Shearman & Sterling LLP | Antitrust Blog | Impax Reaches Impasse As Fifth Circuit Denies Review Of FTC’s First Post-<em >Actavis</em > Reverse Payment Ruling<br >  
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  • Impax Reaches Impasse As Fifth Circuit Denies Review Of FTC’s First Post-Actavis Reverse Payment Ruling

    On April 13, 2021, the United States Court of Appeals for the Fifth Circuit, in an opinion authored by Judge Gregg Costa, affirmed the Federal Trade Commission’s (“FTC”) order finding a reverse payment settlement between a branded drug manufacturer and a generic drug manufacturer violated the FTC Act and the Sherman Act.  Impax Laboratories, Inc. v. Federal Trade Commission, No. 19-60394 (5th Cir. 2021).  The Court upheld the FTC administrative court’s finding that the settlement agreement was anticompetitive because it “replaced the ‘possibility of competition with the certainty of none.’”
    Petitioner Impax is a generic drug manufacturer.  Petitioner sought FDA approval to enter the market as the generic version of a branded and patented oxymorphone drug, Opana ER, which is an extended-release pain reliever.  In 2008, Opana ER’s manufacturer and patent-holder, Endo, filed a patent infringement lawsuit that, under the terms of the Hatch-Waxman Act, stayed FDA approval of petitioner’s generic drug for a period of 30 months or until the conclusion of patent litigation.  In June 2010, after years of discussion to settle the litigation and right before the 30-month stay was set to expire, Endo and petitioner agreed to a settlement where, among other things, Endo would pay $100 million to petitioner.  The Court found that this was an unusual form of settlement because the patent owner paid the alleged infringer, reverse from the ordinary flow of payment in patent settlements.  In return, petitioner agreed to delay its generic’s market entry until January 2013, thereby extending by two and a half years the time that Opana ER (the branded drug) would be the only oxymorphone drug available on the market.  Subsequently, in 2012, Endo executed a planned “product hop” that replaced the existing version of Opana ER with an upgraded, reformulated version (which also received patent exclusivity).  Petitioner’s generic was not a substitute for Endo’s reformulated Opana ER, and Endo was further able to enjoin petitioner and other manufacturers from marketing a new generic.  The FTC found that this settlement agreement was anticompetitive in its first reverse payment settlement decision since the Supreme Court’s Actavis decision in 2013.  FTC v. Actavis, 570 U.S. 136, 158 (2013).

    On appeal, to determine whether the settlement was an unreasonable restraint of trade, the Court relied on Actavis in setting out the framework for its rule of reason analysis.  At the Actavis court’s instruction that reverse payment settlements should be analyzed as in other rule of reason cases, the Fifth Circuit described the standard burden-shifting framework:  first, the FTC must prove anticompetitive harm from the parties’ agreement; second, the petitioner must prove procompetitive benefits; and if both of those steps are satisfied, third, the FTC must demonstrate that those benefits could be achieved through less anticompetitive means.  A reverse payment settlement is illegal where the anticompetitive effects on balance outweigh the procompetitive effects.

    In its first-step analysis to assess anticompetitive effects, the Court noted that, absent an underlying patent right to exclude, the payment of a potential competitor to have it not compete was “by definition, anticompetitive.”  Id. at 11.  However, the existence of a potentially valid and infringed patent required a more searching analysis into the terms of the settlement.  The Court concluded that it need not inquire into the merits of Endo’s patent infringement lawsuit against petitioner because the reverse settlement payment’s size and lack of legitimate justification were sufficient to infer anticompetitive effects under Actavis.  Here, the “nine figures” payment was worth much more than the estimated sum of “simply litigating the case to its conclusion” (only several million) as well as any “services” from petitioner (parties agreed to collaborate on Parkinson’s research).  Therefore, the excessive “windfall” in Endo’s payment to petitioner created an inference that the settlement was designed for anticompetitive ends and preserved monopolist profits.  Id. at 14-16.  Additionally, the Court rejected petitioner’s argument that subsequent events – including the product recall of Endo’s reformulated Opana ER – eliminated anticompetitive harm.  Rather, an assessment of anticompetitive effects should occur at the time the agreement was adopted, and not after with the gloss of hindsight.

    The Court next considered the procompetitive effects of the agreement, and specifically raised the question of how to define the agreement at issue:  as limited to the reverse payments, or inclusive of the entire settlement agreement.  The Court ultimately side-stepped this issue because, regardless, the FTC had substantial evidence supporting its finding that the parties could have accomplished the same proffered benefits with a less anticompetitive alternative:  a settlement with no reverse payment and an earlier agreed-upon generic entry date.  The Court gave substantial deference to the FTC’s factfinding, which relied on industry practice (no more than 30% of brand-generic settlements included a reverse payment), expert economic analysis (Endo could have kept more than the $100 million paid if it had negotiated an earlier entry date), and adverse credibility findings as to witness testimony (prior testimony of petitioner’s chief negotiator stated that he did not recall whether petitioner considered an earlier entry date, whereas at trial he stated Endo was adamant about preventing pre-2013 entry).  Overall, the Court credited the FTC’s finding that petitioner could have negotiated to have its generic enter the market prior to 2013 (and therefore prior to Endo’s “product hop”) and without a sizable payment, which would be a less restrictive agreement that equally benefited parties.  As such, the actual settlement agreement with its reverse payment of $100 million and a 2013 entry date for petitioner’s generic drug was unreasonably anticompetitive.

    As the first fully litigated FTC decision since Actavis, this case is an important development in jurisprudence surrounding reverse payment settlements.  Courts typically give a degree of deference to parties’ private settlements resolving their intellectual property disputes in a subsequent antitrust suit, relying on the parties’ own litigation interests to reach an optimal outcome in light of the merits of the case.  But as the Impax case illustrates, courts in reverse payment cases will scrutinize settlement terms that can skew parties’ ordinary litigation incentives.