The Federal Trade Commission (FTC) suffered another defeat in its war against "reverse payment" or "pay-for-delay" drug patent litigation settlements with a ruling by the Eleventh Circuit affirming the dismissal of FTC v. Watson Pharmaceuticals, Inc., No. 10-12729, 2012 U.S. App. LEXIS 8377 (11th Cir. April 25, 2012), a case challenging Solvay Pharmaceuticals, Inc.’s settlement with generic challengers to Solvay’s AndroGel product. In prior cases, the Eleventh Circuit held that such settlements are lawful as long as they were within the "scope of the patent" — meaning that they do not restrain competition any more than the patent itself would have.

Stuck with the "scope of the patent" test, the FTC argued that Solvay was "unlikely to prevail" in the patent litigation, and that because the settlement did not provide for immediate entry of the generic drug it was outside the patent’s scope. It urged the court to adopt a "rule that an exclusion payment is unlawful if, viewing the situation objectively as of the time of the settlement, it is more likely than not that the patent would not have blocked generic entry earlier than the agreed-upon entry date." The court rejected this approach decisively. The Watson decision thus left undisturbed its rulings in previous cases that "reverse payment" settlements enjoy antitrust immunity absent proof that the patent litigation was a sham or the patent was obtained by fraud.

Reverse Payment Settlements

Judge Carnes’s playful opinion in Watson begins with a walk through the world of pharmaceutical patent litigation. Every company proposing to put a new drug on the market must file a New Drug Application (NDA) with the FDA if the drug is truly new to the market, or an Abbreviated New Drug Application (ANDA) if the drug is generic and chemically identical to a "pioneer drug."1 A generic drug company may signal its intent to challenge the patent on a branded drug in the generic’s ANDA, triggering patent litigation among the drug companies.2

The branded and generic drug companies sometimes choose to settle with a reverse payment. "In this type of settlement, a patent holder pays the allegedly infringing generic drug company to delay entering the market until a specified date, thereby protecting the patent monopoly against a judgment that the patent is invalid or would not be infringed by the generic competitor."3 The drug at the center of the Watson litigation was AndroGel, a gel treatment for low testosterone, sold by Solvay Pharmaceuticals, Inc. AndroGel was a highly successful product, generating nearly two billion dollars in sales starting in 2000.4

Enter generic manufacturers Watson Pharmaceuticals, Inc. and Paddock Laboratories, Inc. Watson and Paddock filed ANDAs after developing their generic versions of AndroGel. Solvay promptly filed patent infringement lawsuits. In response, Watson and Paddock challenged the validity of Solvay’s patent. While Watson’s and Paddock’s motions for summary judgment were pending, the parties reached a settlement, pursuant to which Solvay agreed to share its profits from AndroGel and the generic companies would not launch their generic versions until, crucially, five years before the expiration of Solvay’s patent.5

The FTC has long condemned deals like this as illegal agreements not to compete. The FTC’s position garnered some early support in the case law.6 The Sixth Circuit in In re Cardizem CD Antitrust Litigation, 332 F.3d 896 (6th Cir. 2003) held that the reverse payment agreement at issue in that case was a per se illegal restraint of trade under Section 1 of the Sherman Act. "There is simply no escaping the conclusion that the Agreement, all of its other conditions and provisions notwithstanding, was, at its core, a horizontal agreement to eliminate competition in the market for Cardizem CD throughout the entire United States, a classic example of a per se illegal restraint of trade."7

But since Cardizem, every court of appeals to address the issue has rejected this view. The prevailing rule, as articulated by Watson, is that "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."8 The "exclusionary potential" is the breadth of the exclusion from competition the patent, if upheld, would allow. In other words, an agreement allowing for generic entry before patent expiration, as long as it does not prevent the generic company from marketing other products not covered by the patent, does not violate the federal antitrust laws.

The rule is a compromise between the twin policy goals of protecting competition, as Congress intended with the antitrust laws, and spurring innovation, as Congress intended with the patent laws. So long as the drug companies have patents in effect, so most courts have reasoned, the government has bestowed them with monopoly protections the benefits of which they can parcel out as they please. Only after the patents lapse will any restraints of trade imposed by the settlements exceed those allowed by the patent laws and therefore violate the antitrust laws.

The FTC AndroGel Challenge

The AndroGel settlement permitted generic competition before the patent expired, thus falling squarely within the majority rule.

Not to be deterred, the FTC tried to bring its AndroGel challenge in California, avoiding the brunt of the Eleventh Circuit’s precedent and perhaps seeking fertile ground to widen a circuit split.9 The Central District of California booted the case to the Northern District of Georgia, "where the underlying patent suits were litigated and settled."10 The Northern District of Georgia then tossed the case out as legally deficient.

The FTC appealed to the Eleventh Circuit, hanging its argument on rhetorical sleight of hand about the meaning of "exclusionary potential": "[A] patent has no exclusionary potential if its holder was not likely to win the underlying infringement suit. And if the patent has no exclusionary potential, the FTC continues, then any reverse payment settlement that excludes any competition from the market necessarily exceeds the potential exclusionary scope of the patent and must be seen as the patent holder’s illegal ‘"buying off" of a serious threat to competition.’"11 In other words, the FTC argued that a patent vulnerable to defeat in a court of law is no better than no patent at all, and earns the patent holder no exemption from the antitrust laws. According to the FTC, Solvay was "not likely to prevail" in the patent suit, and that accordingly the patent was "unlikely" to prevent generic entry before expiration.

The Watson court told the FTC no means no, not unlikely. Even a patent unlikely to withstand judicial scrutiny does not have no exclusionary potential; nor does settlement indicate that a patent is likely to be defeated. "A party likely to win 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. With four chambers of a seven-chamber revolver unloaded, a party pulling the trigger is likely (57 percent to 43 percent) to survive, but the undertaking is still one that can lead to undertaking."12

The Eleventh Circuit also refused to adopt a rule requiring courts to undertake the "turducken task" of "deciding a patent case within an antitrust case about the settlement of the patent case."13 Under the Eleventh Circuit’s precedent, the question is much simpler: Does the settlement agreement exclude competition beyond the scope of the patent? The court affirmed the case’s dismissal.

Watson

has important ramifications for cases brought by private plaintiffs. These frequently allege that but for the settlement, the generic manufacturer would have won the patent litigation and therefore would have brought its drug to market earlier. After Watson, defendants will have solid support for their argument that it is inappropriate and unfeasible for courts in antitrust cases to relitigate the merits of the patent case.

The FTC is not done fighting. Nor is the battle to widen the circuit split on the treatment of reverse payment settlements over; the Third Circuit is mulling such a case right now.14 And bills are perpetually introduced in Congress that would make such deals illegal. Until those become law, or the Supreme Court rules that the settlements violate the antitrust laws, pharmaceutical companies likely will continue to enter into "reverse payment" settlements of patent litigation against would-be generic competitors.

The geography of the drug companies in question should be a first consideration. Companies with strong grounds for keeping the forum of an antitrust suit within circuits hewing to the looser "scope of the patent" standard have greater leeway in agreeing to reverse payment settlements. Once within those jurisdictions, any such settlements should fall within the bounds of the latest reverse payment decisions.

The FTC, likewise, does not consider all settlements of equal threat to competition. Obviously, those with less exclusionary effect are less likely to be targeted than those with more. Less obviously, but as Watson demonstrated, the FTC has set its sights on settlements involving patents it considers weak.15

Keeping tabs on the FTC’s moves is paramount for drug companies entering into agreements that take generic entry off the table, even for limited periods. The Watson decision, though not unexpected, is a boon for drug companies. It does not, however, fundamentally shore up the unstable landscape of antitrust enforcement in patent litigation settlements. For those that tread in this territory, it is still wise to tread with caution.