Eleventh Circuit Approves Patent "Pay for Delay" Settlements

Practical Law Legal Update 0-519-1594 (Approx. 5 pages)

Eleventh Circuit Approves Patent "Pay for Delay" Settlements

by PLC Intellectual Property & Technology

Key Litigated Issues

The key issue before the US Court of Appeals for the Eleventh Circuit in FTC v. Watson Pharmaceuticals, Inc., was whether a plaintiff states a valid antitrust claim by alleging that a patent holder has entered into a "Pay for Delay" settlement with a defendant generic drug manufacturer against which it is unlikely to prevail on a patent infringement claim (No. 10-12729 (11th Cir. April 25, 2012)).

Background

Solvay Pharmaceuticals, Inc. has a license to sell the FDA approved drug AndroGel in the US. The Orange Book listing for AndroGel also includes a patent covering a synthetic testosterone used in the drug (894 Patent). In May 2003, Watson Pharmaceuticals, Inc. and Paddock Laboratories, Inc. developed generic versions of AndroGel. Each filed an Abbreviated New Drug Application (ANDA) with the FDA and paragraph IV certifications under Title 21 Section 355(j)(2)(A)(vii) of the US Code that their generic drugs did not infringe Solvay's 894 Patent or that the patent was invalid. For more information on seeking FDA approval for generic drugs, see Legal Update, Second ANDA Filer Has Hatch-Waxman Declaratory Judgment Jurisdiction: Federal Circuit.

Solvay filed a patent infringement suit against both Watson and Paddock. After years of litigation and discovery, Watson, Paddock and Paddock's new partner Par Pharmaceutical Companies, Inc. filed motions for summary judgment on the validity of the 894 Patent. In 2006, after the defendants filed their motions for summary judgment, the FDA approved Watson's generic AndroGel product.

To avoid the forfeiture of its monopoly in the AndroGel market that would result from losing the infringement case, Solvay settled with Watson and Par/Paddock. Under the terms of these Pay for Delay or "reverse payment" settlement agreements:

Watson, Par and Paddock agreed not to market generic versions of AndroGel until August 31, 2015.
Watson and Par agreed to promote AndroGel.
Solvay promised Watson and Par/Paddock yearly payments.

After the parties reported the settlement agreement to the FTC, the FTC filed an antitrust lawsuit against Solvey, Watson and Par/Paddock (FTC Defendants). The FTC alleged that the settlement agreements are unlawful agreements not to compete in violation of Section 5(a) of the Federal Trade Commission Act. In support of its antitrust claim, the FTC complaint specifically alleged that:

Solvay was unlikely to prevail in the patent litigation against Watson and Par/Paddock.
Because the 894 Patent was unlikely to prevent generic entry, Solvay's reverse payments to the generic drug producers continued and extended a monopoly not authorized by US patent law.

The FTC Defendants moved to dismiss the FTC's complaint under Rule 12(b)(6) of the Federal Rules of Civil Procedure for failure to state a claim. The US District Court for the Northern District of Georgia granted the FTC Defendants' motion because the FTC did not allege that the settlements exceed the scope of the 894 Patent.

Outcome

In its April 25, 2012 decision, the Eleventh Circuit affirmed the district court's decision, ruling that the FTC failed to satisfy Eleventh Circuit's standards for pleading and proving a valid antitrust claim. Relying on Valley Drug Co. v. Geneva Pharmaceuticals, Inc., Schering-Plough Corp. v. FTC, and Andrx Pharmaceuticals, Inc. v. Elan Corp., the Eleventh Circuit repeated its rule that parties to a Pay for Delay settlement should be immune from antitrust liability if the anticompetitive effects of their settlement fall within the potential exclusionary scope of the patent. The court refused to adopt the per se test of illegality for these settlements. The Eleventh Circuit rule requires a court to consider:

The scope of the exclusionary potential of the patent.
The extent to which the settlements exceed the scope of the patent's exclusionary potential.
The resulting anticompetitive effects.

Insufficient Complaint Allegation

The Eleventh Circuit rejected the FTC's argument that an allegation that a patent holder who is "not likely to prevail" in an infringement claim sufficiently states an antitrust claim under the Eleventh Circuit rule. The FTC argued that a patent has no exclusionary potential if its holder was not likely to win the underlying infringement suit. The court found this argument incorrectly equates a likely result (losing an infringement claim) with an actual result. The court emphasized that:

Based on probability and the plain meaning of "likely," it is not true that an infringement claim that is likely to fail will actually fail.
Eleventh Circuit precedent focuses specifically on the potential exclusionary effect of a patent, not the likely exclusionary effect.

Shortcomings of FTC Proposed Rule

The Eleventh Circuit also rejected the FTC's proposed rule that an exclusion payment is unlawful if, viewing the situation objectively 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-on entry date.

The court noted that the FTC's proposed rule would require an after-the-fact calculation of how likely a patent holder was to succeed in a settled lawsuit if it had not settled. The court highlighted several problems with this approach, including:

It would place a burden back on the parties and the court to review evidence, which would defeat the benefits of settling.
Retrospective prediction of a patent case's outcome is unlikely to be reliable since a generic competitor that has agreed to delay its entry no longer has an incentive to challenge the validity or alleged infringement of the patent in issue.
Because Congress has given the US Court of Appeals for the Federal Circuit exclusive appellate jurisdiction over patent cases, non-specialized circuit courts that lack expertise and experience in the area would be ill-equipped to judge the merits of a patent infringement claim.

Update: On July 18, 2012, the Eleventh Circuit issued an order denying the FTC's request for rehearing and rehearing en banc.

Practical Implications

The Eleventh Circuit's decision in FTC v. Watson Pharmaceuticals Inc. underscores the split among the federal circuit courts over the legality of Pay for Delay agreements under the Sherman Antitrust Act. In the Sixth Circuit and District of Columbia Circuit, these agreements are per se illegal. However, in the Second, Eleventh and Federal Circuits, these agreements are not per se antitrust violations if the activities they prohibit fall within the patent's potential exclusionary scope. Parties should be mindful of the potential impact of this discrepancy on the legality of Pay for Delay settlements when filing ANDA patent infringement claims.

Eleventh Circuit Approves Patent "Pay for Delay" Settlements | Practical Law