Pay-for-Delay: Still a Critical Antitrust Enforcement Priority

On Monday, June 11, 2012, the Federal Trade Commission continued its lengthy and aggressive challenge to pay-for-delay settlement agreements by petitioning the Eleventh Circuit to reconsider its decision in FTC v. Watson Pharmaceuticals. The en banc petition urges the court to set aside circuit precedent and apply more rigorous scrutiny to settlement agreements between brand and generic manufacturers that delay the entry of a generic product into the market.

Over the last decade, the FTC and private plaintiffs have argued that pay-for-delay settlements,¹ like the one in Watson Pharmaceuticals, are unlawful restraints on trade. A circuit split has emerged on the proper antitrust treatment of these agreements. In earlier cases, the D.C. Circuit and Sixth Circuit found these agreements per se unlawful. In more recent cases, however, the Second Circuit, Eleventh Circuit, and Federal Circuit have held that absent sham litigation or fraud on the patent office, these agreements do not violate the antitrust laws as long as they fall within the scope of the patent.

In Watson Pharmaceuticals the Eleventh Circuit again upheld a pay-for-delay settlement in the face of an antitrust challenge. The underlying dispute centered around a topical steroid named AndroGel. Solvay Pharmaceuticals, Inc. held the brand patent for AndroGel, and two generic manufacturers, Watson Pharmaceuticals, Inc. and Paddock Laboratories, Inc., sought to enter the market. In so doing, they filed Abbreviated New Drug Applications with the Food and Drug Administration, making Paragraph IV certifications under the Hatch-Waxman Act. The Paragraph IV certifications stated that either Solvay's AndroGel patent was invalid or that Watson and Paddock's generic products did not infringe.

Within the forty-five day statutory period, Solvay filed a lawsuit against Watson and Paddock² for patent infringement. On the eve of a decision on summary judgment and entry of generic AndroGel to the market,³  the parties settled the dispute. Under the settlement agreements, Paddock and Watson agreed to delay entry into the market for six and nine year respective periods that would elapse before the expiry of Solvay's patent. In exchange, Solvay agreed to share its profits on AndroGel with the generic drug companies.

On notice of the settlement agreement, the FTC, joined by the California Attorney General, filed an antitrust lawsuit in January 2009 in federal district court in California, claiming that the settlement agreements violated Section 5(a) of the Federal Trade Commission Act.⁴  In its complaint, the FTC alleged that the agreements postponed the entry date of the generic drugs, which allowed Solvay to maintain monopolistic profits at the expense of consumer savings that would have resulted from price competition. The FTC argued that the brand AndroGel patent did not give Solvay a legal monopoly because Solvay was "not likely to prevail" in the patent litigation, making it unlikely that the brand patent would "prevent generic entry" into the market. Accordingly, the FTC argued, Solvay's settlement with the generic drug companies extended its monopoly beyond the authorization of the patent laws.

The suit was transferred to the Northern District of Georgia, where the defendants moved to dismiss the FTC's action for failure to state a claim. Following Eleventh Circuit precedent, the district court granted the defendants' motion. The FTC then appealed to a three judge panel of the Eleventh Circuit. The FTC urged the panel to ignore Circuit precedent and instead find "an exclusion payment . . . unlawful if, viewing the situation objectively as of the time of settlement, it is more likely than not that the patent would not have blocked generic entry earlier than the agreed-upon entry date" under the settlement. The panel refused, and upheld the settlement agreements under the scope-of-the-patent test.

Finding the agreements to be lawful, the panel criticized the FTC's proposed rule. According to the panel, the rule would require an after-the-fact district court determination of how likely the patent holder was to succeed in a now-settled lawsuit; an enterprise "too perilous . . . to serve as the basis for antitrust liability . . . ."⁵  Furthermore, the court concluded that the FTC's rule would likely discourage settlement and punish parties who make the rational decision to avoid litigation risk by settling a lawsuit.

Undeterred by the strongly worded opinion from the panel, the FTC has petitioned the Eleventh Circuit for rehearing en banc.  The FTC's brief argues that the panel's decision "upsets the balance between patent law and antitrust law." Moreover, according to the FTC, "the rule allows for weak patents to stifle competition, which conflicts with patent law's encouragement of challenges to such patents and with the Hatch-Waxman Act's goal of promoting generic entry specifically by rewarding those who challenge branded patents." The FTC's petition advocates for a rule that presumes that a pay-for-delay settlement payment establishes a prima facie case of illegality under the antitrust laws. Under such a rule, the burden shifts to the parties to the settlement agreement, who would be required to demonstrate that the payment is not anticompetitive. 

The FTC's argument contravenes the growing line of cases that do not find pay-for-delay settlements presumptively unlawful.  However, the Commission is unlikely to change its posture any time soon. After losing in the Eleventh Circuit, FTC Chairman Leibowitz stated, "we continue to believe this conduct violates antitrust laws."⁶ And last week, the Agency announced the creation of a new position in the Bureau of Economics – Deputy Director of Health Care and Antitrust. This position will be filled on August 1, 2012 by Leemore Danfy, a microeconomist from Northwestern University whose research focuses on competition in health care markets. Accordingly, the FTC has made clear that companies entering into pay-for-delay settlements can expect agency action.