Per se legal? The Eleventh Circuit Rejects FTC’s “Unlikely to Prevail” Antitrust Challenge to “Reverse Payment” Patent Settlements

By Meera El-Farhan

In F.T.C. v. Watson Pharmaceuticals, Inc., 677 F.3d 1298 (11th Cir. 2012) the U.S. Court of Appeals for the Eleventh Circuit rejected the Federal Trade Commission’s (“FTC”) antitrust challenge to “reverse payment” patent settlements. Under the terms of the “reverse payment” (or “pay-for-delay”) agreement, the patent owner of AndroGel, Solvay Pharmaceuticals, Inc. (“Solvay”), agreed to make over $20 million annual payments to the generic challengers Watson Pharmaceuticals, Inc., Par Pharmaceuticals, Inc., and Paddock Laboratories, Inc. In return, the generic challengers agreed to stay out of the market until 2015, unless another generic version was to enter the market before then.

 

The FTC brought suit against all parties to the agreement. The FTC challenged the “pay-for-delay” settlement on the basis of unfair restraint of trade (the settlement allegedly being an “unlawful agreement not to compete,” in violation of section 5(a) of the Federal Trade Commission Act[1] (“FTCA”)). The FTC argued that such monopolies allow both generic and patent holding pharmaceuticals to make more profits at the expense of consumer welfare (increasing drug costs by an estimated amount of $3.5 billion per year). On appeal, the FTC argued, among other things, that Solvay’s ‘894 patent [2] was “unlikely to prevail.” According to the FTC, because the patent was unlikely to bar Watson and Par, and Paddock’s generic drug from entering the market the settlement was an unlawful restraint on competition.

The Eleventh Circuit rejected the “more likely than not” standard contended for by FTC. The court held the “unlikely to prevail” standard to be insufficient to state a claim; thus, a patent did not thereby exceed its “exclusionary potential.” The court adhered to the test set-forth by its precedent: “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.”[3]

Although critics of the court’s decision argue such a test makes reverse payments “per se lawful” due to resulting difficulty in challenging reverse payment agreements, the Eleventh Circuit proffered convincing arguments for rejecting the FTC’s challenge. Among other things, the court argued FTC’s “predict-the-likely-outcome-that-never-came” approach would not only impose a retrospective burden on parties and courts (even if the burden of proof fell on the plaintiff), but also, such a test would not align with the strong public policy favoring settlements.

The court noted that parties settle patent litigations to “cap the cost” of litigation and avoid the “all or nothing” outcomes from courts. Settlements are one option for parties who “might not want to play the odds for the same reason that one likely to survive a game of Russian roulette might not want to take a turn.” The Eleventh Circuit further explained that the costly and tedious process of developing new drugs should also be supported by strong public policy favoring settlements over costly litigation. The court, with reference to the maxim “More Money, More Problems,” sided with pharmaceutical companies’ incentive to recoup costs of research and development. The court proffered additional reasons such as the exclusive appellate jurisdiction of the U.S. Court of Appeals for the Federal Circuit over patent cases and the court’s lack of expertise to rule on the patent.

The heart of resolving such cases, as noted by the Eleventh Court, is in striking the balance between antitrust law interests (promoting competition) and intellectual property law interests (allowing temporary monopolies to provide innovators with incentives to create). Antitrust laws aim to protect consumers from artificially high prices, maximize efficiency of the market, and also promote improvement of products through competition. On the other hand, granting patents ensures parties have the incentive to innovate in the first place. Although one can easily recognize the tensions between antitrust law and intellectual property law, one must also recognize the common goal: promoting innovation for a better future.

However, there is no consensus over resolving this tension yet. In the Sixth Circuit and the District of Columbia Circuit, reverse payment agreements are per se unlawful under the Sherman Act.[4] However, the Second Circuit, like the Eleventh Circuit, refused to assess the ex post validity of the patent at trial, but instead the court held that the question is whether “the exclusionary effects of the agreement exceed the scope of the patent’s protection.”[5] In devising a test that can better serve both interests, per se rules are unlikely to accommodate such a goal. However, with a growing circuit split among federal courts, in addition to a silent United States Supreme Court (as it passed the opportunity to articulate a unifying a standard at this point in time), the FTC will have many more opportunities to argue for, perhaps better, multi-factored tests.


[1] 15 U.S.C. §45(a)(1) (2006).

[2] U.S. Patent No. 6,503,894 (filed Aug. 30, 2000) (issued Jan. 7, 2003).

[3] F.T.C. v. Watson Pharmaceuticals, Inc., 677 F.3d 1298, 1312 (11th Cir. 2012)

[4] See In re Cardizem CD Antitrust Litig., 332 F.3d 896 (6th Cir. 2003); see also Andrx Pharmaceuticals, Inc. v. Biovail Corp. Int’l, 256 F.3d 799 (D.C. Cir. 2001)

[5] In re Tamoxifen Citrate Antitrust Litig., 466 F.3d 187, 213 (2d Cir. 2006)

Report On FTC Hearing on the Evolving IP Marketplace Held December 5, 2008

By James G. McEwen[1]

Introduction

On December 5, 2008, the Federal Trade Commission (FTC) conducted its first of multiple hearings to explore the continuing evolution of intellectual property marketplace and the effect of this marketplace on competition.  Entitled The Evolving IP Marketplace, the hearings are a continuation of the FTC work first published in To Promote Innovation: The Proper Balance of Competition and Patent Law and Policy A Report by the Federal Trade Commission (October 2003) (hereinafter the “2003 FTC Report”), and to revise its findings in light of changes in law since 2003.  Of special interest, according to William Kovacic, Chairman, Federal Trade Commission, is to ensure that the FTC is able to obtain empirical solutions to IP marketplace issues as they affect competition law, and to determine the extent to which the theory meets practice in regards to optimizing the interface between IP and competition law.  As such, the December 5, 2008 hearing is only one of multiple planned sessions.  All materials presented, including transcripts and slide show presentations, are available on the FTC website at http://www.ftc.gov/bc/workshops/ipmarketplace/. Continue reading