Supreme court to resolve legality of ‘reverse payment’ settlement agreements between brand-name drug manufacturers and generic competitors

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Factual background of FTC v. Watson Pharmaceuticals Inc., et al

The case the Supreme Court selected to grant certiorari involves the testosterone replacement drug AndroGel®, sold by Solvay Pharmaceuticals Inc., (‘Solvay’), which has rights to US Patent No. 6,503,894 (the ‘894 patent) listed in the Orange Book. The ‘894 patent is directed to a pharmaceutical formulation that includes certain amounts of testosterone and other ingredients. ^g FDA approved AndroGel® in 2000, and the product had sales of over $400 million in 2007. See FTC Petition at page 5. In 2003, Watson and Paddock Laboratories, Inc. (‘Paddock’) submitted Abbreviated New Drug Applications (‘ANDAS’) and included a paragraph IV certification that their generic products would not infringe the patent and that the patent is invalid.

The first ANDA with Paragraph IV certification was submitted before 8 December 2003, such that the pre-MMA Hatch-Waxman Act applies for all ANDAs for the product. ^h Therefore, the current forfeiture provisions relating to the 180-day exclusivity do not apply, and first-filer Watson was able to prevent subsequent generics from entering the market simply by not itself going to market.

Solvay sued Watson and Paddock in August 2003 and the litigation proceeded beyond the thirty (30) month stay. Solvay first entered into a settlement agreement (and co-marketing agreement) with Watson, wherein Solvay agreed that Watson could enter the market after 31 August 2015, which was five years before the patent at issue expired, and Solvay agreed to pay Watson a percentage of profits (estimated between $19–30 million per year). Shortly after concluding the agreement with Watson, Solvay extended similar terms to Paddock, agreeing that Paddock could enter the market after 31 August 2015, subject to Watson’s exclusivity period, and further agreeing to pay $2 million per year to Paddock and $10 million annually to Par, so that Paddock can serve as a back-up supplier and Par will market the drug to primary care physicians. Watson thereafter relinquished its first-filer exclusivity so that both Paddock and Watson can enter the market on the same day.

The FTC, upon review of the agreements, accused the companies of postponing generic competition for the drug AndroGel, and sued the companies for violating federal antitrust law and filed suit. The district court granted defendants’ motion to dismiss, determining that the FTC had failed to state plausible antirust claims under either federal or state law. The FTC appealed to the Eleventh Circuit, which affirmed the district court’s judgment.

Federal Trade Commission’s position

The FTC has long-maintained its position that reverse-payment settlement agreements in the context of the Hatch-Waxman act raise anti-competitive issues. According to the FTC, the reverse payment agreements align with the recognized anti-competitive practice of an incumbent company paying a would-be competitor to stay out of the market. Generally speaking, these types of agreements are anticompetitive because they reduce output and increase price. See FTC Petition, at page 22. The FTC does not appear to advocate banning all settlements between name brand and generic drug manufacturers, or even categorically banning all such settlements that involve reverse payments.

Rather, the FTC wants the courts to review the settlement agreements under the Third Circuit’s proposed ‘quick look’ or ‘truncated rule of reason analysis.’ Under the ‘quick look’ test, the court would presume that the reverse payment agreement is anticompetitive, and the parties to the agreement would bear the burden of justifying that the agreement is lawful.

The FTC maintains that ‘scope of the patent’ test enunciated by the Eleventh Circuit places too much value on the presumption of validity and the allegation of infringement, effectively equating an allegation of infringement by the name-brand with a judgment in the name-brand’s favor. The ‘scope of the patent’ test focuses on the potential exclusionary effect of the patent, based on the scope of the claims at issue, given that the patent is presumed valid.

The FTC points out that generic drug manufacturers often prevail in the ANDA patent lawsuits based on non-infringement and invalidity grounds. See FTC Petition, at pages 16–17. In the particular case at issue, the FTC had argued in the lower courts that the name-brand manufacturer was ‘not likely to prevail’ on the merits regarding its claims of infringement against the generic companies. The FTC advanced the argument that a ‘patent has no exclusionary potential if its holder was not likely to win the underlying infringement suit’ and therefore, if a patent has no exclusionary potential, any reverse payment settlement excluding competition ‘necessarily exceeds the potential exclusionary scope of the patent and must be seen as the patent holder’s illegal “buying off of a serious threat to competition.”’ FTC Petition at pages 25–26.

The FTC further argues that treating reverse-payment agreements as presumptively lawful incentivizes the name brand and the generic competitors to enter into the agreements, given that it permits the parties to share in higher profits than they would individually obtain. See FTC Petition at page 19. These settlement agreements, according to the FTC, harm the public because they result in higher prices to consumers. In support of this argument, the FTC points to the statistics the FTC has maintained since 2003, when the FTC began reporting on the settlement agreements it receives each year. See FTC Petition, at page 20. The reverse-payment agreements delay the entry of generic competition by approximately 17 months than in cases where there is no such settlement. See Pay for Delay Report 2.

In response to the argument that the reverse-payment settlements are not unlawfully anticompetitive because they often permit generic entry before the expiration date of the patent (as is the case at bar), the FTC once again indicates that the Courts have presumed the validity and infringement of the patent, and the success of the patentee at court. The FTC argues that the courts advocating the scope of the patents test ‘assess (and discount) the anticompetitive potential of a reverse -payment agreement by comparing the level of generic competition it permits to the level of competition that would have occurred if the infringement suit had been litigated to judgment and the patent holder had prevailed.’ The FTC asserts that the generic competitor is excluded by reason of the reverse payment, and not a valid patent, stating that ‘the fact that a potential generic competitor might have been excluded from the market if the infringement suit had been litigated to judgment thus does not mean that the same result can lawfully be achieved through an agreement between competitors.’ FTC Petition at pages 25–26.

Further, while the FTC recognizes that there is a general public policy favoring settlement of litigation, the FTC argues that this is not an unfettered right. FTC maintains that the public has an interest in resolving challenges to patent validity, and even non-infringement, particularly in the context of the Hatch-Waxman Act, which is intended to promote competition.

Respondents’ position

Respondents Par Pharmaceutical Companies, Inc. and Paddock (collectively ‘Par’) filed a brief opposing the grant of certiorari by the Supreme Court. See Respondents’ Brief in Opposition (S.Ct. No. 12-416) (hereinafter ‘Par’s Brief’). Respondents Watson and Solvay filed separate Briefs acquiescing in the request for certiorari. See, Brief for Respondent Watson Pharmaceuticals, Inc., and Brief for Respondent Solvay Pharmaceuticals, Inc. (13 November 2012) (hereinafter ‘Watson Brief’ and ‘Solvay Brief,’ respectively). All of the Respondents’ Briefs provide insight into their positions and point to the Eleventh Circuit’s opinion and reasoning in support of their positions.

With respect to the question presented, Respondent Par reminded the Court that the Hatch-Waxman Act ⁱ has two goals. The first, emphasized by the FTC, is to facilitate the entry of lower-priced drugs. Par argues that the second goal, to maintain the incentive to conduct research and development into new drug development, is equally important, but seems to get lost in the opinions and FTC’s position. See Par’s Brief at pages 4–5. Respondent Watson echoed these sentiments. Watson Brief at page 3.

Further, Par argues that the original Hatch-Waxman Act created an environment where the patentee may well settle even though the patentee believes that its claims are strong, thus negating the FTC’s position that a patentee with a weak patent is incentivized to settle with the generic company. Specifically, under the Hatch-Waxman Act, the generic infringer can address the patent issues and clear a path to market entry before it actually incurs liability for damages. The name-brand, on the other hand, often faces devastating market consequences upon losing the patent case. This imbalance, according to Par, incentivizes the reverse payment settlements, and the settlements are not necessarily attributed to a perceived weakness in the patent at issue. Par’s Brief at pages 5–6.

Par also argued that the Supreme Court should deny certiorari in this case because Congress has addressed the alleged deficiencies of the old Hatch-Waxman regime with the 2003 MMA amendments such that continued antitrust enforcement has little to no benefit, particularly given that the case would not address the law as it exists today. See Par’s Brief at pages 13, 17. In fact, Par suggests that the relevance of this issue is diminished by the fact that reverse-payment cases are found only in the Hatch-Waxman context, and that the number of such settlements has declined over the past 5 years, citing to Agreements Filed with FTC under MMA Act of 2003: Overview of Agreements Filed in F 2011, at 2, http://www.ftc.gov/os/2011/10/1110mmaagree.pdf (hereinafter ‘FTC 2011 Report’). Par’s Brief at pages 17–18. According to the FTC 2011 Report, 28 of the 156 final settlements involved potential pay-for-delay settlements, which is a much lower rate than the 50% peak in FY 2006, as can be observed from the following: ^j

OPEN IN VIEWER

Respondents Watson and Solvay point to the Eleventh Circuit’s opinion and reasoning, particularly in response to the FTC’s allegation that Solvay was ‘not likely to prevail’ in the patent litigation, making it more likely that the agreement was anticompetitive. Watson Brief at page 20 et seq. Despite the FTC’s assertion that Par/Paddock had amassed substantial evidence that their products did not infringe the patent, and that the patent was invalid or otherwise unenforceable, the Eleventh Circuit rejected the FTC’s invitation to review the merits of the claims/defenses. 677 F.3d at 1305–1306. The Eleventh Circuit reasoned that such a standard incorrectly ‘equates a likely result (failure of an infringement claim) with an actual result’. See FTC v. Watson, 677 F.3d at 1212.

The Eleventh Circuit further indicated that the FTC’s approach 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. The court characterized the FTC’s proposed approach as ‘retroactively predicting from a past perspective a future that never occurred’ and concluded that it is too perilous an enterprise to serve as a basis for antitrust liability and treble damages. Id. at 1313.

In response to the FTC’s argument that the weak patent incentivizes the patentee to settle with the generic drug manufacturer (or else lose all control over the market), the Respondents point out that, as the Eleventh Circuit noted, in the context of drug patents, ‘there usually are many challengers to a patent.’ Id. at 1315. Thus, if a given patent were vulnerable, as the FTC contends in the present case, other generic manufacturers, who are not bound by a prior settlement, would continue to attempt to enter the market and launch new challenges to the patent.

Further to the issue regarding the strength of the litigated patents, Respondent Watson disputes the FTC’s statistics regarding the rates at which generic competitors have prevailed in paragraph IV patent litigations, indicating that the actual rates are far lower, i.e. 48%, citing a study performed for the generic drug industry. Watson Brief at page 24.

The Eleventh Circuit, and Respondents Solvay and Watson, emphasize that the approach proposed by the FTC is inefficient and requires the court to engage in too much burdensome fact-finding 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.’ Id. at 1315; Solvay Brief at 10.

Respondent Solvay points out that Congress has refused to enact any legislation making the reverse-payment settlements at issue here presumptively or per se illegal, even though multiple bills have been introduced attempting to achieve this result. Solvay Brief at page 19. Solvay further argues that relegating the reverse payment agreement to a presumptively anticompetitive status would increase the uncertainty and costs of litigation, and decrease generic competition because it would reduce the number of patent challenges (forcing the generic company to wait until patent expiry to enter the market), and would result in increased litigation over what is considered a ‘reverse payment’ (e.g. is it solely money, or may it be any consideration that changes hand). Solvay Brief at pages 22–23.