Cephalon and Teva’s $1.2 Billion Consent Order using the Federal trade commission: Could it be A real Harbinger of products in the future?

Cephalon and Teva’s $1.2 Billion Consent Order using the Federal trade commission: Could it be A real Harbinger of products in the future?

On Next Month, 2015, the U.S. District Court for that Eastern District of Pennsylvania approved a consent order (the “Consent Order”) between your Ftc and defendants Cephalon, Corporation. and it is parent, Teva Pharmaceutical Industries Limited.,[1] resolved lengthy-running antitrust litigation stemming from four “reverse payment” settlements of Hatch-Waxman patent violation cases relating to the branded drug Provigil?.  Pursuant to the settlement using the Federal trade commission (the “Consent Order”), Cephalon decided to disgorge $1.2 billion and also to limit the relation to any future settlements of Hatch-Waxman cases.[2]  The Federal trade commission and it is Staff have celebrated and promoted the the settlement as setting a brand new standard for resolving reverse-payment cases.  However their enthusiasm might be more unrealistic than reality, as well as their speculation the agreement may exert pressure on market behavior doesn’t seem to be based on a good assessment from the condition from the law.  First, the limitations on Cephalon’s ability to initiate settlements of Hatch-Waxman cases exceed anything a court has ever needed, and conflict with settlement terms apparently approved within the U.S. Supreme Court’s seminal reverse-payment decision, Ftc v. Actavis, 133 S. Ct. 2223 (2013).  Second, the FTC’s utilization of disgorgement like a remedy remains questionable and Cephalon, despite initial opposition, may have under your own accord accepted that remedy included in an approach to acquire a global resolution of remaining private litigation.  We email place the Consent Order in perspective, to ensure that industry participants can better assess its meaning.

I.  Background

The Federal trade commission filed a complaint against Cephalon in U.S. District Court for that District of Columbia on Feb 12, 2008.[3] At that time, Cephalon marketed a brandname prescription medication known as Provigil?, which treats narcolepsy, anti snoring, and shift work sleep problem. The complaint alleged that Provigil? was, during the time of its approval, the only real Food and drug administration-approved prescription drugs for individuals uses.[4] The merchandise was effective: Cephalon’s U.S. sales of Provigil? increased from $25 million in 1999 to greater than $800 million in 2007.[5]

The initial patent for Provigil? expired in 2001, but Cephalon had acquired another patent for any formulation from the particle size Provigil?’s active component, modafinil, that was set to run out in April 2015.[6] Apparently, however, the particle size paten might be easily circumvented. Thus, in December 2002-the first possible date-four generic manufacturers each posted an ANDA for generic Provigil?, proclaiming that its form of the drug didn’t infringe the particle size patent.[7] Cephalon understood the generic modafinil would probably be priced 75 to 90 % underneath the cost of Provigil?, producing a $400 million annual decrease in the brand’s sales inside a year.[8]

Cephalon sued the generic companies for patent violation in March 2003. It eventually settled all of the cases, with every generic saying yes to avoid marketing any modafinil product until April 2012 unless of course another generic launched just before that date.[9] Simultaneously, Cephalon joined into 13 purportedly independent transactions leading to payments to individuals companies totaling more than $200 million.[10] The FTC’s complaint quoted Cephalon’s Chief executive officer as proclaiming that the plans guaranteed six more many years of patent protection for his company, leading to yet another $4 billion in sales.[11]

The FTC’s complaint alleged that Cephalon’s settlements constituted unfair ways of competition in breach of Section 5(a) from the Federal trade commission Act, 15 U.S.C. § 45(a). The complaint searched for an injunction prohibiting Cephalon from enforcing the contracts that barred the generic manufacturers from marketing generic versions of Provigil? or successor products before April 2012.

The Final Court made the decision Actavis as the FTC’s suit was pending. A Legal Court held that reverse-payment settlements can raise antitrust concerns which their lawfulness ought to be judged underneath the Rule of Reason. In The month of january 2015, the district court applied Actavis towards the settlements and denied Cephalon’s motion for summary judgment.[12] Recognizing that Actavis left a lot of the Rule of Reason analysis to become fleshed by the lower courts, the district court discussed the plethora of approaches which had then been drawn in the wake from the Supreme Court’s decision, most particularly regarding that which was meant through the phrase, a “large and unjustified” payment with a generic to some brand to stay a Hatch-Waxman violation situation.[13] Ultimately, the district court discovered that the Federal trade commission (and plaintiffs within the now-consolidated cases) “satisfied their burden of presenting proof of anticompetitive effects, with a large reverse payment,” as well as found there is an authentic dispute of fabric fact whether Cephalon’s procompetitive justifications were pretextual.[14] That’s, “Plaintiffs have given significant direct and circumstantial evidence that, if believed, may lead an acceptable jury to summarize the side-deals between Cephalon and also the Generic Defendants were just a way of supplying payments for delay,” in breach of law.[15]

Inside a separate decision made on April 15, 2015, the district court denied Cephalon’s motion to preclude the Federal trade commission from seeking disgorgement of Cephalon’s profits for that years 2007-2012.[16] You should put the court’s ruling in context: It made the decision that the Federal trade commission wasn’t precluded from seeking disgorgement, which ruling was based a minimum of partly around the FTC’s explanation the disgorged funds could be put into someone Relief Fund that might be accustomed to satisfy any claim from private complaintant cases.[17]

II. The Consent Agreement

The situation was looking for trial, but simply before it started the Federal trade commission and Cephalon settled the litigation simply by entering right into a consent agreement, that was subsequently authorized by the district court. For present purposes, the agreement’s terms are listed below[18]:

Cephalon concurs to pay for $1.2 billion right into a Consumer Relief Fund administered through the Federal trade commission, reduced by amount (i) compensated to stay or satisfy a judgment associated with private litigation or (ii) agreed via settlement agreement or term sheet to become compensated in settlement of related litigation, either in situation within thirty days after entry from the Consent Order[19]

The Customer Relief Fund will be accustomed to fund both settlements and judgments against Cephalon within the related civil cases, and also to pay expenses from the fund

Any monies residing in the fund following the related private litigation ends is going to be compensated towards the U.S. Treasury

Cephalon (including Teva) agree to not settle a Hatch-Waxman patent violation claim on terms which include:

(a) With exceptions not relevant here, any payment or “change in value” more than believed future litigation costs (initially set at $seven million), in which the payment or transfer

§ is believed without regard as to whether the generic “purportedly transfers value in exchangeInch and

§ is “specifically contingent” on getting into the settlement or even the change in value occurs within thirty days after or before the settlement and

(b) A contract through the generic to not “research, develop, manufacture, market or sell” the topic drug for just about any time period.

III. Discussion

The Federal trade commission required virtually no time heralding the settlement agreement, describing it as being “preclud[ing] the biggest generic drug company within the U . s . States from getting into probably the most common types of anticompetitive reverse payments later on.Inches[20] Within an interview provided to Law360, Markus Maier, the Assistant Director from the FTC’s Healthcare Division, went further. He stated the Consent Order transmits a “strong and important” message towards the industry, which the Federal trade commission would turn to the settlement later on discussions along with other companies.[21] Mr. Maier added that, even though future deals may not be identical in most respects, “there’s . . . a significant potential this settlement sets a typical for that industry. Now you ask ,: Are also companies likely to fall lined up or otherwise?Inches[22]

If the Consent Order will function as a template to solve future reverse-payment cases remains seen, but any claim through the Federal trade commission Staff the agreement reflects existing law, or that it is terms and structure ought to be generally relevant in most litigation contexts, is overstated. Consent orders frequently make bad law. Within the M&A context, for instance, parties frequently embrace nonmaterial but debatable divestitures to be able to close transactions that will well be in limbo in a period of litigation. Exactly the same might be true within the litigation context, where agencies’ institutional interests may drive settlement terms with private parties missing a motivation to litigate what exactly, or getting different proper objectives in your mind. Here, the Consent Order seems to mirror terms that may ‘t be won in the court through the Federal trade commission, and also the the settlement might be less vital that you Cephalon compared to proper possibilities the settlement offers for settling the whole litigation. Even inside the Federal trade commission, the the Consent Order drawn on right into a simmering dispute within the proper role of disgorgement in Section 5 cases. Many of these factors may limit the influence from the Cephalon settlement.

A. The Settlement Prohibitions: Are Arm’s Length Side Deals Authorized?

The Consent Order sweeps within its bounds a category of transactions of tremendous potential importance to branded drug manufacturers in settling Hatch-Waxman cases, but whose putative illegality has not been tested. The main from the agreement may be the prohibition against future settlements by Cephalon involving cash along with other compensation to generics more than litigation costs, if associated with delayed generic entry. To become incorporated inside the prohibition, a repayment should be “a change in value through the [patentholder] towards the [generic challenger] (including, although not restricted to, money, services or goods), whether or not the [generic challenger] purportedly transfers value in exchange,Inches as long as the worth is more than decided “saved future litigation expenses.”[23] Quite simply, as long as a suggested Hatch-Waxman money is conditioned upon or proximately close enough over time having a settlement from the patent violation litigation, any side deal supplying compensation towards the generic more than saved litigation costs is prohibited, whether or not along side it deal includes arm’s length financial terms or perhaps is otherwise commercially justifiable.

If the law is violated by a “sweetheart” side deal where the generic pays under market price for services or goods included in a Hatch-Waxman settlement remains a wide open and hotly debated question within the lower courts.[24] But no court (or perhaps the Federal trade commission) has declared an arm’s length side deal to become an illegal element of this type of settlement within an adjudicated situation.[25] Indeed, the final Court in Actavis appeared to reject the Consent Order’s approach, identifying one of the justifiable aspects of funds having a generic a “payment [that] may reflect compensation for other services the generic has decided to perform-for example disbursing the patented item or assisting to create a marketplace for that item.”[26] These activities, particularly sanctioned through the Top Court, could be prohibited underneath the Consent Order. More generally, the final Court’s decision in Actavis rejected the Consent Order’s by itself ban on payments more than presumed litigation expenses, declining to subject reverse-payment settlements to by itself illegality or “quick look” antitrust analysis, because the Federal trade commission has suggested.[27] Rather, a legal court found the existence of “large and unjustified payments” is the grounds for Rule of Reason analysis.[28]

The Cephalon situation itself doesn’t even supply the factual framework for declaring arm’s length transactions illegal poor settlements. The FTC’s own portrayal from the side deals at trouble in the situation helps make the point: The challenged contracts were (i) to provide ingredients to Cephalon “despite evidence that Cephalon already had sufficient supply offered at considerably affordable prices,Inches (ii) ip licenses where Cephalon had “previously rejected any concerns about possible violation risk,” and (iii) targeted at product, “despite internal projections showing an adverse internet present value to Cephalon.”[29] As of this moment, there is no authority for that proposition that arm’s length transactions prohibited through the Consent Order are illegal.

B. The Disgorgement Order

The FTC’s capability to require equitable disgorgement orders competing cases under Section 5 from the Federal trade commission Act finds support within the situation law, but is not for sure established. Outside of the issue of authority is a problem of administrative discretion to use the remedy. Disagreements inside the Commission over this subject bubbled towards the surface regarding the the unanimous approval from the Consent Order.

The FTC’s statement describing the suggested settlement was signed only by Chairwoman Ramirez and Commissioners Brill and McSweeny. The 2 Republican appointees, Commissioners Ohlhausen and Wright, authored individually (the “Cephalon Minority Statement”) to describe why they supported the suggested disgorgement remedy within the situation, and also to address the things they known as their “concerns about the possible lack of guidance the Commission provides on using this remarkable remedy competing cases.”[30] The issue, they described, included the FTC’s 2012 withdrawal of their 2003 guidelines,[31] and also the Commission’s failure to articulate a substitute methodology, guideline, or policy. The significance of now you ask , underscored because, within the 3 years because the disgorgement policy statement was withdrawn, the Federal trade commission has searched for the remedy three occasions, in contrast to two times within the nine years the insurance policy was at effect.[32] The withdrawal from the policy statement might thus be viewed not just because the product of the ideological disagreement but because a particular effort by a few in the Commission to become free of guidelines that stored them from seeking disgorgement in additional cases. That three from the recent types of such enforcement efforts were against healthcare companies (against AbbVie and Cardinal Health, additionally to Cephalon)-regular targets of Federal trade commission scrutiny-includes the weather of means, motive, and chance. The Federal trade commission minority known as upon most with the idea to reinstate the rules in order to “provide alternative guidance.”[33]

Most responded by explaining that it is support for disgorgement within the Cephalon situation took it’s origin from three factors. First, it stated the financial remedy may be “necessary” to discourage illegal conduct because economic incentives to take part in reverse-payment settlements encouraged companies to collude instead of compete.[34] Second, most thought the remedy appropriate as punishment for Cephalon’s success in delaying a judicial resolution from the situation for six years as the generic continued to be from the market, along with a statement to investors by Cephalon’s general counsel the Federal trade commission might have “no practical remedy” considering the delay (most didn’t claim that any one of Cephalon’s litigation tactics were illegal or violated Rule 11).[35] Finally, most mentioned that disgorgement was appropriate since the settlements came about from litigation on the patent that almost all stated have been “procured by fraud.”

Towards the extent this last factor is visible as and therefore the alleged breach of law was “clear,” it matches the foremost and most significant qualifying criterion identified within the now-abandoned guidelines.[36] The majority’s decision to not acknowledge that possible relationship, and also to list it last, gives little comfort to potential respondents that they’ll ‘t be susceptible to a disgorgement claim even where their conduct was perhaps authorized. More generally, the very fact-specific nature from the majority’s explanation provides only limited guidance regarding future efforts to find disgorgement. The interior political divisions inside the Federal trade commission suggest the lack of a bipartisan consensus around the question, departing future policies likely susceptible to the outcomes of presidential elections.

The issue if the Consent Order will, because the Federal trade commission Staff desires, exert sufficient gravitational pressure to result in industry participants to “fall in line” using its terms can also be colored by the chance that the disgorgement remedy may have been positively based on Cephalon during this instance. Cephalon’s agreement to pay for $1.2 billion to stay litigation are only able to reasonably be viewed as reflecting significant concerns within the ultimate results of the instances and damage awards-along with its earlier settlement of $512 million using the direct-purchaser plaintiffs. The $1.2 billion is, literally, the ground for Cephalon’s liability. But Cephalon might also think it may be accustomed to set a ceiling. It’s possible to easily imagine Cephalon’s lawyers going after a worldwide settlement using the remaining plaintiffs regarding the approval from the Consent Order. They may reason that the rest of the fund is enormous, available immediately, could be viewed as getting been fortunate through the Federal trade commission regarding an expression of genuine damages, which absent an offer Cephalon would litigate before the finish. Confronted with a considerable recovery that plaintiffs’ counsel could defend as reflecting actual injuries, as well as an uncertain capability to collect more without significant effort, delay, and risk, the sale might be appealing. This really is speculation to be certain, but defendants prepared to pay $1.2 billion to stay litigation could gladly possess the mechanism from the disgorgement fund to assistance with attempting to acquire a global settlement.

IV. Conclusion

The FTC’s settlement with Cephalon is a vital rise in the evolving good reputation for antitrust litigation over reverse-payment settlements. However the Federal trade commission Staff might be overplaying its hands in insisting that the the settlement will make up the template of industry conduct and litigation settlements in the future.


[1] Teva acquired Cephalon in October 2011, after many of the relevant events occurred.  For ease of discussion, Cephalon and Teva will be referred to collectively as “Cephalon,” although certain historical statements apply only to Cephalon itself.
[2] The Consent Order may be found at: https://www.ftc.gov/system/files/documents/cases/150617cephalonstip.pdf.
[3] Complaint, Federal Trade Commission v. Cephalon, Inc., No. 2:08-cv-2141-MSG (D.D.C. 2008).
[4]Id. ¶ 26.
[5]Id. ¶ 1.
[6]Id. ¶¶ 32-36.
[7]Id. ¶ 36.
[8]Id. ¶ 39.
[9]Id. ¶ 58-59.
[10]Id. ¶ 56.
[11]Id. ¶ 4.
[12]King Drug Co. of Florence v. Cephalon, Inc., No. 2:08-cv-2141, 2015 U.S. Dist. LEXIS 9545 (E.D. Pa. Jan. 28, 2015).
[13]Actavis, 133 S. Ct. at 2237.
[14]King Drug Co., 2015 U.S. Dist. LEXIS 9545, at *25.
[15]Id. at *64.
[16]Federal Trade Commission v. Cephalon, Inc., No. 2:08-cv-2141, 2015 U.S. Dist. LEXIS 49333, at *9 (E.D. Pa. Apr. 15, 2015).
[17]Id. at 21.
[18] Readers are advised to consult the Consent Order for a full statement of its terms.
[19] Cephalon’s $1.2 billion payment to the Consumer Relief Fund presumably will be used in part to fund its $512 million settlement with direct-purchaser plaintiffs, announced in court filings on April 17, 2015 in the consolidated litigation in the Eastern District of Pennsylvania.  Indirect purchaser and third-party payor claims remain unsettled.
[20] Statement of the Federal Trade Commission, FTC v. Cephalon, Inc., May 28, 2015 (reflecting the views of Chairwoman Ramirez and Commissioners Brill and McSweeny) at 3, appearing at:  https://www.ftc.gov/system/files/documents/cases/150528cephalonstatement.pdf. (“Cephalon Majority Statement”).
[21] M. Lippman, “FTC Health Care Chief: $1.2B Cephalon Deal A Strong Warning,” Law360 (May 28, 2015).
[22]Id.
[23] Consent Order, § 21, 21(a).
[24]Compare In re Lipitor Antitrust Litig., No. 3:12-cv-02389 (PGS), 2014 U.S. Dist. LEXIS 127877 at *62 (D.N.J. Sept. 12 2014) (reverse payments not limited to monetary payments), In re Niaspan Antitrust Litig., MDL No. 2460, 2014 U.S. Dist. LEXIS 124818, at *54 (E.D. Pa. Sept. 5, 2014) (same), and In re Nexium (Esomeprazole) Antitrust Litigation, 42 F. Supp. 3d 231, 262 (D. Mass. 2014) (same) with FTC v. AbbVie, Inc., Civil Action No. 14-5151, 2015 U.S. Dist. LEXIS 59115, at *18-*20 (E.D. Pa. May 6, 2015) (below-market supply agreement to support generic entry prior to patent expiration pro-competitive, and not a “reverse payment”), In re Loestrin 24 Fe Antitrust Litigation, 45 F. Supp. 3d 180, 192 (D.R.I. 2014) (reverse payments under Actavis  limited to cash payments or their “very close analogues”), and  In re Lamictal Direct Purchaser Antitrust Litig., 18 F. Supp. 3d 560, 567-69 (D.N.J. 2014) (Actavis limited to “reverse payments” of money).
[25] By using the term “arm’s length,” we do not mean to define or limit the universe of payments that would be “justified” under Actavis, and thus lawful.  It just allows a ready contrast with the terms of the Consent Order, and seemingly describes a wide range of potential commercial transactions.
[26] 133 S. Ct. at 2236.  In its recent decision on the lawfulness of reverse-payment settlements under California law, the California Supreme Court built on this provision in Actavis.  The California court held that one of the express elements of a plaintiff’s prima facie claim in a reverse-payments case is an allegation that the settlement includes “cash or equivalent financial consideration” that exceeds  “the value of goods and services . . . provided by the generic challenger to the brand.”  In re Cipro Cases I & II, 61 Cal.4th 116, 151 (Cal. 2015).
[27]Id. at 2237.
[28]Id.
[29] Cephalon Majority Statement at 2 n.7.
[30] The statement of Commissioners Ohlhausen and Wright appears at:  www.ftc.gov/system/files/documents/cases/150528cephalonohlhausenwright.pdf.
[31] Fed. Trade Comm’n, Policy Statement on Monetary Equitable Remedies in Competition Cases, 68 Fed. Reg. 45820 (Aug. 4, 2003); Fed. Trade Comm’n, Withdrawal of the Commission’s Policy Statement on Monetary Equitable Remedies in Competition Cases, at 1 (July 31, 2012), available at https://www.ftc.gov/system/files/documents/public_statements/296171/120731commstmt-monetaryremedies.pdf.
[32] Dissenting Statement of Commissioner Maureen K. Ohlhausen in the Matter of Cardinal Health, Inc., at 2, available at https://www.ftc.gov/system/files/documents/public_statements/637761/150420cardinalhealthohlhausen.pdf.
[33] Cephalon Minority Statement at 3.
[34] Cephalon Majority Statement at 3.
[35]Id. at 4.
[36] Policy Statement on Monetary Equitable Remedies in Competition Cases, supra note 31, at 2.

 

 

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