Fed. Trade Comm'n v. Cephalon, Inc.

• Decision Date: 29 July 2014
• Docket Number: Civil Action No. 2:08–cv–2141.
• Citation: 36 F.Supp.3d 527
• Court: U.S. District Court — Eastern District of Pennsylvania
• Parties: FEDERAL TRADE COMMISSION, Plaintiff, v. CEPHALON, INC., Defendant.

36 F.Supp.3d 527

FEDERAL TRADE COMMISSION, Plaintiff

v.CEPHALON, INC., Defendant.

Civil Action No. 2:08–cv–2141.

United States District Court, E.D. Pennsylvania.

Signed July 29, 2014.

Markus Meier, Abigail Slater, Alpa D. Gandhi, Bradley S. Albert, Daniel Butrymowicz, Dominic Edward Vote, Edward David Hassi, Garth Huston, J. Maren Schmidt, Jon J. Nathan, Llewellyn Davis, Michael Perry, Richard A. Feinstein, Saralisa C. Brau, Susan L.C. Mitchell, Suzanne B. Munck Af Rosenchold, Walter Wayne Brown, U.S. Federal Trade Commission, Washington, DC, for Plaintiff.

Gregory P. Teran, Peter J. Kolovos, Robert J. Gunther, Jr., Mark A. Ford, Michelle D. Miller, Peter A. Spaeth, Yin Zhou, James C. Burling, Wilmer Cutler Pickering Hale & Dorr LLP, Boston, MA, Frank R. Emmerich, Jr., John A. Guernsey, Nancy J. Gellman, Conrad O'Brien, Philadelphia, PA, Mary J. Edwards, Wilmer Hale, Boston, MA, Pro Hac, Vice, for Defendant.

MEMORANDUM OPINION

GOLDBERG, District Judge.

In Federal Trade Commission v. Actavis, ––– U.S. ––––, 133 S.Ct. 2223, 186 L.Ed.2d 343 (2013), the Supreme Court attempted to provide trial courts with guidance regarding the proper factors to be considered in a “reverse payment”¹ antitrust trial. In doing so, the court stated that it is “normally not necessary to litigate patent validity to answer the antitrust question.” Id. at 2236.

In the reverse payment antitrust case before me, such litigation has already occurred wherein the patent in question (RE '516) was found invalid and procured through inequitable conduct. Thus, the issue in this case is not whether the validity of the patent should be litigated in the antitrust trial, but rather, how my previous finding of invalidity and inequitable conduct will shape the antitrust trial.

This question has loomed over this case for some time and was first raised by the private plaintiffs in three related cases, who urged that Cephalon's inequitable conduct and the principles of collateral estoppel mandated that judgment be entered in their favor. The collateral estoppel question was not addressed because I concluded that Cephalon's Seventh Amendment right to a jury trial prevented the private Plaintiffs from using offensive collateral estoppel to preclude re-litigation of the issue of fraud on the Patent and Trademark Office (PTO). King Drug Co. of Florence, Inc. v. Cephalon, Inc., 2014 WL 982848 (E.D.Pa. March 13, 2014). In so ruling, I also put off consideration of the Federal Trade Commission's (FTC) related motion contending that Cephalon be precluded from introducing any evidence related to the strength (or perceived strength) of the RE '516 patent. This is because the FTC may only seek equitable relief, and as such, Seventh Amendment considerations did not apply to their case. See F.T.C. v. Verity Int'l, Ltd., 443 F.3d 48, 67 (2d Cir.2006) (“The fact that only an equitable remedy is available eviscerates the defendants-appellants' contention that the Seventh Amendment confers a right to a jury trial in this case.”).

The effect of Cephalon's inequitable conduct on the antitrust trial where the FTC is the Plaintiff must now be sorted out. After careful consideration, I conclude that principles of collateral estoppel prevent Cephalon from relying on the strength of its patent or litigation “uncertainty” in defending against the FTC's antitrust claims. This Opinion explains the basis of that decision.²

I. Factual & Procedural Background

Cephalon was once the owner of U.S. Reissue Patent No. 37,516 (RE '516), which claimed a specific formulation of modafinil—a molecule with wakefulness-promoting properties. This patent covered Cephalon's flagship drug, Provigil

, and when combined with a number of regulatory exclusivity periods Cephalon had obtained, it had the potential to protect Provigil

from competition through April 6, 2015.

But the life of the RE '516 patent was challenged long before that date. On December 24, 2002, the first day allowed by law, four generic drug manufacturers sought permission from the FDA to market generic versions of Provigil

. In doing so, the generics were required by the Hatch–Waxman Act to make a certification regarding the RE '516 patent. All four certified that the RE '516 patent was either invalid or not infringed by the proposed generic drugs.³

These certifications—technical acts of infringement under Hatch–Waxman—prompted Cephalon to file a lawsuit for patent infringement against the four generic companies. Between late 2005 and early 2006, all four of these cases settled, with Cephalon paying the generics millions of dollars in return for various business arrangements and, most importantly for purposes of this case, promises from each of the generics to drop their respective invalidity contentions and not market a generic version of Provigil

until April 6, 2012. These settlements, which potentially delayed the entry into the market of generic Provigil, immediately drew antitrust scrutiny from private plaintiffs and, as relevant here, the FTC.

The settlements also left other companies who wished to market a generic version of Provigil

in a bind. Under another feature of Hatch–Waxman, no other company could sell generic Provigil until six months after the four settling generics began to market their versions. Thus, in order to be allowed to enter the market sooner, a generic would need to receive a court determination that the RE '516 patent was invalid or not infringed. Here, along with its antitrust claims, Apotex, Inc. sought a declaratory judgment invalidating the patent. See King Drug Co. of Florence, Inc. v. Cephalon, Inc., 2014 WL 2813312, at *1–3 (E.D.Pa. June 23, 2014) (recounting these and other facts surrounding the reverse payment settlement agreements and the pending antitrust cases).

After an extensive bench trial, I found merit in Apotex's contentions, and held that Cephalon's patent was invalid on several grounds, and unenforceable as a result of Cephalon's inequitable conduct during the procurement process. Apotex, Inc. v. Cephalon, Inc., 2011 WL 6090696 (E.D.Pa. Nov. 7, 2011). In short, I concluded that Cephalon knew, but failed to disclose to the Patent Office, that another company had invented the drug formulation for which it sought a patent. Id. at *26. I further found that Cephalon omitted this information from its presentation to the Patent Office with the specific intent to deceive the Office into granting an invalid patent. Id. at *27. This ruling was subsequently affirmed by the United States Court of Appeals for the Federal Circuit, Apotex Inc. v. Cephalon, Inc., 500 Fed.Appx. 959 (Fed.Cir.2013), and further review was denied, ––– U.S. ––––, 134 S.Ct. 825, 187 L.Ed.2d 686 (2013).

II. The Parties' Positions

While the Actavis decision held that reverse payment settlements should be analyzed under antitrust law's rule of reason, the “analysis left it unclear how the lower courts should deal with the patent's merits.” Note, Reverse Payment Settlements: The Ongoing Dilemma After FTC v. Actavis, 8 Brook. J. Corp. Fin. & Com. L. 516, 533 (2014).

The FTC's motion, styled “Motion For Preclusion Of Patent Issues or, In the Alternative, Partial Summary Judgment,” asks that I enter an order “preventing Cephalon from introducing evidence at trial related to the potential validity, enforceability, or infringement of its RE '516 patent.” (Br. of FTC 3.) The FTC offers three grounds in support of its position. First, the FTC posits that Actavis clearly directs that the merits or perceived merits of the underlying patent dispute are irrelevant to the antitrust analysis. Second, the FTC, relying on principles of collateral estoppel, urges that my ruling that the RE '516 patent is invalid and was procured by inequitable conduct precludes Cephalon from now claiming that its infringement case had merit. And third, under ordinary summary judgment principles, the FTC asserts that undisputed facts conclusively establish the invalidity of the RE '516 patent under the on-sale bar and derivation.

Cephalon counters that what matters in the antitrust analysis is not whether the RE '516 patent was ultimately declared invalid—a judgment made over five years after the reverse payment settlements were signed. Rather, Cephalon stresses that the appropriate inquiry is whether there was legitimate “uncertainty and risk on both sides of the patent litigation” when the settlements at issue were negotiated. (Br. of Ceph. 30.) Cephalon points out that my findings of invalidity and inequitable conduct were “unknown to and unpredictable by the parties” at the time of the negotiations and thus, are not relevant to the antitrust analysis. (Br. of Ceph. 31.) Cephalon also stresses that binding it to the finding of inequitable conduct would violate its right to due process of law, because at the time of the inequitable conduct patent trial, it was unaware of the possibility that any of the findings might have conclusive effects in the antitrust case.

III. Discussion

The FTC's motion first invites me to read Actavis as mandating that a patent's strength or weakness is irrelevant to the antitrust analysis of a reverse payment settlement. In the FTC's view, “the likelihood of a reverse payment bringing about anticompetitive effects does not depend on the likelihood of the patent being found invalid or not infringed.” (Br. of FTC 2.) And further, because the Supreme Court identified a “payment [that] ... seeks to prevent the risk of competition,” as the “relevant anticompetitive harm,” the FTC asserts that there is simply no room for a defense based on the strength of the patent. Actavis, 133 S.Ct. at 2236. Indeed, in the FTC's view, a defendant that sought to show that it paid to avoid the possibility of an invalidity ruling in uncertain patent litigation would not be defending itself at all, but proving the plaintiff's case. (Br. of FTC 5 (“Thus, even if a patent holder could demonstrate at trial that it faced only a ‘small risk of invalidity’ ... such proof would...