Federal Trade Commission Statements Regarding First FTC Settlement Of Reverse Payment Claims Post-Actavis and Largest Ever Disgorgement Award

June 2, 2015

 

The Federal Trade Commission (“FTC”) has reached a settlement resolving its claims that Cephalon, Inc. violated the antitrust laws by entering into reverse payment settlements to delay generic competition for Provigil. This is the first FTC settlement of a reverse payment case post-Actavis, and contains the largest disgorgement award in FTC history: $1.2 billion. The settlement, which was reached on the eve of trial, caps a lengthy litigation over Cephalon’s payments to four generic drug manufacturers. The Commission voted unanimously to approve the settlement, and it was filed with the court on May 28, 2015.

The details of the settlement and the commissioners’ statements in support provide insight into the FTC’s approach to equitable monetary relief. The commissioners remain bitterly divided in their views on when disgorgement is appropriate and how much guidance is needed on this topic. They nevertheless unanimously approved the settlement, based on the unique and egregious conduct at issue in the Provigil matter (most significantly that Cephalon obtained the patent by fraud) and the structure of the monetary relief (establishing a fund to be used to pay past and future settlements or judgments).

The statements and settlement are also significant for FTC enforcement regarding reverse payment settlements. By settling with Cephalon and Teva, the Commission gave up what may have been its best chance to establish precedent on applying the rule of reason in a reverse payment case. They had persuasive facts, including but not limited to an earlier decision by the same court that the patent at issue was obtained by fraud. In exchange for foregoing this opportunity, the FTC secured something it could not have won at trial: an order that applies very broadly to “all branded and generic U.S. pharmaceutical operations of Teva, the largest generic drug maker in the United States.” This is significant because Teva is not only the largest generic manufacturer, it has been a frequent participant in reverse payment settlements.

The details of these broad conduct restrictions, as well as the Commission’s reasoning in approving disgorgement, are discussed in more detail below.

FACTUAL BACKGROUND

In late 2002, four generic manufacturers filed abbreviated new drug applications to market generic Provigil. Cephalon, the manufacturer of branded Provigil, sued the generics for infringement. Between late 2005 and early 2006, Cephalon settled with all four generics. The terms of these settlements provided the generics licenses to sell generic Provigil beginning in April 2012. In addition, Cephalon allegedly paid each generic millions of dollars pursuant to business deals executed concurrently with the patent litigation settlements.

The FTC challenged these settlements in 2008 by filing an antitrust suit against Cephalon (but not the generic manufacturers).

In 2011, in a separate but related proceeding, Judge Goldberg—the same judge overseeing the antitrust litigation—held that Cephalon’s patent was invalid and unenforceable. Specifically, he found that Cephalon knew, but failed to disclose to the PTO, that another company had invented the formulation for which Cephalon sought the patent. Cephalon was also found to have intentionally omitted this information from presentation to the PTO, with the specific intent to deceive. The Federal Circuit subsequently affirmed Judge Goldberg’s decision.

In early 2012, generic Provigil entered the market, pursuant to the terms of the patent settlement agreements between Cephalon and the various generic manufacturers. In August 2012, the FTC suit and private civil cases that had since been filed against Cephalon and the generic companies were stayed, pending resolution of a split of authority on reverse payment settlements. In light of the 2013 Supreme Court decision in FTC v. Actavis, litigation of pre-trial issues did not begin in earnest until 2014.

Judge Goldberg addressed several key issues in pre-trial motions that inform an understanding of the recent settlement.

For example, in July 2014, Judge Goldberg granted an FTC motion for partial summary judgment, which precluded Cephalon from re-litigating patent validity in the antitrust litigation.1

In January 2015, Judge Goldberg denied defendants’ motion to prevent the FTC from seeking disgorgement, citing the FTC’s statutory authority to do so. Judge Goldberg’s ruling on this issue also noted that equitable considerations weighed in favor of permitting the FTC to pursue an equitable monetary remedy in the Provigil matter specifically. These considerations included the fact that the FTC had stated its intention to place any award in a consumer relief fund, thereby mitigating the risk of duplicative recovery from private cases. In its briefs on this motion, the FTC also argued that because generic Provigil was already on the market, non-monetary remedies would be inadequate.

The trial in the FTC matter was scheduled to begin in June 2015.

SETTLEMENT TERMS

Note that the Teva entities and Cephalon entities are referred to collectively in the settlement as the “Cephalon Parties,” and the summary below adopts this nomenclature.

Equitable Monetary Relief

The Cephalon Parties must place into a Settlement Fund $1.2 billion, less the amount of any private settlement payments already made, or any payments that will be made pursuant to private settlements already executed. The money in the Fund is to be disbursed according to the Settlement Disbursement Agreement (“SDA”). The SDA sets forth the procedure for a plaintiff or government entity to request a settlement or judgment amount from the fund.

‎If any funds remain after all private cases have been resolved, the remaining amount will go into the US Treasury.

Prohibited Conduct

The Cephalon Parties further agreed not to “enter[] into any Brand/Generic Settlement that includes: (1) Payment by the NDA Holder to the ANDA Filer; and (2) an agreement by the ANDA Filer not to research, develop, manufacture, market or sell the Subject Drug Product for any period of time,‎” though the Cephalon Parties may seek prior approval from the Commission for such a settlement. The definition of what constitutes a “Payment by the NDA holder to the ANDA filer” is interesting in at least the following respects:

Connection between payment and settlement. The definition of what constitutes a “Payment by the NDA holder to the ANDA filer” requires a linkage between the patent settlement and the transfer of value. Specifically, this phrase is defined as: “a transfer of value by the NDA Holder to the ANDA Filer (including, but not limited to, money, goods or services), regardless of whether the ANDA Filer purportedly transfers value in return, where such transfer is either:

  1. expressly contingent on entering a Brand/Generic Settlement Agreement, or
  2. agreed to during the 60 day period starting 30 days before executing a Brand/Generic Settlement Agreement and ending 30 days after executing a Brand/Generic Settlement Agreement.”

$7M litigation costs avoided safe harbor. Payment of litigation expenses of $7M or less does not constitute a Payment by the NDA Holder to the ANDA filer under the terms of the settlement. This amount is to be adjusted for inflation as time goes on.

Note re No-AG clauses. In a footnote in the FTC statement re the settlement, the Commission makes clear that “the proposed order does not prohibit all of the types of agreements that have the potential to raise antitrust concerns and is instead tailored to the specific conduct at issue in this case. For example, the proposed order does not reach certain exclusive licensing agreements that could amount to so-called ‘no authorized generic’ agreements, where the branded drug firm compensates the generic through an agreement not to market an ‘authorized generic.’ The Commission believes that these agreements can serve as anticompetitive reverse payments by limiting the competition faced by generics.”

Finally, the settlement notes the FTC will consider modifications to the settlement if there is “a material change in the law governing the antitrust implications of Brand/Generic Settlements.”

Reporting Requirements

For nine years, the Cephalon Parties must make annual reports to the FTC on compliance with the settlement terms.

This includes providing the FTC a copy of any kind of agreement with a party if, within the previous year, the Cephalon Parties have also executed a brand/generic patent settlement with that same party that involves “an agreement by the ANDA Filer not to research, develop, manufacture, market or sell the Subject Drug Product for any period of time.”

COMMISSION STATEMENT REGARDING THE SETTLEMENT

The FTC statement, representing the views of Chairperson Ramirez, Commissioner Brill, and Commissioner McSweeney, provides several reasons why‎ equitable monetary relief was “especially appropriate” in this matter.

First, the statement generally notes that the FTC’s mission includes deterrence of antitrust violations, and that disgorgement is often key to effective deterrence.

With respect to the Provigil matter specifically, the fact that the patent at issue was procured by fraud was an equitable consideration that weighed in favor of monetary relief. The statement also notes that because generic Provigil is already available (having entered the market during the many years of litigation), injunctive relief cannot remedy the violation. (This was also argued, and accepted by the court, in earlier litigation regarding the FTC’s ability to seek disgorgement in this matter).

In addition to discussing the monetary relief, the statement highlights how the injunctive relief in the settlement is tailored ‎to what the statement describes as a common form of reverse payments: those involving a “side deal” that conveys the payment.

SEPARATE STATEMENT OF COMMISSIONERS WRIGHT AND OHLHAUSEN

Commissioners Wright and Ohlhausen voted in favor of the settlement, but wrote separately to reiterate their concerns that the FTC has not provided clear guidelines for when it will pursue the exceptional remedy of disgorgement. Both commissioners had expressed these same concerns in dissenting statements regarding the Cardinal Health settlement in April.

In the separate statement regarding the Provigil settlement, Commissioner Ohlhausen reiterates her concerns that seeking disgorgement in an unstructured manner could expand the role of the FTC in an undesirable way. Commissioner Wright reiterates his view that decisions on whether to seek disgorgement should be clearly guided by the economics of deterrence. Because of these concerns, Commissioners Wright and Ohlhausen advocate reinstituting the 2003 FTC Policy Statement regarding disgorgement (withdrawn in 2012).

However, Commissioners Wright and Ohlhausen note that the monetary relief provided for in the Provigil settlement meets the three requirements of that 2003 Policy Statement: a clear violation, the ability to reasonably calculate the amount of remedy, and that the remedy will not risk duplicative recovery.

The separately writing commissioners were especially swayed by the clear violation factor. Commissioners Wright and Ohlhausen note that, at the time of the conduct, the scope of the patent test was the governing law, and since the patent at issue was procured by fraud, the violation was clear. The separate statement also notes that the third factor weighs in favor of the settlement, given the structure of the Settlement Fund. The separate statement did not comment on the second factor, except to state that it was met.

The fraud element played a significant role for the separately writing commissioners, just as it did for Chairperson Ramirez and Commissioners Brill and McSweeney. Commissioner Wright notes that the fraud aspect is key in applying the economics of deterrence, which take into account the likelihood of detection, a factor obviously affected by fraud. The fraudulently procured patent was thus a factor that loomed large in all levels of decision making in this matter - for all commissioners accepting the settlement, for the court in deciding that the FTC could seek disgorgement, and even at the summary judgment stage.

Commissioners Wright and Ohlhausen also note that the conduct at issue occurred while the Policy Statement was still in effect and thus should govern decisions regarding monetary equitable relief from such conduct.

The separate statement is strongly worded (as were the dissenting statements of these same commissioners in the Cardinal matter), regarding the need for clear guidance and, ideally, a return to the 2003 Policy Statement. Commissioners Wright and Ohlhausen describe the FTC’s use of disgorgement remedies as “unpredictable”: “This uncertainty and lack of predictability faced by firms is unacceptable. We therefore urge the Commission to reinstate the Policy Statement or provide some additional guidance on when it plans to seek the extraordinary remedy of disgorgement in antitrust cases. Simply saying that the agency will be guided by the case law is insufficient.”

***

While the landmark amount of the settlement’s disgorgement award will certainly embolden the FTC to seek disgorgement in reverse payment and other matters, its practical implications may be limited by at least the following factors: (i) the egregious and unique facts of the Provigil matter; (ii) the continuing lack of clear guidance from the Commission on when disgorgement should be sought, and the discord among the Commissioners on whether such guidance is necessary; and (iii) the fact that the majority, if not all, of the Settlement Fund will likely be used to satisfy private settlements. In terms of the implications for reverse payment investigations, the law on how the rule of reason analysis mandated by Actavis should be structured remains unclear.

[1] The judge would not agree with the FTC that patent issues are categorically irrelevant under Actavis, however, and denied the FTC’s request to preclude the introduction of any patent-related evidence.

This memorandum is a summary for general information and discussion only and may be considered an advertisement for certain purposes. It is not a full analysis of the matters presented, may not be relied upon as legal advice, and does not purport to represent the views of our clients or the Firm. Richard Parker, an O'Melveny partner licensed to practice law in California and the District of Columbia, Ted Hassi, an O'Melveny partner licensed to practice law in the District of Columbia and New York, Kenneth O'Rourke, an O'Melveny partner licensed to practice law in California, and Anna Fabish, an O'Melveny counsel licensed to practice law in California, contributed to the content of this newsletter. The views expressed in this newsletter are the views of the authors except as otherwise noted.

Portions of this communication may contain attorney advertising. Prior results do not guarantee a similar outcome. Please direct all inquiries regarding New York's Rules of Professional Conduct to O’Melveny & Myers LLP, Times Square Tower, 7 Times Square, New York, NY, 10036, Phone:+1-212-326-2000. © 2015 O'Melveny & Myers LLP. All Rights Reserved.