Cephalon And Teva's $1.2 Billion Consent Order With The FTC: Is It Really A Harbinger Of Things To Come?

On June 17, 2015, the U.S. District Court for the Eastern District of Pennsylvania approved a consent order (the "Consent Order") between the Federal Trade Commission and defendants Cephalon, Inc. and its parent, Teva Pharmaceutical Industries Ltd.,1 resolved long-running antitrust litigation stemming from four "reverse payment" settlements of Hatch-Waxman patent infringement cases involving the branded drug Provigil®. Pursuant to its settlement with the FTC (the "Consent Order"), Cephalon agreed to disgorge $1.2 billion and to limit the terms of any future settlements of Hatch-Waxman cases.2 The FTC and its Staff have celebrated and promoted the terms of the settlement as setting a new standard for resolving reverse-payment cases. But their enthusiasm may be more wishful thinking than reality, and their speculation that the agreement may exert force on market behavior does not appear to be supported by a fair assessment of the state of the law. First, the restrictions on Cephalon's ability to enter into settlements of Hatch-Waxman cases exceed anything a court has ever required, and conflict with settlement terms apparently approved in the U.S. Supreme Court's seminal reverse-payment decision, Federal Trade Commission v. Actavis, 133 S. Ct. 2223 (2013). Second, the FTC's use of disgorgement as a remedy remains controversial and Cephalon, despite initial opposition, might have voluntarily embraced that remedy as part of a strategy to achieve a global resolution of remaining private litigation. We write to put the Consent Order in perspective, so that industry participants can better assess its meaning.

I. Background

The FTC filed a complaint against Cephalon in U.S. District Court for the District of Columbia on February 12, 2008.3 At the time, Cephalon marketed a brand prescription drug called Provigil®, which treats narcolepsy, sleep apnea, and shift work sleep disorder. The complaint alleged that Provigil® was, at the time of its approval, the only FDA-approved prescription medicine for those uses.4 The product was successful: Cephalon's U.S. sales of Provigil® grew from $25 million in 1999 to more than $800 million in 2007.5

The original patent for Provigil® expired in 2001, but Cephalon had obtained a second patent for a formulation of the particle size of Provigil®'s active ingredient, modafinil, which was set to expire in April 2015.6 Apparently, however, the particle size paten could be easily circumvented. Thus, in December 2002—the earliest possible date—four generic manufacturers each submitted an ANDA for generic Provigil®, stating that its version of the drug did not infringe the particle size patent.7 Cephalon understood that the generic modafinil would likely be priced 75 to 90 percent below the price of Provigil®, resulting in a $400 million annual reduction in the brand's sales within a year.8

Cephalon sued the generic companies for patent infringement in March 2003. It eventually settled all the cases, with each generic agreeing to refrain from marketing any modafinil product until April 2012 unless another generic launched prior to that date.9 At the same time, Cephalon entered into 13 purportedly independent business transactions resulting in payments to those companies totaling in excess of $200 million.10 The FTC's complaint quoted Cephalon's CEO as stating that the arrangements secured six more years of patent protection for his company, resulting in an additional $4 billion in sales.11

The FTC's complaint alleged that Cephalon's settlements constituted unfair methods of competition in violation of Section 5(a) of the FTC Act, 15 U.S.C. § 45(a). The complaint sought an injunction prohibiting Cephalon from enforcing terms of the agreements that barred the generic manufacturers from marketing generic versions of Provigil® or successor products before April 2012.

The Supreme Court decided Actavis while the FTC's lawsuit was pending. The Court held that reverse-payment settlements can raise antitrust concerns and that their lawfulness should be judged under the Rule of Reason. In January 2015, the district court applied Actavis to the settlements and denied Cephalon's motion for summary judgment.12 Recognizing that Actavis left much of the Rule of Reason analysis to be fleshed out by the lower courts, the district court discussed the range of approaches that had then been taken in the wake of the Supreme Court's decision, most notably with respect to what was meant by the phrase, a "large and unjustified" payment by a generic to a brand to settle a Hatch-Waxman infringement case.13 Ultimately, the district court found that the FTC (and private plaintiffs in the now-consolidated cases) "satisfied their burden of presenting evidence of anticompetitive effects, which includes a large reverse payment," and also found there was a genuine dispute of material fact as to whether Cephalon's procompetitive justifications were pretextual.14 That is, "Plaintiffs have provided significant direct and circumstantial evidence that, if believed, could lead a reasonable jury to conclude that the side-deals between Cephalon and the Generic...