The Eleventh Circuit Court of Appeals has dismissed an antitrust action filed by the Federal Trade Commission (FTC) against a name-brand prescription drug manufacturer (the patent holder) and generic drug companies that entered into pay-for-delay agreements to settle patent infringement claims filed against the generic drug companies. FTC v. Watson Pharm., Inc., No. 10-12729 (11th Cir., decided April 25, 2012). According to the court, FTC failed to state a claim on which relief could be granted because it alleged simply that the patent holder was “not likely to prevail” in the underlying infringement action. Under Eleventh Circuit precedent, FTC should have alleged that the settlement violated antitrust law because it “imposes an exclusion greater than that contained in the patent at issue,” that is, the agreement prevents the generic drug makers from marketing a potentially infringing product to a greater degree than the existing patent would in the absence of the agreement.
Generic drug makers may obtain Food and Drug Administration approval to market a product that is chemically identical to a “pioneer drug” already approved and many do so by certifying that the “pioneer drug’s patent is invalid or will not be infringed by the manufacture, use, or sale of the new drug.” Thereafter, the patent holder has the opportunity to file an infringement action against the generic drug maker.
Under a pay-for-delay agreement, used to settle an infringement action, the patent holder “pays an 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.” FTC has long maintained that these agreements, which it refers to as “reverse payment settlements,” unfairly restrain trade in violation of federal antitrust laws in that they are tools the manufacturers use to protect monopoly profits “that the companies divvied up by means of payments from the patent holder to the generic manufacturers.” FTC also contends that reverse payment settlements cost consumers some $3.5 billion annually due to higher drug prices.
Key to the Eleventh Circuit’s approach is that a patent, by design, gives the holder a monopoly, and thus, an anticompetitive effect is already present. Without a court declaration that a patent is invalid or that a generic drug maker has not infringed the patent, the patent has inherent “potential exclusionary power,” and a reverse settlement of patent litigation is immune from an antitrust attack unless the agreement excludes more competition that the patent has the potential to exclude. This would occur, for example, where a generic manufacturer agrees to refrain from ever marketing a generic version of the patented drug.
In this case, generic drug companies agreed not to market a gel used to treat the symptoms of low testosterone in men until 2015, i.e., five years before the patent expired, or unless another manufacturer launched a generic version before then. Generic drug companies also agreed to promote the branded drug to separate, specific markets. In return, the patent holder agreed to pay one generic drug maker $10 million per year for six years and an additional $2 million per year for backup manufacturing assistance. The patent holder also agreed to share some of its profits with another generic drug maker through September 2015, projecting payments between $19 million and $30 million per year. The drug had produced $1.8 billion in revenue from sales in the United States between 2000 and 2007, and it was estimated that the generic version, if sold for 25 percent of the price of the branded drug, would cut the patent holder’s profits by $125 million per year.
The court refused FTC’s invitation 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.” According to the court, this approach “equates a likely result (failure of an infringement claim) with an actual result.” In the court’s view, “it is simply not true than an infringement claim that is ‘likely’ to fail actually will fail. . . . Rational parties settle to cap the cost of litigation and to avoid the chance of losing. Those motives exist not only for the side that is likely to lose but also for the side that is likely, but only likely, to win.”
The court also rejected FTC’s approach because it would “impose heavy burdens on the parties and courts. . . . In this case, assaying the infringement claim ‘as of the time of settlement’ would have required mining through mountains of evidence—when the lawsuit settled, more than 40 depositions had been taken and one side alone had produced more than 350,000 pages of documents. The settlement made that unnecessary, but the FTC’s approach would put that burden back on the parties and the court, undo much of the benefit of settling patent litigation, and discourage settlements. Our legal system can ill afford that.”
Further, because Congress has given the Federal Circuit Court of Appeals exclusive jurisdiction over appeals in patent cases, the court noted that the Eleventh and other non-specialized circuit courts “have no expertise or experience in the area. We are ill-equipped to make a judgment about the merits of a patent infringement claim, which is what we would have to do in order to decide how likely the claim was to prevail if it had been pursued to the end. The FTC’s approach is in tension with Congress’ decision to have appeals involving patent issues decided by the Federal Circuit.”