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Impax Oral Argument at Fifth Circuit Reveals Thorny Issues and Uncertain Outcome

On June 9, the United States Court of Appeals for the Fifth Circuit heard oral argument in Impax Laboratories, Inc., Etc. v. Federal Trade Commission.  The appeal by pharmaceutical manufacturer Impax marks the first time a court will review the Federal Trade Commission’s (“FTC”) interpretation of the Supreme Court’s watershed decision on reverse payment settlements, FTC v. Actavis, 570 U.S. 136 (2013).

Reversing the decision of the ALJ who presided over the administrative trial, the FTC concluded that Impax violated the Sherman Act and the FTC Act by entering into an anticompetitive “reverse payment” agreement with Endo International plc (“Endo”), the maker of the brand drug Opana.  Impax appealed the FTC’s ruling to the Fifth Circuit.  This post focuses on the oral argument that just took place, which you can listen to here. Click here for background on the case and an overview of the parties’ briefs.

Oral argument indicated that the court would likely address the following questions:

  1. What is required to show that a reverse payment settlement caused anticompetitive harm?

Citing Actavis, the FTC argued that simply showing that a reverse payment settlement may have eliminated the risk of potential earlier generic competition is sufficient to prove competitive harm. According to the FTC, the Commission is not required to prove that it is more likely than not that the reverse payment actually caused a delay in generic entry.

Impax, on the other hand, argued that there is no showing of anticompetitive harm unless the record demonstrates that the reverse payment more than likely did, in fact, delay entry of a generic.  If the record demonstrates that earlier entry was not possible, the reverse payment did not have an anticompetitive effect and the FTC did not meet its burden of proof.

In support of its argument, Impax pointed to evidence that it could not have launched its generic Opana ER product any earlier because Endo would not have entered into a settlement agreement allowing entry prior to 2013 under any circumstance.  The reason for this is that leading up to 2013, Endo was seeking to switch patients using Opana ER to a different formulation with longer patent protection.  The FTC responded that the proper test “cannot possibly be whether there was an alternative [agreement] that a monopolist was willing to accept.”  In other words, a monopolist’s inflexibility on the date of generic entry cannot be a bar to liability.  Instead, the test should be whether the parties could have reached a viable settlement agreement with an earlier date if they were acting with a legitimate purpose rather than colluding to share Endo’s monopoly profits on Opana by virtue of the reverse payment and the alleged “delayed” entry date.  The parties disagreed on whether the record showed that Impax attempted to negotiate an earlier entry date. Impax argued that the testimony of its chief negotiator shows that an earlier date was discussed and rejected by Endo, but the FTC attempted to cast doubt on that witness’s credibility by pointing to contradictions in his testimony.

The panel appeared to be wrestling with the question of whether the brand company’s efforts to shift the market to a new formulation prior to generic entry should matter in assessing the legality of the patent settlement which allegedly delayed entry and allowed the brand to pursue this strategy.  The panel evinced sympathy for Impax’s position that there is no anticompetitive harm where earlier entry would not have been possible.  Nevertheless, the panel seemed uncomfortable with the idea that an agreement could be immune to antitrust scrutiny solely because a monopolist was attempting to leverage its monopoly by delaying generic entry while it sought to move patients to a new formulation. As the FTC noted, in certain cases, efforts to move patients to different product formulations have themselves been the subject of antitrust scrutiny.

  1. Are reverse payment settlements presumptively harmful to competition unless they meet a narrow set of exceptions?

The FTC argued in the affirmative, stating that the only permissible justifications should be (1) saved litigation costs, (2) fair value for legitimate services a challenger provides to the patentee, such as a distribution agreement, and (3) an explicitly procompetitive imperative, like ensuring a cash-starved challenger has the resources necessary to bring the generic product to market.  If the payment was not made pursuant to one of those rationales, the FTC maintained, it is part of an illegal agreement to “share monopoly profits.”

Impax, on the other hand, said that the FTC’s position amounts to a presumption that reverse payment settlements cause competitive harm regardless of the actual underlying facts, unless the narrow exceptions noted above are met.  According to Impax, such a presumption may have been appropriate if these agreements were subject to a “quick look” analysis, but the Supreme Court rejected that standard in Actavis and instead ruled that these agreements are subject to review under a full “rule of reason” analysis.  The first step of this analysis requires the plaintiff (here, the FTC) to affirmatively show that a restraint caused substantial anticompetitive harm.  According to Impax, the FTC’s formulation reverses the burden by making the defendant show an absence of anticompetitive harm.

One judge on the panel called the FTC’s position “bold,” but seemed to hedge by acknowledging that the FTC’s “bold” position may be what the Supreme Court had in mind in Actavis

  1. Should the competitive effects of a reverse payment be analyzed in isolation or as one part of a larger settlement agreement?

Under the rule of reason, once a plaintiff has shown that a restraint has substantial anticompetitive effects, the defendant must show that there are procompetitive benefits.  The anticompetitive effects are then weighed against the procompetitive benefits. To prevail, the plaintiff must show that the harm outweighs the benefits.

The FTC argued that the reverse payment aspect of the settlement must be analyzed on its own; Impax insisted that a payment must be measured in the context of the agreement as a whole.

Impax pointed to two procompetitive benefits from its settlement agreement with Endo: (1) it permitted generic entry eight months earlier than the expiration of Endo’s patents, and (2) it  granted Impax licenses on other patents Endo filed on Opana ER, without which it would not have been able to market the generic version it sells today.

The FTC had two responses.  First, the reverse payment must be evaluated on its own and not as part of the larger settlement agreement.  If a less restrictive alternative exists that produces the same procompetitive benefits, the anticompetitive harm of the restraint outweighs the procompetitive benefits.  Here, because the procompetitive benefits Impax asserts are things of value that Endo provided to Impax, the less restrictive alternative is obvious: the same agreement but with no reverse payment.  Second, the FTC argues that the procompetitive benefits Impax cites are close to nonexistent.  Impax knew Endo planned to switch patients to a different formulation of Opana ER prior to generic entry in 2013, which allegedly would decimate the market for a generic version and make pointless the early entry of Impax’s generic.  And the patent licenses Impax trumpets were worthless at the time of the agreement and purely speculative because the patents in question had not yet been issued by the Patent Office. 

But Impax reasoned that those arguments replace the “procompetitive benefit” analysis with another presumption: that is, if a patentee ever provides anything of value to the challenger in addition to a monetary payment, a less restrictive alternative to a reverse payment automatically exists—namely, the same agreement without the monetary payment. This approach presumptively renders the reverse payment an unreasonable restraint of trade.  Instead, Impax suggested, to decide whether a “less restrictive alternative” is viable, a court should look at the procompetitive benefits of the agreement as a whole and not simply assume those same benefits could have been achieved without the reverse payment.  Here, because Endo would not have agreed to an earlier entry date under any circumstance, there was no “less restrictive alternative” available.

The panel’s questions focused on how to determine whether another less restrictive agreement was viable: does it mean that it was theoretically possible, or that it was reasonably achievable given the parties’ bargaining positions?

The Fifth Circuit's decision will begin to address some of the issues left open in the wake of Actavis and provide a strong signal on the strength of the FTC’s position that reverse payment settlements presumptively cause anticompetitive harm absent some very limited circumstances.