By Kevin E. Noonan —

The Federal Trade Commission is nothing if not persistent in trying to eliminate "reverse payment" settlements in ANDA litigation, even going so far as to "forum shop" to do so, according to a brief by appellees Unimed Pharmaceuticals LLC, Abbott Products, Inc., and Watson Pharmaceuticals, Inc.  In their responsive brief in the FTC's appeal to the 11th Circuit Court of Appeals, defendants-appellees allege that the FTC initially filed suit in the Central District of California, hoping to get a decision from the 9th Circuit at odds with the 11th Circuit's consistent precedent (Valley Drug Co. v. Geneva Pharmaceuticals, Inc., 344 F.3d 1294 (11th Cir. 2003); Schering-Plough Corp. v. Federal rade Commission, 402 F.3d 1056 (11th Cir. 2005); and Andrx Pharmaceuticals, Inc. v. Elan Corp., 421 F.3d 1227 (11th Cir. 2005)) that reverse payments are not per se illegal.  Having failed (the District Court in California transferred the action to the District Court in Georgia, which then dismissed), the FTC appealed.

The action arose over a reverse payment settlement between appellees and ANDA filers Watson Pharmaceuticals and Paddock Pharmaceuticals over AndroGel, a prescription testosterone formulation prescribed for treating hypogonadism.  Unimed (later acquired by Solvay, in turn 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, Judge Thrash presiding.  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).  As part of the suit, both Watson and Paddock did not contest that their products would infringe the '894 patent, but rather that the patent was invalid or unenforceable.  The issue was construction of the claim term "sodium hydroxide," which defendants Watson and Paddock contended meant solid sodium hydroxide, while the patentees argued that it meant a sodium hydroxide solution as set forth in the specification.  After extensive discovery, the District Court held a Markman hearing to construe the meaning of this disputed claim term.  However, before the Court could rule, 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 AndroGel product until the agreed time for their own product launch, and that Unimed 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 in a "backup capacity" for an additional $2 million annually.

The case on appeal arose pursuant to an investigation by the FTC of these settlement agreements.  The suit was transferred from the Central District of California to the Northern District of Georgia, once again before Judge Thrash.  In its second amended complaint, the FTC alleged "(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 District Court granted defendants' motion to dismiss, based on the controlling 11th Circuit precedent (Valley Drug Co., Schering-Plough and Andrx Pharmaceuticals).  The Court agreed with defendants that these cases precluded antitrust scrutiny for such reverse payment agreements "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."  As set forth in its responsive brief, the FTC did not allege "any of the circumstances that courts have suggested can cause a patent settlement to exceed the exclusionary potential of a patent," specifically that:

• Either of the patent lawsuits was a sham, objectively baseless, or brought in bad faith;
• The '894 patent was procured by fraud;
• Any of the settlements affected any party's ability to market products other than those described in the ANDAs or that Unimed alleged were covered by the '894 patent;
• Any of the settlements had the potential to prevent Watson or Par/Paddock from marketing generic testosterone gel after the '894 patent expired or if it was ever found invalid or unenforceable by a court of final appeal;
• Watson's settlement allowed it, the first ANDA filer, to retain any 180-day generic marketing exclusivity or otherwise manipulate 180-day exclusivity rights to block other potential generic entrants; or
• Any of the settlements operated as a so-called "interim" agreement under which the generic agreed not to market its product while the underlying patent litigation continued, without doing anything to actually settle the litigation, citing In re Cardizem CD Antitrust Litigation, 332 F.3d 896, 902-03, 907-09 (6th Cir. 2003), and In re Terazosin Hydrochloride Antitrust Litigation, 352 F. Supp. 2d 1279, 1290-91, 1308 (S.D. Fla. 2005).

The FTC's position was clear:  "parties to patent litigation should not be permitted to settle patent litigation with payments to the alleged infringers in exchange for a delay in generic entry."  The agency urged the District Court (and invites the 11th Circuit on appeal) to "reinterpret" its determination that such reverse payments are within the exclusionary scope of the patent unless the underlying patent litigation is a sham or objectively baseless.  The FTC's challenge to the 11th Circuit's precedent in this regard is unsupported by adoption of the 11th Circuit's rationale on this issue by the 2d Circuit (In re Tamoxifen Citrate Antitrust Litigation, 466 F.3d 187 (2d Cir. 2006), Arkansas Carpenters Health & Welfare Fund v. Bayer AG, 604 F.3d 98, 105 (2d Cir. 2010)) and the Federal Circuit (In re Ciprofloxacin Hydrochloride Antitrust Litigation, 544 F.3d 1323 (Fed. Cir. 2008)).  The agency argued that the Court should consider the "weakness" of the '894 patent, based on dicta from the Schering case.  The FTC's proposed rule is "that an exclusion payment is unlawful if, viewing the situation objectively as at 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."

Defendants argue in their responsive brief that "every court in every jurisdiction to consider the issue [since the 11th Circuit's Valley Drug decision] has reached the same conclusion:  parties are not subject to antitrust liability for a final settlement of bona fide patent litigation unless the settlement terms exceed the exclusionary potential of the patent."  They advance several important policy points in support of their position.  First, a contrary rule would inhibit settlement in patent infringement cases because of the "fear of treble damage[s] antitrust liability" if a later court second-guessed the evidence presented or adduced in earlier, settled patent litigation.  Second, following the FTC's proposed regime would require "a retrial of the patent merits [i.e., validity and enforceability] inside the antitrust case," making settlement of infringement litigation futile.  Defendants state that the FTC "has made no bones about its long-term strategy of seeking reversal" of the 11th Circuit precedent, including filing suit in California in an effort to produce a Circuit split for Supreme Court review and public statements by FTC commissioners regarding their view that reverse payments should be per se illegal.

Defendants argue that the 11th Circuit should not overrule settled precedent, something a panel cannot do; any inclination by the appellate court to do so will require en banc review (as was recently denied in the Cipro case at the 2nd Circuit).  They remind the Court that it has spoken clearly that there should not even be antitrust scrutiny for settlements within the "scope of the exclusionary potential of the patent."  The existence of settlement payments are irrelevant, they argue, citing similar conclusions by the Court in the Schering and Valley Drug decisions, as is the "odds" that the patentee was at risk of losing the patent infringement lawsuit absent the reverse payment-containing settlement.  In a footnote, defendants distinguish the only case to the contrary, In re Cardizem CD Antitrust Litigation, 332 F.3d 896 (6th Cir. 2003), as being "clearly beyond the exclusionary potential of the patent at issue," based on "(1) the agreement not being a final settlement of litigation but instead an 'interim' agreement that had the effect of prolonging the litigation; (2) the 'dispositive' fact that the generic had agreed not to relinquish or transfer its 180-day Hatch-Waxman exclusivity, which was a 'bottleneck' to the entry of any other generic competitor; and (3) a restraint on all competing products regardless of whether they might be covered by the patent at issue."  Defendants' brief alleges that the FTC's complaint contained no allegations that the settlements extend past the "exclusionary potential" of the '894 patent or that litigation between the parties was a sham or that the patent was procured by fraud.  And the only allegations asserted by the FTC were that Par/Paddock had alleged during the underlying infringement suit that Unimed (Solvay's) asserted claims were invalid or unenforceable.  But "[a]n exception cannot lie, as the [FTC] might think, when the issue turns on validity . . . as opposed to infringement" according to defendants,' citing Schering, 402 F.3d at 1075-76.

Having "created its proposed legal rule out of whole cloth," defendants argue that the FTC has provided no evidence of any wrongdoing nor any support in earlier precedent for its proposed rule.  Citing an "array of horribles" that could arise by overturning the Court's "settled precedent" on reverse payments, defendants' brief raises the "real worry" about the consequences:  hampering future innovation, a "real driver of our prosperity."  This portion of the brief is replete with estimates and economic explanations for these consequences.  This is an instance where the FTC's persistence may hurt rather than help innovation; unfortunately, the agency seems neither capable of understanding that or of ceasing its crusade to ban reverse payment settlement agreements in ANDA litigation.  Unless the 11th Circuit has a change of heart, however, the agency will have lost another opportunity to ban such settlements.