Fed. Trade Comm'n v. Watson Pharms., Inc.

• Decision Date: 25 April 2012
• Docket Number: No. 10–12729.,10–12729.
• Citation: 2012 Trade Cases P 77865,677 F.3d 1298,102 U.S.P.Q.2d 1561,23 Fla. L. Weekly Fed. C 966
• Parties: FEDERAL TRADE COMMISSION, Plaintiff–Counter Defendant–Appellant, v. WATSON PHARMACEUTICALS, INC., Solvay Pharmaceuticals, Inc., Defendants–Appellees,Par Pharmaceutical Companies, Inc., Paddock Laboratories, Inc., Defendants–Counter Claimants–Appellees.
• Court: U.S. Court of Appeals — Eleventh Circuit

102 U.S.P.Q.2d 1561

2012-1 Trade Cases P 77,865

23 Fla. L. Weekly Fed. C 966

677 F.3d 1298

FEDERAL TRADE COMMISSION, Plaintiff–Counter Defendant–Appellant,

v.WATSON PHARMACEUTICALS, INC., Solvay Pharmaceuticals, Inc., Defendants–Appellees,Par Pharmaceutical Companies, Inc., Paddock Laboratories, Inc., Defendants–Counter Claimants–Appellees.

No. 10–12729.

United States Court of Appeals, Eleventh Circuit.

April 25, 2012.

Imad Dean Abyad, Bradley S. Albert, John F. Daly, Markus H. Meier, John R. Robertson, Mark J. Woodward, FTC, Office of Gen. Counsel, Lore A. Unt, U.S. FTC, Washington, DC, Cindy A. Liebes, FTC, Atlanta, GA, for Plaintiff–Appellant.

Jason W. Eakes, David A. Rabin, Morris, Manning & Martin, LLP, Mark Gerald Trigg, Greenberg Traurig, LLP, Teresa Thebaut Bonder, Matthew Kent, Alston & Bird, LLP, Atlanta, GA, Maris A. Raptis, Skadden, Arps, Slate, Meagher & Flom, LLP, New York City, Steven Craig Sunshine, Julia K. York, Skadden, Arps, Slate, Meagher & Flom, LLP, J. Mark Gidley, Eric Grannon, White & Case, LLP, John Roberti, Rebecca Valentine, Mayer Brown, LLP, Washington, DC, Jeffrey I. Weinberger, Munger, Tolles & Olson, LLP, Los Angeles, CA, Rohit K. Singla, Munger, Tolles & Olsen, LLP, San Francisco, CA, for Defendants–Appellees.

Appeal from the United States District Court for the Northern District of Georgia.Before CARNES, KRAVITCH, and FARRIS,^* Circuit Judges.CARNES, Circuit Judge:

The system of developing new drugs in this country exemplifies the maxims “no risk, no reward” and “more risk, more reward.” Developing new drugs is a risky, lengthy, and costly endeavor, but it also can be highly lucrative. Only one in every 5,000 medicines tested for the potential to treat illness is eventually approved for patient use, and studies estimate that developing a new drug takes 10 to 15 years and costs more than $1.3 billion.¹ No rational actor would take that kind of a risk over that period of time without the prospect of a big reward. The reward, if any, comes when the drug is approved and patented, giving the pioneer or “brand name” company that developed it a monopoly over the sale of the new drug for the life of the patent. The pioneer company can then exploit the patent monopoly by charging higher prices than it could if competitors were allowed to sell bioequivalent or “generic” versions of the drug. In that manner, the pioneer company is usually able to recoup its investment and gain a profit, sometimes a super-sized one.

Another maxim might also apply to the patent monopoly of drug pioneers: “more money, more problems.” The huge profits that new drugs can bring frequently attract competitors in the form of generic drug manufacturers that challenge or try to circumvent the pioneer's monopoly in the market. Patent litigation often results, threatening the pioneer's monopoly and profits. Instead of rolling the dice and risking their monopoly profits in the infamously costly and notoriously unpredictable process of patent litigation, many patent-holding companies choose to settle lawsuits in order to preserve their patents and keep the monopoly profits flowing.

This case involves a type of patent litigation settlement known as a “pay for delay” or “reverse payment” agreement. In this type of settlement, a patent holder pays the allegedly infringing generic drug company to delay entering the market until a specified date, thereby protecting the patent monopoly against a judgment that the patent is invalid or would not be infringed by the generic competitor. This case began when the Federal Trade Commission filed a complaint in district court alleging that the reverse payment settlements between the holder of a drug patent and two generic manufacturers of the drug are unfair restraints on trade that violate federal antitrust laws. The FTC claims that the settlements are simply tools that the three manufacturers used to avoid a judgment that the patent was invalid or would not be infringed by the generics, thereby protecting monopoly profits that the companies divvied up by means of payments from the patent holder to the generic manufacturers. The key allegation in the FTC's complaint is that the patent holder was “not likely to prevail” in the infringement actions that it brought against the generic manufacturers and then settled. According to the FTC, the reverse payment settlements unlawfully protected or preserved a monopoly that likely was invalid and that should not be shielded from antitrust attack.

The drug companies counter that, far from being devices designed to dodge antitrust restrictions, reverse payment settlements are simply a way that patent holders protect and maintain the lawful exclusionary rights patent law grants them. Cf. Walker Process Equip., Inc. v. Food Mach. & Chem. Corp., 382 U.S. 172, 177, 86 S.Ct. 347, 350, 15 L.Ed.2d 247 (1965) (“A patent ... is an exception to the general rule against monopolies ....” (quotation marks omitted)); Precision Instrument Mfg. Co. v. Auto. Maint. Mach. Co., 324 U.S. 806, 816, 65 S.Ct. 993, 998, 89 L.Ed. 1381 (1945) (same). They say that punishing a patent holder for paying a potential competitor to stay out of the market as part of a settlement agreement would penalize precisely what patents are designed to permit: the exclusion of competition. That erosion of patent rights, the drug companies argue, would weaken incentives for investing in drug development, which would reduce the number of life-saving or life-enhancing innovations that benefit consumers.

The FTC would like us to hold that reverse payment settlements, like the ones in this case, are presumptively unlawful restraints of trade. It argues that such settlements allow brand name and generic drug companies to be partners in unlawful monopolies. Monopoly profits, the FTC says, will typically exceed the sum of the individual profits that the drug companies could make by competing against each other. So even if the generic drug company is likely to win the infringement suit, it has a strong economic incentive to drop its lawsuit in exchange for a share of the brand name company's monopoly profits.² Viewed this way, a reverse payment settlement ending patent litigation is a “win-win” for both companies. The brand name drug company maintains its monopoly by enforcing a patent that may be invalid, and the generic drug company makes more money under the settlement than it could have earned by competing in a market free of the patent's restraints. While the drug companies are the big winners in this scenario, consumers are the big losers; they continue paying monopoly prices for the drug even though the patent creating the monopoly is likely invalid or would not be infringed by generic competition. The FTC estimates that reverse payment settlements cost consumers about $3.5 billion per year in the form of higher drug prices.

I.

The usual protocol in opinions is to put the facts and procedural history of the case before a discussion of the applicable statutes, but in this case the facts make more sense after a discussion of the statutory process for introducing new drugs to the market.

No one can legally market or sell a new drug in the United States without first gaining the approval of the Food and Drug Administration. See 21 U.S.C. § 355(a). The particular pathway to approval depends largely on the type of drug involved. One pathway is for pioneer drugs, which are ones that have never before received FDA approval. To initiate that approval process, an applicant files a New Drug Application. See id. The NDA must contain detailed information about the drug, including its chemical composition, “full reports of investigations” about its safety and efficacy, descriptions of its production and packaging processes, and proposed labeling language. Id. § 355(b)(1). An NDA applicant must also provide the FDA with “the patent number and the expiration date of any patent” that a generic manufacturer would infringe by making or selling the applicant's drug. Id.; see also 21 C.F.R. § 314.53(b). If the FDA approves the NDA, it publishes the drug and patent information in a book called “Approved Drug Products with Therapeutic Equivalence and Evaluations,” commonly referred to as the “Orange Book.” See 21 U.S.C. § 355(j)(7)(A); see also Caraco Pharm. Labs., Ltd. v. Novo Nordisk A/S, ––– U.S. ––––, 132 S.Ct. 1670, 1675–76, ––– L.Ed.2d –––– (2012). The pioneer company may then market and sell the drug.

A more streamlined pathway to approval is reserved for generic versions of pioneer drugs that the FDA has already approved and listed in the Orange Book. To begin the generic drug approval process, an applicant files an Abbreviated New Drug Application. See 21 U.S.C. § 355(j). The ANDA allows an applicant “to piggyback on the safety and efficacy studies conducted for the pioneer drug” and thereby gain FDA approval by establishing that the generic drug is chemically identical to a pioneer drug already listed in the Orange Book. Valley Drug Co. v. Geneva Pharm., Inc., 344 F.3d 1294, 1296 (11th Cir.2003); see 21 U.S.C. § 355(j)(2)(A); Caraco Pharm. Labs., 132 S.Ct. at 1676 (“Rather than providing independent evidence of safety and efficacy, the typical ANDA shows that the generic drug has the same active ingredients as, and is biologically equivalent to, the brand-name drug.”).

An ANDA that piggybacks on a drug listed in the Orange Book must make one of four “paragraph certifications” with respect to any patents affiliated with the listed drug. It must certify that: (I) no patent information for the brand name drug has been filed with the FDA; (II) the patent has expired; (III) the patent will expire on a specifically identified date; or (IV) the “patent is invalid or will not be infringed by the manufacture, use, or sale of the new drug for which the application is submitted.” 21 U.S.C. § 355(j)(2)(A)(vii).

It matters which certification is made. If the applicant certifies under ...