Eric Stock May 7 2009 FTC Implements New Legal Strategy in Judicial Challenge to Patent Settlement Hogan Lovells | Competition & Antitrust - USA Eric Stock Competition & Antitrust Androgel Patent Litigation and SettlementsLegal StrategyOn February 2 2009 the Federal Trade Commission (FTC) filed its latest challenge to a patent litigation settlement involving a so-called 'reverse payment'. The case was filed by the FTC and the California attorney general in California federal district court against Solvay Pharmaceuticals, Inc and two generic companies which had settled patent litigation with Solvay over generic versions of Solvay's product Androgel. The case illustrates the FTC's latest strategy in connection with its efforts - so far largely unsuccessful - to challenge reverse payment settlements.Androgel Patent Litigation and SettlementsThe facts were set out in the FTC's amended complaint, filed on February 12 2009. Androgel (a synthetic testosterone gel) has been Solvay's most successful and profitable product in the United States, with domestic revenues of over $300 million in 2006. In 2003 two generic companies – Watson Pharmaceuticals and Paddock Laboratories, Inc – filed applications to market generic versions of Androgel. Each alleged that Androgel's patent was invalid and that its generic product did not infringe Solvay's Androgel patent. Solvay subsequently sued both parties for patent infringement under the Hatch-Waxman Act.In 2006 Watson and Paddock each settled the patent litigation with Solvay with an agreement that it would not enter the market until 2015 – five years before Solvay's Androgel patent was set to expire. Solvay also entered into separate side-deal agreements with each generic company involving payments to the generic companies in return for certain services. In the Watson agreement, Watson agreed to co-promote Androgel in return for a significant cash payment (Solvay projected $19 million for the first year). In the second agreement, which also involved Paddock's business partner Par Pharmaceuticals, Par agreed to co-promote Androgel and Paddock agreed to serve as a back-up manufacturer for Solvay. In return, the two generic companies were to receive approximately $12 million a year for six years.The FTC complaint contains numerous allegations suggesting that the cash payments made to the generic companies as part of the side deals were in fact compensation for a delayed entry date, and not part of genuine separate transactions. For example, the FTC alleges that Solvay wanted to avoid generic entry prior to 2015 because it expected to introduce a line extension in that year to which it would shift its Androgel patient population (and thus blunt the impact of generic entry). The FTC also alleges that the compensation paid to each generic company was recognized during settlement negotiations as consideration for the 2015 entry date, and was not considered to be a separate transaction that could stand on its own. Finally, the FTC alleges that Solvay entered into these settlements, at least in part, because its patent was weak. The FTC noted that synthetic testosterone is not patented and that Solvay had only one formulation patent. Describing the generic companies' legal positions concerning non-infringement and invalidity, the FTC alleged that Solvay's patent lawsuits were ultimately "unlikely to prevent generic entry".Legal StrategyThe case against Solvay illustrates several elements of the FTC's strategy in its continuing efforts to challenge patent settlements involving 'reverse payments' (ie, cash payments to generic companies, even where such payments are part of a side deal). First, having suffered significant legal setbacks in the Second, Eleventh and Federal Circuits, the FTC has chosen to commence lawsuits in other circuits in an attempt to obtain a more favourable precedent in another circuit (in this case, the Ninth Circuit), and possibly obtain Supreme Court review. The inclusion of the California attorney general in the action can be seen as part of a strategy to justify litigation in the Ninth Circuit. The FTC pursued a similar strategy when it commenced an action against Cephalon in the District of Columbia for an alleged reverse payment patent settlement, although that case was later transferred to the Third Circuit where private litigation was pending.In addition, the FTC complaint contains specific allegations concerning the alleged weakness of Solvay's patent lawsuit. These allegations are notable because in prior lawsuits and public statements the FTC has taken the position that it need not prove that the branded manufacturer's patent was weak in order to prove that a patent settlement constituted an antitrust violation. The allegations in the Solvay complaint may illustrate some willingness (or recognition that it may be required by a court) to prove that the generic companies were likely to win the patent litigation.Finally, it remains clear that the FTC intends to continue to challenge patent settlements with reverse payments aggressively, despite the numerous legal decisions that have been passed down in favour of defendants in such cases. With the appointment of Commissioner Leibowitz (who has publicly championed such cases) as FTC chairman, this trend is certain to continue, even while Congress considers legislation that would ban certain of these arrangements outright.For further information on this topic please contact Eric J Stock at Hogan & Hartson LLP by telephone (+1 212 918 3000) or by fax (+1 212 918 3100) or by email ([email protected]).