may rely on the innovator's clinical data, saving the generic company time and expense in bringing its product to market. Id. As part of the ANDA, an applicant must make one of four certifications regarding any patent or lack thereof listed in the Orange Book for the branded drug. 21 U.S.C. § 355(j)(2)(A)(vii). One such certification is the so-called "Paragraph IV" certification, whereby the ANDA applicant certifies that the Orange Book-listed patent for the reference listed drug "is invalid or will not be infringed by the manufacture, use, or sale of the new drug for which the application is submitted." 21 U.S.C. § 355(j)(2)(A)(vii)(IV). The first generic to file a substantially complete ANDA containing a Paragraph IV certification receives a 180-day marketing exclusivity period upon approval provided certain forfeiture provisions are not met. 21 U.S.C. §§ 355(j)(5)(B)(iv) and (D)(I)-(VI).

Filing an ANDA containing a Paragraph IV certification constitutes an act of infringement under 35 U.S.C. § 271(e)(2)(A), and thus gives the patentee standing to file a patent infringement suit in federal court. Filing a timely suit against the ANDA applicant triggers a 30-month stay of the FDA's approval of the ANDA. 21 U.S.C. § 355(j)(5)(B)(iii). Having initiated this process, the ANDA applicant stands to gain much as the ANDA applicant harbors little risk and expense outside the costs of preparing and filing the ANDA and any ensuing litigation, including the slight chance of an adverse finding of exceptional case which may require reimbursement of court costs and/or attorneys' fees. See Yamanouchi Pharm. Co. Ltd. v. Merck & Co. 231 F.3d 1339, 1346 (Fed. Cir. 2000). But with this small investment, the first ANDA applicant stands to gain a majority of the market upon generic entry, albeit with lesser returns as additional generics enter the market. On the other hand, a brand pharmaceutical company stands to gain little and lose much of its extensive investment in developing a drug if its patent is invalidated and/or found unenforceable. This asymmetric risk sets the stage for brand name patentees to settle uncertain patent litigations. 

The Two Sides of the Debate: Antitrust vs. Patent Monopoly

As stated above, the Third Circuit has recently held that reverse payment settlements should be subject to a "quick look" analysis, in which the court presumes that reverse payment agreements are anticompetitive, leaving it to the settling parties to show that the payments were not intended to delay generic entry, or that the agreement has pro-competitive benefits. In such an analysis, the existence of the underlying patent is of no moment, and the Third Circuit has expressly concluded that the merits of the patent need not be considered. K-Dur, 686 F.3d at 218. Even though the "scope of patent" test employed by the Eleventh Circuit does take into account the patent's term, it relies on the statutory presumption that the patent is valid. And although the Eleventh Circuit has referred to the "strength of the patent," it clarified that this refers to "the exclusionary rights appearing on the patent's face and not the underlying merits of the infringement claim." Watson, 677 F.3d at 1311, n. 8.

On both sides of the debate, then, the underlying strength of the patent is inconsequential. The FTC, arguing intra-agency and before the Third Circuit, would appear to agree. But the FTC has championed the opposite position in a different forum, arguing before the Eleventh Circuit that the merits of the patent should be considered.

Before the Third Circuit the FTC Argues that Considering the Strength of the Patent Is Unnecessary and Unhelpful

The Third Circuit K-Dur opinion involved settlements between Schering, the NDA holder and patentee, and two potential generic manufacturers of Schering's K-Durproduct, Upsher and ESI-Lederle ("ESI"). Schering's agreement with Upsher included a non-royalty, non-exclusive license under its patent and an agreement to pay $60 million over three years. In return, Upsher agreed to delay market entry until four years later, albeit before the patent expired.1 K-Dur, 686 F.3d at 205-206. Schering granted a similar license to ESI to market its generic version of the drug, beginning three years after Upsher's market entry, but also prior to the patent's expiration, in exchange for a total payment of $15 million. Id. at 206.

The FTC first opposed those agreements in 2001. But, after a two-month trial, an Administrative Law Judge ("ALJ") dismissed the FTC's complaint in an initial decision comprising more than 100 pages and over 400 findings of fact. In re Schering-Plough Corp.,136 F.T.C. 956, 963-964 (F.T.C. 2003). The ALJ reasoned that Schering's patent gave it the legal right to exclude a generic competitor from the market. It concluded that absent proof of patent invalidity or noninfringement, the settlements were within Schering's exclusionary power, and thus were not anticompetitive.

In a subsequent hearing, the FTC rejected the ALJ's reasoning and unanimously ruled that the Schering settlements violated antitrust law without considering the inherent strength of the patent-in-suit. Id. In fact, the FTC concluded that addressing the merits of the patent were both unnecessary and unhelpful because "we focus on the state of the world as it was perceived by the parties at the time that they entered into the settlement agreement, when they could not be sure how the litigation would turn out." Id. at 995. In essence, the FTC reasoned that because the outcome of the underlying patent litigation was unknown at the time of settlement, the strength of the patent was an unreliable factor in analyzing the settlement.

Further, the FTC concluded that the only reason for Schering's payments was the generic competitors' promise to abstain from entering the market. Id. at 988.2 The FTC also noted that to consider the merits of the patent at the post-settlement stage would place the patent's prior opponent in a position to now defend it. Since the patent now protects the would-be infringer, the generic manufacturer has no incentive to challenge the patent, and a true adversarial proceeding on the merits of the underlying patent is impossible. Moreover, the FTC was concerned that the uncertainties of examining the patent's strength during an antitrust suit would have a "chilling effect" on efficient settlement of patent litigation. Id. at 998.

On appeal, to the Third Circuit, the FTC maintained that there is no need to consider the merits of the underlying patent. Brief of the FTC as Amicus Curiae Supporting Appellants and Urging Reversal, K-Dur (Nos. 10-277, 10-2078, 10-2079). As mentioned above, that Court agreed, holding that any payment from a patent holder to a generic challenger who agrees to delay entry in the market is prima facie evidence of an unreasonable (albeit rebuttable) restraint of trade.

Before the Eleventh Circuit the FTC Embraces the Patent Merits or Lack Thereof

Contrary to the position the FTC eschewed in K-Dur, the FTC argued in Watson that the underlying merits of the patent must be considered. Similar to K-Dur, Watson relates to an ANDA settlement between the NDA holder and patent licensee, Solvay, and several generic drug manufacturers, including Watson. After extensive discovery, the defendants in the ANDA litigation filed motions for summary judgment. The motions were fully briefed and ready for a decision, when the statutory 30-month stay ended. Shortly thereafter, the FDA approved Watson's ANDA. But, prior to any decision on the pending summary judgment motions, the parties entered into a settlement agreement to end the patent litigation. Solvay agreed to pay the potential generic manufacturers an estimated $19 to $30 million per year to refrain from marketing their products until some date in the future but before the expiration of the patent. Watson, 677 F.3d at 1304-05.

The FTC challenged those settlements, arguing that ample evidence at the summary judgment stage demonstrated that Solvay was unlikely to prevail in its patent litigation, and as a result, its reverse settlement payment extended a monopoly that patent laws did not authorize. Id. at 1305-06. Despite this reasoning, the district court applied Eleventh Circuit law, granting defendants' Rule 12(b)(6) motion to dismiss the action because the settlement did not "impose[] an exclusion greater than that contained in the patent at issue." Id. at 1306.

On appeal, the Eleventh Circuit affirmed, following the Federal Circuit and its own precedent. Id. at 1315. Among the Court's reasons for rejecting the FTC's "strength of the patent" analysis, the Court stated "[t]his Court and the other non-specialized circuit courts have no expertise or experience in the area. We are ill-equipped to make a judgment about the merits of a patent infringement claim, which is what we would have to do in order to decide how likely the claim was to prevail if it had been pursued to the end. The FTC's approach is in tension with Congress' decision to have appeals involving patent issues decided by the Federal Circuit." Id.

Will the FTC Assert Both Positions Before the Supreme Court?

At least one of K-Dur or Watson will likely end up before the Supreme Court, and the possibility exists for both to land there. Petitions for Supreme Court review of both K-Dur and Watson have already been filed. K-Dur, Petitions for Writ of Certiorari, 81 USLW 3090 (August 24, 2012)(No. 12-245); 81 USLW 3090 (August 29, 2012)(No. 12-265); Watson, Petition for Writ of Certiorari, 81 USLW 3216 (October 4, 2012)(No. 12-416). In its Watson petition, the FTC tempered its "strength of the patent" argument, instead focusing on its long-standing position that reverse settlements are presumptively anticompetitive, even suggesting that the United States, not the FTC, is the real advocate for examination of the merits of the patent. See Watson Petition, fn. 6. Notwithstanding this apparent shift away from its merit-based argument, Watson's petition is still laced with contentions that an untested patent should not result in the automatic exclusion of potential rivals, a position that arguably stands the statutory presumption that the patent is valid on its head. See, e.g., Watson Petition at 25. But even if the FTC no longer argues its "strength of the patent" position, the FTC's historically dichotomous arguments are on the record and ironically place patents center stage in the debate even though the FTC champions a rule of reason analysis that ignores them.

1 The Schering-Upsher agreement also included licenses to Schering covering certain Upsher products, though Schering apparently abandoned plans to make and market those products subsequent to settlement.

2 Schering appealed the FTC's ruling to the Eleventh Circuit, which reversed in Schering-Plough Corp. v. FTC, 402 F.3d 1056 (11th Cir. 2005).

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