Antitrust and Unfair Competition Law
Applying Actavis, the FTC Reverses Initial Decision and Finds that Impax Labs Entered Into Illegal Pay-for-Delay Agreement
Bethany Caracuzzo
Pritzker Levine LLP
On March 29, 2019 the Federal Trade Commission (“FTC” or “Commission”) announced its Opinion and Final Order against generic pharmaceutical manufacturer Impax Laboratories LLC (“Impax”). The Commission ruled that Impax engaged in an illegal pay-for-delay, or “reverse payment” settlement to delay the sale of a generic version of Endo Pharmaceuticals, Inc. (“Endo”)’s branded extended-release opioid pain reliever, Opana ER. The Opinion reverses the May 18, 2018 Initial Decision in which the Chief Administrative Law Judge dismissed all antitrust charges against Impax after an administrative trial.
The unanimous Opinion, approved by all members of the five-person Commission panel, finds that Impax contrived with Endo “to accomplish precisely what led the Court in Actavis to subject reverse payment settlements to antitrust scrutiny – i.e. the elimination of the risk of competition in return for sharing monopoly rents.” March 29, 2019 Opinion (“Opinion”), at 3. In FTC v. Actavis, the Supreme Court held that reverse payment settlements, even when thy limit competition under the scope of the patent, can still violate antitrust laws and are to be analyzed under the rule of reason. Id., citing to Actavis, 570 U.S. 136, 158-60 (2013).The Commission noted that “[t]his case provides the Commission our first opportunity to apply Actavis, and to develop the rule of reason analysis that it directs. Id. at 3.
And the Commission did just that. Applying a balancing test used in other rule of reason cases, informed by Actavis, the Commission found that complaint counsel for the FTC met their burden in establishing a prima facie case under Actavis of a large, unjustified payment was made in exchange for deferring entry into the market or for abandoning a patent suit, plus the existence of market power. While the burden shifted to Impax to provide evidence of a credible procompetitive reason, Impax did not make an effort to show that the reverse payment portion of the agreements benefited competition and therefore failed to satisfy that burden. Lastly, while not required to because the burden did not shift back to the FTC, complaint counsel also demonstrated that there were less restrictive alternatives to the reverse payment agreement.
I. Background
The FTC’s January 2017 administrative complaint against Impax charged that, in June 2010, Impax and Endo illegally agreed that Impax would refrain from marketing a generic version of Endo’s Opana ER until January 2013. In exchange, Endo paid Impax more than $112 million. Opinion, at 3. The FTC alleged that this reverse-payment settlement was an unfair method of competition in violation of Section 5(a) of the Federal Trade Commission Act.
Rather than a simple cash payment from Endo to Impax, the FTC alleged that the reverse-payment settlement involved an unlawful transfer of value in several forms: (1) freedom from generic competition during Impax’s first 180 days on the market by virtue of Endo’s agreement to refrain from offering an “authorized generic” version of Opana ER (the “No-AG Commitment”); (2) a contingent payment – ultimately worth $102 million – designed to ensure that Impax recouped the value of the No-AG Commitment in the event Endo destroyed the market for oxymorphone ER (the “Endo Credit”); and (3) a payment to Impax of $10 to $40 million, purportedly for an independent development and co-promotion deal (the “DCA”). Opinion, at 3-4. As a result, the FTC’s complaint counsel alleged, patients were denied the opportunity to purchase lower-cost generic versions of Opana ER until at least January 2013, and were forced to pay hundreds of millions of dollars a year more for the branded product. Id.
Endo quickly settled the FTC’s claims against it regarding its 2010 patent settlement for Opana ER in February 2017. See Stipulation for Permanent Injunction, FTC v. Endo Pharmaceuticals, No. 17-cv-00312-WHO (N.D.Cal. Feb.2, 2017) (ECF No. 25). In the stipulation, Endo agreed not to enter into any agreements that would restrict the development of generic drug products or that would pay any manufacturer to delay development of a generic drug product. Id., at 14. Endo also agreed to submit all settlements and agreements involving branded and generic drugs to the FTC for prior approval, amongst other restrictions Id.
The case proceeded to a 12-day trial against Impax, which was completed in November 2017. In his Initial Decision, the Administrative Law Judge (“ALJ”) concluded that the FTC failed to prove that the agreement between Impax and Endo violated Section 5 of the Federal Trade Commission Act, and that, “the magnitude and extent of any anticompetitive harm is largely theoretical” finding that it was unlikely that Impax would have entered the market with its generic before the agreed date of January 2013 because patent litigation was ongoing at the time and therefore such a launch would have been considered “at risk.”[1] Initial Decision, at 7; see also, id., at 62-73: Findings of Facts Nos. 450 – 548. The ALJ also held that the evidence submitted failed to prove that the agreement between Endo and Impax was “anticompetitive on balance” because the procompetitive benefits of the agreement outweighed any anticompetitive harm, and, therefore, the evidence failed to demonstrate that the deal constituted an unreasonable restraint of trade. Id. This resulted, the ALJ found, in a failure to prove a violation of Section 5 of the Federal Trade Commission Act, and thecase was dismissed. Id.
The FTC appealed, and oral arguments were held on October 11, 2018. Opinion, at 4. The applicable standard of review for the Commission’s review of an ALJ’s initial decision following an administrative trial is de novo. Id., at 14.
II. Antitrust Analysis
A. The Hatch-Waxman Act and the Actavis Decision
The Commission dedicated much of its Opinion to an analysis of the Hatch-Waxman Act and the Actavis decision. Under the Hatch-Waxman Act, when a manufacturer seeks to market a new prescription drug, it must submit a New Drug Application (“NDA”) and undergo a long and costly testing process, and identify the number and expiration date of any relevant patents. Opinion, at 4, citing 21 U.S.C. § 355(b)(1). Once approved by the FDA, a manufacturer seeking to market a generic version may file an Abbreviated New Drug Application (ANDA) certifying that the product contains the same ingredients as, and is biologically equivalent to, the brand-name drug. Id., citing to 21 U.S.C. § 355(j)(2)(A)(ii),(iv). The generic manufacturer must certify to the FDA that its generic drug will not infringe on any valid patents. Id., at 5, citing to 21 U.S.C. § 355(j)(2)(A)(ii),(iv)(IV).
“This certification ‘automatically counts as patent infringement’ and entitles the brand manufacturer to sue.” Id., quoting Actavis, 570 U.S. at 143; see 35 U.S.C. § 271(e)(2)(A). If the branded company files suit within 45 days, the FDA may not approve the generic for 30 months, while the parties litigate their dispute. Id. If there is no resolution of the patent litigation within those 30 months, the FDA may approve the generic, which allows the generic manufacture to launch its drug, “at risk” of being liable for the brand-name manufacturer’s lost profits, should the court proceeding ultimately uphold the patent. Id.
The purpose of adopting the Hatch-Waxman Act, the Commission opines, is to give generic manufacturers a special incentive to be the first to file an ANDA so that the first-filer may “‘enjoy a period of 180 days of exclusivity’ from other generic competition” which could be worth hundreds of millions of dollars. Opinion, at 5, quoting Actavis, 570 U.S. at 144.
In Actavis, the Supreme Court held that reverse payment settlements in which a branded drug manufacturer pays a generic entrant to “abandon its patent challenge under the Hatch-Waxman Act” can have “significant adverse effects on competition” and “may keep drug prices at monopoly levels ‘while dividing that return between the’ branded and generic manufacturers.” 570 U.S. at 148, 154, 156.
This does not mean that every time money is exchanged between branded and generic manufacturers of a bio-equivalent drug amounts to an antitrust violation. Supreme Court noted that, where a payment reflects “traditional settlement considerations” there is not the same concern as where a “patentee is using its monopoly profits to avoid the risk of patent invalidation or a finding of non-infringement. Actavis, 570 U.S. at 156. What the Actavis court found was that a reverse payment settlement “can sometimes diminish competition in violation of the antitrust laws” and that such agreements are not presumptively unlawful, but should be subject to rule of reason analysis. Id., at 158-159. The structuring of the rule of reason antitrust analysis was to be “le[ft] to the lower courts.” Id., at 159-160.
B. The Commission’s Application of Actavis
Informed by other courts applying Actavis, the Commission applied a burden-shifting analysis, with the plaintiff first having the burden to prove that “the challenged restraint has a substantial anticompetitive effect that harms consumers in the relevant market.” Id. at 15 citing to Ohio v. American Express, 138 S.Ct. 2274, 2284 (2018)(“Amex”) (other citations omitted). Provided the plaintiff shows anticompetitive harm, the burden shifts to the defendant to show a procompetitive rationale for the restraint. Id., citing to Amex, 138 S.Ct. at 2284. If the defendant does so, the burden shifts back to the plaintiff to demonstrate that the procompetitive efficiencies could reasonably be achieved through less anticompetitive means. Id., citing Amex, 138 S.Ct. at 2284.
If the plaintiff carries this burden, it prevails. If it does not, the adjudicator proceeds to weigh the harms and benefits against each other to judge whether the challenged behavior is, on balance, reasonable. Id., citing Law v. NCAA, 134 F.3d 1010, 1019 (10th Cir. 1998). “Cases do not often reach the balancing stage.” Id.
The Commission applied this burden shifting test to the Impax-Endo agreement.
1. The FTC’s Prima Facie Case under Actavis
a. A large unjustified payment was made
A plaintiff may make out a prima facie case by proving a large, unjustified payment was made in exchange for deferring entry into the market or for abandoning a patent suit, plus the existence of market power. Opinion, at 16, citing to In re Nexium (Esomeprazole) Antitrust Litig., 842 F.3d 34, 59 (1st Cir. 2016). Such a payment “raises a red flag signaling that the parties may not merely be settling valid claims, but may actually be entering an unlawful agreement…” and would “be an irrational act unless the patentee believed the generic…would cut into its profits.” Id. (citation omitted).
When analyzing the size of the payment, factfinders should consider all value, not just cash, that is transferred through settlement. Opinion, at 17. The Endo/Impax settlement had both cash and non-cash contingent forms of value that could be considered “large.” Id.
The No-AG Commitment, which obligated Endo not to market an authorized generic of Opana ER during the six months’ of Impax’s exclusivity was valued by Impax at between $23 and $33 million in projected revenue. Opinion, at 19. The Endo Credit, which Impax would receive if Endo moved the market away from the original formulation of Opana ER before Impax could bring its generic to market, sometimes called “product hopping,” resulted in Endo paying Impax $102 million. Id., at 20. The DCA was a written agreement separate from, but incorporated into, the settlement agreement. Under the DCA, Endo agreed to make a $10 million upfront payment to Impax, which it did, with the possibility of paying $30 million more in milestone payments for the development of a different and unrelated drug called IPX-203, and Impax and Endo would share in promotional responsibilities for IPX-203, and also in profits if it was marketed. Id. The DCA’s inclusion in the settlement agreement led both the ALJ and the Commission to consider it part of the “payment.” Id., at 19-20.[2] Endo also granted Impax a broad patent license with respect to the oxymorphone ER products covered by Impax’s ANDA. This freedom to operate was also held to constitute value exchanged between the parties. Opinion, at 22.
In addition to being large, the payment was “unjustified.” In making their prima facie case, plaintiff’s counsel “need not negate every conceivable justification for the payment, nor pre-emptively refute evidence of value not in their possession or control…” Opinion, at 18. The Initial Decision found that, including the No-AG Commitment, Impax received a large and unjustified payment as part of the settlement at issue. Impax did not challenge that finding, and the Commission found “likewise” and concluded that the FTC “met their burden here.” Id., at 16, 19.
b. The payment was made in exchange for restraint of trade
A large unjustified payment triggers antitrust scrutiny under Actavis if it is consideration in exchange for a restraint of trade. Opinion, at 22. The ALJ concluded that any anti-competitive harm was “largely theoretical” because Impax was unlikely to have introduced a generic Opana ER before January 2013, the agreed-upon entry date under the settlement at issue.
The Commission disagreed. A plaintiff does not have to prove that entry would have actually or probably occurred earlier, only that the harm Actavis recognizes is the elimination of the risk of competition. Opinion, at 23, citing to Actavis, 570 U.S. at 157 (requiring a fact-finder to conclude whether and one what competition would have incurred asks too much)(emphasis in original). The “antitrust problem” is that entry might have been earlier, or the risk of competition not eliminated, had the reverse payment not been made. Id., citing to King Drug Co. of Florence, Inc. v. Smithkline Beecham, Corp., 791 F.3d 388, 408 (3d Cir. 2015). “Antitrust liability can thus attach even where the parties entered into a settlement without knowing for certain that they were, in fact, eliminating competition.” Id., citing to Actavis, 570 U.S. at 147.
In this case, there was “ample evidence” that there was a real threat of competition from Impax. It had an approved ANDA since June 2010, senior management had considered launching “at risk,” and the company had taken a number of steps to prepare for launch. Opinion, at 24. The settlement agreement eliminated risk of competition from Impax by halting its efforts. Id.
c. Endo had market power
Under the rule of reason, a plaintiff must generally prove that the defendant possessed market power in the relevant market. Opinion, at 25 (citations omitted). Market power is the ability to charge prices above what would prevail in a competitive market by restricting output below competitive levels. Id. (citations omitted). Both the ALJ and the Commission found that Endo possessed the requisite market power, and, accordingly, that complaint counsel met their burden. Id., at 25, 26.
The Commission engaged in a fulsome analysis of the relevant market and Endo’s market power in the Opinion, including review of complaint counsel’s and Impax’s competing economic experts’ opinions, which I will not fully address here. The Commission noted that, while in most cases arising in the Actavis context a brand and its generics will constitute the relevant product market, this is not always the case, and a decision-maker must still analyze the relevant market. Opinion, at 26, fn. 29.
In summary, Impax’s expert Dr. Addanki argued that the relevant antitrust market consisted of all long acting opioids, while complaint counsel’s expert Professor Noll argued that the market was comprised of just branded and generic oxymorphone ER. Id. at 27. The Commission found that the evidence submitted by Professor Noll is “consistent with economic research showing that generic entry is, by far, the most important source of price competition for pharmaceuticals – generally far more important than different compounds in the same therapeutic class.” Id., at 28 (citations omitted).
The submitted evidence also was found to support that Endo “clearly held market power in this highly concentrated market” as “[p]rior to entry by Actavis in 2011, Endo was the only player on the market – in other words, it had a monopoly.” Opinion, at 30. Furthermore, the entry of generic oxymorphone ER caused Opana ER to lose market share and the average price fell, indicating that pre-entry prices were above the competitive level. Id. “The substantial evidence of Endo’s market power is consistent with the inference permitted by Actavis:that the presence of a large and unjustified payment may itself signal market power.” Id., at 31. There was also “strong evidence” that Endo’s market power was durable and that there were substantial barriers to entry. Id.
The Commission concluded that the relevant market consists of branded and generic oxymorphone ER and that Endo commanded market power. Opinion, at 31.
2. Impax’s Evidence of Procompetitive Justifications
Because the FTC’s counsel made out a prima facie case that Impax harmed competition, the burden was held to shift to Impax to show a procompetitive rationale for the restraint. Opinion at 31, citing to Amex, 138 S.Ct. at 2284.
The ALJ found, as discussed above, that the No-AG Commitment and Endo Credit had the purpose and effect of inducing Impax to give up its patent challenge and agree not to launch a generic; which Impax did not challenge on appeal. Opinion, at 31. The ALJ also found, however, that other provisions of the settlement benefited competition by protecting Impax. Id., at 31-32.
The Commission disagreed, finding that Impax did not meet its burden of linking the procompetitive benefits to the challenged restraint, i.e. the use of a reverse payment to eliminate the risk of generic entry before January 2013. Opinion, at 32. Courts are required to look at the specific restraint to see if it benefits competition, not the agreement as a whole.[3] Id. (citations omitted). Thus, Impax was required to “articulate the specific link between the challenged restraint the purported justification” and demonstrate that the restating in fact “advance[s] procompetitive goals.” Id. (citations omitted); see also Actavis, 570 U.S. at 158.
Even if there were some procompetitive benefits alleged, those benefits must bear a “logical nexus” to the restraint. Opinion, at 36 (citations omitted). Under Actavis, Impax needed to show that the reverse payment leads to more competition than would have resulted without the payment. 570 U.S. at 156, 158. The Initial Decision did not require this link, and therefore was an incorrect statement of law. Id. Looking to whether Impax made that showing, the Commission concluded Impax never even attempted to. Id., at 37.
Therefore, the Commission concluded Impax failed to carry its burden to establish procompetitive justifications for its acceptance of a large reverse payment to delay generic entry. Opinion, at 39.
C. The FTC Showed A Less Restrictive Alternative
As Impax was found not to bear its burden to connect credible procompetitive justifications to the restraint, the burden would have shifted back to the FTC to demonstrate that the “procompetitive efficiencies could be reasonably achieved through less competitive means. Opinion, at 39 (citations omitted). While the burden did not shift, the Commission found that complaint counsel did demonstrate that a practical less restrictive alternative existed: that Impax could have settled without a reverse payment for delayed entry. Id., at 40; see also Actavis, 570 U.S. at 158 (“parties may well find ways to settle patent disputes without the use of reverse payments”). Specifically, no payment but with an earlier entry date. Id., at 42. Contrary to Impax’s assertion that such a settlement would not be possible, expert for complaint counsel, Professor Max Bazerman, provided numerous studies, covering more than a decade, that demonstrated the feasibility of such settlements, and that over 80% of 120 patent settlements tracked by the FTC in the first full year after Actavis did not include compensation flowing from the branded to the generic firm. Id. at 40-41.
The Commission therefore ruled that Impax engaged in an unreasonable restraint of trade in violation of Section 1 of the Sherman Act, 15 U.S.C. § 1, and an unfair method of competition in violation of Section 5(a) of the Federal Trade Commission Act, 15 U.S.C. § 45(a).
D. The Remedy Imposed
The Commission has wide latitude to fashion a remedy, provided it has a reasonable relation to the unlawful practices found to exist. Opinion, at 42 (citations omitted). Because settlements involving reverse payments continue to be entered into, and because Impax remains an active participant in the pharmaceutical industry and “regularly engages” in patent infringement litigation, the Commission found prospective relief to be warranted. Opinion, at 44.
The Commission’s Final Order prohibits Impax from entering into any settlements between a brand and generic that include either a commitment, or the payment of money in exchange for a commitment, by the generic manufacturer to not research, develop, manufacture, distribute, market or sell a drug product for which one or more patent infringement claims are settled, for any period of time. Impax is also prohibited from entering into any agreement with any Oxymorphone ER manufacturer or any new drug applicant to the FDA that prevents or restricts competition between Oxymorphone ER products. See April 3, 2019 Final Order, at 3. Impax must also design, maintain and operate an Antitrust Compliance Program which is to include mandatory training, the development of policies and procedures, employee discipline, and retention of records. Id., at 4-5. Impax must then update the Commission of its progress via compliance reports that are to be submitted annually for at least the next 19 years. Id., at 5. Impax is also required to notify the FTC of any change in corporate control at least 30 days prior to such change and the FTC is granted full access to review Impax’s records and documents, and to interview any of its officers, directors or employees, at any time. Id., at 6.
III. Conclusion
Impax Labs reveals the FTC’s interpretation and application of the rule of reason analysis to reverse payment settlement cases, as directed by the Supreme Court in Actavis. It can be assumed that the Commission will continue to apply the burden shifting analysis it utilized here, and that for the procompetitive justifications rationale that defendants are required to prove, the Commission will look narrowly at whether the reverse payment portion of the settlement agreement, rather than the settlement as a whole, benefits competition. The Commission is also inclined to believe that less restrictive, no-payment settlements of patent disputes between branded and generic drug product manufacturers are possible.
1. An “at risk” launch occurs when a generic firm begins marketing its product before a non-appealable decision is issued in the relevant patent litigation. Opinion, at 5, fn.7.
2. The ALJ found the $10 million DCA payment to be justified. Even without the Endo Credit money, however, the ALJ still concluded that the entirety of the agreement between Impax and Endo satisfied the “large and unjustified” requirement. Opinion, at 21. The Commission, on appeal, found the “peculiar circumstances surrounding the DCA suggested that the agreement may have been a means of masking value transferred in exchange for eliminating risk of competition.” Id.
3. Impax did not provide, and the Commission could not find, any cases that supported that it must consider the competitive effects of the entire settlement agreement rather than the allegedly uncompetitive terms. Opinion, at 34-36.