On February 22, 2010, the U.S. District Court for the Northern District of Georgia dismissed an antitrust challenge brought by the FTC and private plaintiffs to a so-called “reverse payment” patent settlement relating to the drug Androgel. See In re Androgel Antitrust Litigation (No. II), MDL Docket 2084 (N.D. Ga. 2010). The court’s decision was based on plaintiffs’ failure to plead facts indicating that the patent settlement impacted competition outside of the scope of the branded manufacturer’s (Solvay’s) patents. The case was yet another setback for efforts by the FTC to reverse the trend of the judicial decisions analyzing so-called “reverse payment” patent settlements in a manner that the FTC views as improperly lenient.

The decision was not unexpected given that the court issuing the decision sits within the jurisdiction of the Eleventh Circuit Court of Appeals, which has already ruled adversely to the FTC’s position on the antitrust treatment of patent settlements in prior cases. See, e.g. Schering-Plough Corp. v. Federal Trade Comm’n, 402 F.3d 1056, 1064 (11th Cir. 2005). Indeed, the fact that the FTC had to litigate in the Northern District of Georgia at all was the result of a previous adverse result for the FTC when the federal district judge in California (where the FTC had originally brought its challenge) granted the defendants’ motion to transfer.

The Allegations

Androgel is a synthetic testosterone gel. 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 each for patent infringement under the Hatch-Waxman Act. According to the recent court decision, the generic companies’ internal documents showed a contemporaneous expectation that they would prevail in the litigation and that generic entry would take place in the 2006-2007 time frame.

In 2006, Watson and Paddock settled the patent litigation with Solvay with an agreement that each 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 (according to the allegations, Solvay projected $15-30 million per year). In the second agreement (which involved Paddock’s business partner Par Pharmaceuticals as well), Par agreed to copromote Androgel and Paddock agreed to serve as a back-up manufacturer for Solvay. In return, according to the allegations, Par and Paddock were to receive approximately $6 million and $2 million per year respectively for several years.

The FTC alleged 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 bona fide separate transactions.

The Court’s Ruling

The court followed the reasoning of the Schering-Plough decision and ruled that no antitrust challenge could be mounted against the patent settlements at issue without some allegation that the patent settlement impacted competition outside of the valid patent. The court noted that the settlements only impacted competition from generic products that were within the scope of the claims of the patent at issue. The settlements did not impact competition after patent expiration (in fact, they allowed entry 5 years earlier), nor did they impact competition from other (non-infringing) products or from other potential sellers of generic Androgel. In fact, Watson had agreed to relinquish its 180-day exclusivity rights.

The court rejected the position of the private plaintiffs and FTC that the agreement potentially impacted competition outside the scope of a valid patent based on the possibility that Solvay might have lost its infringement case at trial. The court refused to “second guess” Solvay’s view of its patents, or subject Solvay to potential liability in the event that a court later issued a ruling suggesting that Solvay’s patents were invalid or not infringed. The court concluded that subjecting settling parties to the risk that they might be liable for treble damages in the event that a court subsequently disagreed with their view of the patent case would tend to discourage the settlement of patent litigation. The court feared that such a result would have negative ramifications on innovation in the pharmaceutical industry.

The court declined to dismiss, however, the allegations of “sham litigation” asserted by certain plaintiffs against Solvay. According to the decision, an error had apparently been committed in the patent application that listed the wrong concentration for certain chemicals in the Androgel formulation, with the result that under the literal terms of the patent it did not cover generic (or branded) Androgel. The court found that this error and other arguments made by the plaintiffs raised issues of fact that could not be resolved on a motion to dismiss.

Implications

This decision, as noted, represents another setback for the FTC in its efforts to “change the law” on reverse payment patent settlements. However, in a sense, the decision will not likely have an immediate impact on the FTC’s enforcement efforts (other than this particular case) because, as noted, the Eleventh Circuit has already ruled against the FTC’s position on patent settlements. The decision also arguably goes further than prior cases in defending these types of settlements than the Eleventh Circuit has gone before.

The most immediate impact of the decision may be on the FTC’s attempts to obtain a legislative “fix” to its enforcement setbacks. The FTC has long been supportive of pending bills that would subject patent settlements with so-called “reverse payments” to much stricter scrutiny. Indeed, a leading bill on this issue is part of President Obama’s recently-proposed overall health care package. That bill would make such patent settlements presumptively unlawful absent “clear and convincing” evidence that the settlement’s procompetitive impact outweighs its anticompetitive effects. While passage of the President’s health care reform package is uncertain, the fact that the provision was included means that the legislative approach is still a possible option, and indeed perhaps a more promising route for the FTC given the continuing string of court defeats the agency has faced.