FTC Takes 4-in-1 Shot At Reverse Payment Settlements February 2008

The Federal Trade Commission has taken the next step in its long battle against "reverse payment settlements" that some argue delay entry by generic pharmaceutical manufacturers. On February 13, 2008, the FTC filed a complaint against Cephalon, Inc., alleging that the company illegally extended its monopoly over its sleep disorder drug, Provigil, by paying four generic drug manufacturers to delay entry as part of patent litigation settlements with each generic. According to the Commission, each of these four agreements is an unlawful act of monopolization.

The case, brought in the U.S. District Court in the District of Columbia, is extremely significant for brand and generic manufacturers faced with these business and legal decisions. This litigation represents the latest move in an effort by the FTC to develop the law in this area, and the outcome of this litigation could significantly impact the terms under which brand and generic manufacturers may settle patent infringement litigation. Although circuit courts have addressed these issues, the law remains turbid regarding the circumstances under which a patent settlement that includes a payment to a generic and delays entry is unlawful. The law has become more favorable to reverse payment settlements, but FTC remains resolute in its position that the current direction of the law is wrong. The Cephalon complaint represents the FTC's first effort to clarify the law in this area and challenge a reverse payment settlement after the Eleventh Circuit ruled against the Commission in Schering-Plough Corp. v. FTC, 402 F.3d 1056 (11th Cir. 2005), cert. denied, 126 S. Ct. 2929 (2006). The outcome of the case also may clarify the effect on the antitrust analysis of additional terms - such as licenses to additional intellectual property, supply agreements, and co-development deals - that brand and generic manufacturers have included in settlement agreements since the Schering decision.

The Commission's Complaint

According to the Commission's complaint, Cephalon's compound patent covering its Provigil product expired in 2001. Although Cephalon obtained a formulation patent for its product, four companies filed applications to market generic versions of Provigil the very first day the Federal Drug Administration began accepting such applications. All four therefore became "first filers," entitling each to certain benefits under FDA regulations. As is common, generic entry would have a dramatic impact on Provigil sales. Cephalon predicted that generic entry would reduce its Provigil revenues by at least $400 million within one year, and one of the generic companies predicted that generics would garner 90% of total sales of modanifil (the active pharmaceutical ingredient of Provigil) within one month and that generic prices would be only 10% of the branded price within one year.

Cephalon sued each generic manufacturer under its formulation patent. After discovery, each generic filed for summary judgment on non-infringement as well as invalidity in some cases. Cephalon then entered into settlement agreements with each of the four generics that precluded each from entering before April 2012 (three years before the formulation patent expired). Cephalon and the generic manufacturers also entered into "purportedly independent business transactions" that included payment from Cephalon to each generic manufacturer (totaling over $200 million) for licenses to intellectual property, supply agreements, or co-development deals. According to the complaint, Cephalon did not need any of the benefits from any of these agreements. In addition, each settlement agreement included a "most favored nations" clause that allowed for accelerated entry...