FTC Maintains Aggressive Stance Against Pay-for-Delay Deals
By Lisl Dunlop, Partner, Litigation | Ashley Antler, Associate, Health | Shoshana Speiser, Associate, Litigation
A recent complaint filed by the Federal Trade Commission (FTC) indicates that the agency is continuing its aggressive pursuit of agreements between drug manufacturers that delay the entry of generic pharmaceuticals into the market. In FTC v. Endo Pharmaceuticals Inc., the FTC alleges that Endo Pharmaceuticals Inc. (Endo) and other pharmaceutical manufacturers entered into "pay-for-delay" settlements that raised costs for consumers, in violation of the antitrust laws.1
The Endo case reveals two key elements of the FTC's ongoing, aggressive strategy against pay-for-delay agreements. First, the FTC is taking an increasingly broad view of what constitutes an unlawful pay-for-delay settlement, in this case by attacking a noncash settlement for the first time. Second, the FTC is likely to pursue the remedy of disgorgement in pay-for-delay cases.
When a pharmaceutical manufacturer wants to launch a new drug, it must file a New Drug Application (NDA) with the Food and Drug Administration (FDA) before it can market and sell that drug. While this process is very expensive and time-consuming, the drugs are typically protected by patents, giving the manufacturers a period of exclusivity to reap the rewards of their investment in the drug development and approval process.
The Hatch-Waxman Act (Act) encourages the introduction of generic versions of popular drugs by 1) permitting generic manufacturers to gain approval through filing a less cumbersome application, known as an Abbreviated New Drug Application (ANDA), and 2) providing a 180-day statutory exclusivity period to the first generic drugmaker to file an ANDA (known as the first filer) when its drug goes to market. During the first filer's exclusivity period, no other generic manufacturer can sell the drug; however, the branded manufacturer can continue to sell the original branded drug, as well as license its own generic version, known as an "authorized generic." The existence of a second generic on the market decreases the first generic's profits, as sales of generics (promoted by various state mandatory substitution laws) will be split between both generic versions.
The Act also includes procedures that govern patent disputes between generic and branded drug manufacturers. When a generic manufacturer tries to launch its product before the brand manufacturer's patent has expired, the brand manufacturer may sue the generic for patent infringement. This suit automatically prevents the generic manufacturer from entering the market for 30 months. Alternatively, the generic may also sue the branded manufacturer alleging that its patent is invalid.
While patent infringement suits are usually settled by payments from the infringer to the patent holder, in branded/generic patent litigation, suits are often settled by the branded drug manufacturer paying the generic manufacturer company—a "reverse payment." In return for the payment, the generic manufacturer will delay its immediate entry into the market for some period of time. Although such payments were typically in cash, parties have grown more creative in crafting settlements so that cash payments are not included. For instance, when the brand manufacturer agrees not to license an authorized generic during the first filer's 180-day exclusivity period, this is known as a no-AG agreement.
In 2013 the Supreme Court held in FTC v. Actavis that patent settlements involving unjustified or unexplained large reverse payments are subject to antitrust scrutiny under the antitrust rule of reason.2 Conduct subject to the rule of reason is not automatically illegal; rather, a court must consider the surrounding facts and circumstances to weigh the potential benefits to consumers against its harms. The Court's opinion in Actavis, however, did not specify whether this rule applies to noncash payments. Although lower courts have struggled with whether or not noncash payments constitute "pay-for-delay" settlements, the FTC has consistently declared that all settlements that delay generic entry are anticompetitive.3 Since Actavis, the FTC has essentially engaged in a game of "whack-a-mole," striking each attempt by drugmakers to craft a patent litigation settlement that avoids antitrust condemnation.
The Endo Case
The Endo case represents the FTC's latest challenge to pharmaceutical companies' pay-for-delay settlements. According to the FTC's complaint, Endo paid several generic drug manufacturers and entered into no-AG agreements to delay generic entry and prolong its monopoly profits for two of its blockbuster drugs, Opana ER and Lidoderm:
- In June 2010 Endo agreed to pay Impax Laboratories, Inc. (Impax) to settle its patent challenge and delay its entry into the market by 2.5 years. The payment consisted of Endo's 1) agreement not to launch an authorized generic and provision of a cash payment if market conditions changed, and 2) payment of up to $40 million for a development and co-promotion deal that made no economic sense for Endo if Impax was on the market. To date, these agreements have yielded payments of over $112 million to Impax.
- In May 2012 Endo and its partners, Teikoku Pharma USA, Inc. and Teikoku Seiyahu Co., Ltd., agreed to pay Watson Laboratories, Inc. (Watson) (now Allergan plc) to settle its patent challenge and delay its entry into the market by over a year. The payment here consisted of Endo's 1) agreement not to launch an authorized generic for 7.5 months after Watson's entry, and 2) provision of branded products to Watson "at no cost," which Watson could sell for pure profit.
The FTC is seeking a permanent injunction to block these agreements and restitution or disgorgement to compensate consumers and prevent the companies from engaging in similar behavior in the future.
FTC's Use of Disgorgement
As we discussed in our June 2015 newsletter, from 2003 through 2012 the FTC adhered to its Policy Statement, which reserved disgorgement as a remedy for "exceptional" competition cases. During the nine years that the Policy Statement was in effect, the FTC sought disgorgement in only two cases. In 2012, however, the FTC withdrew its Policy Statement and in so doing effectively lowered the bar for seeking a disgorgement remedy. Since then the FTC has sought disgorgement in four cases, all of which were against pharmaceutical companies, and three of which involved pay-for-delay settlements.4 In fact, since the Policy Statement's withdrawal, the FTC has sought disgorgement in all of its pay-for-delay cases.
After attacking pay-for-delay settlements for years without gaining much traction, the FTC's victory under Actavis in 2013 shifted the tides. In the wake of the Supreme Court's decision, the FTC has maintained an aggressive "post-Actavis agenda[,]" and "continues to devote significant resources to combatting anticompetitive pay-for-delay agreements."5
The FTC's challenge against Endo reflects its continued aggressive stance against pay-for-delay agreements in two notable ways:
- It is the FTC's first case challenging a no-AG agreement as an unlawful pay-for-delay agreement. The FTC's position in this regard is particularly notable because the law is unsettled, and consequently courts are split on whether noncash payments such as no-AG agreements qualify as anticompetitive pay-for-delay agreements.
- This case demonstrates the FTC's disproportionate pursuit of disgorgement in the pay-for-delay context. The use of such a remedy in this case is particularly surprising in light of the unsettled law regarding whether noncash payments, such as no-AG agreements, constitute such an agreement.
Based on the FTC's most recent figures, the total number of patent litigation settlements involving potential reverse payments dropped from 40 in 2012 to 29 in 2013 and to 21 in 2014, a nearly 50% drop in just two years.6 Despite this substantial decline in the overall number of pay-for-delay agreements since Actavis, the FTC has not stepped down its efforts. Rather, the agency has pursued two pay-for-delay cases in the past two years and continues to devote resources to investigating pay-for-delay cases. The FTC's repeated use of disgorgement and attack on no-AG agreements in Endo suggests that the FTC will closely scrutinize pharmaceutical settlements and aggressively pursue any agreements that resemble unlawful pay-for-delay settlements. Looking ahead, what remains to be seen is which pay-for-delay mole the FTC will whack next.
1No. 2:16-cv-01440 (E.D. Pa. Mar. 30, 2016).
2133 S. Ct. 2223 (2013).
3E.g., Jamie Towey, Quo Vadis Post-Actavis?, FTC Blog Competition Matters (Mar. 30, 2016), https://www.ftc.gov/news-events/blogs/competition-matters/2016/03/quo-vadis-post-actavis.
4FTC v. Cardinal Health, No. 15-cv-3031 (S.D.N.Y. Apr. 20, 2015); FTC v. AbbVie, Inc., No. 2:14-cv-05151 (E.D. Pa. Sept. 8, 2014) (pay-for-delay matter); and FTC v. Cephalon, Inc., No. 2:08-cv-2141 (E.D. Pa. Nov. 18, 2013) (same).
5Jamie Towey, Quo Vadis Post-Actavis?, FTC Blog Competition Matters (Mar. 30, 2016), https://www.ftc.gov/news-events/blogs/competition-matters/2016/03/quo-vadis-post-actavis.
6Dana A. Elfin, Should FTC Seek Disgorgement of Profits in Pay-for-Delay Cases?, Bloomberg BNA (Apr. 18, 2016), http://www.bna.com/ftc-seek-disgorgement-n57982069953/.
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