By
Kevin E. Noonan —

Reinvigorated
by its triumph in convincing a three-judge panel of the Third Circuit to adopt
its view that reverse payment settlement agreements in ANDA cases are presumptively
illegal (in the K-Dur case, In re K-Dur
Antitrust Litigation, which was a relaxation of the Commission's former
position that such agreements were per se
illegal), the Federal Trade Commission has petitioned for certiorari in the Androgel case, FTC v. Watson (Federal Trade Commission v. Watson Pharmaceuticals, Inc. (11th Cir. 2012).  In an apparent attempt to bootstrap the
circuit split it achieved in the K-Dur
case into Supreme Court review of a case it considers better positioned to
achieve what a decade of litigation and legislative lobbying did not, the
Commission's certiorari petition
makes several arguments trying to convince the Court that the Watson case, not the K-Dur case, is the right vehicle for
consideration of the legality vel non
of reverse payment settlement agreements.

To
recap, the underlying litigation involved a
reverse payment settlement between NDA holder Solvay Pharmaceuticals and ANDA
filers Watson Pharmaceuticals and Paddock Pharmaceuticals over AndroGel®,
a prescription testosterone formulation prescribed for treating
hypogonadism.  Unimed (acquired by Solvay and later acquired by Abbott)
and Besins Healthcare S.A. held the NDA, as well as Orange Book-listed U.S.
Patent No. 6,503,894
directed to the formulation; this patent will expire in August 2020.  Watson and Paddock filed separate ANDAs having Paragraph IV certifications that
the '894 patent was invalid or unenforceable, and Unimed/Besins timely filed
suit pursuant to 35 U.S.C. § 271(e)(2) in the U.S. District Court for
the Northern District of Georgia.  The lawsuit was pending longer than the
statutory 30-month stay, and the FDA approved Watson's ANDA, but neither Watson
nor Paddock launched "at risk" (i.e., before the lawsuit had
been decided).  However, before the Court could rule on defendants'
summary judgment motions after a Markman hearing the parties
settled; the District Court entered a Stipulation of Dismissal against
Watson and a permanent injunction against Paddock.

In addition to these actions by the
District Court, the parties agreed that the § 271(e)(2) defendants would "respect"
the '894 patent, and that both were entitled to launch in August 2015, five
years before the '894 patent was scheduled to expire.  In addition, Watson
and Paddock agreed that their sales forces would promote Unimed's (later Solvay's)
AndroGel® product until the agreed time for their
own product launch, and that Unimed (later Solvay) would pay the parties
(~$20-30 million to Watson, ~$10 million to Par/Paddock) annually; in addition,
Par/Paddock agreed to supply AndroGel® to Unimed
(later Solvay) in a "backup capacity" for an additional $2 million
annually.

The FTC investigated this settlement
agreement, pursuant to 21 U.S.C. § 355 note (2003).  The FTC alleged
violations of Section 5a of the Federal Trade Commission Act under 15 U.S.C. §
45(a)(1).  The suit was transferred from the Central District of
California (in the Ninth Circuit, which had not found these agreements lawful) to
the Northern District of Georgia (where the Eleventh Circuit had ruled these agreements
to be lawful absent "sham" litigation, in Valley Drug Co. v. Geneva Pharmaceuticals, Inc.,
344 F.3d 1294 (11th Cir. 2003); Schering-Plough Corp. v. Federal Trade Commission,
402 F.3d 1056 (11th Cir. 2005)).  The
District Court granted defendants' motion to dismiss pursuant to Fed. R. Civ.
Pro. 12(b)(6) (failure to state a claim).  In doing so, the District Court
rejected the FTC's contentions in its complaint "(1) that the settlement
agreement between Solvay and Watson is an unfair method of competition; (2)
that the settlement agreement among Solvay, Paddock, and Par is an unfair
method of competition; and (3) that Solvay engaged in unfair methods of
competition by eliminating the threat of generic competition to AndroGel and
thereby monopolizing the market."  The decision was based on the
earlier 11th Circuit precedent that reverse payments did not
constitute anticompetitive behavior "so long as the terms of the
settlement remain within the scope of the exclusionary potential of the patent,
i.e., do not provide for exclusion going beyond the patent's term or
operate to exclude clearly noninfringing products, regardless of whether
consideration flowed to the alleged infringer."

The 11th Circuit affirmed.  The opinion focused on what it considered the
economic realities (instead of the FTC's economic theories), specifically that new
drugs are produced in the U.S. under the maxims "no risk, no reward"
and "more risk, more reward," and that "no rational actor"
(the economists' archetype) "would take [the] risk" of investing more
than "$1.3 billion" on a potential drug where "[o]nly one of
every 5,000 medicines tested . . . is eventually approved for patient use"
"without the prospect of a big reward."  Under this system, the
Court recognized that the successful drug maker who patents its drug will "usually[]
recoup its investment and make a profit, sometimes a super-sized one." 
The Court also noted that "more money, more problems" is the result,
with the profits "frequently attract[ing] competitors in the form of
generic drug manufacturers that challenge or try to circumvent the pioneer's
monopoly in the market."  The Court recognized the FTC's position to be
that reverse payments are per se anticompetitive as "unlawful
restraints on trade" and hence violations of Section 1 of the Sherman Act.

The Court stated that "[t]he lynchpin
of the FTC's complaint is its allegation that Solvay probably would have lost
the underlying patent infringement action" and that "Solvay was not likely to prevail" in the patent
litigation because "Watson and Par/Paddock developed persuasive arguments
and amassed substantial evidence that their generic products did not infringe
the ['894] patent and that the patent was invalid and/or unenforceable"
(emphasis in original).  "The difficulty," according to the
Court, "is [in] deciding how to resolve the tension between the
pro-exclusivity tenets of patent law and the pro-competition tenets of
antitrust law," a difficulty that "is made less difficult [] by []'[o]ur
earlier decisions.'"  While noting that generally agreements between
competitors that keep one competitor from the market to the benefit of the
other (and that increase costs to the public) would be barred under the
antitrust laws, reverse payment cases were "atypical cases because 'one of
the parties [owns] a patent'," citing Valley Drug.  This "makes
all the difference" to the Court, because the patent holder "has a
lawful right to exclude others" from the marketplace.  Said another
way, "[t]he anticompetitive effect is already present" due to the
existence of a patent," according to the opinion, citing Schering
Plough.  Further citing Valley Drug, the Court said that even
subsequent invalidation of the patent would not render the agreement unlawful,
since its lawfulness must be considered at the time of settlement, where the
patentee "had the right to exclude others."  What counts is the "potential
exclusionary power" of the patent at the time of the reverse payment
settlement, not its "actual exclusionary power" unless a court
had rendered a negative judgment of invalidity or unenforceability prior to the
settlement (an unlikely but not impossible scenario).  But the Court noted
that the mere existence of a patent did not give the parties to a reverse
payment settlement carte blanche; the settlement cannot "exclude[]
more competition that the patent has the potential to exclude."  Such
agreements remain "vulnerable to antitrust attack" according to the
opinion, and are subject to a "three-prong analysis" that requires an
evaluation of "(1) the scope of the exclusionary potential of the patent;
(2) the extent to which the agreements exceed that scope; and (3) the resulting
anticompetitive effects," citing Valley Drug.

The Court then synthesized the rule from its
cases:  "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 exclusionary potential of
the patent."  The Court assessed the FTC's allegations under this
standard, noting those allegations to be:  (1) that Solvay was "unlikely
to prevail" in the underlying patent infringement litigation; (2) that
accordingly the patent has "no
exclusionary potential" (emphasis in original); and (3) if a patent has no
exclusionary potential, the reverse payment arrangement "necessarily"
exceeds its "potential exclusionary scope" and thus is tantamount to "'buying
off' a serious threat to competition."  The FTC urged the Court,
according to the opinion, "to adopt '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.'"

The Court "decline[d] the FTC's
invitation and reject[ed] its argument," saying that to adopt either would
"equate[] a likely result (failure of an infringement claim) with an
actual result."  In this context, according to the Court, if Solvay
was "likely" to fail to survive litigation that meant its chances
were 51% to 49%; under these circumstances "as many as 49 out of 100 times
that an infringement claim is 'likely' to fail it actually will succeed and
keep the competitor out of the market."  Under these circumstances
the Court reasoned that "rational parties settle to cap the cost of
litigation and to avoid the chance of losing," noting that "[o]ne
side or the other almost always has a better chance of prevailing, but a chance
is only a chance, not a certainty."  The rationality of settling was
evident to the Court:  "[w]hen both sides of a dispute have a substantial
chance of winning and losing, especially when their chances may be 49% to 51%,
it is reasonable for them to settle" without incurring antitrust liability
for doing so.  The FTC's concerns are likely to be overstated, according
to the Court, because of "the reality that there usually are many
potential challengers to a patent, at least to drug patents" and other
generic competitors will arise to challenge the patent.

The
Question Presented in the FTC's certiorari
petition is prefaced by a long prelude, and (eventually) reads as follows:

Federal competition law generally prohibits an incumbent firm from
agreeing to pay a potential competitor to stay out of the market.  See Palmer
v. BRG of Ga., Inc., 498 U.S. 46, 49-50 (1990).  This case concerns
agreements between (1) the manufacturer of a brandname drug on which the
manufacturer assertedly holds a patent, and (2) potential generic competitors
who, in response to patent-infringement litigation brought against them by the
manufacturer, defended on the grounds that their products would not infringe
the patent and that the patent was invalid.  The patent litigation culminated in
a settlement through which the seller of the brand-name drug agreed to pay its
would be generic competitors tens of millions of dollars annually, and those
competitors agreed not to sell competing generic drugs for a number of years.  Settlements containing that combination of terms are commonly known as "reverse
payment" agreements.  The question presented is as follows:  Whether
reverse-payment agreements are per se lawful unless the underlying patent
litigation was a sham or the patent was obtained by fraud (as the court below
held), or instead are presumptively anticompetitive and unlawful (as the Third
Circuit has held).

The Commission's brief recites many of the
same reasons supporting a certiorari grant
that have been raised by the parties and amici
in the certiorari petition in the K-Dur
case:  the circuit split, the importance of the issues to healthcare and the
drug industry, and the substantive question of whether the Third Circuit's
approach of presumptive illegality, or the Second, Eleventh and Federal
Circuits' approach of legality within the boundaries of the "scope of the
patent," is the correct basis for assessing these agreements.  But the Commission brings its own unique
perspective to each question.

With regard to the circuit split, the
Commission argues, with no apparent irony, the likelihood of forum shopping
should the Court not step in to resolve the circuit split it tried very hard to
create by forum shopping itself.  The
petition also bemoans that "[t]he near certainty of facing judicial review
in a circuit that applies the scope-of-the-patent approach has effectively disabled
the FTC from proceeding administratively against any reverse-payment agreement,"
in the face of the Commissioner affirmatively stating that the FTC will be
filing all its reverse payment cases in district courts in the Third
Circuit.  The "important question"
argument is based entirely on the FTC's views of the economics of the branded
and generic drug marketplace, citing only academic studies and its own Reports
in support of its argument.  In this
regard it also cites some dated (vintage 1992-2000) statistics to the effect
that generic drug manufacturers prevail ~75% of the time in ANDA
litigation.  And its arguments
regarding the "scope of the patent" test and its purported legal
error are based predominantly on cases that relate to "naked" restraints
of trade and that ignore the exclusionary rights of the patent holder and the
regulatory framework imposed on Hatch-Waxman litigation.

Their principal new argument is that this
case provides a "superior vehicle" for Supreme Court review,
supported by four arguments.  First, the
brief argues, the K-Dur case is a
private cause of action (no matter how encouraged and supported by the FTC) and
the Watson case is an FTC enforcement
action, brought by the government agency "charged by Congress with
challenging unfair methods of competition, see 15 U.S.C. 45, and responsible
for reviewing agreements settling litigation under the Hatch-Waxman Amendments."  "The Court would benefit from the experienced
presentation that the FTC, represented by the Solicitor General, would offer as
a party" rather than an amicus,
the brief argues.  Unmentioned are the
procedural advantages of being a petitioner rather than an amicus in framing and presenting the arguments to the Court; the
private plaintiffs were useful in the matter below but now that policy is to be
decided the government wants to control how the case is presented to the Court.

The FTC's second argument is that this case
has a "simpler" procedural history, arising from a motion to dismiss under
Fed. R. Civ. Pro. 12(b)(6) rather than from a grant of a summary judgment
motion.  Of course, unmentioned in the
brief is the consequence that this case is devoid of the extensive record that
exists in the K-Dur case, both before
the Commission as well as in the District Court and the Third Circuit, and also
the proceedings in parallel litigation in the 11th Circuit where the Court came to the contrary conclusion.

The third argument set forth by the FTC is
that the K-Dur case is about post hoc damages (the agreements expired
long ago), whereas the Watson case is
about injunctive relief on agreements that will keep the generic parties off
the market until 2015.  "That makes
this case the more attractive vehicle because whatever uncertainties may arise
in fixing the damages caused by a reverse-payment agreement — a question no
court of appeals has confronted or passed upon — the FTC unquestionably will be
entitled to the remedy of an injunction if it proves that the reverse-payment
agreements here are unfair methods of competition," is the way the brief
summarizes the FTC's position.

The FTC's fourth and final argument is that the
K-Dur case does not involve a
Paragraph IV allegation of invalidity, which at first blush appears to provide
an attractive reason for the Court to preferentially consider these issues by
granting certiorari in the Watson case.  However, the grounds for deciding whether the agreement is anticompetitive and
thus illegal should not depend on whether the product does not infringe or the
patent is invalid; those considerations are only relevant to the type of
arguments FTC petitioner wants to make, which at root are that the litigation
is based on a "bad" patent and thus the patent should not be entitled
to the presumption of validity.

In its conclusion, the FTC decides to hedge
its bets, suggesting in the alternative that the Court grant both petitions and
hear the cases together.

The Court is expected to decide whether to
grant certiorari in the Watson case
and the K-Dur case later this term.