FTC Administrative Law Judge Rejects Agency's First Post-Actavis Enforcement Action Under Rule of Reason
In the FTC's first administrative enforcement action challenging an alleged "reverse payment" settlement of patent litigation following the Supreme Court's decision in FTC v. Actavis, 1 an Administrative Law Judge (ALJ) found that the substantial procompetitive benefits of the settlement outweighed the "largely theoretical" harm to competition and that the FTC had therefore failed to prove that the challenged agreement constituted an unreasonable restraint of trade.2 Most notably, the ALJ's decision expressly incorporated into the rule of reason analysis an evaluation of the "but-for" world without settlement, and included the likely outcome of subsequent patent cases in that evaluation.
Since Actavis, federal courts evaluating challenges to alleged "reverse payment" settlements have evaluated the "but-for" world under the rubrics of antitrust injury and causation.3 However, unlike private plaintiffs seeking damages under Section 4 of the Clayton Act, the FTC does not need to prove injury, causation, or damages to prevail on a claim under Section 5 of the FTC Act. The Impax case analyzed the "but-for" world in the context of the balancing of benefits versus the alleged anticompetitive effects of the challenged restraint required under the rule of reason. The facts of the Impax case presented the issue squarely, because the evidence showed that the generic manufacturer, Impax Laboratories Inc., entered the market earlier than it would have been able to do so absent the settlement and obtained broad licensing rights that enabled it to stay on the market continuously notwithstanding the brand manufacturer's ability to lawfully exclude others by enforcing patents acquired after the settlement. The ALJ articulated a framework that incorporated both the notion that eliminating "the risk of competition" by settling an ANDA case can be a form of anticompetitive harm at the front end of his analysis, and a detailed analysis of the "but-for" world required by the rule of reason at the back end, and then—as established antitrust law requires—balancing the two to determine whether a challenged agreement is more anticompetitive than procompetitive.
The ALJ also rejected several of the "shortcuts" advocated by FTC following Actavis, such as the argument that anticompetitive effects can be demonstrated solely by proof of a large payment and market power. Instead, the ALJ conducted a rigorous and thorough examination of all relevant facts. On the whole, the Impax decision represents a positive development for consistency in application of the rule of reason and for companies defending challenges to alleged "reverse payment" settlements.
In November 2007, Impax Laboratories Inc. filed an Abbreviated New Drug Application (ANDA) seeking to market a generic version of Opana ER, a branded drug manufactured by Endo Pharmaceuticals Inc. As part of its ANDA, Impax submitted a "Paragraph IV" certification, certifying that Endo's patents were not valid and/or would not be infringed by Impax's generic drug. Impax was the first to file an ANDA for five dosage strengths of Opana ER. As the first ANDA filer, Impax was entitled to a 180-day period of exclusivity, during which the FDA would not approve the applications of subsequent ANDA filers, for those dosage strengths. On January 25, 2008, Endo sued Impax, alleging that Impax's ANDA infringed two of Endo's patents, which were set to expire in September 2013. On June 3, 2010, Endo and Impax went to trial in the patent litigation. However, on June 8, 2010, the parties reached a settlement (Settlement Agreement).
Under the key terms of the Settlement Agreement, Endo granted a license enabling Impax to sell its generic version of Opana ER beginning January 1, 2013. The license included existing patents covering Opana ER as well as any additional subsequently issued patents covering Opana ER. Endo agreed not to sue Impax for patent infringement with respect to any of the licensed patents.
Endo further agreed that Impax's license to sell generic Opana ER would be exclusive during Impax's 180-day first-filer exclusivity period, meaning that Endo would not sell an authorized generic for Opana ER until Impax's 180-day exclusivity period ended. This provision is commonly referred to as a "no-AG provision."4
Along with the Settlement Agreement, the parties reached agreement on a development and co-promotion agreement, agreeing to collaborate with respect to the development and marketing of a potential treatment for Parkinson's disease. Endo agreed to make an upfront payment to Impax of $10 million and to make additional milestone payments for achieving specified milestone events in the development and commercialization of the product. In exchange, if the product was successfully commercialized, Endo would be entitled to a share of the resulting profits.
Between March 2012 and October 2014, Endo obtained six additional patents and patent licenses covering Opana ER and a reformulated version of Opana ER. With the additional patents, Endo sought and obtained injunctions against each of the other drug manufacturers seeking to market generic versions of Opana ER, except Impax. However, because of the Settlement Agreement's broad licensing provision covering subsequently issued patents, Endo did not assert such patents against Impax with regard to its generic version of original Opana ER. Impax was therefore the only manufacturer able to market a generic version of the original Opana ER.
In March 2016, the FTC challenged the Settlement Agreement in federal court. However, in October 2016, the FTC voluntarily dismissed the federal court action. Instead, on January 19, 2017, FTC Staff filed an administrative complaint against Impax under Section 5 of the FTC Act.5 In October and November 2017, the ALJ conducted an administrative trial in October and November 2017, the first such trial since the Supreme Court's decision in Actavis.
II. Rule of Reason Framework Under Actavis
In FTC v. Actavis,6 the Supreme Court held that reverse payment settlement agreements containing a large and unexplained payment must be evaluated under the rule of reason. However, the Court explicitly left to the lower courts the task of structuring the rule of reason analysis.7 In Impax, the ALJ observed that while some courts had articulated a rule of reason framework in the context of motions to dismiss and motions for summary judgment following Actavis, none had been called upon to apply the rule of reason to a complete evidentiary record developed after trial.
The ALJ explained that the traditional burden-shifting framework of the rule of reason has four steps. First, the plaintiff bears the initial burden of proving that the challenged agreement produced anticompetitive effects within the relevant product and geographic markets. Second, if the plaintiff meets its burden of demonstrating anticompetitive effects, the burden shifts to the defendant to prove that the challenged restraint has procompetitive effects. Third, if the defendant is able to demonstrate procompetitive effects, the plaintiff then must prove that the challenged conduct is not reasonably necessary to achieve the legitimate objectives or that those objectives can be achieved in a substantially less restrictive manner. Fourth, if these steps are met, the factfinder must weigh the harms and benefits against each other in order to judge whether the challenged behavior is, on balance, reasonable.
While the first step in the rule of reason analysis traditionally focuses on the real world effects of a restraint rather than its purpose or the parties' expectations,8 the ALJ concluded that in the reverse payment context, the analysis of anticompetitive effects should focus on whether the challenged agreement provided a payment for delay, or, in other words, a payment to prevent the risk of competition. In evaluating that risk, the ALJ observed that a large reverse payment can imply that the market entry date in the settlement agreement is later than the date that the patent holder expected the alleged patent infringer to enter the market.9
However, the ALJ rejected several of the FTC's arguments concerning proof of anticompetitive effects. The ALJ rejected the argument that anticompetitive effects can be demonstrated solely by proof of a large payment and market power, explaining that such a standard has not has not been adopted by any other court, and that it would present an unduly truncated burden of proof. The ALJ also observed that the fact that a payment exceeds saved litigation costs is a relevant benchmark in assessing whether a payment is large, but it is not dispositive. And the ALJ rejected the FTC's argument that the defendant bears the burden of proving that a payment was justified.
With regard to the second step—proof of procompetitive effects—the ALJ rejected the FTC's argument that the only relevant procompetitive justifications are limited to those that justify the reverse payment itself. The ALJ reasoned that such an approach would be "too abbreviated to permit proper analysis." Rather, the ALJ explained, analysis of procompetitive benefits requires evaluating the effects of the settlement agreement as a whole. For purposes of evaluating procompetitive effects, the ALJ also found relevant that a settlement may enable a generic manufacturer to enter the market prior to the expiration of a brand manufacturer's patents.
The ALJ explained that the third step of the analysis would then consider whether the evidence proves that the demonstrated procompetitive benefits of a challenged agreement could have been achieved with a less restrictive agreement.
Finally, the ALJ explained that proper balancing of the procompetitive and anticompetitive effects of the agreement requires consideration of the extent to which a settlement agreement actually delayed competition. The ALJ cited the California Supreme Court's decision in In re Cipro Cases I & II,10 for the proposition that "the relevant benchmark in evaluating reverse payment patent settlements should be no different from the benchmark in evaluating any other challenged agreement: What would the state of competition have been without [i.e., "but for"] the agreement?"
III. Application Of The Rule of Reason In Impax
The ALJ conducted a rigorous and thorough analysis under the framework articulated for the rule of reason, and concluded that the FTC failed to prove that the settlement agreement constituted an unreasonable restraint of trade. The ALJ found that the $10 million payment to Impax pursuant to the co-promotion agreement was justified as a bona fide product development collaboration with profit-sharing rights. The ALJ also found, however, that the no-AG provision was unjustified. The ALJ found that, at the time of settlement, the value of the no-AG provision was between $23 and $33 million in projected sales. The ALJ found that a reasonable estimate of the combined saved litigation costs for both Endo and Impax for settling the patent litigation was approximately $5 million. The ALJ thus concluded that the FTC met its initial burden of proving the existence of a large unexplained payment, and accepted the elimination of the risk of competition accomplished by the settlement as an anticompetitive effect.11
The ALJ also found that the January 2013 entry date, together with the broad license agreement, enabled a generic Opana ER to enter the market eight months before the original patents expired, and sixteen years before Endo's after-acquired patents expired, and to continue with the sale of that product up to the present day, without threat of patent infringement litigation, and deemed those to be procompetitive benefits of the settlement. The ALJ highlighted that Impax's product is the only generic Opana ER available to consumers: Every other ANDA filer had settled patent claims asserted by Endo related to Opana ER, but no other drug manufacturer negotiated rights to future patents similar to the broad license agreement that Impax obtained in the SLA. Accordingly, the ALJ explained, "the real-world effect" of the Settlement Agreement was a product on the market and available to consumers that would not have been available had Impax not negotiated licenses to future patents.
The ALJ also rejected the FTC's argument for a less restrictive alternative (i.e., an agreement that would have accomplished the procompetitive benefits without the challenged anticompetitive effect). He found that the FTC had failed to show that a hypothetical settlement that did not include any payment could have, or would have, included the broad patent license included in the actual Settlement Agreement.
Accordingly, for purposes of balancing the anticompetitive and procompetitive effects, the ALJ evaluated two entry scenarios—an "at-risk" launch by Impax, and a launch following litigation. A launch "at risk" refers to a generic launch prior to a non-appealable decision in the underlying patent litigation, in which case the generic manufacturer risks liability for the brand-name manufacturer's lost profits if it loses the patent litigation. Based on extensive record evidence, the ALJ found that Impax would not have launched its generic Opana ER at risk.
Having found that Impax would not have launched at risk, the ALJ focused on the posture and duration of continued litigation at the time of the settlement. The ALJ found that an appellate decision from the Federal Circuit Court of Appeals would not have issued before November 2011, at the earliest. Moreover, even if the appellate court agreed with Impax's arguments, he deemed it likely that the appellate court would have remanded to the district court for further proceedings, because, having obtained a favorable claim construction ruling, Endo never developed a record that Impax had infringed its patents under Impax's construction of the claims. Thus, even if Impax ultimately would have prevailed in the litigation, it would not have been able to launch its generic product until a date close to January 2013—the settlement entry date. And if Impax ultimately would have lost its patent challenge against Endo, it would not have been able to launch its generic Opana ER product until the litigated patents expired in September 2013. The ALJ further observed that, even if Impax would have ultimately prevailed with regard to the two patents at issue, Endo likely would have successfully enjoined Impax from entering that market based on later-acquired patents, as it had against all other sellers of generic Opana ER meaning that Impax would have been unable to enter with a generic Opana ER until 2029. Thus, contrary to the observations of some critics of the decision, the ALJ neither resurrected the "scope of the patent test" nor treated the patent term as sacrosanct, but rather carefully looked that the facts and posture of this particular litigation at the time of settlement to come to a practical conclusion as to what likely would have happened in the absence of a settlement – precisely what the rule of reason calls upon courts to do in evaluating any agreement alleged to contain a restraint.
The ALJ thus concluded that while the Settlement Agreement included payment to prevent the risk of competition, which, under Actavis, could present anticompetitive harm, the magnitude or extent of such harm was "largely theoretical." By contrast, the ALJ found, the real world procompetitive benefits of the Settlement Agreement were substantial. Accordingly, the ALJ concluded that the FTC failed to prove that the settlement agreement constituted an unreasonable restraint of trade.
Though decided on a particular set of facts, the Impax decision provides a useful roadmap for applying the rule of reason to antitrust claims based on ANDA litigation settlements in the wake of FTC v. Actavis. In addition to incorporating the evaluation of a thorough "but-for" world into the rule of reason analysis consistent with established antitrust jurisprudence, the ALJ rejected several of the "shortcuts" advocated by FTC, private plaintiffs, and certain commentators following Actavis. On a practical level, the ALJ also provides some assurance for parties attempting to facilitate the prospects of settlement by introducing additional terms involving bona fide business arrangements. However, as the Impax decision focused on the duration of continued patent litigation and the inherent speculativeness of the FTC’s articulated harm, it avoided what is perhaps the thorniest question presented in post-Actavis reverse payment cases—whether and how to evaluate the merits of the settled patent litigation in assessing what would have occurred in the absence of the agreement (the "but-for" world). That issue awaits further development.
Because the FTC Staff has appealed the decision to the full Commission, we can expect further guidance on the application of the rule of reason under Actavis in the days ahead.
© Arnold & Porter Kaye Scholer LLP 2018 All Rights Reserved. This Advisory is intended to be a general summary of the law and does not constitute legal advice. You should consult with counsel to determine applicable legal requirements in a specific fact situation.
See In re Wellbutrin XL Antitrust Litig., 868 F.3d 132, 167 (3rd Cir. 2017); In re Nexium (Esomeprazole) Litig., 842 F.3d 34, 62-64 (1st Cir. 2016); In re Solodyn (Minocycline Hydrochloride) Antitrust Litig., No. CV 14-MD-2503, 2018 WL 563144, at *14 (D. Mass. Jan. 25, 2018); United Food & Commercial Workers Local 1776 v. Teikoku Pharma USA (Lidoderm), No. 14-MD-02521-WHO 2017 WL 5068533, at *5 (N.D. Cal. Nov. 3, 2017); Apotex, Inc. v. Cephalon, Inc., 255 F. Supp. 3d 604, 614 (E.D. Pa. 2017).
Under a provision titled "Endo Credit," Endo would be obligated to make a cash payment to Impax in the event Endo's Opana ER dollar sales fell by more than 50 percent of their quarterly peak, prior to Impax's entering the market with its generic drug. The ALJ found that the purpose of the "Endo Credit" was designed to compensate Impax for lost profits if, in the two and a half year time period between the June 2010 settlement and the agreed January 2013 entry date, Endo launched a reformulated version of Opana ER, which could have substantially eliminated the market for original Opana ER. Conversely, in the event that sales of Opana ER grew by a specific percentage, the agreement obligated Impax to pay Endo a 28.5 percent royalty on Impax's generic Opana ER sales during Impax's 180-day exclusivity period.
The FTC did not name Endo as a defendant in its administrative complaint. The ALJ explained that, in February 2017, FTC and Endo entered into an agreement that resolved any FTC concerns regarding Endo's conduct in relation to Opana ER.
As the Court of Appeals for the Third Circuit in In re Wellbutrin XL Antitrust Litigation, 868 F.3d 132, 168–69 (3d Cir. 2017) recognized, risk aversion makes it difficult to use the size of a reverse payment as a surrogate for patent strength, because the parties may be willing to accept a settlement payoff that is smaller than the expected payoff in litigation in exchange for certainty.
While the ALJ did not decide conclusively whether market power is a mandatory aspect of the FTC's proof, he appears to have taken a narrow view of the relevant market as the branded pharmaceutical product and its generic equivalents. The ALJ thus found that Endo had market power in the "relevant oxymorphone ER market" at the time of the settlement. The ALJ also found that the unjustified reverse payment constituted strong proof of Endo's market power in the relevant market.