Recent Actions By Supreme Court And U.S. Antitrust Authorities Illustrate Continued Focus On Antitrust Issues In The Health Care Sector

Introduction

A few developments in the past month by the Supreme Court and the U.S. antitrust agencies serve as reminders that regulators continue to focus on antitrust enforcement in the health care sector. These recent actions, of course, are occurring during the health care reform process, which has spurred increased horizontal and vertical integration in the health care space.

First, there have been recent developments in connection with the Supreme Court's review of two enforcement actions by the Federal Trade Commission ("FTC" or "the Commission"). On December 7, 2012, the Supreme Court confirmed it will consider the legal standards for "pay-for-delay" or "reverse payment" pharmaceutical patent settlement agreements by granting certiorari to review the Eleventh Circuit Court of Appeals' decision in FTC v. Watson Pharm. The Eleventh Circuit had rejected the FTC's challenge to the patent settlement agreements between Solvay Pharmaceuticals and Watson Pharmaceuticals and Par Pharmaceutical Companies that, according to the FTC, would delay entry of generic versions of Solvay's branded testosterone-replacement drug, AndroGel.1 On November 26, 2012, the Supreme Court also heard oral arguments on the appropriate scope of the so-called "state action" doctrine in connection with an FTC challenge to a Georgia hospital merger between Phoebe Putney Health System, Inc. and Palmyra Park Hospital, Inc.2 The FTC appealed to the Supreme Court after both the District Court and the Eleventh Circuit ruled that the state action doctrine immunized the transaction from antitrust challenge.3

In addition to recent appeals to the Supreme Court, antitrust authorities have also challenged hospital and health insurance mergers in the past few weeks. On November 16, 2012, the FTC challenged Reading Health System's proposed purchase of Surgical Institute of Reading L.P. Soon thereafter, Reading Health System decided to abandon the proposed transaction.4 Moreover, on November 28, 2012, the Department of Justice ("DOJ" or "the Department") required a divestiture as a condition for clearing WellPoint's acquisition of rival health insurance group, Amerigroup, requiring that the combined company divest Amerigroup's Virginia subsidiary.5

These cases are only the most recent examples of U.S. antitrust authorities' longstanding focus on the heath care sector.

After Years of FTC Scrutiny, the Supreme Court Will Finally Hear a Case Involving an FTC Challenge to Pay-for-Delay Deals

On December 7, 2012, the Supreme Court granted the FTC's petition for certiorari to review the Eleventh Circuit Court of Appeals' decision in Watson, in which the court rejected the FTC's challenge to a "reverse payment" agreement between Solvay Pharmaceuticals, Par Pharmaceutical, and Watson Pharmaceuticals.6 For several years, the FTC has targeted "reverse payment" or "pay-for-delay" agreements, which refer to patent settlement agreements between a brand-name and a generic manufacturer that, according to those that challenge them, delay entry by the generic manufacturer in exchange for some type of compensation. These have long been a cause célèbre for the FTC and, particularly, for the current FTC Chairman Jon Leibowitz. Indeed, the Chairman recently reiterated the Commission's focus "on egregious practices like 'pay-for-delay' pharmaceutical settlements."7 There has been extensive litigation surrounding these types of agreements, including cases brought by the FTC as well as class actions and other cases brought by private parties. Nevertheless, both the Commission and private parties have found limited success in litigating these types of cases.8

In Watson, Solvay Pharmaceuticals, developer of brand-name drug AndroGel, had filed patent infringement lawsuits against generic pharmaceutical manufacturers. The generic manufacturers claimed that their generic drugs either did not infringe Solvay's patent or that the patent was invalid. Solvay and the generic manufacturers settled these suits, with Solvay agreeing to make annual payments to each of the generic manufacturers, and the generic manufacturers agreeing to delay marketing their generic versions of AndroGel. The FTC sued the parties to the settlement agreements, claiming that the agreements were unreasonable restraints of trade. The Eleventh Circuit held that reverse payment settlement agreements do not give rise to antitrust liability if their anticompetitive effects fall within the potential exclusionary scope of the patent's duration and subject matter, and found that Solvay's agreement with the generic manufacturers did not violate the antitrust laws. This "scope of the patent" test is also used by the Second and Federal Circuit Courts of Appeals.9

Three Circuits—the Third Circuit, the Sixth Circuit, and the D.C. Circuit—have been more receptive to claims that reverse payment settlements can violate the antitrust laws.10 Notably, the Third Circuit in In re K-Dur Antitrust Litig. highlights the divide in the federal appellate courts over reverse payment settlement agreements.11 In K-Dur, Upsher, a generic drug manufacturer, entered a settlement agreement with Schering-Plough under which Upsher agreed to refrain from marketing its generic version of K-Dur, Schering's potassium chloride supplement, for slightly over four years. The Third Circuit held that reverse payment settlement agreements were prima facie evidence of an unreasonable restraint of trade that gives rise to antitrust liability, and that the Schering-Upsher agreement was a violation of the antitrust laws.

The Supreme Court's decision to grant certiorari in Watson hopefully will provide some guidance about the legal standards in this high-profile area of antitrust law.

Hospital Merger Enforcement Actions Over the Last Two Decades: A Long History with a Recent Resurgence

The Phoebe case before the Supreme Court and the challenge involving Reading Hospital System are the most recent examples of antitrust authorities' long-standing scrutiny of hospital mergers. The efforts of U.S. antitrust authorities to challenge hospital mergers were largely unavailing in the mid-to-late 1990s. From 1994 to 2000, the FTC, the DOJ, and state authorities lost several hospital merger challenges.12 After that string of losses, there was a lull in enforcement and, it seems, a...