District Court Dismisses FTC Challenge to ANDROGEL Settlement Agreements; President’s Proposed Health Reform Bill Would Adopt a Senate Measure to Curb Settlement Agreements

By Kurt R. Karst –      

In yet another setback to the Federal Trade Commission’s (“FTC’s”) battle against settlement agreements between brand name and generic drug companies – so-called “reverse payments” or what the government now calls “pay-for-delay” agreements – the U.S. District Court for the Northern District of Georgia (Atlanta Division) largely dismissed multidistrict litigation brought by the Commission, direct purchasers, and indirect purchasers challenging certain agreements in which Solvay Pharmaceuticals, Inc. allegedly paid generic drug companies to delay generic competition to Solvay’s drug product ANDROGEL (testosterone gel) 1%.  Specifically, the FTC’s complaint (originally filed in the U.S. District Court for the Central District of California) alleged that in 2006, Solvay and generic companies violated various federal antitrust laws when they agreed to dismiss patent infringement litigation on U.S. Patent No. 6,503,894 (“the ‘894 patent”) in exchange for a profit-sharing arrangement and provided the generic competitors would not launch their generic versions of ANDROGEL until 2015.

The court, citing previous circuit court decisions concerning settlement agreement  antitrust challenges – e.g., Valley Drug Co. v. Geneva Pharms., Inc., 344 F.3d 1294, 1303 (11th Cir. 2003); Schering-Plough Corp. v. Fed. Trade Comm’n, 402 F.3d 1056 (11th Cir. 2005); In re Tamoxifen Citrate Antitrust Litigation, 466 F.3d 187 (2d Cir. 2006); and In re Ciprofloxacin Hydrochloride Antitrust Litigation, 544 F.3d 1323 (Fed. Cir. 2008)) – ruled that the settlements are not an unreasonable restraint of trade:

The Plaintiffs do not allege that the settlements between the Defendants exceed the scope of the ‘894 patent.  First, the settlements only exclude generic AndroGel from the market.  The ‘894 patent claims the gel formulation used in AndroGel and that gel formulation is necessary to the manufacture and sale of generic AndroGel.  The settlements do not exclude any product other than generic AndroGel.  Second, the settlements only exclude generic AndroGel from the market until August 31, 2015.  This provides for five years less exclusion than the ‘894 patent, which does not expire until August 2020.  Third, the settlements only prevent Watson, Par, and Paddock from selling generic AndroGel. . . .  Because the Plaintiffs do not allege that the settlements exceed the scope of the ‘894 patent, it does not matter if the Defendants settled their patent disputes with reverse payments. The Plaintiffs’ reverse payment settlement claims must be dismissed. [(internal quotation and citation omitted)]

The decision comes just a month after the FTC issued its report, titled “Pay-for-Delay: How Drug Company Pay-Offs Cost Consumers Billions,” in which the Commission analyzed the effects of settlement agreements in the drug industry over the past 6 years and pleaded for the inclusion of a provision in Health Reform legislation that would address such settlements.  (See our previous post here) 

Earlier this week, the Obama Administration released a Health Reform proposal that includes, among other things, provisions addressing settlement agreements.  (see our previous post on the proposal here)   According to summary:

The President’s proposal adopts a provision from the bipartisan legislation that gives the FTC enforcement authority to address this problem. Specifically, it makes anti-competitive and unlawful any agreement in which a generic drug manufacturer receives anything of value from a brand-name drug manufacturer that contains a provision in which the generic drug manufacturer agrees to limit or forego research, development, marketing, manufacturing or sales of the generic drug. This presumption can only be overcome if the parties to such an agreement demonstrate by clear and convincing evidence that the pro-competitive benefits of the agreement outweigh the anti-competitive effects of the agreement. The proposal also requires the Chief Executive Officer of the branded pharmaceutical company to certify to the accuracy and completeness of any agreements required to be filed with the FTC.

The Obama Administration’s description of its settlement agreement proposal – which FTC Chairman Jon Leibowitz praised – appears to be similar to S. 369, the Preserve Access to Affordable Generics Act, which was passed out of the Senate Judiciary Committee last year.  That bill would amend the FTC Act to permit the FTC to “initiate a proceeding to enforce the provisions of [new Sec. 28] against the parties to any agreement resolving or settling, on a final or interim basis, a patent infringement claim, in connection with the sale of a drug product.”  Such agreements, if challenged, would be presumptively anticompetitive and unlawful unless it can be demonstrated “by clear and convincing evidence that the procompetitive benefits of the agreement outweigh the anticompetitive effects of the agreement.”  In contrast, the bill passed by the House (§ 2573) would amend the FDC Act to add section 505(w) – “Protecting Consumer Access to Generic Drugs” – to, among other things, make it unlawful for any person from being a party to any agreement resolving or settling a patent infringement claim in which an ANDA applicant receives anything of value, and the ANDA applicant agrees not to research, develop, manufacture, market or sell the generic drug that is the subject of a patent infringement claim.  Both bills were scored by the Congressional Budget Office (here and here). 

According to a recently filed report on S. 369, there is some disagreement as to how best to address settlement agreements.  Senators Orrin Hatch (R-UT), Jon Kyl (R-AZ), John Cornyn (R-TX), and Tom Coburn (R-OK) filed their “minority views” criticizing the legal-presumption rule in the bill:

Although this bill has been substantially improved since it was first introduced, we cannot support it in its current form. The original bill would have created a per se violation of the antitrust laws where the parties to a drug patent infringement suit settle the suit in a way that gives something of value to the generic company other than the right to go to market earlier. The reported bill replaces an express per se ban with a presumption that such agreements are anticompetitive and invalid. Because of the way that the bill enforces that presumption, however, we believe that the bill would amount to a de facto per se ban on covered settlements—and would entail all of the evils attendant to a per se ban.

To be clear, we would support creating a legal presumption against drug patent settlements—in effect, requiring the parties to such settlements to show why the terms of the settlement are reasonable and will not harm consumers. Such a test would require the parties to explain what consideration is being transferred between them under the agreement, to estimate the value of that consideration, and to give a neutral and legitimate reason for the exchange. We think that such a test would ferret out settlements that are anticompetitive and designed simply to delay generic market entry, while still allowing the parties to enter into settlements that are reasonable.

For a legal-presumption rule to work, however, the parties must be afforded a forum in which they can quickly and fairly test whether they have overcome the presumption and whether the agreement is valid. Unfortunately, under the reported bill, settlements would be made presumptively unlawful, but the bill does not create a process for quickly resolving whether the agreement is unlawful. The issue would not be resolved until the FTC brings an action to challenge the settlement, which could be years after the settlement was entered into. Moreover, the current bill requires the brand and generic companies to rebut the presumption that the agreement is unlawful by clear and convincing evidence. This is a heavy burden that is not appropriate for commercial litigation and that tilts the scales in a lawsuit sharply in the government’s favor. . . .

By effectively preventing the parties from settling, it is likely that this bill will discourage generic drug companies from bringing challenges to brand companies’ patents in the first place—and as a result, the bill will ultimately reduce competition and raise prices for drugs that are currently subject to invalid or low-quality patents.

Notwithstanding the current legislative initiatives to address settlement agreements – and the loss in the ANDROGEL case – the FTC will presumably continue to fight against such arrangements.  Indeed, settlement agreement antitrust challenges are currently beling litigated in a Pennsylvania district court in Fed. Trade Comm’n v. Cephalon, and before the U.S. Court of appeals for the Second Circuit in Arkansas Carpenters Health and Welfare Fund v. Bayer AG.