On June 17, 2015, the U.S. District Court for the Eastern District of Pennsylvania approved a consent order (the “Consent Order”) between the Federal Trade Commission and defendants Cephalon, Inc. and its parent, Teva Pharmaceutical Industries Ltd.,[1] resolved long-running antitrust litigation stemming from four “reverse payment” settlements of Hatch-Waxman patent infringement cases involving the branded drug Provigil®. Pursuant to its settlement with the FTC (the “Consent Order”), Cephalon agreed to disgorge $1.2 billion and to limit the terms of any future settlements of Hatch-Waxman cases.[2] The FTC and its Staff have celebrated and promoted the terms of the settlement as setting a new standard for resolving reverse-payment cases. But their enthusiasm may be more wishful thinking than reality, and their speculation that the agreement may exert force on market behavior does not appear to be supported by a fair assessment of the state of the law. First, the restrictions on Cephalon’s ability to enter into settlements of Hatch-Waxman cases exceed anything a court has ever required, and conflict with settlement terms apparently approved in the U.S. Supreme Court’s seminal reverse-payment decision, Federal Trade Commission v. Actavis, 133 S. Ct. 2223 (2013). Second, the FTC’s use of disgorgement as a remedy remains controversial and Cephalon, despite initial opposition, might have voluntarily embraced that remedy as part of a strategy to achieve a global resolution of remaining private litigation. We write to put the Consent Order in perspective, so that industry participants can better assess its meaning.
I. Background
The FTC filed a complaint against Cephalon in U.S. District Court for the District of Columbia on February 12, 2008.[3] At the time, Cephalon marketed a brand prescription drug called Provigil®, which treats narcolepsy, sleep apnea, and shift work sleep disorder. The complaint alleged that Provigil® was, at the time of its approval, the only FDA-approved prescription medicine for those uses.[4] The product was successful: Cephalon’s U.S. sales of Provigil® grew from $25 million in 1999 to more than $800 million in 2007.[5]
The original patent for Provigil® expired in 2001, but Cephalon had obtained a second patent for a formulation of the particle size of Provigil®’s active ingredient, modafinil, which was set to expire in April 2015.[6] Apparently, however, the particle size paten could be easily circumvented. Thus, in December 2002—the earliest possible date—four generic manufacturers each submitted an ANDA for generic Provigil®, stating that its version of the drug did not infringe the particle size patent.[7] Cephalon understood that the generic modafinil would likely be priced 75 to 90 percent below the price of Provigil®, resulting in a $400 million annual reduction in the brand’s sales within a year.[8]
Cephalon sued the generic companies for patent infringement in March 2003. It eventually settled all the cases, with each generic agreeing to refrain from marketing any modafinil product until April 2012 unless another generic launched prior to that date.[9] At the same time, Cephalon entered into 13 purportedly independent business transactions resulting in payments to those companies totaling in excess of $200 million.[10] The FTC’s complaint quoted Cephalon’s CEO as stating that the arrangements secured six more years of patent protection for his company, resulting in an additional $4 billion in sales.[11]
The FTC’s complaint alleged that Cephalon’s settlements constituted unfair methods of competition in violation of Section 5(a) of the FTC Act, 15 U.S.C. § 45(a). The complaint sought an injunction prohibiting Cephalon from enforcing terms of the agreements that barred the generic manufacturers from marketing generic versions of Provigil® or successor products before April 2012.
The Supreme Court decided Actavis while the FTC’s lawsuit was pending. The Court held that reverse-payment settlements can raise antitrust concerns and that their lawfulness should be judged under the Rule of Reason. In January 2015, the district court applied Actavis to the settlements and denied Cephalon’s motion for summary judgment.[12] Recognizing that Actavis left much of the Rule of Reason analysis to be fleshed out by the lower courts, the district court discussed the range of approaches that had then been taken in the wake of the Supreme Court’s decision, most notably with respect to what was meant by the phrase, a “large and unjustified” payment by a generic to a brand to settle a Hatch-Waxman infringement case.[13] Ultimately, the district court found that the FTC (and private plaintiffs in the now-consolidated cases) “satisfied their burden of presenting evidence of anticompetitive effects, which includes a large reverse payment,” and also found there was a genuine dispute of material fact as to whether Cephalon’s procompetitive justifications were pretextual.[14] That is, “Plaintiffs have provided significant direct and circumstantial evidence that, if believed, could lead a reasonable jury to conclude that the side-deals between Cephalon and the Generic Defendants were simply a means of providing payments for delay,” in violation of law.[15]
In a separate decision rendered on April 15, 2015, the district court denied Cephalon’s motion to preclude the FTC from seeking disgorgement of Cephalon’s profits for the years 2007-2012.[16] It is important to place the court’s ruling in context: It decided only that the FTC was not precluded from seeking disgorgement, and that ruling was based at least in part on the FTC’s explanation that the disgorged funds would be placed in a Consumer Relief Fund that would be used to satisfy any claim from private plaintiff cases.[17]
II. The Consent Agreement
The case was set for trial, but just before it began the FTC and Cephalon settled the litigation by entering into a consent agreement, which was subsequently approved by the district court. For present purposes, the agreement’s key terms are as follows[18]:
- Cephalon agrees to pay $1.2 billion into a Consumer Relief Fund administered by the FTC, reduced by any amount (i) paid to settle or satisfy a judgment related to private litigation or (ii) agreed via settlement agreement or term sheet to be paid in settlement of related litigation, in either case within 30 days after entry of the Consent Order;[19]
- The Consumer Relief Fund is to be used to fund both settlements and judgments against Cephalon in the related civil cases, and to pay expenses of the fund;
- Any monies remaining in the fund after the related private litigation ends will be paid to the U.S. Treasury;
- Cephalon (including Teva) agree not to settle a Hatch-Waxman patent infringement claim on terms that include:
(a) With exceptions not relevant here, any payment or "transfer of value" in excess of estimated future litigation costs (initially set at $7 million), where the payment or transfer
§ is estimated without regard to whether the generic "purportedly transfers value in return"; and
§ is "expressly contingent" on entering into the settlement or the transfer of value occurs within 30 days before or after the settlement; and
(b) An agreement by the generic not to "research, develop, manufacture, market or sell" the subject drug for any period of time.
III. Discussion
The FTC took no time heralding the settlement agreement, describing it as “preclud[ing] the largest generic drug company in the United States from entering into one of the most common forms of anticompetitive reverse payments in the future.”[20] In an interview given to Law360, Markus Maier, the Assistant Director of the FTC’s Health Care Division, went further. He said that the Consent Order sends a “strong and important” message to the industry, and that the FTC would look to the settlement in future discussions with other companies.[21] Mr. Maier added that, despite the fact that future deals might not be identical in all respects, “there’s . . . a meaningful potential that this settlement will set a standard for the industry. The question is: Are other companies going to fall in line or not?”[22]
Whether the Consent Order will serve as a template to resolve future reverse-payment cases remains to be seen, but any claim by the FTC Staff that the agreement reflects existing law, or that its terms and structure should be generally applicable in all litigation contexts, is overstated. Consent orders often make bad law. In the M&A context, for example, parties frequently embrace nonmaterial but debatable divestitures in order to close transactions that would otherwise be in limbo during a period of litigation. The same may be true in the litigation context, where agencies’ institutional interests may drive settlement terms with private parties lacking an incentive to litigate the points, or having different strategic objectives in mind. Here, the Consent Order appears to reflect terms that could not be won in court by the FTC, and the terms of the settlement may be less important to Cephalon than the strategic opportunities...
