Antitrust Law Daily Wrap Up, TOP STORY—E.D. Pa.: Cephalon precluded from arguing strength of patent in FTC “pay-for-delay” suit, (Jul 30, 2014)

By Jeffrey May, J.D.

In an FTC action against Cephalon, Inc. for blocking generic competition for its flagship wakefulness drug Provigil, the federal district court in Philadelphia will not allow Cephalon to introduce evidence at trial related to the potential validity, enforceability, or infringement of a patent that was previously found invalid and procured through inequitable conduct. The principles of collateral estoppel prevented Cephalon from relying on the strength of its patent or litigation “uncertainty” in defending against the FTC’s antitrust claims (FTC v. Cephalon, Inc., July 29, 2014, Goldberg, M.).

In 2008, the FTC brought an action against Cephalon, alleging that the pharmaceutical company 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.

Five years after the so-called “reverse payment” settlements were signed, it was determined that Cephalon's patent claiming a specific formulation of modafinil—a molecule with wakefulness-promoting properties—was invalid and unenforceable. The finding of invalidity was based on Cephalon’s inequitable conduct during the procurement process.

Based on the finding of patent invalidity, the FTC moved for an order precluding Cephalon from reopening the issue of patent validity in the antitrust case. In support of its position, the FTC argued that the merits or perceived merits of the underlying patent dispute were irrelevant to the antitrust analysis under the U.S. Supreme Court's 2013 decision in FTC v. Actavis, Inc. In addition, the agency alleged that, under principles of collateral estoppel, the earlier ruling that the subject patent was invalid and was procured by inequitable conduct precluded Cephalon from claiming that its infringement case had merit.

At the outset, the court questioned the FTC's argument that Actavis mandated that a patent’s strength or weakness was irrelevant to the antitrust analysis of a reverse payment settlement. In Actavis, the Court explained that it “is normally not necessary to litigate patent validity to answer the antitrust question.” However, under certain discrete circumstances, there could be situations where the validity of the patent should be litigated within a reverse payment antitrust trial, the district court noted. The court concluded that it did not need to decide this issue because it was persuaded by the FTC’s collateral estoppel argument.

Collateral estoppel. In order for preclusion to apply under the doctrine of collateral estoppel, among other things, the issue sought to be precluded must be the same as that involved in the prior action. Cephalon contended that the issues were not the same. The company contended that it was not seeking to litigate patent validity at the antitrust trial. Instead, according to the defendant, it sought to “introduce evidence showing that there was uncertainty and risk on both sides of the patent litigation when it negotiated the settlements with the Generic Defendants.”

A later determination of patent invalidity by itself would likely not foreclose proof of litigation uncertainty with respect to the patent settlements, the court explained. However, the court determined that the invalidity was the result of fraud on the Patent Office. As a general rule, patents procured by fraud did not provide a defense under the antitrust laws. Cephalon should not be allowed to justify a reverse payment on the grounds that it resolved “uncertainty and risk” that existed because of its own affirmative misconduct, in the court's view. “[T]he issue of fraud on the PTO conclusively resolved a key issue that Cephalon wishes to raise at trial—that is, litigation uncertainty.”

The court was not swayed by the statements of two high-ranking Cephalon employees who, at the time of the settlements, said they believed Cephalon had a strong patent. Cephalon—the signatory to the settlement agreements and the entity accused of antitrust violations—was required to have had knowledge of its own misconduct, notwithstanding the alleged lack of specific knowledge on the part of the two executives, the court explained.

Due process argument. Lastly, the court rejected Cephalon's argument that applying collateral estoppel in this instance would violate its due process rights. Cephalon's contention that it had no notice of the potential impact of an inequitable conduct ruling because, prior to Actavis, a finding of invalidity or unenforceability in a patent case would not be relevant to the antitrust analysis was unavailing.

Earlier ruling in related private suits. In March, the court ruled that Cephalon’s right to a jury trial under the Seventh Amendment to the U.S. Constitution barred the private plaintiffs in related cases from using offensive collateral estoppel to preclude relitigation of the issue of fraud on the Patent Office (2014-1 Trade Cases ¶78,712). The court explained in this latest ruling that, because the FTC was only seeking equitable relief, Seventh Amendment considerations did not apply.

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

Attorneys: Markus Meier for FTC. Gregory P. Teran (Wilmer Cutler Pickering Hale & Dorr LLP) for Cephalon, Inc.

Companies: Cephalon, Inc.

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