Fifth Circuit Impax Decision Validates FTC’s Post-Actavis Approach to Reverse Payments
On April 13, 2021, the Court of Appeals for the Fifth Circuit issued its long-anticipated decision in Impax v. FTC, marking the first time an appellate court has weighed in on the merits of a so-called reverse payment case prosecuted by the Federal Trade Commission (“FTC”) since the Supreme Court’s Actavis decision in 2013. The case resulted in a validation of the FTC’s approach to policing reverse payment agreements. Specifically, the Court affirmed the Commission’s conclusions that (1) large, unjustified reverse payments are anticompetitive regardless of the strength of the underlying patent litigation, and (2) reverse payment settlements are more anticompetitive than procompetitive if a less-restrictive alternative exists, and that a less-restrictive alternative can be an agreement without a payment that results in an earlier generic entry.
The decision left open the question of whether there needs to be a nexus between the reverse payment and the agreement’s procompetitive benefits, or if the settlement agreement as a whole should be evaluated when balancing anticompetitive and procompetitive effects. It also left undecided whether a less-restrictive alternative is viable if there is conclusive proof that the brand manufacturer would not have permitted earlier entry than what was ultimately agreed upon; the Fifth Circuit agreed with the Commission that the testimony of Impax’s lead negotiator was not credible on this point. But even if there were such evidence, the Court signaled that this sort of tactical posturing should not enable litigants to avoid liability for anticompetitive conduct.
Settlement and FTC Decision
By way of background, Endo and Impax settled a patent infringement action Endo had brought against Impax after Impax became the first manufacturer to file an application with the FDA to market a generic version of Endo’s Opana ER brand-name pharmaceutical product, an extended-release formulation of oxymorphone. The settlement agreement required Impax to refrain from entering the market with its generic product until January 1, 2013—two-and-a-half years after it could have launched its generic “at-risk” but several months before the patents protecting Opana ER were set to expire—and Endo, in turn, paid Impax over $100 million. The terms of the agreement prohibited Endo from marketing an authorized generic during the exclusive 180-day window granted to generic manufacturer first-filers under the Hatch-Waxman Act, granted Impax a license to use Endo patents related to future formulations of the product, and included an agreement to collaborate on the development of a new Parkinson’s disease treatment, with Endo paying Impax $10 million upfront and up to $30 million contingent on certain benchmarks.
Reversing an ALJ opinion following a 12-day trial, the Commission decided that it did not need to consider the merits of the underlying litigation or “how much competition was eliminated” in order to make this determination. It found that this settlement was an illegal “reverse payment” agreement because it eliminated the “risk of competition” in the market for extended-release oxymorphone. The Commission concluded it merely needed to have shown that the reverse payment was “large and unjustified” and that the procompetitive benefits of the agreement could have been achieved by a less-restrictive alternative, i.e., without the reverse monetary payment. (For more background on the case, click here; for information about the Fifth Circuit oral argument, click here.) Endo settled, but Impax filed a petition in the Fifth Circuit seeking to reverse the FTC’s ruling.
Fifth Circuit Decision
A “Large and Unjustified Payment” is Sufficient to Infer Anticompetitive Effects
The Court first analyzed whether the settlement agreement had anticompetitive effects by examining whether the reverse payment was “large and unjustified.” The Court agreed with the FTC that the payment here—over $100 million—was both large and unjustified because the amount was not tethered to either saved litigation costs or services that the brand manufacturer promised to render to the generic manufacturer. Impax had argued that the FTC needed to do more than that to show anticompetitive impact; the FTC needed to evaluate “the patent’s strength, which is the expected likelihood of the brand manufacturer winning the litigation.” Impax argued that if the brand manufacturer was likely to win, allowing generic entry at any time before patent expiration was not anticompetitive.
In response, the Court held that Actavis does not require the “Commission to assess the likely outcome of the patent case in order to find anticompetitive effects. The fact that generic competition was possible, and that Endo was willing to pay a large amount to prevent that risk, is enough to infer anticompetitive effect.” The Fifth Circuit held that “Actavis squarely rejected Impax’s argument” when it held that “the size of the unexplained reverse payment can provide a workable surrogate for a patent’s weakness, all without forcing a court to conduct a detailed exploration of the validity of the patent itself.” The Court noted that “[i]f the parties thought Endo was highly likely to win the infringement suit, then Impax would have been happy with a deal giving it nothing more than entry months in advance of the likely-valid patent’s expiration. Reverse payments would have been a windfall. The need to add that substantial enticement indicates that at least some portion of that payment is for exclusion beyond the point that would have resulted, on average, from simply litigating the case to its conclusion.”
If a Less-Restrictive Alternative Exists, Anticompetitive Effects Outweigh Procompetitive Benefits
The Court next analyzed whether the proffered procompetitive benefits—entry before the patents were set to expire and a license on other patents—were sufficient to offset the payment’s anticompetitive effect. Impax argued that the procompetitive benefits should be measured in the context of the settlement agreement as a whole, and that there did not need to be a direct nexus between the monetary payment and the procompetitive benefits. The Court did not identify whether a nexus existed between the reverse payment and the procompetitive benefits of the agreement. Instead, the panel examined the Commission’s finding that even if some nexus existed between the reverse payment and the procompetitive benefits, a less-restrictive alternative existed: an agreement providing for the procompetitive benefits without the reverse payment for delayed entry. The FTC’s evidence for the viability of this less-restrictive alternative included “industry practice, economic analysis, expert testimony, and adverse credibility findings discounting the testimony of Impax’s lead settlement negotiator.” The Court held that the viability of this alternative is a “question of fact,” and the Court owes the Commission deference as to its findings of fact under the “substantial evidence” standard.
The FTC Met Its Burden of Showing the Agreement was More Anticompetitive than Procompetitive
Before examining the FTC’s evidence, the Court rejected two legal arguments made by Impax. First, it rejected Impax’s argument that the Commission, by considering whether entry on the same date without the reverse payment was feasible, only found that an “equally restrictive alternative” was viable. But the Commission premised the less-restrictive alternative determination on its finding that an agreement that provided for even earlier entry was feasible, and as discussed below, the Court held that this finding was supported by substantial evidence. The Court also rejected Impax’s argument that the Commission impermissibly shifted to Impax the burden of disproving a less-restrictive alternative, holding that it was proper to ask Impax to rebut evidence of the feasibility of the less-restrictive alternative once the FTC’s Complaint Counsel made a “strong showing” of that feasibility.
Evidentiary Analysis Shows an Earlier Entry for No Payment Was a Less-Restrictive Alternative
The Court then evaluated the FTC’s evidence. The FTC’s evidence of “industry practice” noted that most settlements between brand and generic manufacturers do not include a reverse payment and a delayed generic entry. The Court credited this evidence, noting that “real commercial experience may be especially compelling as the defendant often will not want to acknowledge its willingness to enter into an arrangement that would not have included the illicit profits arising from an anticompetitive effect.” The Court also cited a student law review note that raised “concerns about rules that would tell defendants that all they need to do to avoid liability is to insist in settlement talks that the only agreement they would make is an illegal one.” The Court then credited the adverse inference the Commission drew from the testimony of Impax’s lead negotiator, highlighting his inconsistency as to whether “the possibility of pre-2013 entry” was a sticking-point in negotiations. Finally, the Court credited the economic analysis the FTC used to prove the “fairly obvious” point that Endo would have traded an earlier entry date for a smaller payment. The panel ultimately held that the Commission’s finding of fact on the less-restrictive alternative was “more than enough” to “allow a reasonable factfinder to conclude that a no-payment settlement was feasible.”
Denying Impax’s petition, the Court held that “the reverse payment settlement was an agreement to preserve and split monopoly profits that was not necessary to allow generic competition before the expiration of Endo’s patent. As a result, Impax agreed to an unreasonable restraint of trade.” The Fifth Circuit decision is a vindication of the Commission’s approach to reverse payment settlements. The Court rejected that any analysis of the underlying patent litigation is necessary to show the anticompetitive effects of a “large and unjustified payment” and confirmed that the only allowable justifications for a “reverse” monetary payment are saved litigation expenses and the fair-market value of any promised services. It also held that a plaintiff may prove a less-restrictive alternative exists by showing through expert testimony that an agreement permitting the generic challenger’s earlier market entry would have produced a smaller payment or no payment—a “fairly obvious” observation that is likely to be true in the vast majority of reverse payment settlements. If this analytical framework becomes widely accepted as controlling law in other Circuits, parties to reverse payment settlement agreements will face an uphill battle overcoming challenges to those agreements once there is a finding of a “large and unjustified payment.”