D.C. Circuit Rejects FTC’s Appeal Related To Alleged Anticompetitive Conduct Stemming From Endo And Impax’s Patent Settlement Agreement, Holding It Was No Different From A Permissible Exclusive Licensing Agreement
09/06/2023On August 25, 2023, a panel of the United States Court of Appeals for the D.C Circuit affirmed the district court’s dismissal of the FTC’s complaint against Endo Pharmaceuticals Inc. (“Endo”), Impax Laboratories LLC (“Impax”) and their parent companies (collectively “Appellees”) for alleged violations of sections 1 and 2 of the Sherman Act. FTC v. Endo Pharmaceuticals Inc., et al., Dkt. No. 22-05137 (D.C. Cir. Aug. 25, 2023). The suit stemmed from a patent litigation settlement agreement in 2017, which the FTC alleged was an impermissible exclusive licensing arrangement. The D.C. Circuit held that the FTC failed to state a claim because the complaint lacked allegations establishing that the 2017 Agreement extended beyond the rights granted to Impax under settled law and precedent.
In 2006, Endo developed, patented, and began selling Opana ER, a long-acting, extended-release version of the semi-synthetic opioid Oxymorphone. Endo continuously sold Opana ER until 2017. In 2007, Impax began marketing a generic version of Opana ER and sought approval from the FDA. In 2008, Endo filed a patent infringement action against Impax over the generic drug, which led to a 2010 settlement (the “2010 Agreement”). Under the 2010 Agreement, (i) Impax agreed it would not sell its generic Opana ER until January 2013, (ii) Endo would convey a license to Impax to cover all Endo’s patents related to Opana ER, including patents after the agreement became effective, and (iii) after the expiration of a temporary “Exclusivity Period,” Endo and Impax would negotiate in good faith an amendment to the terms of the license to any patents which issued from any pending applications.
In 2013, pursuant to the 2010 Agreement, Impax began selling its generic version of Opana ER. Due to successful patent injunctions that Endo brought against other generic competitors with similar synthetic Oxymorphone drugs, Endo and Impax were the only companies producing Opana ER (or its generic equivalent). In 2015, Endo proposed that Impax pay an 85% royalty on the license for additional Opana ER patents. When Impax refused, Endo sued claiming Impax breached the 2010 Agreement. While the litigation was pending, Endo removed its version of a reformulated Opana ER from the market due to FDA scrutiny. Shortly after Endo’s withdrawal of its drug, Endo and Impax settled the litigation.
Under the settlement agreement (the “2017 Agreement”) (i) the parties clarified Impax’s license to all of Endo’s Opana ER patents in exchange for monetary payment, in addition to a percentage of royalties relating to Impax’s gross Oxymorphone ER profits, and (ii) agreed that royalty payments would be terminated if Endo attempted to re-enter the Oxymorphone ER market. The upshot of this agreement was that Impax was the only company selling Oxymorphone ER, it was paying a royalty to Endo based on Impax’s profits, and the agreement effectively prevented Endo from re-entering the Oxymorphone ER market.
In January 2021, the FTC filed a lawsuit against Endo and Impax, alleging that the 2017 Agreement (1) violated §1 of the Sherman Act and constituted an unfair method of competition in violation of §5(a) of the FTC Act, 15 U.S.C. §45(a); and (2) Impax’s parent company exercised monopoly power in violation of §2 of the Sherman Act and §5(a) of the FTC Act.
Appellees moved to dismiss the complaint for failure to state a claim, and the district court granted their motion. Although the district court found that the FTC had plausibly alleged that the 2017 Agreement was “an exclusive licensing agreement and a patent monopoly,” it ultimately held that the FTC failed to plausibly allege anticompetitive activity because the conduct was permitted under patent law.
Reviewing de novo, the D.C. Court of Appeal affirmed. On appeal, the FTC argued that it had adequately alleged market power and that the 2017 Agreement harmed competition by removing a market competitor, causing loss of price competition, and reducing innovation. Appellees argued the FTC failed to allege conduct exceeding the scope of what the Patent Act allowed.
The Court analyzed the interplay between the Patent Act and the Sherman Act and noted that “[t]he Supreme Court has long recognized certain exercises of patent rights are lawful despite the Sherman Act’s dictates,” and that the “resolution of this dispute turns on the answer to a single question: [d]oes a valid patent holder’s grant of a nearly exclusive license to a single potential competitor in exchange for royalty payments violate antitrust law when that nearly exclusive license restrains trade only to an extent traditionally recognized by patent law as reasonable?” In answering ‘no’, the Court relied on the Supreme Court’s decision in FTC v. Activis, 570 U.S. 136 (2013), in which the Supreme Court held that courts “must strike a balance” between antitrust law and patent law, and that consistent with the Patent Act, there is an accepted understanding that a patent holder’s grant of an exclusive license to a potential competitor in exchange for payment of a royalty generally raises no issues under antitrust laws. In highlighting this, the D.C. Circuit emphasized that Actavis concerned the unusual situation involving a reverse settlement payment from that patent owner to the licensee but noted the Supreme Court did not purport to disturb a patent owner’s ability to license a patent with no reverse payment.
Additionally, the Court rejected an argument that the 2010 Agreement had already given Impax a license and that therefore the 2017 Agreement was an agreement not to compete. The Court held that even if the FTC’s characterization of the 2010 Agreement was correct, it still failed to explain how the 2017 Agreement meaningfully differed from a standard exclusive license, and the FTC failed to allege how the otherwise permissible exclusive license became impermissible if it was preceded by another non-exclusive license. Lastly, because the viability of the claim relied on the sufficiency of the 2017 Agreement, the complaint failed because it did not allege any other aspects of the agreement that would justify further antitrust scrutiny, such as if it was “unusual” in any way, or if it gave Endo any undue economic power to control a different market beyond the one it already controlled through its patents.
The main takeaway from the D.C. Circuit’s decision is that defendants appear to continue to receive deferential treatment, even at the pleading stage, when engaging in ordinary course intellectual property licensing that does not have any unusual features, such as a reverse payment.