By Kevin E. Noonan —

The Federal Trade Commission (FTC) spent the better part of a decade attacking the practice of innovator drug companies settling ANDA litigation by providing payments to generic applicants challenging the validity of Orange Book-listed patents (see "The FTC's Thinking Does Not Make It So Regarding Reverse Payment Agreements"; "Federal Trade Commission Issues Report on Reverse Settlement Agreements in FY2010"; "FTC Releases Another Report on Reverse Payment Settlement Agreements in ANDA Litigation"; "The FTC Is at It Again").  These agreements were termed "reverse payment" settlements because unlike in most patent suits, the defendant secured a payment from the patentee (as part of its campaign, the FTC termed these "pay-for-delay" agreements).  The Commission persisted in its efforts despite most Federal Courts of Appeal deciding that, rather than being anticompetitive, the agreements frequently resulted in generic drugs coming to market much earlier than would be expected (see 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); In re Tamoxifen Citrate Antitrust Litigation, 466 F.3d 187 (2d Cir. 2006); In re Ciprofloxacin Hydrochloride Antitrust Litigation, 544 F.3d 1323 (Fed. Cir. 2008); Arkansas Carpenters Health & Welfare Fund v. Bayer AG, 604 F.3d 98, 105 (2d Cir. 2010); and Federal Trade Commission v. Watson Pharmaceuticals, Inc. (11th Cir. 2012)).  One basis for the FTC's persistence was the belief that branded drug companies settled because they were aware that their patents were invalid and thus improperly tried to extend their "monopoly"; of course this position supposed not only that innovator drug companies were willing to contravene the antitrust laws but perhaps more importantly that the Commission's bureaucrats had a better understanding of the pharmaceutical industry than the executives making the decisions.  Persistence being what it is, the FTC finally prevailed in finding a Circuit Court (the Third) to accept its arguments (see "The Federal Trade Commission Finally Wins One"), leading to the Supreme Court deciding the issue in FTC v. Actavis.

That decision was anything but a complete victory for the Commission's position.  Indeed, Justice Breyer wrote a relatively nuanced opinion holding, most importantly, that such settlements were not a per se antitrust violation (the FTC's original position).  Rather, the Court held that such agreements must be evaluated under the "rule of reason."  However, reasonableness (i.e., how tightly tethered to reality) of any such determination depends in larger part on the reasoner, and this characteristic (or flaw) is illustrated in the first full-fledged appellate affirmance of the FTC in a reverse payment settlement case, Impax Laboratories v. FTC, decided earlier this week.

The case arose over a settlement between branded drug maker Endo against Impax over its extended-release oxymorphone opioid drug product, Opana ER.  The agreement, entered into before the Supreme Court's Actavis decision, included a number of facts that the FTC used to support its position that the agreement was anticompetitive.  Impax was the first filer, and thus its settlement created a "bottleneck" against later-filing generic competitors due to its 180 exclusivity period to which Impax was entitled as first filer.  In addition, Endo engaged in "product hopping," wherein it substituted out another Opana ER formulation (a "crush-resistant" form less amenable to abuse) and withdrew its original FDA approved drug from the market, which would have severely limited Impax's market share from sales of a generic version of the original formulation.  According to the 5th Circuit's opinion:

But extending the period in which it could sell Opana ER without competition was just one of Endo' s priorities.  The drug maker had something else in the works:  It planned to move consumers to a new brand name drug that would not face competition for years.  Endo would remove the original Opana ER from the market, replace it with a crush-resistant version of the drug, and obtain new patents to protect the reformulated drug.  While Impax's generic would still eventually reach the market, it would not be therapeutically equivalent to Endo' s new branded drug and thus pharmacists would not be able to automatically substitute the generic when filling prescriptions.  This automatic substitution of brand drug prescriptions, promoted by state laws, is the primary driver of generic sales.  So, if Endo succeeded in switching consumers to its reformulated drug, which would be just different enough from the original formulation to preclude substitution, the market for Impax' s generic would shrink dramatically, preserving Endo's monopoly profits.

The timing of the agreement was also a factor:  Endo and Impax were not able to come to an agreement until right before the expiration of the Hatch-Waxman 30-month stay of FDA approval (although it must be said that the 5th Circuit's opinion seemed not to appreciate the risks for Impax of "launching at risk" prior to a final determination in its favor in the ANDA lawsuit).

Under the terms of the settlement agreement, Impax delayed its launch until January 1, 2013, 30 months later than any "at risk" launch scenario without the agreement.  Endo agreed not to bring its own branded generic to market in competition with Impax's product until after the 180-day exclusivity period had passed (July 1, 2013).  Endo also agreed to pay Impax a "credit" should its own Opana ER sales fall by 50% or more after the parties entered into the agreement and before Impax's generic entered the market (as a result, inter alia, of Endo's product hop).  Endo also broadly licensed its relevant patents to Impax, and entered into an agreement to co-develop a Parkinson's disease drug, funded in part by a $10 million payment to Impax with provisions for up to an additional $30 million depending on development of the new product.  As a consequence of Endo's product hop, Impax was entitled to and received $102 million in credits due to the shrinking market share of the original Opana ER formulation.  The product hop formulation proved to have its own safety concerns, however, and Endo withdrew it from the market in 2017.  The result is that "Impax's generic is the only extended-release oxymorphone available to consumers today."

The FTC brought actions separately against Endo and Impax; Endo settled and Impax put up a fight.  While the Administrative Law Judge found that the agreement's procompetitive benefits outweighed any anticompetitive effects the Commission decided otherwise, leading to this appeal (in the form of a petition for the Court to overrule the Commission).

The Fifth Circuit unanimously affirmed the Commission's decision and denied Impax's petition.  In doing so, it set forth and followed Justice Breyer's formula for applying the rule of reason to the facts provided in the agreement.  The Court gave deference to the Commission's factual findings and reviewed any legal judgments de novo.  The panel recognized the burden shifting inherent in applying the rule of reason.  First, the burden was on the Commission to show that the agreement had an anticompetitive effect.  Then Impax was empowered to demonstrate any procompetitive effects, and if so the Commission had the opportunity to establish that those procompetitive effects could have been achieved "through less anticompetitive means" (which provides at least some of the potential for mischief illustrated by this decision).  Finally, if the FTC should fail in this step a court is empowered to balance the anticompetitive effects against the procompetitive benefits.  Of course, if this balance rests on the anticompetitive side of the comparison the agreement is illegal.

In applying these rubrics, the Court held that the FTC had established anticompetitive effects (or that the agreement "created the potential for anticompetitive effects," citing Doctor's Hosp. of Jefferson, Inc. v. Se. Med. All., Inc., 123 F.3d 301 (5th Cir. 1997)) of the agreement.  The Court considered "increased prices, decreased output, or lower quality goods" specifically or "[e]liminating potential competition" to be "by definition, anticompetitive," citing United States v. Falstaff Brewing Corp., 410 U.S. 526, 532-33 (1973).  Here, the size of the payment ($102 million) was sufficiently large that Impax did not challenge the FTC's determination that this aspect of the agreement was anticompetitive, and the Court agreed (the opinion also values Endo's agreement not to market a branded generic version of Opana ER to have provided an additional $24.5 million in "projected profits" to Impax).  Unlike other cases where such benefits as "avoided litigation costs" justified the reverse payment in view of the small sums of such payments ($3 million for example) here the significant amount of the direct payment ($102 million) was itself sufficient to satisfy the anticompetitive effect prong of the Supreme Court's analytical framework for the Commission and the Court.  Importantly, the Court rejected Impax's argument that it should consider the "strength" of the patent (i.e., the likelihood that it would have not been invalidated had the lawsuit gone to trial) based in part of the Supreme Court's rejection of this argument in its Actavis decision (although the decision is replete with the unjustified argument that the size of a reverse payment is an accurate gauge ("a strong inference") of the "weakness" of the underlying patent).  But the fact that, as it turned out, Impax is the only marketed generic version of extended release Opana is not relevant according to the opinion, based on the principle that "the impact of an agreement on competition is assessed as of 'the time it was adopted,'" citing Polk Bros. v. Forest City Enters., 776 F.2d 185, 189 (7th Cir. 1985).

The panel then turned to Impax's evidence of procompetitive benefits.  While the Commission had conceded that certain provisions could have procompetitive effects, the fact that the agreement permitted Impax's generic drug to come to market nine months prior to patent expiry and that Endo licensed its other relevant patents did not outweigh the anticompetitive effect of the reverse payment.  The Court avoided ruling on this aspect of the Commission's decision because alternatively the Commission decided that any procompetitive benefits could have been achieved by a less restrictive alternative.  The concept is clear: "[a] restraint [of trade] is unreasonable when any procompetitive benefits it produces 'could be reasonably achieved through less anticompetitive means,'" under Ohio v. Am. Express, 138 S. Ct. 2274, 2284 (2018).  The policy justification is that this rule permits courts to "smoke out" anticompetitive practices or "pretextual justifications" for an unlawful restraint (a concept the Court finds in an academic paper rather than a judicial decision).  Following this logic, the opinion poses the question of whether "the good [could] have been achieved equally well with less bad."  The Commission based its decision that the parties could have come to a "less bad" agreement on "industry practice, economic analysis, expert testimony, and adverse credibility findings discounting the testimony of Impax's lead settlement negotiator."  The "less bad" alternative would have been, predictably, an earlier generic market entry date without the credits that led to the $102 million reverse payment (It should be kept in mind that this figure was not specifically contemplated when the agreement was negotiated; indeed, under different factual circumstances unlinked to the terms of the agreement there might have been no payment.)  The factual predicate for the Commission's determination included that "most settlements between brand and generic makers do not include reverse payments" (30% in settlements between 2004-2009; ironic in view of the FTC's purple prose regarding the scope of the "pay-for-delay" problem during those years).  In addition to adverse credibility determinations for Impax's chief negotiator, the Commission performed an ex post facto economic analysis that it would have been reasonable for Endo to permit earlier Impax market entry "if it could have kept the more than $100 million it ended up paying Impax."  Indeed that may have been the case, but at the time of the agreement (which the Court earlier in its opinion established as the timeframe for evaluating the competitiveness vel non of the agreement) this eventual payment may have been recognized as a risk but was not a certain cost of later Impax market entry.  Nevertheless, because this is a question of fact, the Court granted the Commission deference and thus found that Impax had not overcome the grounds the Commission asserted in favor of this conclusion.

And this illustrates the analytical limitations of the Actavis inquiry into ANDA settlement agreements having reverse payment provisions.  Ultimately, far after the fact the FTC and its cadre of economists impose their conclusions on the parties' behavior which, as in this case, can be a mixture of ex ante and ex post analyses focused on the Commission's goal of preventing any agreement that can be cast as "pay-for delay."  While a worthwhile goal of influencing generic earliest generic drug entry, the Commission now as then has a blind spot to the economic realities under which parties in Hatch-Waxman litigation exist and come to these agreements.  The benefit in such agreements is almost always that a generic drug comes to market earlier than it would have if the parties had continued ANDA litigation to its outcome.  Sometimes the branded innovator will prevail in such litigations and sometimes they will not.  But the fact that sometimes the parties come to a commercially reasonable settlement reflects their considered evaluation of the risk under which each party operates and the consequences of prevailing or not.  Not all patents that are invalidated objectively should be nor are all patents that are upheld.  And there have been instances (remarkably few) where just what the Commission fears has come to pass (a true "pay for delay"), but in at least one instance even pre-Actavis that agreement was struck down as being anticompetitive.  The principal consequence of the Supreme Court's Actavis decision has been parties to ANDA litigation coming to settlement agreements less easily challenged by FTC or consumer groups (see "The Effects of the Actavis Decision on Reverse Payment Settlement Agreements in ANDA cases — Four Years After"), and in that way this decision is an anomaly due to the timing that the agreement was entered into prior to the refinement in the law by Actavis.  But this decision illustrates the sometime consequences of FTC's crusade against settlement agreements in ANDA litigation, which is not and has not always been in the public's interest.