A pending case in the U.S. Court of Appeals for the 3rd Circuit has raised several interesting questions about the FTC enforcement approach and patent litigation in the pharmaceutical industry. The case, FTC v. AbbVie, involves allegations that AbbVie (and Besins) filed sham patent infringement cases against generic manufacturer Teva (and Perrigo) for the purpose of preventing or delaying entry into the testosterone gel market in which AbbVie’s AndroGel had a monopoly. The FTC further alleges that AbbVie and Teva settled the testosterone gel litigation in AbbVie’s favor while making a large payment to Teva in an unrelated case, behavior that, considered together, amounted to an illegal reverse payment settlement. The district court dismissed the reverse payment claims, but concluded that the patent infringement cases were sham litigation. It ordered disgorgement damages of $448 million against AbbVie and Besins which was the profit they gained from maintaining the AndroGel monopoly.
The 3rd Circuit has been asked to review several elements of the district court’s decision including whether the original patent infringement cases amounted to sham litigation, whether the payment to Teva in a separate case amounted to an illegal reverse payment, and whether the FTC has the authority to seek disgorgement damages. The decision will help to clarify outstanding issues relating to patent litigation and the FTC’s enforcement abilities, but it also has the potential to chill pro-competitive behavior in the pharmaceutical market encouraged under Hatch-Waxman.
First, the 3rd Circuit will review whether AbbVie’s patent infringement case was sham litigation by asking whether the district court applied the right standard and how plaintiffs must prove that lawsuits are baseless. The district court determined that the case was a sham because it was objectively baseless (AbbVie couldn’t reasonably expect to win) and subjectively baseless (AbbVie brought the cases solely to delay generic entry into the market). AbbVie argues that the district court erred by not requiring affirmative evidence of bad faith and not requiring the FTC to present clear and convincing evidence that AbbVie and its attorneys believed the lawsuits were baseless.
While sham litigation should be penalized and deterred, especially when it produces anticompetitive effects, the 3rd Circuit’s decision, depending on how it comes out, also has the potential to deter brand drug makers from filing patent infringement cases in the first place. This threatens to disrupt the delicate balance that Hatch-Waxman sought to establish between protecting generic entry while encouraging brand competition.
The 3rd Circuit will also determine whether AbbVie’s payment to Teva in a separate case involving cholesterol medicine was an illegal reverse payment, otherwise known as a “pay-for-delay” settlement. The FTC asserts that the actions in the two cases—one involving testosterone gel and the other involving cholesterol medicine—should be considered together, but the district court disagreed and determined there was no illegal reverse payment. True pay-for-delay settlements are anticompetitive and harm consumers by delaying their access to cheaper generic alternatives. However, an overly-liberal definition of what constitutes an illegal reverse payment will deter legitimate settlements, thereby increasing expenses for all parties that choose to litigate and possibly dissuading generics from bringing patent challenges in the first place. Moreover, FTC’s argument that two settlements occurring in separate cases around the same time is suspicious overlooks the reality that the pharmaceutical industry has become increasingly concentrated and drug companies often have more than one pending litigation matter against another company involving entirely different products and circumstances.
Finally, the 3rd Circuit will determine whether the FTC has the authority to seek disgorgement damages on past acts like settled patent litigation. AbbVie has argued that the agency has no right to disgorgement because it isn’t enumerated in the FTC Act and because courts can’t order injunctive relieve, including disgorgement, on completed past acts.
The FTC has sought disgorgement damages only sparingly, but the frequency with which the agency seeks disgorgement and the amount of the damages have increased in recent years. Proponents of the FTC’s approach argue that the threat of large disgorgement damages provides a strong deterrent to anticompetitive behavior. While true, FTC-ordered disgorgement (even if permissible) may go too far and end up chilling economic activity by exposing businesses to exorbitant liability without clear guidance on when disgorgement will be awarded. The 3rd Circuit will determine whether the FTC’s enforcement approach is authorized, a decision that has important implications for whether the agency’s enforcement can deter unfair practices without depressing economic activity.