On July 18, 2012, the U.S. Court of Appeals for the Eleventh Circuit issued an order denying a petition for rehearing an appeal by the Federal Trade Commission (“FTC”) concerning a “pay for delay agreement” between brand-name licensee Solvay Pharmaceuticals, Inc. (“Solvay”) and generic drug makers Watson Pharmaceuticals, Inc. (“Watson”), Paddock Laboratories, Inc. (“Paddock”), and Par Pharmaceutical Companies, Inc. (“Par”).  That denial means the Eleventh Circuit will not reconsider its April 2012 decision that affirmed a dismissal of the FTC’s complaint challenging the legality of those agreements.

The Eleventh Circuit defines “pay for delay agreements,” also called “reverse payment agreements,” as agreements in which a patent owner settles infringement litigation by paying “the allegedly infringing generic drug company to delay entering the market until a specified date, thereby protecting the patent monopoly against a judgment that the patent is invalid or would not be infringed by the generic competitor.”

The underlying patent litigation involved the prescription drug sold under the trademark AndroGel^®, a topical gel that treats the symptoms of low testosterone in men, and which is the commercial embodiment of U.S. Patent No. 6,503,894 (“the ‘894 Patent”).  Besins Healthcare, S.A. developed AndroGel^® and granted Solvay a license to sell it in the United States.  Solvay then obtained approval from the Food and Drug Administration (“FDA”) to market and sell that product.  It then filed the patent application that issued as the ‘894 Patent, which expires in August 2020.

Subsequently, Watson and Paddock developed generic versions of AndroGel^® and applied for FDA approval to market them.  Solvay, however, sued both of them, in the U.S. District Court for the Northern District of Georgia (“Northern District”) for infringement of the ‘894 Patent.  Par gained interest in the lawsuit by partnering with Paddock to share its costs of defending the patent litigation in exchange for a share of profits from sales of Paddock’s generic drug, if the FDA were to ultimately approve that drug.  Following the discovery phase of the case, Watson and Paddock filed motions for summary judgment, seeking a declaration that the ‘894 Patent was invalid. 

Before the court ruled on those summary judgment motions, and before either generic product was brought to market, the parties settled the case by entering into a “pay for delay” agreement.  Under the terms of that agreement:

Watson, Par, and Paddock agreed not to market generic versions of AndroGel until August 31, 2015, unless another manufacturer launched one before then.  In addition, Watson agreed to promote branded AndroGel to urologists, and Par agreed to promote it to primary care doctors. Par also agreed to serve as a backup manufacturer for branded AndroGel but assigned that part of the agreement to Paddock.

For its part, Solvay agreed to pay Par/Paddock $10 million per year for six years and an additional $2 million per year for the backup manufacturing assistance. Solvay also agreed to share some of its AndroGel profits with Watson through September 2015, projecting that those payments would be between $19 million and $30 million per year.

Following the voluntary dismissal of the patent litigation resulting from their settlement, the parties filed their settlement agreements with the FTC, as required by federal law.  The FTC then sued all parties for violating federal antitrust laws.  Following transfer of the FTC’s action to the Northern District, the parties moved to dismiss the FTC’s complaint, pursuant to Rule 12(b)(6) of the Federal Rules of Civil Procedure, for failure to state a claim.  The Northern District granted that motion, agreeing with the movants that the FTC failed to allege that the “pay for delay” agreement exceeded the scope of the ‘894 Patent, and that such an allegation was required under Eleventh Circuit precedent to state an antitrust claim directed to such agreements.  In other words, the FTC failed to allege the the agreement resulted in a greater exclusion of generic products from the market than that already imposed by the patent.

In its April 2012 decision, the Eleventh Circuit affirmed the Northern District’s dismissal of the FTC’s complaint.

While some appellate courts from other circuits agree with the Eleventh Circuit’s “scope-of-the-patent” test, the Third Circuit does not, revealing a clear split of authority and setting the stage for eventual resolution by the Supreme Court.  On July 16, 2012 – just 2 days before the Eleventh Circuit issued its order denying the petition for rehearing – the Philadelphia-based U.S. Court of Appeals for the Third Circuit issued a decision expressly disagreeing with the Eleventh Circuit.  The Third Circuit held that a “pay for delay” agreement should be evaluated under a “quick look rule of reason” analysis, under which it is presumptively in violation of antitrust laws, unless a party can show that the payment either: “(1) was for a purpose other than delayed entry, or (2) offers some pro-competitive benefit.”

The April 2012 decision by the Eleventh Circuit discussed above is Federal Trade Comm’n v. Watson Pharms., Inc., 677 F.3d 1298 (11th Cir. 2012).

UPDATE:  On October 4, 2012, the FTC filed a Petition for Writ of Certiorari, seeking Supreme Court review of the Eleventh Circuit’s decision (see our October 8 post), and on November 13, 2012, Watson responded to that petition, and 31 states jointly filed a brief on November 5, 2012 supporting the FTC’s position (see our November 15 post).  The Supreme Court granted the FTC’s petition on December 7, 2012 (see our December 10 post).