Antitrust Law Daily Wrap Up, ANTITRUST—E.D. Pa.: FTC may seek disgorgement of drug maker’s profits in “pay-for-delay” case, (Apr 16, 2015)

By Thomas Long, J.D.

In an FTC action against pharmaceuticals manufacturer Cephalon, Inc., for blocking generic competition for its flagship wakefulness drug Provigil, the federal district court in Philadelphia has denied Cephalon’s motion to preclude the FTC from seeking disgorgement of Cephalon’s past profits for the years 2007 through 2012 (FTC v. Cephalon, Inc., April 15, 2015, Goldberg, M.). The FTC had statutory authority to seek equitable monetary remedies under Section 13(b) of the FTC Act, and equitable considerations did not preclude the agency from seeking such relief in this case.

Patent-in-suit. Cephalon owned U.S. Patent No. RE 37,516 (“the RE ’516 patent”), which claimed a specific formulation of modafinil—a molecule with wakefulness-promoting properties—and covered Provigil. Because of a number of regulatory exclusivity periods Cephalon had obtained, the RE ’516 patent had the potential to protect Provigil from competition through April 6, 2015.

Entry of generic products. On December 24, 2002, the four generic drug makers sought permission from the Food and Drug Administration to market generic versions of Provigil. The generic drug makers certified that the RE ’516 patent was either invalid or was not infringed by their proposed products. Cephalon filed suit against the generic drug makers for patent infringement. Between late 2005 and early 2006, all four of infringement cases settled, and Cephalon paid the generic drug makers millions of dollars in return for, among other agreements, promises from each of the generics to drop their invalidity contentions and not market a generic version of Provigil until April 6, 2012. These settlements were of a type known as “reverse payment” settlements. Generic Provigil entered the market in early 2012.

FTC action. In 2008, the FTC brought an action against Cephalon, alleging that the pharmaceutical company unlawfully responded to the threat of generic competition to its Provigil monopoly by buying-off all four of its potential competitors. The agency alleged that Cephalon paid generic drug makers to refrain from selling generic versions of Provigil and to drop their patent invalidity contentions under “pay-for-delay” patent litigation settlements. Private plaintiffs also challenged the conduct.

Following a bench trial in 2011 in a related matter, it was determined that the RE ’516 patent was invalid and unenforceable because of Cephalon’s inequitable conduct during the procurement process. On August 29, 2012, this case and the related private plaintiff matters were stayed pending proceedings before the U.S. Supreme Court that would potentially resolve a circuit split regarding the standards applicable to reverse payment settlement claims. On June 17, 2013, the Court issued its decision in FTC v. Actavis, Inc., 133 S.Ct. 2223 (2013), holding that courts should apply the “rule of reason” approach when reviewing reverse payment settlement agreements.

At a July 11, 2013 status conference, the FTC indicated that it might seek consumer redress for the harm caused the delayed entry of the generic drugs. In a July 31, 2013 proposed scheduling plan, the FTC stated that it was seeking to supplement its economic expert’s report to “address appropriate equitable monetary remedies.” Cephalon contended, and the FTC did not dispute, that July 2013 was the first time that the FTC indicated that it intended to seek equitable monetary remedies.

On September 20, 2013, Cephalon moved to dismiss the case for lack of subject matter jurisdiction, arguing that the entry of generic Provigil rendered the FTC’s requested injunctive relief moot and that the FTC’s proposed monetary equitable remedy was inappropriate. The court denied the motion to dismiss, stating that Cephalon’s argument as to monetary relief “confuse[d] mootness with the merits.”

Subsequently, the FTC served a supplemental expert report that included disgorgement calculations, and Cephalon served a supplemental expert report responding to these calculations. On January 28, 2015, Cephalon filed a motion to preclude the FTC from seeking disgorgement.

Cephalon contended that preclusion was warranted because the FTC lacked statutory authority to seek disgorgement. Alternatively, Cephalon argued that, even if the FTC was authorized to seek disgorgement in some cases, it should not be permitted to do so in this case as a matter of equity.

Statutory authority. According to Cephalon, Section 13(a) of the FTC Act—the provision under which the FTC brought the case—did not permit the agency to seek equitable monetary relief. That section authorized the FTC to seek an injunction and did not specifically mention other forms of equitable remedies.

The FTC countered—and the court agreed—that courts had uniformly concluded that Section 13(b) grants district courts the authority to order monetary equitable relief. The general rule was that the equitable discretion of the courts is limited only when that is the necessary and inescapable inference of the statutory scheme. Nothing in the statute restricted the court’s inherent equitable powers. Accordingly, the court found that the FTC was permitted to seek disgorgement in cases brought pursuant to Section 13(b).

Equitable considerations. Cephalon argued that the FTC should not be able to seek disgorgement of its past profits, based on equitable principles. First, Cephalon points to the fact that the FTC did not mention disgorgement in its prayer for relief. However, the court noted, the FTC requested “such other equitable relief as the Court finds necessary to redress and prevent recurrence of Cephalon’s violation of Section 5(a) of the FTC Act.” In the court’s view, this language encompassed disgorgement.

Second, Cephalon contended that the FTC should be precluded from seeking disgorgement because the agency repeatedly stated that it would not pursue monetary remedies. According to Cephalon, the FTC changed its position “simply because it became strategically convenient” to do so after generic Provigil entered the market.

Changed circumstances may necessitate a change in relief, the court said. The FTC argued that the finding that Cephalon procured its patent by fraud, as well as the entry of generic Provigil into the market in 2012, were “dramatic changes in circumstances since it brought its case” and necessitate a change in the relief requested. The court found the FTC’s argument persuasive.

Third, Cephalon argued that disgorgement was only permissible upon the showing of a “clear violation” of law. Citing the Restatement (Third) of Restitution and Unjust Enrichment §3, Cephalon asserted that disgorgement was limited to instances of “conscious wrongdoing.” Cephalon also pointed to a 2003 FTC policy statement that the agency would ordinarily only seek monetary disgorgement when the violation was “clear.” According to the policy statement, “A violation is ‘clear’ for this purpose when, based on existing precedent, a reasonable party should expect that the conduct at issue would likely be found to be illegal.”

However, the court said, Cephalon did not point to any precedent establishing that a showing of a clear violation was a prerequisite to seeking disgorgement. Moreover, the 2003 policy statement explicitly said that the FTC had warned pharmaceutical companies that it would consider the entire range of remedies—“including possibly seeking disgorgement of illegally obtained profits”—in connection with reverse payment schemes. Therefore, the court rejected the argument that a “clear violation” was a prerequisite for disgorgement.

Finally, Cephalon argued that disgorgement would be improperly duplicative of the relief that consumers could obtain in the private actions. There was no way to predict the outcome of those lawsuits, the court noted. In addition, the FTC explained that any disgorgement award in this case would be placed in a Consumer Relief Fund and would be used to satisfy any claims in the private cases. Therefore, the court rejected Cephalon’s argument that disgorgement would be a duplicative remedy.

The case is No. 2:08-cv-2141.

Attorneys: Markus Meier for Federal Trade Commission. Eric J. Mahr (Wilmer Cutler Pickering Hale and Dorr LLP) for Cephalon, Inc.

Companies: Cephalon, Inc.

Cases: Antitrust FederalTradeCommissionNews PennsylvaniaNews