On January 29, 2009, the Federal Trade Commission ("FTC"), in conjunction with California’s Attorney General, launched its latest challenge to reverse payment settlements in the pharmaceutical industry, Fed. Trade Comm’n et al. v. Watson Pharm., Inc. et al., 09-cv-00598 (AHM) ("Watson"). In a press release announcing the action, the FTC stated that "’[t]oday’s action reaffirms the Commission’s commitment to protect American consumers from artificially high prescription drug prices that result when branded and generic pharmaceutical companies decide to collude rather than compete."[i]

Watson was filed in the United States District Court for the Central District of California and alleges violations of Sections 1 and 2 of the Sherman Act, Section 5(a) of the FTC Act, and California’s Cartwright and Unfair Competition Acts. The complaint names the brand-name pharmaceutical company Solvay Pharmaceuticals, which produces AndroGel, a widely prescribed testosterone replacement drug. AndroGel, protected by a formulation patent, is Solvay’s top-selling drug, generating more than $400 million in U.S. sales in 2007. The complaint also names generic pharmaceutical companies Watson Pharmaceuticals, Par Pharmaceuticals and Paddock Laboratories.

Pursuant to the regulatory framework of the Drug Price Competition and Patent Term Restoration Act of 1984 (commonly referred to as the "Hatch-Waxman Act"), Watson and Paddock (in partnership with Par) each filed Abbreviated New Drug Applications ("ANDAs") with the FDA in 2003, seeking to market generic versions of AndroGel. The Hatch-Waxman Act, 21 U.S.C. § 301 et seq., was enacted to facilitate competition from lower-priced generic drugs, while maintaining incentives for pharmaceutical companies to invest in developing new drugs. The ANDAs filed by Watson and Paddock certified that Solvay’s patent was either invalid or not infringed, and sought approval to market their generic versions well before expiration of Solvay’s patent in 2020. Solvay promptly filed patent infringement suits against both would-be generic competitors.

The Watson complaint alleges that in 2006, shortly after Watson obtained final approval from the FDA to market its generic version of AndroGel, Watson and Solvay agreed to settle their patent dispute. The settlement provided for Watson to refrain from marketing its generic until 2015, or earlier if another generic company entered the market before that date. The FTC alleges that Solvay and Watson simultaneously entered into a co-promotion deal in which Solvay agreed to share a portion of AndroGel’s profits with Watson, and alleges that the substantial compensation Solvay agreed to provide pursuant to the co-promotion was designed to, and did in fact, induce Watson to refrain from competing with Solvay until 2015. Solvay and Watson filed a voluntary stipulation of dismissal terminating their patent litigation, without filing their settlement or co-promotion agreements with the court.

On the same day that Solvay settled its dispute with Watson, it also signed a settlement agreement with Par and Paddock. Par and Paddock agreed to refrain from marketing their generic until 2015, in exchange for a co-promotion deal wherein Solvay agreed to pay $10 million annually for six years. The patent litigation between Solvay, Par and Paddock was dismissed pursuant to a consent judgment. The parties did not file their settlement and co-promotion agreements with the court.

The complaint alleges that the settlements, commonly referred to as "reverse payment settlements," unlawfully eliminated competition between would-be competitors, denying consumers the opportunity to purchase lower-cost generic versions of AndroGel, at a cost of hundreds of millions of dollars a year.

This not the first time the FTC has challenged reverse payment settlements as anticompetitive. In 2001, the FTC issued an administrative complaint charging Schering-Plough Corp., Upsher-Smith Laboratories and American Home Products Corp. with similar violations of Section 1 of the Sherman Act and Section 5 of the FTC Act. The FTC’s final order, finding the respondents liable for antitrust violations, was reversed on appeal to the Eleventh Circuit. Schering-Plough Corp. v. FTC, 402 F.3d 1056 (11th Cir. 2005), cert. denied, 548 US 919 (2006).

Authored By:

Helen Cho Eckert

(213) 617-4286

hchoeckert@sheppardmullin.com


[i] The public version of the Watson complaint, the FTC’s press release and related documents are available at  http://www.ftc.gov/os/caselist/0710060/index.shtm.