FTC and Cephalon Ink $1.2 Billion Settlement in Provigil “Pay-for-Delay” Litigation

On May 28, 2015, the FTC announced that it settled its longstanding antitrust suit against Cephalon, Inc., which is now owned by Teva Pharmaceutical Industries, Ltd.1 The FTC’s suit alleged that Cephalon unlawfully protected its monopoly on Provigil—a sleep disorder drug—by making payments to four generic manufacturers to drop their patent challenges and forgo marketing of their generic products for six years under their respective patent settlements.2

The FTC/Cephalon settlement includes two components: (1) equitable monetary relief of $1.2 billion; and (2) a conduct prohibition that prevents Cephalon/Teva from entering into agreements similar to the ones challenged by the FTC in the Provigil “pay-for-delay” litigation.3

According to the FTC, the $1.2 billion in equitable relief will be “available to compensate purchasers, including drug wholesalers, pharmacies, and insurers, who overpaid because of Cephalon’s illegal conduct.”4 Cephalon has already settled with some of these purchasers in related private litigation—including a $512 million settlement with a group of direct purchaser plaintiffs—and may settle with additional parties in the near future. Payments made in those cases can be credited against the FTC fund, with the remainder of the $1.2 billion balance paid to the U.S. Treasury.5

In terms of the prohibited conduct, Cephalon is barred from entering agreements where there is: (1) a payment by the New Drug Application (NDA) holder6 to the Abbreviated New Drug Application (ANDA) filer7; and (2) an agreement by the ANDA filer not to research, develop, manufacture, market, or sell the drug product that is the subject of the patent litigation, for any period of time. In the proposed order, “payment” includes any “transfer of value by the NDA holder to the ANDA filer (including, but not limited to, money, goods or services), regardless of whether the ANDA filer purportedly transfers value in return.”8 The prohibited payments, in the form of side business agreements, must be either: (i) expressly contingent on the patent settlement agreement; or (ii) agreed to during the 60 day period starting 30 days before executing the patent settlement agreement and ending 30 days after executing the patent settlement agreement.9 Condition (ii) is significant, as it bars Cephalon/Teva from entering into a business deal with a competitor within 30 days of a patent litigation settlement with that same competitor. Finally, the order specifically excludes saved litigation expenses (typically assessed from the perspective of the NDA holder)—up to $7 million—from the definition of a “payment.”

There are several key takeaways from the FTC/Cephalon settlement for pharmaceutical companies involved Hatch-Waxman litigation.

  • First, the FTC can and will seek disgorgement of ill-gotten gains in its “pay-for-delay” litigations and, particularly for the NDA holder, this could result in significant financial exposure. In particular, disgorgement has been a focus for the FTC in more recent years, as the FTC sought this remedy in the Provigil litigation after generic entry occurred in 2012 (rendering injunctive relief moot), and included disgorgement as a remedy in its recent complaint against AbbVie relating to the drug AndroGel.
  • Second, consistent with Actavis, the FTC continues to allow for some transfer of value from the NDA holder to the ANDA filer for saved litigation costs, and sets the cap for such costs at $7 million. In the FTC’s 2003 Schering-Plough decision, it set that the cap for saved litigation costs at a maximum of $2 million10, so it is clear that the FTC has adjusted this figure since that time to account for inflation and perhaps the increased cost of patent litigation. Indeed, the FTC/Cephalon order provides room for an increase in the $7 million figure in the future, based on any annual changes in the Producer Price Index for Legal Services. This provision should effectively create a safe harbor for saved litigation payments in pharmaceutical patent settlements of up to $7 million, absent extraordinary circumstances.
  • Third, the FTC continues to take the position that transfers of value can take forms other than simple cash payments. Indeed, all of the FTC’s recent litigations and publically disclosed investigations in the “pay-for-delay” space have involved allegations of a transfer of value from the NDA holder to the ANDA filer through side business arrangements, suggesting a heavy skepticism by the agency regarding such transactions. Certainly, going forward, the Third Circuit’s forthcoming decision in Lamictal will be influential in guiding courts on whether Actavis is limited to cash payments only, thereby supporting or rejecting the FTC’s position on this issue. In particular, the Lamictal court will determine whether a “no-authorized generic” provision can constitute a payment under Actavis.11 While that type of alleged “payment” was not at issue in the Provigil litigation, the FTC did note in its press release that such “promise[s] can function as an anticompetitive reserve payment.”12
  • Last, in prohibiting side agreements that are within 30 days—before or after—the settlement agreement, the FTC suggests that business transactions that are truly independent from patent litigation settlement agreements will not be considered “payments” under Actavis, particularly where there is some “cooling off” period between the two sets of agreements. While some FTC officials recently have alluded to this 30-day cooling off period in speeches, this marks the first time that the agency has put this principle into practice by including it in the proposed order. This provides some further guidance to companies considering a business arrangement with another company at the same time as they are settling ongoing patent litigation. While executing the business transaction outside of the 30-day cooling off period (before and after settlement) does not foreclose the possibility of an FTC investigation, it may further mitigate the likelihood of FTC scrutiny going forward.

Obviously, the FTC/Cephalon settlement is likely to further spur the FTC’s enforcement efforts in the “pay-for-delay” arena and embolden its efforts to seek disgorgement. Indeed, in the FTC press release announcing the settlement, Chairwoman Ramirez remarked that “[r]equiring wrongdoers to give up their ill-gotten gains is an important deterrent” in the FTC’s crusade to prohibit “pay-for-delay” settlements. As a result, pharmaceutical companies should continue to closely review patent settlement agreements, and any potentially related agreements, with outside counsel before entering into such agreements.

 

1 See https://www.ftc.gov/news-events/press-releases/2015/05/ftc-settlement-cephalon-pay-delay-case-ensures-12-billion-ill (FTC Cephalon Press Release).

2 Id.

3 See https://www.ftc.gov/system/files/documents/cases/150528cephalonstip.pdf (“FTC Cephalon Order”).

4 FTC Cephalon Press Release.

5 Notably, it is conceivable that total damages paid out in class action lawsuits against Cephalon could exceed $1.2 billion.

6 The NDA holder is typically the brand pharmaceutical company that is suing for patent infringement.

7 The ANDA filer is typically the generic pharmaceutical company that is sued for patent infringement.

8 FTC Cephalon Order.

9 Id.

10 In the Matter of Schering-Plough Corporation, et al., FTC Docket No. 9297 (December 18, 2003), available at https://www.ftc.gov/sites/default/files/documents/cases/2003/12/031218commissionopinion.pdf.

11 For more discussion on the Lamictal case see “Good Luck” Post-Actavis: Current State of Play on “Payfor-Delay” Settlements, available at https://www.wsgr.com/publications/PDFSearch/silber-1114.pdf.

12 FTC Cephalon Press Release.