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The new five-member Federal Trade Commission will weigh in this summer on an Obama-era enforcement priority on the evolving question of when it’s illegal to delay generic versions of brand drugs.
The case presents important questions about how antitrust law intersects with patent infringement settlements. It also may provide insights into the enforcement priorities of the Trump administration’s FTC. The commissioners hearing the case in August will be different from those who voted to file the complaint in January 2017.
In a rare victory, Impax Laboratories Inc. prevailed over the FTC’s challenge to its patent settlement with brand drugmaker Endo Pharmaceuticals, convincing an FTC administrative law judge that the agreement was harmless. The FTC staff appealed Michael Chappell’s May 18 decision to the full commission the day it was issued.
Chappell’s decision offered a rare, full “rule of reason” analysis of how to balance the possible benefits of such agreements against the threat companies might be using them to thwart competition. “This is unusual,” University of Memphis Law School Professor John Newman told Bloomberg Law. “Balancing cases are rare.”
Enforcement against drugmakers’ agreements to delay generic competition to name-brand drugs was a signature priority of the Obama administration’s FTC. The agency won an important victory in the U.S. Supreme Court in FTC v. Actavis in 2013 that set a new standard for reviewing whether such agreements violate the antitrust laws.
But over the ensuing years, the law has developed slowly. There has been only one full-fledged jury trial on an alleged “pay-for-delay” deal among drug companies, which yielded a mixed verdict.
A rule of reason test, mandated by the Supreme Court in Actavis, involves three steps that shift the burden of proof between the parties. Cases typically turn on the earlier steps in the analysis, making it rare for a court to work through all three steps.
Chappell first determined that the FTC staff carried its burden of showing that Endo, suing for patent infringement, made a large payment to defendant Impax. Ordinarily, the accused patent infringer pays to exit a lawsuit, so a “reverse payment” from the patent holder like this one sometimes suggests a secret anticompetitive deal, the Supreme Court held.
But then Chappell accepted the argument that the deal benefited competition because it removed risks Impax faced in launching a generic, which may have meant the generic launched on the market sooner than it would have otherwise. Chappell saw no other less harmful way Impax could have removed those risks.
Chappell’s ruling against the FTC is unusual because it applies a full burden-shifting and balancing analysis, Newman said. An empirical study by Rutgers Law School Professor Michael Carrier found that such analysis has been used in only 2 percent of cases between 1999 and 2009. In the preceding 20 years, it was used in 4 percent of cases.
Chappell’s conclusion based on that analysis is even rarer. Carrier’s study found only two decisions in a decade, out of 222 total, in which a defendant’s claims of pro-competitive benefits carried the day.
Newman said Chappell weighed a weak showing of harm to the market against what he considered a strong showing of benefits from the patent settlement.
But Carrier told Bloomberg Law the decision doesn’t comport with the analysis the Supreme Court proscribed in Actavis. Actavis “limited the justifications that courts were to consider,” he said. The justices said the argument that a generic drug got to market earlier wasn’t appropriate when they disposed of the older legal test.
A brand-new slate of FTC commissioners will decide on the previous FTC’s 3-0 decision to challenge Impax and Endo’s deal as anticompetitive. Chairman Joseph Simons and three other commissioners are new, and the entire commission may consist of new members by the time it hears Impax’s case. “It’s a weird circumstance,” Christopher Sagers, a law professor at Cleveland State University, told Bloomberg Law.
If the FTC decides in Impax’s favor, it would be a big deal. Since at least the mid-1990s, the FTC has never dismissed an action on appeal that it previously voted to put before an administrative law judge, Republican Commissioner Maureen Ohlhausen noted in a 2016 paper.
Ohlhausen, who will sit on the commission until she’s confirmed as a judge for the U.S. Court of Federal Claims, is the only member who was present at the time the complaint was filed. The other Democratic commissioners who brought the action were then-Chairwoman Edith Ramirez and Terrell McSweeny.
If Ohlhausen is confirmed before August, a likely possibility, the FTC will see a 100 percent turnover from when the Impax complaint was filed. Republican Christine Wilson is slated to begin her seven-year term when Ohlhausen departs.
The case will offer the new commission its first chance to weigh in on the generic drug issue as it has developed over five years of active FTC enforcement. All briefing is due in July, and oral argument is expected in early August.
Any decision is likely to be further appealed to the U.S. Court of Appeals for the D.C. Circuit.
The case is In re Impax Laboratories Inc. , F.T.C., No. 9373, 5/18/18 .
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