Patent Settlement Agreements – How will the US experience impact on the European Commission's decision-making?

This article was produced by Olswang LLP, which joined with CMS on 1 May 2017.

In rejecting the FTC's case, the Eleventh Circuit recognised that one of the major difficulties it faced was deciding how to resolve the tension between the pro-exclusivity doctrine of patent law and the pro-competition doctrine of antitrust law.

Indications are that Statements of Objections are imminent in several of the antitrust cases opened by the European Commission following its 2008/2009 pharmaceutical sector inquiry. A number of these focus on patent settlement agreements between originator and generic companies, which the Commission considers to be the cause of delay to generic market entry. Given the US Federal Trade Commission's ("FTC") failure in its campaign to successfully challenge such agreements in certain of the US circuit courts, industry players are eagerly awaiting an indication as to how the Commission proposes to frame its legal case.

The FTC's latest set back, in which it failed to convince the US Court of Appeals for the Eleventh Circuit that a so-called "pay for delay" agreement violated US antitrust laws, will be of little comfort to the Commission. The judgment will however help to reassure the pharma companies involved in similar investigations in Europe, as it highlights some of the major legal obstacles the Commission will face in trying to successfully prosecute its ongoing cases. This update looks at some of the pertinent aspects of the US judgment in more detail.

The case, brought by the FTC in 2009 against Solvay Pharmaceuticals and generic companies Watson Pharmaceuticals, Par Pharmceutical and Paddock Laboratories, centred on whether a patent holder which enters into a "pay for delay" settlement with a defendant drug manufacturer should be prosecuted under US antitrust laws. The lynchpin of the FTC's complaint was its allegation that Solvay, the patent holder, probably would have lost the underlying patent infringement action.

In rejecting the FTC's case, the Eleventh Circuit recognised that one of the major difficulties it faced was deciding how to resolve the tension between the pro-exclusivity doctrine of patent law and the pro-competition doctrine of antitrust law. However, the Court chose to follow precedent established in Valley Drug Co. v Geneva Pharmaceuticals, Inc., Shering-Plough Corp. v FTC and Andrx Pharmaceuticals, Inc v Elan Corp., by deciding that, absent sham litigation or fraud in obtaining the patent, parties to a pay for delay settlement should be immune from antitrust liability if the anticompetitive effects of their settlement fall within the potential exclusionary scope of the patent.

The settlement at issue concerned the prescription drug, Androgel, a topical gel that treats the symptoms of low testosterone in men. Solvay was granted patent protection until 2020 against a particular gel formulation of the product. When generic manufacturers Watson and Paddock attempted to bring their own versions of the product to market in 2003, Solvay launched patent infringement proceedings. Following several years of litigation, Solvay agreed a settlement with the generics (including Par, which had partnered with Paddock) under which, inter alia, they would not market generic Androgel until 31 August 2015 and Solvay would pay an annual amount to each of the parties. As required under US law, the agreement was notified to the FTC which subsequently filed an antitrust lawsuit against the parties.

In its judgment, the Eleventh Circuit set out that a proper analysis of the antitrust implications of a pay for delay settlement would be limited to examination of (i) the scope of the exclusionary potential of the patent; (2) the extent to which the agreements exceed that scope; and (3) the resulting anticompetitive effects. It recognised that in circumstances where the settlement agreements contain provisions that restrict competition beyond the scope of the patent, such as in Andrx Pharmaceuticals, Inc v Elan Corp. where it was agreed that the generic manufacturer would refrain from ever marketing a generic version of the patented drug, there would be a plausible antitrust claim. However, the Court did not agree with the FTC's contention that it should decide an antitrust claim based on the "likely" outcome of a patent infringement claim - something it likened to "retroactively predicting from a past perspective a future that never occurred". The Court considered such a prediction would most likely be unreliable, not least because the non-specialised circuit courts were "ill-equipped to make a judgment about the merits of a patent infringement claim".

The Court also rejected the FTC's "ominous" warning that the alternative to prosecution was to allow patent holders and potential competitors "to forgo litigation over patent infringement and split up an ongoing stream of monopoly profits, even in situations in which it is evident that it is more likely than not that the patent would be found invalid". The Court's view was that if a patent actually is vulnerable there will be plenty of other generic manufacturers ready and willing to launch their own challenges and while a patent holder may be willing to share monopoly profits with the first one or two, it would not likely want to see those profits eaten away by many more.

This case highlights a major divide among the US circuit courts over the treatment of patent settlements under the Sherman Act. The Sixth Circuit and District of Columbia Circuit hold these agreements to be per se illegal while the Eleventh, Second and Federal Circuits will only consider them to be illegal where they go beyond the patent's potential exclusionary scope.

The US experience clearly raises many questions for the European Commission as it prepares to unveil its own legal cases against patent settlement agreements involving companies such as Servier and Lundbeck. With its continued monitoring of patent settlement agreements over the past few years, it seems likely that the Commission is ready to attack any agreements which seek to protect monopoly profits although we will have to wait and see just how far it is willing to go. What is for certain, however, is that pharmaceutical companies will find plenty of ways to fight back. This may yet turn out to be the next great battle in the continuing conflict between intellectual property rights and competition law.

UPDATE (18 July 2012)

Further divergence in the US circuit courts' approach to patent settlements has been highlighted this week in a decision which has, somewhat surprisingly, resoundingly endorsed the FTC's position. The decision of the Court of Appeals for the Third Circuit, which paves the way for a class action against Schering-Plough and Upsher-Smith Laboratories, states that "pay for delay" agreements could potentially give rise to antitrust damages claims as "a payment flowing from the innovator to the challenging generic firm may suggest strongly the anti-competitive intent of the parties entering into the agreement".

The pay for delay settlement in question involved a 1997 agreement under which Upsher-Smith Laboratories was paid $60m over three years by Schering-Plough in return for not marketing its generic potassium supplement, K-Dur, until September 2010. The FTC challenged the agreement back in 2001 but, as mentioned above, was defeated on appeal in the Eleventh Circuit.

Given the run of inconsistent rulings, it now seems likely that the Supreme Court will weigh in to review the issue. Will the European Commission be encouraged by the latest US ruling and issue its statements of objections? Or will it continue to stall until the issue has reached a more conclusive resolution on the other side of the Atlantic?

US cases:

Re: K-DUR Antitrust Litigation (3rd Cir. July 16, 2012)

FTC v Watson Pharmaceuticals Inc. No. 10-12729 (11th Cir. April 25, 2012)

Valley Drug Co. v Geneva Pharm., Inc., 344 F.3d 1294 (11th Cir. 2003)

Schering Plough Corp. v FTC, 402 F.3d 1056 (11th Cir. 2005)

Andrx Pharm., Inc. v Elan Corp., 421 F.3d 1227 (11th Cir. 2005)