The U.S. Court of Appeals for the Eleventh Circuit recently rejected the Federal Trade Commission’s (FTC) antitrust challenge to settlement agreements reached between Solvay Pharmaceuticals Inc. and two generic drug manufacturers resolving patent litigation and enforcing the exclusionary rights of the challenged patent. The Eleventh Circuit rejected the FTC’s proposal to allow its antitrust challenge to the settlement agreements to be anchored on an allegation that the patent holder “was not likely to prevail” in the patent litigation. In so ruling, the court adhered to its precedent establishing that reverse payment settlements are “immune from antitrust attack so long as its anticompetitive effects fall within the scope of the exclusionary potential of the patent.”1 The Eleventh Circuit further noted that the standard proposed by the FTC would impose too great a burden on courts, requiring them to conduct “an after-the-fact calculation of how ‘likely’ a patent holder was to succeed in a settled lawsuit if it had not settled.”2

Background

The development of new products and technology, and specifically pharmaceuticals and medical devices, is a risky, lengthy and costly process. To incentivize innovation, federal law permits the developers of new products and technology a reward in the form of a patent. A valid patent allows its owner the right to a monopoly over the sale of the product it has created for the life of the patent. This grant of monopoly power allows a patent holder to do something that would otherwise be illegal under antitrust law—exclude certain competitors from the market. Competitors who wish to enter the market can challenge the patent, alleging that it is invalid or will not be infringed by the competitor. However, patent litigation is expensive and time-consuming; the stakes are high, and the results are unpredictable.  

Not surprisingly, most patent litigation settles. The usual terms of such settlement involve a “patent split,” whereby the generic challenger agrees to stay off the market for a prescribed period of time, and the patent owner allows the generic challenger onto the market before the patent expires. Some of these settlements also include a substantial payment from the patent owner to the generic challenger to settle the litigation—hence the name “reverse payment”(since it is usually the infringer who pays damages to the patent owner) or “pay for delay” (since it can be argued that the patent owner is paying the generic challenger to stay off the market). At the time of the settlement, of course, it is unknown whether the patent would be ruled valid, and the generic challenger would be kept off the market the entire term of the patent. Thus, the FTC does not seem to have problems with the patent split component of the settlement. It is the “reverse payment” that faces FTC scrutiny, and that raises questions regarding the application of antitrust law:  

  • Does the payment of money to competitors to prevent this possibility from coming to fruition “unlawfully protect[] or preserve[] a monopoly that likely was invalid and that should not be shielded from antitrust attack,” as alleged by the FTC?
  • Or is it “simply a way that patent holders protect and maintain the lawful exclusionary rights patent law grants them,” as argued by the pioneers?
  • To the extent that the answer to these questions rests on which party was likely to succeed in the patent litigation, how does a court or jury answer that question?  

Facts

Solvay obtained FDA approval for a prescription drug called AndroGel in February 2000. Shortly after obtaining FDA approval, Solvay filed a patent application for AndroGel, and its application was granted in January 2003. The patent expires in August 2020.  

Other pharmaceutical companies developed generic versions of AndroGel, and two of these companies sought FDA approval as generics. Solvay filed a patent infringement lawsuit against the two competitors. The parties reached a settlement in which the competitors agreed to delay marketing generic versions of AndroGel, and Solvay agreed to make certain payments. As a result of the settlement, the parties entered a stipulation of dismissal terminating the patent infringement lawsuit.  

The settlement agreements were reported to the FTC, and the FTC filed an antitrust lawsuit against Solvay and the competitors alleging that the settlement agreements were “unlawful agreements not to compete in violation of Section 5(a) of the Federal Trade Commission Act.” The FTC’s complaint alleged that the competitors had a strong case against Solvay’s patent and that “Solvay was not likely to prevail” in the patent litigation.  

Analysis

The Eleventh Circuit noted that “[t]he difficulty at the heart of this case is deciding how to resolve the tension between the pro-exclusivity tenets of patent law and the pro-competition tenets of antitrust law.” However, the court noted, the outcome was largely dictated by its prior decisions in this arena. Arnall Golden Gregory LLP Page 3 Client Alert  

Prior Eleventh Circuit Decisions

In Valley Drug Co. v. Geneva Pharmaceuticals Inc., 344 F.3d 1294 (11th Cir. 2003), the Eleventh Circuit acknowledged that antitrust laws generally prohibit payments to a competitor but noted that patent holders have a lawful right to exclude others from the market. Therefore, the Eleventh Circuit held, a payment by a patent holder to competitors to end a challenge to the patent is not a per se antitrust violation. The Eleventh Circuit further explained that the settlement must be judged as of the time of settlement. And the antitrust implications of a reverse payment settlement must be judged on the “potential exclusionary power” of the patent. Because the patent had the potential to exclude competition at the time of settlement for the life of the patent, the holder was treated as though it had an exclusionary right at that time (even though the patent had been deemed invalid after the settlement). The Valley Drug court did caution that exclusionary rights granted in a patent settlement that do not fall within the scope of the patent would not be immune from antitrust liability.  

Similarly, in Schering-Plough Corp. v. FTC, 402 F.3d 1056 (11th Cir. 2005), the Eleventh Circuit measured a reverse payment patent settlement against the scope of the exclusionary potential of the patent. The Eleventh Circuit measured the exclusionary scope of the patent at issue by giving full force to the exclusionary rights the patent potentially conveyed. Finding that the agreements did not convey exclusionary rights greater than the rights potentially conveyed by the patent, the court vacated an FTC order announcing a rule prohibiting all reverse payment settlements in which a generic company receives anything of value in exchange for deferring research, development, or entry to market.  

In Andrx Pharmaceuticals Inc. v. Elan Corp., 421 F.3d 1227 (11th Cir. 2005), the Eleventh Circuit held that the complaint sufficiently pleaded an antitrust claim in the reverse payment settlement context because it sufficiently alleged that the agreement conveyed exclusionary rights that exceeded the potential scope of the patent. For example, the generic manufacturer agreed to refrain from ever marketing a generic version of the patented drug. In addition, the complaint alleged that the settlement agreement allowed the generic company to retain a 180-day exclusivity period under the FDA approval process for generic drugs, which (since the generic had no intention of marketing a generic version of the drug) would have blocked other generic competition from entering the market.3 The complaint, therefore, alleged the purchase of exclusionary rights beyond the scope of the exclusionary potential of the patent, and therefore asserted a plausible antitrust claim.  

The Eleventh Circuit summed up the rule established in Valley Drug, Schering-Plough, and Andrx as follows:  

[A]bsent 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.4

 

FTC v. Watson Pharmaceuticals, Inc.

In Watson, the FTC sought to state an antitrust claim by alleging that the reverse payment settlement exceeded the scope of the exclusionary potential of the patent because Solvay was “not likely to prevail” in the patent litigation against its generic competitors.5 The FTC suggested “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.”6  

The Eleventh Circuit rejected this approach, noting that its precedent in this arena focused on the “potential exclusionary effect of the patent, not the likely exclusionary effect.”7 Moreover, the court noted, “likely” is not the equivalent of “actually,” and that a 51 percent (more likely than not) chance of failure means that there is a 49 percent chance of success. Likening patent litigation to a game of Russian roulette, even the side that is “likely to prevail” has a strong incentive to settle because a likelihood of success is no guarantee of actual success. “That companies with conflicting claims settle drug patent litigation in these circumstances is not a violation of the antitrust laws.”8  

Additionally, the Eleventh Circuit noted the practical problems inherent in the FTC’s suggested approach:  

It would require an after-the-fact calculation of how “likely” a patent holder was to succeed in a settled lawsuit if it had not been settled. Predicting the future is precarious at best; retroactively predicting from a past perspective a future that never occurred is even more perilous. And it is too perilous an enterprise to serve as a basis for antitrust liability and treble damages.9

Such an approach would impose undue burdens on courts and parties by “undo[ing] much of the benefit of settling patent litigation and discourag[ing] settlements.”10 Moreover, the court noted, appellate jurisdiction over patent cases rests exclusively within the Federal Circuit, and the other non-specialized circuit courts have no expertise or experience in this area.  

The Eleventh Circuit also rejected the FTC’s policy argument that allowing reverse payment settlements of patent litigation that is likely to be resolved against the patent holder presents an unacceptable risk that potential competitors will split an ongoing stream of monopoly profits even where it is more likely than not that the patent would be found invalid or not infringed. The FTC posits that the profits derived from the monopoly created by a valid patent will typically exceed the aggregate profits that would be generated in the absence of the patent with the pioneer and generics working in competition. The FTC alleges that this creates an economic situation where patent challengers can make more money by settling the patent litigation in exchange for a share of the monopoly profits than they can make by winning the patent litigation and engaging in competition.11 However, the Eleventh Circuit rejected this policy argument, noting that there are many potential competitors who can step in to challenge the patent after the settlement. “Although a patent holder may be able to escape the jaws of competition by sharing monopoly profits with the first one or two generic challengers, those profits will be eaten away as more and more generic companies enter the waters.” 12  

In closing, the court emphasized:  

[W]hat the FTC proposes is that we attempt to decide how some other court in some other case at some other time was likely to have resolved some other claim if it had been pursued to judgment. If we did that we would be deciding a patent case within an antitrust case about the settlement of the patent case, a turducken task.13

Therefore, the Eleventh Circuit, relying on its existing precedent in this arena, rejected the FTC’s attempt to impose antitrust liability on reverse payment settlements in patent litigation absent an allegation that the exclusionary rights granted by the agreement exceed the scope of the exclusionary potential of the patent.

Please click here for a copy of Federal Trade Commission v. Watson Pharmaceuticals Inc.14