Should FTC Seek Disgorgement of Profits in Pay-for-Delay Cases?

Stay ahead of developments in federal and state health care law, regulation and transactions with timely, expert news and analysis.

By Dana A. Elfin

April 15 — Pharmaceutical companies need to be prepared. The FTC appears to be increasingly aggressive in seeking disgorgement from companies that profit from allegedly illegal drug patent litigation settlements, antitrust attorneys tell Bloomberg BNA.

Disgorgement, or repayment, is an equitable remedy through which ill-gotten gains can be recouped from defendants. Historically, the Federal Trade Commission has sought disgorgement mostly in consumer protection cases but hasn't frequently sought it on the antitrust side.

But the FTC's reluctance to seek disgorgement in competition cases appears to be changing, especially in cases challenging drug companies' pay-for-delay or reverse-payment settlements, antitrust attorneys say. Even more remarkable, according to antitrust attorneys, is that the FTC is asking for disgorgement in reverse-payment settlements cases where the issues are novel and unsettled.

Pay-for-delay or reverse-payment settlements are patent litigation settlements that generally involve payments from branded drug companies to generic drug companies in exchange for delaying the generic from reaching the market.

Most recently, the FTC is seeking both monetary disgorgement and injunctive relief in its suit against multiple drug companies, including Endo International PLC, Allergan PLC, and Impax Laboratories Inc. over alleged pay-for-delay settlements (FTC v. Endo Pharms. Inc., E.D. Pa., No. 2:16-cv-01440-PD, complaint 3/30/16) .

Authorized Generics Targeted

The Endo suit is notable because it marks the first time the commission has specifically targeted an agreement not to launch an authorized generic as a form of illegal reverse payment.

“This lawsuit reflects the FTC’s commitment to stopping pay-for-delay agreements that inflate the prices of prescription drugs and harm competition, regardless of the form they take,” FTC Chairwoman Edith Ramirez said in a March 31 statement.

Authorized generics are generic drugs sold under a license from the patent holder. Patent litigation settlements between brand-name and generic manufacturers often include an agreement by a branded drugmaker to refrain from launching an authorized generic during the 180-day period of generic exclusivity granted to the first generic challenger under the Hatch-Waxman Act.

Such agreements not to launch authorized generics are informally referred to as “no-AG” agreements, but the law is unsettled about whether such agreements can be considered illegal reverse payments.

The FTC's pursuit of disgorgement in Endo is particularly noteworthy, given that district courts are split on whether such “no-AG” agreements and other forms of noncash payments violate antitrust law, antitrust attorneys tell Bloomberg BNA.

Indeed, whether the FTC goes to court—where it can seek equitable remedies—or uses the administrative process, usually depends on how settled the law is, Barry Cutler, who formerly served as director of the FTC's Bureau of Consumer Protection and as an assistant U.S. attorney in the Justice Department, told Bloomberg BNA.

“Unlike the Justice Department, which goes only to court, the FTC often has a choice, except in civil penalty matters, of going to court for a money judgment or bringing an administrative action in a normally friendlier forum,” Cutler said.

Endo brings this hard choice to antitrust cases,” Cutler, now of counsel to BakerHostetler in Washington, said.

FTC Withdrew Guidance

Meanwhile, there is no FTC guidance on when it is appropriate for seek disgorgement as a remedy in competition cases.

In 2003, the commission published a policy statement on monetary equitable remedies in competition cases that set out a framework for determining when the FTC would seek equitable monetary remedies, such as disgorgement of ill-gotten gains, in competition cases. The guidance said that disgorgement and restitution should apply only in exceptional cases.

But, in 2012, the FTC withdrew the guidance, saying that “the practical effect of the Policy Statement was to create an overly restrictive view of the Commission’s options for equitable remedies.”

It also said at the time that “while disgorgement and restitution are not appropriate in all cases, we do not believe they should apply only in ‘exceptional cases,' as previously set out in the Policy Statement.”

When the FTC withdrew the guidance, they were “definitely lowering the bar” for the circumstances in which the commission could seek disgorgement in antitrust cases, Lisl Dunlop, an antitrust lawyer with Manatt Phelps & Phillips in New York told Bloomberg BNA. “The question is,” she said, “lowering it to what?”

The withdrawal of the guidance leaves open the question of when is it appropriate for the FTC to seek disgorgement, she said. “This is a bit of a black box right now,” she said.

No Express Authority

There is even debate over whether the FTC has the authority to seek disgorgement in the first place.

The FTC’s disgorgement authority comes from Section 13(b) of the Federal Trade Commission Act. While it provides the FTC with the power to enjoin anticompetitive acts, it doesn't specifically provide for powers of disgorgement or monetary relief.

While there isn't any statute that explicitly authorizes disgorgement, courts have upheld the FTC's use of it as a logical outgrowth of the FTC’s remedial powers.

For example, in the FTC's reverse-payments case against Cephalon Inc. (now part of Teva Pharmaceutical Industries Ltd.), Cephalon vigorously objected to the FTC's use of the disgorgement remedy and argued that the agency lacked the statutory authority to seek such relief.

Judge Mitchell S. Goldberg of the U.S. District Court for the Eastern District of Pennsylvania rejected Cephalon's argument, finding that ample case law supported the FTC's disgorgement request .

In the past, the FTC employed the remedy primarily in consumer protection cases, not in competition cases.

“Disgorgement, while routinely sought by the FTC in consumer protection cases, wasn't much thought of on the antitrust side until the early 2000s with the Mylan case,” Dunlop said.

In FTC v. Mylan Laboratories, Inc., the FTC alleged that Mylan Laboratories used exclusive licensing arrangements for the supply of the raw material necessary to produce the anti-anxiety drugs lorazepam and clorazepate. Those agreements enabled Mylan to restrain competition and dramatically increase prices, the FTC said, and it sought injunctive and other equitable relief, including disgorgement of ill-gotten profits. In 2000, Mylan ultimately settled the case, agreeing to pay $100 million for distribution to direct purchasers, injured consumers and state agencies.

Muris Advises Caution

Timothy Muris, who chaired the FTC from 2001 to 2004, disagrees with the expansive use of disgorgement in these cases.

“Disgorgement in FTC competition cases should be rare, not routine,” said Timothy Muris, a former chairman of the commission.

“Disgorgement in FTC competition cases should be rare, not routine,” he told Bloomberg BNA.

When he chaired the FTC, Muris told Bloomberg BNA, “We recognized that, given the other potential plaintiffs and forms of liability, FTC disgorgement was a useful, but exceptional, remedy, and would be not be used for most FTC competition cases.”

Muris is currently of counsel at Kirkland & Ellis LLP's Washington, office as well as a George Mason University Foundation Professor of Law at the Antonin Scalia School of Law at George Mason University in Fairfax, Va.

Disgorgement Now Routine?

But antitrust attorneys tell Bloomberg BNA that the FTC doesn't appear to be dissuaded from employing disgorgement despite the criticisms.

“The FTC appears to be making a request for disgorgement in pay-for-delay cases almost routine,” James M. Burns, an antitrust attorney with Baker Donelson's Washington office told Bloomberg BNA.

Dunlop agreed. “They are more aggressively now using the disgorgement remedy in the pay-for-delay context,” she said.

In fact, the Endo case is just the latest reverse-payments case in which the FTC is seeking disgorgement.

The FTC also asked for disgorgement in its 2014 complaint against AbbVie Inc. over a pay-for-delay settlement that allegedly delayed generic drug competition to the testosterone replacement drug AndroGel .

Although the U.S. District Court for Eastern District of Pennsylvania, where the AbbVie case is pending, dismissed the FTC's reverse-payment claims, allegations that the parties engaged in sham patent litigation remain as do the FTC's claims for injunctive and other equitable relief, including equitable monetary relief.

In 2015, the FTC wrested $1.2 billion from Teva in connection with the commission's action challenging anticompetitive pacts with generic drugmakers over the sleep disorder drug Provigil .

The results in the Provigil case are likely to encourage the FTC to continue to seek disgorgement, Cutler said.

“With a $1.2 billion settlement notched in its belt, the Democratic Commissioners [at the FTC] seem eager to go to court for an injunction and a large disgorgement judgment,” Cutler said.

Dunlop said the FTC needs to determine whether seeking equitable monetary relief is a valuable use of its resources.

The issue, she said, isn't whether the FTC should bring these cases in the first place, but whether they should seek cease and desist orders instead of seeking disgorgement, leaving the pursuit of monetary remedies to private actions.

Attorney Lisl Dunlop says the issue isn't whether the commission should bring these cases in the first place, but whether they should seek cease and desist orders instead of disgorgement.

Apply Actavis Standard

Meanwhile, the issue of whether noncash features of drug patent settlement agreements—such as the no-AG agreement in Endo—can be subject to antitrust scrutiny is unsettled.

In 2013, the Supreme Court decided FTC v. Actavis and held that drug patent litigation settlements that include large and unjustified payments will be subject to antitrust scrutiny under a rule of reason analysis .

Rule of reason analysis involves balancing the procompetitive benefits of a challenged business practice against its anticompetitive effects.

Actavis left open many questions, including whether the reverse payment must be in cash to be considered an anticompetitive reverse payment under the Sherman Act.

Indeed, in the Endo case, Commissioner Maureen K. Ohlhausen voted against filing the complaint, and issued a dissenting statement saying the FTC should pursue the case through administrative action.

Although Ohlhausen said she had “reason to believe that the Defendants violated Section 5 of the FTC Act by entering into pay for delay agreements,” she said “[t]he better course would be to pursue this matter administratively.”

Taking the administrative route in Endo case, Ohlhausen said, would allow the commission to “render a thoughtful decision applying the Actavis standard, providing much-needed guidance to courts and firms around the country in connection with this vote.”

What's FTC's Purpose?

David A. Balto, of the Law Offices of David A. Balto in Washington, criticized the administrative approach suggested by Ohlhausen.

Ohlhausen's dissent, Balto said, reflects a difference in opinion about the purpose of the FTC. Balto formerly served as assistant director for policy and evaluation in the FTC's Bureau of Competition.

“Is the purpose of the FTC to clarify the law or is the purpose of the FTC to protect consumers?” he asked.

If the FTC pursues a case administratively and gets a favorable result, defendants can appeal that decision to any appeals court where they transact business, Balto said. Because defendants will likely pick a forum that is pro-defendant, any decision that is favorable to the FTC is likely to be reversed on appeal, he said.

In contrast, when the FTC files a suit in court, he said, the commission gets to pick a forum likely to be favorable to it.

“The purpose of the FTC is to make consumers whole,” he said, not to get “some beautiful but ephemeral result that will be totally destroyed in an appellate court favorable to defendants.”

“At the end of the day, consumers will lose and they'll never get that money back,” he said.

Caution Advised as Law Develops

But according to Cutler, “Ohlhausen should not be seen as eschewing the idea of big money settlements.” Instead, he said, “She is simply urging caution as the law develops.”

Moreover, he said, “If the FTC can establish a per se rule in this area, there will likely be a green light to head for court.”

Under antitrust law, certain categories of anticompetitive conduct are considered illegal per se, which means they are automatically deemed to violate antitrust laws and don't require further analysis.

Cease and Desist Ineffective?

But Herbert Hovenkamp, a professor of law at the University of Iowa in Iowa City told Bloomberg BNA that cease and desist orders may lack the desired deterrent effect in such matters.

“The FTC has no criminal authority, and if disgorgement is unavailable, its principal remedial authority in nonmerger cases is a cease and desist order, which is a kind of slap on the wrist that says ‘don't do this again,' ” Hovenkamp said.

“It's not a very serious remedy and isn't much of a disincentive,” he said.

In contrast, disgorgement sends “a strong message that it's not acceptable for companies to engage in this type of conduct,” Michael Carrier, a professor of law at Rutgers Law School in Camden, N.J., told Bloomberg BNA.

“By going after the behavior and seeking a disgorgement remedy, the FTC is making clear that this is not behavior that they can engage in,” Carrier said.

Duplicative of Private Actions?

Like former FTC chair Muris, some members of the antitrust bar see the FTC's use of disgorgement as excessive and duplicative of private purchaser suits seeking money damages, Hovenkamp said.

This argument doesn't hold water, said John A. Macoretta, an attorney with Spector Roseman Kodroff & Willis, P.C. in Philadelphia, who represents consumers and health plans in class action antitrust suits against pharmaceutical companies.

“Defendants in these cases argue that they can't disgorge more than they make, so I can't see how disgorgement would be excessive,” Macoretta told Bloomberg BNA.

FTC and private payer actions aren't in conflict but instead complement each other, he said. “We never felt there was a conflict; they're complementary,” he said.

According to Hovenkamp, private party actions aren't always sufficient to deter the anticompetitive behavior. “Private plaintiffs have hit a lot of roadblocks in these cases,” he said.

“It's hard to prove causation, and it's been very difficult for them to prove counterfactuals such as when a generic would have entered the market” absent the allegedly anticompetitive patent litigation settlement.”

“There's no question that causation has been an issue in these cases,” Macoretta agreed.

Although the FTC also must prove causation in reverse-payment cases, their burden is easier than that of private plaintiffs, Macoretta said.

“The FTC has a couple of advantages,” he said. For example, he said the FTC doesn't have to deal with the hurdles of class certification and its cases aren't before a jury, so they can often proceed more swiftly than private actions.

If cease and desist orders or private party actions aren't sufficient to deter the anticompetitive behavior, Hovenkamp said, then disgorgement might be a way “to ease up that a little bit and deter the practice by making it costly for companies to engage in it.”

Numbers Are Dropping

Meanwhile, since Actavis was decided in 2013, there is evidence that drugmakers are engaging in these reverse-payment deals less frequently.

Drug Patent Litigation Settlements Filed With the FTC

In a March blog post, the FTC said data on patent deals for 2014, the first year of data since Actavis, show that “potentially unlawful reverse-payment settlements appear to be declining.”

In 2014, although the total number of overall patent settlements filed with the FTC and the Department of Justice—as required under the Medicare Modernization Act (MMA) of 2003—climbed, the percentage of those settlements that contained reverse payments dropped. In fact, the FTC said, more than 80 percent of those patent settlements didn't involve any compensation to the generic company.

The total number of such deals involving potentially unlawful reverse-payment settlements dropped from 29 in fiscal year 2013 to 21 in FY 2014, a decrease of about 28 percent, the FTC's most recent figures show. This reverses an earlier trend when potential pay-for-delay agreements contained in MMA filings were on the rise, from three in FY 2005 to 40 in FY 2012.

“The recent decline in settlements with reverse payments may signal that the Commission’s commitment to combat anticompetitive agreements is finally paying off,” the FTC said in the blog.

FTC Efforts Will Continue

Although pharmaceutical companies may be using reverse-payment settlements less frequently in the wake of Actavis, that doesn't mean the FTC is pulling back from this area.

“There's still a role for the FTC to play,” Carrier said. “This is still potentially severe anticompetitive conduct.”

“We'll see continued aggressive efforts to go after reverse-payment settlements,” Jennifer Rie, Bloomberg Intelligence analyst in New York, predicted.

“Pharmaceutical companies have been on notice for quite a while that the FTC is going to challenge any agreement that goes beyond side agreements or saved litigation costs,” she said.

Actavis Redux?

More guidance on these issues may be on the way for the FTC and private parties involved in reverse-payment cases.

The case was sent back to the U.S. District Court for the Northern District of Georgia for trial. Discovery in that case is set to close in December, with summary judgment motions due in February 2017.

To contact the reporter on this story: Dana A. Elfin in Washington at

To contact the editor responsible for this story: Allison Gatrone at

For More Information

The FTC v. Endo Pharmaceuticals complaint is at

Request Health Care on Bloomberg Law