“If You’ve Got Legitimate Suspenders, Don’t Have an Unconstitutional Belt:” Federalist Society Panel’s Take on Jarkesy and the Preserve Access to Affordable Generics and Biosimilars Act

On August 30, 2024, we posted on what was then the most recent version of S. 142, the Preserve Access to Affordable Generics and Biosimilars Act.  Some version of the bill, which addresses patent settlement agreements (pejoratively referred to as “reverse payment agreements” by their opponents), has been floating around in Congress for the better part of two decades—even before the U.S. Supreme Court declined to hold, in FTC v. Actavis, Inc., 133 S. Ct. 2233 (2013), that so-called reverse payment settlement agreements are presumptively unlawful.

As we noted in our prior post, S. 142 includes some new provisions (compared to previous iterations of the bill) to expressly provide for the Federal trade Commission (“FTC”) to obtain forfeiture and civil penalties in an administrative proceeding initiated by the Commission.  In particular, the bill would amend the FTC Act (15 U.S.C. 44 et seq.) to add new Section 27(e), titled “Penalties,” stating:

(1) FORFEITURE.—Each party that violates or assists in the violation of this section shall forfeit and pay to the United States a civil penalty sufficient to deter violations of this section, but in no event greater than 3 times the value received by the party that is reasonably attributable to the violation of this section. If no such value has been received by the NDA holder, the biological product license holder, the ANDA filer, or the biosimilar biological product application filer, the penalty to the NDA holder, the biological product license holder, the ANDA filer, or the biosimilar biological product application filer shall be sufficient to deter violations, but in no event shall be greater than 3 times the value given to an ANDA filer or biosimilar biological product application filer reasonably attributable to the violation of this section. Such penalty shall accrue to the United States and may be recovered in a civil action brought by the Commission, in its own name by any of its attorneys designated by it for such purpose, in a district court of the United States against any party that violates this section. In such actions, the United States district courts are empowered to grant mandatory injunctions and such other and further equitable relief as they deem appropriate. . . .

(3) CIVIL PENALTY.—In determining the amount of the civil penalty described in this section, the court shall take into account—

(A) the nature, circumstances, extent, and gravity of the violation;

(B) with respect to the violator, the degree of culpability, any history of violations, the ability to pay, any effect on the ability to continue doing business, profits earned by the NDA holder, the biological product license holder, the ANDA filer, or the biosimilar biological product application filer, compensation received by the ANDA filer or biosimilar biological product application filer, and the amount of commerce affected; and

(C) other matters that justice requires.

We raised the possibility that these civil penalty provisions—likely viewed by proponents of the legislation as hallmark provisions—may be the legislation’s death knell in light of the Supreme Court’s decision in SEC v. Jarkesy, 144 S. Ct. 2117 (2024) (see our previous post here), in which the Court “ruled that the Securities and Exchange Commission (SEC) may not impose fines to penalize securities in its administrative proceedings because that practice violates the Seventh Amendment ‘right of trial by jury’ in all ‘suits at common law.’”  Specifically, we commented that:

The Preserve Access to Affordable Generics and Biosimilars Act (S. 142) cannot be squared with Jarkesy’s interpretation and application of the Seventh Amendment. . . .  [T]he bill expressly provides for the FTC to obtain civil penalties—the exact type of claims the Supreme Court held are subject to Seventh Amendment protections—without a jury trial at any step of the process.  Rather, the bill is structured so that liability is fully determined by an Administrative Law Judge (“ALJ”) in an administrative proceeding without a jury, with “conclusive” factual findings made by that ALJ.  Then, in a follow-on action in court to impose civil penalties, the liability findings made by the ALJ are treated as “conclusive” and a judge—not a jury—assesses penalties in a bench trial.

That structure directly conflicts with the Supreme Court’s holding in Jarkesy.  First, S. 142 removes the jury entirely from both steps of its delineated process for assessing civil monetary penalties.  Second, by having an ALJ “conclusively” determine liability—and without a jury—it impermissibly takes away from the jury its core function of finding facts.  Just as it is unconstitutional to side-step the jury in an action seeking civil penalties for fraud (as in Jarkesy), so too is it impermissible in an action seeking civil penalties for unfair competition.  Both types of claims are analogous to common-law claims that fall squarely within the scope of Seventh Amendment protections.

Of course, a lot has happened since our August 2024 post.  Not only has a challenge been lodged against FDA in the Central District of California over the Agency’s civil money penalty authority based on Jarkesy (see our previous post here), but a new Administration—and one with a likely very different view of the FTC than the Biden Administration—is on the horizon.  Nevertheless, we are where we are at the moment and Congress is pressing on for passage of the Preserve Access to Affordable Generics and Biosimilars Act . . . and, based on a discussion draft we understand has been circulating on Capitol Hill, that introduces some even newer provisions to the bill.

The heightened discussion concerning Jarkesy and the Preserve Access to Affordable Generics and Biosimilars Act has even caught the attention of a Federalist Society panel.  Indeed, in a recent Federalist Society-sponsored webinar, titled “Does Jarkesy Doom the Preserve Access to Affordable Generics and Biosimilars Act?,” moderator Brian Pandya (Duane Morris LLP) hashes out the interplay between Jarkesy and The Preserve Access to Affordable Generics and Biosimilars Act with Matthew S. Hellman (Jenner & Block), William M. Jay (Goodwin Procter LLP), and Prof. Emily Michiko Morris (The University of Akron School of Law).

While we recommend that folks view the webinar video in its entirety, below are some key comments from the panelists worth noting (to be clear, the Federalist Society simply organized this independent panel of experts with varying opinions and does not take an official view on these issues):

Emily Michiko Morris: “This brings up the Preserve Access Act, which was actually introduced back in 2006 . . . A lot has happened since then of course.  In particular, the Supreme Court has weighed in fairly definitively in its 2013 decision in FTC v. Actavis.  For those of us who study the patent system and in particular the pharmaceutical industry and its use of patents, this raises the question of whether the Preserve Access [Act] is even relevant anymore.”

Matt Hellman: “What that means going forward is that if you happen to be aware of any agency enforcement scheme that allows for civil penalties, and we’ll talk about one that’s in the Act today, there’s a big question of whether or not that’s allowed anymore after the opinion striking down the SEC enforcement scheme in Jarkesy . . . Jarkesy is the lens through which we need to understand and assess what’s going on with the [Preserve Access] Act.”

Willy Jay: “Looking at this through the lens of Jarkesy, does the fact that you have an Article III judge come in at the end of the process change the way we look at this for Seventh Amendment purposes?  I would argue that the answer is no.  If this is a cause of action for civil penalties, it is one that should be treated the same way as in Jarkesy . . . [In the FTC proceedings,] you are certainly never getting an adjudication compliant with the Seventh Amendment . . . nowhere in the ALJ, the FTC, the Court of Appeals, or the district court are you getting a jury.”

Matt Hellman: “Agency findings can’t be a preclusive input into . . . [the Article III] process . . . It’s especially the case talking about treble damages,” which are “the kind of [damages] that the modern court . . . says needs to be awarded by a jury . . . .” “The Act as written is probably not going to fly.”

Emily Michiko Morris: “What’s happened is that the FTC requires that these cases submit their settlement terms to the FTC for review . . . The FTC in a 2020 report . . . reported that the vast majority of settlements . . . involved these kinds of early generic terms . . . I think this is probably the reason that the FTC has stopped publishing these reports . . . Overall, the effect has already been what the Preserve Access Act was presumably hoping to accomplish.”

. . . . And a shout-out to Matt Hellman who provided us with the headline for this post: “If you’ve got legitimate suspenders, don’t have an unconstitutional belt.”

Finally, we want to note one additional comment from Willy Jay.  He commented that “[m]ost agencies when they pursue civil penalties have to refer civil penalty actions to the Attorney General.  The FTC has chipped away at that . . . this legislation would allow the FTC to skip that entirely and give the FTC complete authority to pursue civil penalties . . .  You could in theory have a situation where a holdover FTC brings an action for civil penalties for violating federal law that the chief law enforcement officer of the United States does not think is a legal violation.”

Willy’s comment highlights another constitutional issue that we believe arises from the current discussion draft of the Preserve Access to Affordable Generics and Biosimilars Act circulating on Capitol Hill.  That is, that the FTC may be granted the authority to run to district court without consulting the Department of Justice.  If true, that’s a pretty significant development . . . . though perhaps not a scenario we are likely to see under the 47th President.