On 25 April, the United States Court of Appeals for the Eleventh Circuit unanimously affirmed a district court’s dismissal of the FTC’s antitrust challenge to a so-called "reverse payment" patent settlement involving Solvay Pharmaceutical’s drug Androgel. FTC v. Watson Pharmaceuticals, Inc., No. 10-12729 (11th Cir. Apr. 25, 2012). In so doing, the Eleventh Circuit dealt yet another blow to the FTC’s attempts to prohibit these settlements. Indeed, in refusing to permit the FTC to attempt to prove that Solvay was "not likely to prevail" in the underlying patent litigation, the Eleventh Circuit rejected an FTC position that was already a step back from the more aggressive position that the FTC has taken in previous cases.
In 2006, Solvay, the holder of the patent for AndroGel, settled its patent infringement lawsuit against two generic manufacturers of the drug, Watson Pharmaceuticals, Inc. and Paddock Laboratories, Inc. Solvay’s patent for AndroGel is due to expire in August 2020. Under the terms of the settlements, Watson and Paddock agreed not to market generic versions of AndroGel until 15 August 2015, unless another manufacturer did so. As part of the settlement, Solvay and the generic manufacturers agreed to a series of "side deals" pursuant to which Solvay made financial payments to the generics in return for commitments of marketing support and backup supply. This type of settlement – in which the brand company has paid the generic some form of consideration and the generic has agreed not to enter the market before a certain date – has been referred to by the FTC as a “pay for delay” or “reverse payment” settlement.
On 2 February 2009, the FTC filed an antitrust lawsuit against Solvay and the generic companies involved in the settlement, alleging that because Solvay was "not likely to prevail" in the patent litigation, the settlements unlawfully restrained competition by unlawfully extending Solvay’s "monopoly" over AngroGel. The defendants moved to dismiss, arguing that the patent settlement was immune from antitrust scrutiny under Eleventh Circuit precedent because it did not impose restraints on generic manufacturers that exceeded the scope of Solvay’s patents. The district court agreed, and granted the companies’ motion to dismiss.
On appeal, the FTC argued that its allegation that Solvay was "not likely to prevail" in the infringement actions sufficiently alleged that the patent settlement had an impact on competition outside the scope of a valid patent. In other words, the FTC proposed "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 Eleventh Circuit, however, rejected the FTC’s proposed rule. The court held that the test for determining whether patent settlements are immune from antitrust attack focuses “on the potential exclusionary effect of the patent, not the likely exclusionary effect.” (emphasis added). The court also observed that, given the uncertainties of litigation and the varying reasons to settle, "it is simply not true that an infringement claim that is ‘likely’ to fail actually will fail." Until a claim actually fails, a patent retains its full potential exclusionary effect. And a settlement that imposes restraints less than that full potential affect cannot be found to exceed the scope of the patent.
The Androgel decision represents the latest in a string of judicial defeats for the FTC in challenges to branded/generic manufacturer patent settlements. In fact, the decision is a significant setback for the FTC because the court rejected a position that was already a retreat from the FTC’s prior positions on this issue. In previous cases, the FTC had taken the position that so-called “reverse payment” patent settlements are generally unlawful regardless of the merits of the patent litigation. In this case, the FTC was apparently willing to undertake the burden of proving that Solvay was likely to have lost the underlying patent infringement case. Yet the court rejected that position as well, holding (as the Second and Federal Circuits already have) that parties defending a patent settlement need only show that the brand name manufacturer had a reasonable basis for its infringement position – not that it would “more likely than not” have prevailed.
Notwithstanding this defeat, however, we expect the FTC to continue to press on this issue, both in other cases (such as its lawsuit challenging patent settlements relating to Provigil), and in Congress. FTC Chairman Leibowitz, and other Commissioners, have repeatedly emphasized that stopping these types of settlements is among the highest priorities at the FTC, and Chairman Leibowitz reaffirmed in May that the Androgel decision would not dissuade the FTC from continuing to fight aggressively on this issue.