Eleventh Circuit Rejects FTC Challenge to Reverse Payment Settlement

Decision by court of appeals affirms that settlements that do not expand the exclusionary scope of a patent are not subject to antitrust challenge.

On April 25, the U.S. Court of Appeals for the Eleventh Circuit affirmed a lower court's dismissal of the Federal Trade Commission's (FTC's) challenge to a patent settlement agreement between Solvay Pharmaceuticals and three generic competitors. The decision in Federal Trade Commission v. Watson Pharmaceuticals, Inc. et al. is the latest in a series of defeats for the FTC involving challenges to so-called "reverse payment settlements" or "pay-for-delay settlements" in the pharmaceutical industry. In a strongly worded opinion, the Eleventh Circuit rejected the FTC's contention that it was necessary to determine Solvay's likelihood of prevailing in the underlying patent litigation in order to assess the legality of its settlement agreement under the FTC Act. The court instead held that, with a few narrow exceptions, settlements that do not expand the exclusionary scope of the original patent grant—i.e., are within the "scope of the patent"—are not subject to antitrust challenge even if some consideration is paid to the alleged patent infringer as part of the settlement agreement.

Background

Patent litigation between innovator pharmaceutical manufacturers and potential generic competitors often ends in settlements in which the generic companies receive a license to sell their product before the applicable patents expire, but not immediately. The FTC has long taken the view that such settlements delay generic entry and are illegal agreements among competitors not to compete. It has mounted a number of challenges to settlements in which the generic companies received a cash payment or something else of value (e.g., a supply agreement) as part of the settlement—a practice the FTC has labeled "pay for delay."

The dispute underlying Watson Pharmaceuticals revolves around AndroGel, a patented topical treatment for low testosterone. Solvay received approval from the U.S. Food and Drug Administration (FDA) for AndroGel in 2000. In May 2003, Watson Pharmaceuticals and Paddock Laboratories sought approval from the FDA to manufacture, market, and sell generic versions of AndroGel. Solvay responded by filing a lawsuit for patent infringement, which was litigated for more than a year. The parties entered into settlement agreements resolving the patent claims on September 13, 2006.

Under the terms of the settlement agreements, Watson, Paddock, and Par Pharmaceutical Companies each agreed not to market generic versions of AndroGel until August 31, 2015, unless another manufacturer launched a generic version before then. Watson also agreed to promote Solvay's branded AndroGel to urologists. Par agreed to promote branded AndroGel to primary care doctors and serve as a backup manufacturer for branded AndroGel, although it assigned its manufacturing obligations under the agreement to Paddock. Solvay agreed to share its AndroGel profits with Watson through September 2015, with Watson's share amounting to an estimated $19 to $30 million per year. Par and Paddock received $10 million per year for six years to split between them and an additional $2 million per year to provide backup manufacturing assistance.

FTC Challenge

The FTC challenged the settlement under Section 5 of the FTC Act, which "prohibits unfair or deceptive acts or practices in or affecting commerce." Unlike prior reverse payment settlement cases, in which the FTC has proposed treating the settlements as per se illegal, the FTC argued that the AndroGel settlements were anticompetitive because Solvay was unlikely to prevail in the patent infringement case and, therefore, the generic companies would have been able to begin selling their competing formulations before 2015. The FTC based its legal theory on the Eleventh Circuit's statement in Schering-Plough Corp. v. FTC, 402 F.3d 1056 (11th Cir. 2005), that courts "need to evaluate the strength of the patent" in assessing the legality of a reverse payment settlement.

Eleventh Circuit Decision

The Eleventh Circuit rejected the FTC's position and held that courts need not undertake an evaluation of the merits of the infringement claim in determining whether a "reverse payment settlement" exceeds the exclusionary scope of the underlying patents. The court characterized the FTC's approach as unworkable, likely to discourage settlements, and likely to lead to courts "deciding a patent case within an antitrust case about the settlement of the patent case, a turducken task."

The Eleventh Circuit unanimously affirmed its prior holdings in Valley Drug Co. v. Geneva Pharmaceuticals, Inc., 344 F.3d 1294 (11th Cir. 2003), and Schering-Plough that "absent 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 exclusion potential of the patent." At least in the Eleventh Circuit, patent settlements are presumptively legal under the antitrust laws as long as the resulting period of exclusion is narrower in breadth and/or shorter in duration than that granted by the presumptively legitimate patents.