Setting a precedent?

Photographer: JB REED/Bloomberg

FTC's Drug Settlement a Win for the Lawyers

Noah Feldman is a Bloomberg View columnist. He is a professor of constitutional and international law at Harvard University and was a clerk to U.S. Supreme Court Justice David Souter. His books include “Cool War: The Future of Global Competition” and “Divided by God: America’s Church-State Problem -- and What We Should Do About It.”
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Is Thursday's $1.2 billion antitrust settlement between the Federal Trade Commission and Teva Pharmaceutical Industries a victory for consumers? Or is it a sign of government enforcement run amok?

The answer to that question, it turns out, goes back to a 2013 U.S. Supreme Court case, FTC v. Actavis, in which five justices allowed the FTC to pursue a new kind of antitrust litigation. And the issue at the heart of that case was fascinating: What happens when the good kind of monopoly created by a patent runs headlong into the bad kind of monopoly created by collusion between merchants?

To hear the FTC tell the story, the facts that gave rise to Thursday's settlement are pretty upsetting from the standpoint of consumers. Cephalon, a company that was acquired by Teva in 2011, was the maker of an anti-sleep drug known as Provigil. Competitors of Cephalon began producing generic drugs to compete with Provigil.

In response, Cephalon sued the makers of the generic drugs, charging them with patent infringement. The generic makers countersued, insisting they had not infringed on Cephalon's patent. So far, the proceedings were following the familiar script of patent suits and countersuits that are part of the everyday business model of big pharma.

To resolve the lawsuits, Cephalon paid the generic manufacturers $300 million; in return, the manufacturers agreed to hold off on selling generic versions of Provigil for six years. Again, this looked on the surface like business as usual.

But according to the FTC, something was rotten in the agreements. The so-called “reverse payment” settlement, the FTC claims, wasn't really a resolution of the underlying lawsuits. It was a cover for Cephalon to buy off the generic manufacturers and allow Provigil to keep its monopoly on the marketplace.

The FTC’s argument turns on the assertion that, as an economic matter, the payments “made no economic sense for Cephalon except as payments not to compete.” The FTC would've had to prove this claim at trial. By settling the suit against Cephalon, Teva may have been saying in effect that it expected the FTC to win. But it's more likely that Teva determined that it didn’t make business sense to take the risk of a judgment against it. Shareholders typically prefer to see big-ticket litigation resolved, even at a big loss, rather than taken to trial.

On the surface, it seems natural enough that the FTC, which is in the business of looking out for consumers’ interests, would vigilantly scrutinize the resolution of patent infringement lawsuits to assure that they aren't functioning as cover for anti-competitive collusion among drug manufacturers. Otherwise, consumers would get the short end of the stick if patent owners bought off the makers of potentially successful generic competitors.

But when the Supreme Court considered this issue in 2013, the justices were split on how the FTC should look at such reverse payment settlements. The trouble starts with a structural contradiction between patent law and antitrust law: The patent system is designed to confer a monopoly on the patent holder in order to create incentives for research and development in bringing new products to market; the antitrust system is designed to root out and prohibit anti-competitive monopolies.

These two approaches sit poorly with each other. The legal system wants a patent holder such as Cephalon to be able to enjoy its monopoly. If the generic drugs really infringed on Cephalon's patents, we want them to be suppressed. And if it would cost Cephalon more time and money to fight that in court than it would cost to pay the generic makers to hold off, we want Cephalon to be able to make that payoff.

In the 2013 case, Justice Stephen Breyer, writing for the majority, said the FTC should be able to look beyond the basic circumstances of the infringement suit and the reverse payment to ascertain whether there had been anti-competitive effects. (The 2013 case was about a different, analogous instance of a reverse payment, not about Provigil.) In essence, this was a victory for antitrust theory over patent theory. As a young lawyer, Breyer worked for the antitrust division of the Department of Justice. Generally, he tends to trust skilled bureaucratic actors -- such as the staff of the FTC -- to make detailed investigations and wise judgments. And as a liberal, Breyer tends to be pro-consumer rather than pro-corporate.

Chief Justice John Roberts wrote a dissent in the 2013 case. He pointed out that a patent is, by definition, an exception to the antitrust laws. And he argued that the Supreme Court should maintain existing precedent. According to that precedent, as characterized by Roberts, so long as the patent holder acts within the scope of its patent, the antitrust laws don't apply.

In the Cephalon case, Roberts's view, had it prevailed, would've been simple: Cephalon paid to resolve its patent claims. That alone should have exempted its actions from antitrust scrutiny.

The logic of Roberts's view lies in the probabilities of actually settling patent cases. The only way the FTC can know if a settlement is anti-competitive or pro-competitive is to determine whether the patent was actually infringed. Why, Roberts asked, should a company ever settle patent litigation if it knows the FTC will make it relitigate the validity of its patent?

Roberts’s view would have been a victory for patent law over antitrust law. It would also have been a victory for corporate interests over consumers’ interests.

Who was right? The truth is, we may never know. In effect, the FTC is encouraging patent claims to be fully litigated. This will probably cost patent holders money, and at the margins, it may encourage generic-drug competition. The only guarantee is that this will mean more business for the courts -- and for the lawyers.

This column does not necessarily reflect the opinion of Bloomberg View's editorial board or Bloomberg LP, its owners and investors.

To contact the author on this story:
Noah Feldman at nfeldman7@bloomberg.net

To contact the editor on this story:
Brooke Sample at bsample1@bloomberg.net