By Kwame Mensah --
[Ed. The Supreme Court heard oral argument today in Federal Trade Commission v. Watson
Pharmaceuticals. While Patent Docs will provide analysis
regarding the oral argument in a subsequent post, we provide the following analysis
of the case for the benefit of our readers.]
ISSUE
Are reverse-payment settlement agreements in ANDA
litigation per se lawful unless the
underlying patent litigation was a sham or the patent was obtained by fraud, or
instead presumptively anticompetitive and unlawful?
FACTS
Under the Federal Food Drug and Cosmetic Act (FDCA),
a manufacturer of a new drug must seek approval from the U.S. Food and Drug
Administration (FDA) before taking the drug to market. 21 U.S.C. § 355(b). This
approval is obtained via a new drug application (NDA). A drug approved by the
NDA process is generally referred to as a "brand-name" drug and is
listed in the Approved Drug Products with Therapeutic Equivalence and
Evaluations book, a.k.a., the "Orange Book." Under the Hatch-Waxman Act,
any drug manufacturer may seek approval of a generic version of a brand-name
drug, subject to certain periods of exclusivity, via an abbreviated new drug
application (ANDA). 21 U.S.C. § 355(j). As part of the ANDA review process, the
brand-name manufacturer must identify to the FDA patents that could reasonably
be asserted against someone making, using, or selling its drug. 21 U.S.C. §
355(b). In turn, the manufacturer of the generic version of the drug must
explain how its generic drug can be marketed without infringing those patents.
One way in which the generic manufacturer can comply with this requirement is
to file what is called a Paragraph IV certification, which states that a given
patent identified by the brand-name manufacturer "is invalid or will not
be infringed by the manufacture, use, or sale of the drug." 21 U.S.C. §
355(j)(2)(A)(vii)(IV). Filing an ANDA is a statutory act of infringement under
35 U.S.C. 271(e)(2) and a brand-name drug manufacturer is given 45 days to file
a patent infringement suit after receipt of notice from the ANDA applicant that
a Paragraph IV certification was made. Occasionally, settlement agreements of
such litigation are reached between brand-name manufacturers and generic manufacturers,
which confer payment to the generic manufacturer in return for a delay in
introducing their generic product into the marketplace (but generally sooner
than if the patentee had prevailed in litigation). These are referred to as "reverse
payment agreements."
Solvay
Pharmaceuticals, Inc. (Solvay) and Besins Healthcare, S.A. (Besins) are the
co-owners of U.S. Patent No. 6,503,894 (the '894 patent), claiming a formulation
of AndroGel, which is a topical gel containing synthetic testosterone which is
used to treat the symptoms of low testosterone in men. This formulation is
listed in the Orange Book and expires on August 30, 2020. Soon after grant of
the '894 patent, two other drug manufacturers, Watson Pharmaceuticals, Inc.
(Watson) and Paddock Laboratories, Inc. (Paddock) developed generic versions of
AndroGel and filed ANDAs on the formulations. Both companies made Paragraph IV
certifications stating that their generic versions of AndroGel did not infringe
the '894 patent or that the patent was invalid. Solvay then filed suit against
Watson, Paddock, and Par Pharmaceuticals Companies (Par; Par purchased all
rights to Paddock's ANDA in September 2006) alleging patent infringement. The
suit triggered the 30-month stay of the FDA's approval process for Watson's and
Par/Paddock's generic versions of AndroGel, which expired in January 2006. See
21 U.S.C. § 355(j)(5)(B)(iii). When the
stay expired, the litigation was still ongoing, and the FDA promptly approved
Watson's ANDA. This approval, as well as the prospect of losing its monopoly in
the AndroGel market, motivated Solvay to settle. Under the terms of the agreements
reached, Watson, Paddock, and Par agreed not to market generic AndroGel until
August 31, 2015, unless another manufacturer entered the market before then, and
also agreed to provide to Solvay certain marketing and manufacturing
assistance. In return, Solvay agreed to pay Par/Paddock $10 million/year for
six years and an additional $2 million/year for backup manufacturing
assistance. Solvay also agreed to share some of its AndroGel profits with
Watson through September 2015 (projected to be $19 million to $30 million per
year).
The
parties reported the settlement agreements to the Federal Trade Commission (FTC)
as required by 21 U.S.C. § 355 note (2003) (Federal Trade Commission Review). In
response, the FTC filed an antitrust lawsuit against Solvay, Watson, Par and Paddock
in the U.S. District Court for the Central District of California. (In light of
the fact that the same agreement had been the subject of an earlier lawsuit in
the Eleventh Circuit, the California court transferred the matter to the District
Court for the Northern District of Georgia.) The FTC alleged that Solvay's
promises to pay Watson, Par, and Paddock in exchange for those companies not
selling generic AndroGel until 2015 were unlawful under § 5(a) of the Federal
Trade Commission Act, 15 U.S.C. § 45(a)(1), which forbids "[u]nfair
methods of competition in or affecting commerce, and unfair or deceptive acts
or practices in or affecting commerce." The FTC specifically alleged that
the settlement agreements were attempts to defer generic competition with
branded AndroGel by postponing the entry date of the generic drugs, thereby
maintaining Solvay's monopoly and allowing the parties to share monopoly
profits "at the expense of the consumer savings that would result from price
competition." The FTC's complaint hinged on its allegation that Solvay probably would have lost the underlying
patent infringement action. More specifically, the complaint argued that "Solvay
was not likely to prevail" in
the patent litigation because "Watson and Par/Paddock developed persuasive
arguments and amassed substantial evidence that their generic products did not
infringe the ['894] patent and that the patent was invalid and/or unenforceable"
(emphasis added). The FTC concluded
that because the '894 patent "was unlikely to prevent generic entry,"
Solvay's payments to the generic drug producers continued and extended a
monopoly that the patent laws did not authorize, and therefore, the reverse
payment agreements unlawfully restrained competition. The District Court
dismissed the complaint under Fed. R. Civ. P. 12(b)(6), agreeing with the four
defendants that the appellate court's earlier precedent (Valley Drug Co. v. Geneva Pharmaceuticals, Inc., 344 F.3d 1294 (11th
Cir. 2003)) immunizes reverse payment settlements from antitrust attack unless
a settlement "imposes an exclusion greater than that contained in the
patent at issue." The District Court concluded that the FTC did "not
allege that the settlements exceed the scope of the '894 patent." The FTC
then appealed to the U.S. Court of Appeals for the Eleventh Circuit.
The
Eleventh Circuit affirmed the District Court's decision relying on its Valley Drug Co. precedent, which held
that parties to reverse payment settlement agreements in ANDA litigation are
immune from antitrust liability if the anticompetitive effects of their
settlement fall "within the scope of the exclusionary potential of the
patent." The Court stated that the proper
analysis "requires an examination of: (1) the scope of the exclusionary
potential of the patent; (2) the extent to which the agreements exceed that
scope; and (3) the resulting anticompetitive effects." According to the Court, the key to this analysis is an evaluation of whether the settlement
agreements contain provisions that restrict competition beyond the scope of the exclusionary potential of the patent. In
affirming, the Court specifically rejected the FTC's "likely to fail"
rationale, stating that its decisions focus on the potential exclusionary
effect of the patent, not the likely exclusionary effect.
The
FTC then petitioned for certiorari,
which was granted by the Supreme Court. The
Valley Drug decision is consistent
with decisions in other Circuits (Second and Federal). However, in the interim
the Third Circuit agreed with the FTC's position of presumptive illegality,
creating a circuit split that the Supreme Court agreed to resolve in granting
certiorari here.
CASE ANALYSIS
The parties in this case ask the Supreme Court to establish a
rule to analyze reverse payments in the context of antitrust violations. The
FTC supports the use of an analysis that deems reverse payment agreements as per se unlawful, while Watson advocates
for the "scope-of-the-patent" approach adopted by most Circuit Courts
which states that 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 absent sham litigation or fraud in
obtaining the patent.
The FTC asks the Court to rule that reverse payment
agreements are presumptively unlawful under a "quick look" rule of
reason analysis. Under this approach, a reverse payment agreement is presumed
to be anticompetitive, and the antitrust defendants bear the burden of
procompetitive justification by showing, for example, some countervailing
procompetitive virtue. See In re K-Dur
Antitrust Litig., 686 R.3d 197 (3rd Cir. 2012). Therefore, if the plaintiff
establishes the existence of a reverse payment agreement, then the burden
shifts to the defendants to establish an affirmative defense that justifies
their agreement's deviation from the operations of a free market. The FTC presents
two primary ways in which the presumption of illegality could be rebutted.
First, the parties could show that any money that changed hands was for
something other than a delay. Second, the defendants in the antitrust suit
could rebut the presumption by showing that the payment was commensurate with
the litigation costs that the brand-name manufacturer avoided by settling. The
FTC contends that a rule treating reverse payments as presumptively unlawful
will preserve incentives for brand-name and generic manufacturers to resolve Paragraph
IV litigation in alternative ways that do not undo the manufacturers'
competitive relationship.
Additionally, the FTC argues that treating reverse
payment agreements as presumptively unlawful serves the purposes of competition
law. The FTC supports its contention by stating that reverse payment agreements
resemble other agreements between competitors that are per se unlawful because, from an economic perspective, such
agreements directly restrict output and raise price and thus are
anticompetitive. Specifically in the context of Paragraph IV litigation, the
FTC argues that by agreeing to a later date of generic entry, the brand-name
and generic manufacturers can extend the period of monopoly pricing and thereby
increase total profits, while harming consumers.
The FTC also argues that treating reverse payment
agreements as presumptively unlawful serves the purposes of patent law. The FTC
alleges that the Court has never suggested that the bundle of rights a patent
provides to its holder includes the right to share the patentee's monopoly
profits to induce potential competitors to abandon their efforts to compete or
stay out of the market altogether. The Commissioner argues further that since
reverse payments lack support in the Patent Act and traditional settlement
practice, they raise concerns about the integrity of competition-restricting
features of the settlement. The FTC alleges that the "scope-of-the-patent"
approach inappropriately insulates reverse payment agreements from meaningful
antitrust scrutiny. The FTC argues, therefore, that the judgments in cases using its preferred methodology would reflect determinations as to the actual exclusionary force of the
relevant patents. An additional benefit
to this method, the FTC contends, is the elimination of invalid patents.
Finally, the FTC argues that reverse payment
agreements frustrate the procompetitive policy of the Hatch-Waxman Act
(promoting generic competition at the earliest appropriate time) by
short-circuiting the Act's procedures in a way that tends to result in later
generic entry than would otherwise occur. The Commissioner contends further
that Congress established the Paragraph IV litigation framework to facilitate
early and definitive resolution of patent disputes, and although the Amendments
do not compel parties to litigate to judgment, nothing in the Amendments
contemplates that a patentee will pay an accused infringer in order to escape
Paragraph IV litigation.
Watson counters the FTC's suggested use of the quick
look rule of reason, first stating that per
se treatment is appropriate "only if courts can predict with
confidence that [a patent] would be invalidated in all or almost all instances
under the rule of reason." Leather Prods. Inc. v. PSKS, Inc., 551
U.S. 877, (2007). Thus, the quick look
analysis is only applicable "when the great likelihood of anticompetitive
effects can be easily ascertained." California
Dental Ass'n v. FTC, 526 U.S. 756 (1999). Watson argues further that the
FTC's position is inconsistent with the well settled principles of antitrust
law, patent law, and the law of settlement. It arguea specifically that the
proposed test lacks a sound basis in the Court's antitrust precedent, and
reflects an improper effort to shift the burden of persuasion to defendants to
justify settlement of litigation. Watson states that the proposed test would
lead to consumer harm in the form of fewer generic patent challenges and
reduced innovation. Furthermore, Watson argues that it would burden the judicial
system by forcing parties to litigate their patent disputes to conclusion when
they would prefer to settle. Watson continues its rebuke of the FTC's proposed
method by contending that permitting a plaintiff to state a prima facie case for "payment"
without demonstrating an actual net value transfer, and of "delay"
with the simple allegation that the parties agreed that generic entry would
occur at some time in the future sets an alarmingly low and speculative bar for
pleading an antitrust violation.
In response to the FTC's competition arguments,
Watson argues that the FTC cannot demonstrate actual anticompetitive effects,
and instead substitutes a proxy that merely assumes them, i.e., it infers that if Paragraph IV patent litigants were
prohibited from settling with payment, they would reach a settlement with a
deferred entry date that roughly corresponds to the parties' assessments of
their likelihood of success in the litigation. Watson contends that this
assumption is unwarranted and unproven, and presents several examples of what Watson
alleges to be flawed empirical analyses cited by the FTC in support of its
position.
Watson responds to the FTC's patent law contentions
by arguing that the effect of the quick look test is to treat the patent as
though it were presumptively invalid
even though the Patent Act provides that a patent is "presumed valid."
35 U.S.C. § 282(a). Watson states that the FTC explicitly takes the position
that the patent has no scope until the courts have established its validity and
coverage in litigation. Watson concludes that recognition of the patent's
lawful exclusionary potential is crucial to the correct antitrust analysis, and
therefore, the FTC's disregard of the patent is itself a reason to reject its
proposed test.
Watson responds to the FTC's Hatch-Waxman arguments
by stating that a rule that too severely restricts settlement options will
chill settlements and result in continued litigation. In other words, the
uncertainty flowing from such a rule could lead to fewer Paragraph IV ANDA
challenges and reduced incentives to innovate.
Watson asks the Court to adopt the
scope-of-the-patent approach adopted by the Eleventh Circuit in affirming the
holding below. Watson contends that this approach can be viewed as a structured
rule-of-reason inquiry whereby the court, upon finding that the settlement's
terms do not exceed the patent's exclusionary scope, may deem the agreement
reasonable and lawful. It states further that this approach provides
Hatch-Waxman litigants with a bright-line metric for determining the legality
of their conduct at the time of settlement.
SIGNIFICANCE
The
facts of this case place it squarely at the intersection of antitrust law,
patent law, and the pharmaceutical industry. The incentives for developing a
drug can only be described as "no risk, no reward" and "more
risk, more reward." FTC v. Watson Pharmaceuticals, Inc. 677
F.3d 1298 (11th Cir., 2012). Only one in every 5,000 drugs tested for treatment
of illness is eventually approved for use, and the average drug takes 10 to 15
years to develop at a cost of more than $1.3 billion. Therefore, incentives must exist for drug companies to incur the
cost and time that it takes to develop and bring a drug to market, i.e., they must be afforded some period
of exclusivity that will allow them to recoup their cost as well as to receive
profits from the sale of the drug. The patenting process as well as the NDA
process has afforded drug makers with a means to these ends. However, the need
to provide affordable drugs to the public is equally important. Therefore, the Hatch-Waxman Act and ANDA applications allow for generic options to enter the
marketplace.
If
the Court adopts Watson's proposed analysis method, it could lead to an
increase in reverse payment settlement agreements (although agreements of these
types have been trending a bit downward recently). If the FTC's proposed method
is accepted, it could effectively eliminate settlements in Paragraph IV
litigations because if any "pay" or "delay" is determined,
the consequences could be dire for the patent holder.
A
patent confers on its owner the right to exclude others from practicing its
invention. It also provides the owner with the right to allow the invention to
be practiced by others in return for whatever fee they deem reasonable for the right.
In this vein, a reverse payment should be viewed no differently from a
licensing agreement. The alleged infringer has agreed not to use the invention for a fee just as a licensee would agree to use the invention for a fee. Such are
the rights of the patent owner. The courts have routinely held that valid
patents are outside the scope of antitrust law because by their mere existence
they confer monopoly rights of sorts to their owners. It is difficult to see
the use of reverse payment agreements as anticompetitive since they are so
closely tied to rights that already exist based on a valid patent. The FTC seems
to think that any patent holder that would enter into such an agreement knows its patent is "bad" and thus preventing reverse payment settlement
agreements is good. If anything, this appears to be a public policy issue that
may be better addressed by Congress and seems outside the prevue of the FTC and
its role in eliminating anticompetitive business practices.
