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Apr 12, 2010

FTC Challenges to Patent Settlements Entering a New Stage

Recent rulings suggest that the FTC will need to act against these settlements within the framework of existing case law.

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    FTC believes that patent settlements that include payments to generic firms constitute antitrust violations.(smcn/Fotolia.com)

    There is no higher priority at the Federal Trade Commission (FTC) than stopping pharmaceutical companies from entering into certain types of patent settlements, i.e., settlements with an agreed-upon date for the generic to enter plus a payment from the branded manufacturer to the company producing the generic version. There are also few areas where the agency has suffered such a string of judicial defeats—the FTC’s legal position on such settlements has been rejected in more than six cases and by three federal appeals courts.

    The FTC has not given up the fight, but at some point it will have to consider pursuing its challenges within the legal framework endorsed by the courts. Two recent court decisions suggest that if the FTC hasn’t already decided to do that, it will soon.

  • Dispute over Settlements with Payments to Generic Firms

    The FTC believes that patent settlements that include payments to the generic firm are presumptive antitrust violations because they amount to what the FTC calls “pay for delay”—i.e., the payment to the generic is, in the FTC’s view, in return for acceptance of a later entry date. The term “reverse payment” is sometimes used because, more typically, settlements involve a payment from the alleged infringer to the plaintiff. Under the FTC’s reasoning, such settlements are unlawful regardless of who ultimately would have won the patent litigation because, absent the payment, the generic company would have insisted that the settlement have an earlier entry date.

    Most courts, however, have rejected this reasoning. They have found that patent settlements cannot harm competition absent proof that the settlement impacted competition outside the scope of a valid patent. This has been the outcome for the following cases: Schering-Plough Corporation v. FTC, In re Tamoxifen Citrate Antitrust Litig., In re Ciprofloxacin Hydrochloride Antitrust Litig. The courts have typically required those challenging such settlements to show that the settlement impacts competition from products not covered by the patents or that the underlying patent infringement case was “objectively baseless” or based on “fraud.” The FTC has fought hard, albeit unsuccessfully, to overturn these decisions.

  • Two Recent Decisions

    Motions to dismiss were recently decided in two cases brought by the FTC challenging patent settlements that were alleged to include payments to the generic company. Although these courts reached different results, both expressly rejected the FTC’s theory of liability.

    In February a federal court in Georgia dismissed an antitrust challenge brought by the FTC and others to a patent settlement relating to the drug Androgel. In In re Androgel Antitrust Litigation, MDL Docket 2084, the plaintiffs challenged a patent settlement between Solvay Pharmaceuticals and two generic firms pursuant to which (i) the generics agreed to enter in 2015 (five years before patent expiry), and (ii) the parties agreed to several side agreements involving payments to the generic firms in return for providing certain services.

    The FTC contended that the side arrangements were ways to compensate the generic firms for a delayed entry date. The court, however, following the reasoning of the prior cases, dismissed the antitrust challenge due to the lack of adequate allegations that the settlement impacted competition outside of a valid patent.

    In the second case, decided in March, a federal court in Pennsylvania allowed an antitrust challenge to proceed against a patent settlement relating to the drug Provigil but only based on a theory that the settlement impacted competition outside the scope of a valid patent. According to the court in King Drug Co. of Florence, Inc. v. Cephalon, 06 Civ. 1797, the settlement agreements included side arrangements plus a compromise entry date for the settling generic companies. The court expressly rejected FTC’s theory of liability, stating that “a reflexive conclusion that the agreements in question are per se antitrust violations, as urged by Plaintiffs, and in particular the FTC, ignores the ‘exclusionary’ patent rights afforded to Cephalon.” The court did, however, allow the case to proceed based on allegations that competition was impacted outside the scope of the patent.

  • Implications

    While on the surface these recent rulings appear to constitute a split decision, ultimately both decisions represent setbacks for the FTC’s legal strategy. They also appear, as a practical matter, to leave the FTC without a simple way forward to change the law. An appeal of the Androgel decision would go to the Eleventh Circuit, which has twice rejected the FTC’s position. Moreover, in light of the continued and repeated rejection by the courts of its legal theory, the FTC must seriously consider whether it should press on with it.

    At the same time as the pressure on its own legal theory builds, the FTC in Provigil must now attempt to prove its case under the very legal framework that it rejects. Whether it can do so successfully remains to be seen.

    The FTC challenges to patent settlements may therefore be entering a new stage, where the FTC will effectively be required to work against these settlements within the framework of the existing case law. In practice, this may mean that the FTC will be forced to challenge these settlements with evidence that the patents asserted in the underlying infringement litigation were either invalid or not infringed (or show an impact on competition from products not subject to the litigation). This may force the FTC to consider foregoing challenging settlements that include payments to the generic firms, where the patents appear strong.

    A bill making reverse payment patent settlements presumptively unlawful was part of President Obama’s healthcare reform package but was dropped just prior to passage. Hence another effect of these recent decisions will be to add additional impetus to the FTC’s efforts to obtain the legislative fix to its enforcement setbacks.


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