The Federal Trade Commission has recently brought its considerable institutional weight to bear in two developing areas at the intersection of unfair competition and intellectual property law. Continuing its crusade against “reverse-payment” patent infringement settlements in the pharmaceuticals sector, the FTC is promoting—especially in the Third Circuit—a maximalist interpretation of the U.S. Supreme Court’s 2013 FTC v. Actavis, 570 U.S. ___ (2013), decision that may have ramifications in IP-based industries beyond pharmaceuticals. And it scored its first win against another long-term target: a patent assertion entity—pejoratively, a “patent troll”—accused of making misrepresentations to extract money from alleged infringers. Both developments portend a more aggressive use of the FTC’s powers in domains previously reserved to IP law and largely protected from antitrust scrutiny, if political factors don’t blunt its current momentum.
Third Circuit as Antitrust vs. IP Battleground
The FTC has long opposed reverse-payment (or “pay for delay”) settlements, in which a branded drug’s patent holder brings an infringement suit against a generic drug-maker on the verge of market entry, then settles the litigation by paying the purported infringer in exchange for an agreement to delay the generic drug. These anti-competitive settlements, according to the FTC, raise the prices consumers pay for drugs. In 2013, the FTC achieved a partial victory in Actavis, where the Supreme Court held that reverse-payment settlements are subject to a rule-of-reason analysis under which “large” and “unexplained” reverse payments may lead to antitrust liability despite the limited monopoly granted by the patent. That result overturned the decades-old principle, expressed by Chief Justice John Roberts Jr. in dissent, that “a patent holder acting within the scope of its patent has an obvious defense to any antitrust suit: that its patent allows it to engage in conduct that would otherwise violate the antitrust laws.”
Now, with that sea change, the FTC—as predicted by the primary author—seems to be favoring the U.S. Court of Appeals for the Third Circuit as the place to build on the foundation laid by Actavis. (See “Third Circuit Could See Rise in Pay-for-Delay Litigation,” published June 19, 2013, in The Legal.) The court of appeals itself, thanks to a 2012 opinion declaring reverse-payment settlements presumptively illegal in In re K-Dur Antitrust Litigation, 686 F.3d. 197 (3d Cir. 2012), is arguably friendly territory for the FTC’s thesis that competition considerations should trump patent-based immunity from antitrust liability. Though Actavis invalidated K-Dur’s holding in favor of the rule-of-reason analysis, the FTC appears prepared to argue, as plaintiff and as amicus curiae, that courts in the Third Circuit should interpret Actavis broadly to wield it as a weapon against various kinds of allegedly anti-competitive reverse settlements, instead of limiting its reach to settlements that present the same cash-for-delay pattern as in Actavis itself.
In the first case in which any court of appeals will decide an important point left open by Actavis, the FTC has made sure the Third Circuit hears its views. The commission filed an amicus brief and on Nov. 19 presented oral argument in In re Lamictal Direct Purchaser Antitrust Litigation, No. 14-1243 (on appeal as King Drug Co. of Florence v. SmithKline Beecham). One of the main questions there is whether a settlement agreement in which something other than money passes from the patent holder to the alleged infringer involves a “payment” subject to antitrust scrutiny.
In Lamictal, the generic manufacturer, as in Actavis, agreed to delay its product, but what it received in exchange was not cash but a promise by the patent holder not to introduce an “authorized generic”—a drug identical to the branded drug but sold as a generic by the patent holder itself—for 180 days after the generic product’s eventual entry into the market. This agreement is anti-competitive, in the FTC’s analysis, because monopoly profits unreasonably accrue to the settling parties in both the pre-generic phase (when the generic maker refrains from competing with the patent holder) and the immediate post-generic phase (when the patent holder refrains from releasing an “authorized generic” to compete with the generic).
The FTC has also attacked a similar non-cash “no authorized generic” settlement in its first post-Actavis reverse-settlement case as a plaintiff, FTC v. AbbVie, No. 14-05151, filed in September in the Eastern District of Pennsylvania. Meanwhile, in other private lawsuits, district judges in New Jersey and Pennsylvania have already split as to whether non-cash reverse settlements are subject to an Actavis rule-of-reason antitrust analysis. The Third Circuit’s decision in Lamictal may settle the question in all of those cases.
But whatever the outcome in Lamictal, it’s clear that, for the FTC, Actavis was just the first skirmish of an ambitious campaign. Asked during the Nov. 19 argument whether there have been any pay-for-delay suits outside the pharmaceutical context, the FTC’s attorney asserted that, though he didn’t know of any, the Actavis holding does apply to other industries. It may be only a matter of time until the FTC deploys Actavis to attack patent settlements in other industries, or even settlements involving forms of intellectual property other than patents.
The FTC Slays a Patent Troll
In the first use of its powers under Section 5 of the FTC Act against a patent assertion entity, the FTC on Nov. 6 reached a tentative settlement with Delaware-incorporated, Texas-based MPHJ Technology Investments and its law firm, Farney Daniels. MPHJ acquired several patents in the area of networked scanning technology and, the FTC alleged in a draft administrative complaint, sent a series of letters to thousands of small businesses nationwide, claiming that their use of common office equipment infringed MPHJ’s patents and inviting them to purchase a license for $1,000 to $1,200 per employee. The threatening correspondence culminated in a letter from Farney Daniels, attaching a purported draft complaint and threatening imminent litigation unless the recipient paid.
The FTC accused MPHJ of violating Section 5 by making two types of misrepresentations: that “substantial numbers” of businesses had agreed to pay MPHJ licensing fees (when none or very few had), and that MPHJ intended to sue non-paying recipients (when it had made no preparations to do so). MPHJ initially fought back, suing the FTC in federal court in Texas on the theory that the investigation violated MPHJ’s First Amendment right to petition the government, including its right to make pre-litigation threats to sue. The court dismissed that case Sept. 16, holding that, even if MPHJ had a viable claim, it first had to exhaust the FTC’s administrative process.
Under the proposed settlement, a consent order prohibits MPHJ and Farney Daniels from making false or misleading representations in connection with future patent demand letters. Though any violation of the consent order will result, in principle, in a $16,000 fine, the settlement highlights the FTC’s inability to levy a civil penalty against MPHJ under Section 5. Legislation that would give the FTC the power to impose civil penalties for the abuse of patent demand letters has languished in Congress for months. Meanwhile, the FTC has begun an in-depth study of patent assertion entities that will presumably lead to a report supporting its position. If the MPHJ settlement doesn’t give Congress sufficient reason to look again at giving the FTC civil penalty powers against patent assertion entities, the FTC’s report may well do so.
The Promise of an Interesting 2015
It remains to be seen whether the FTC can forge and maintain a consensus on how to use its post-Actavis and stand-alone Section 5 powers in the borderland of antitrust and IP in the coming year. Now reinforced to its full complement of five commissioners, with three Democrats and two Republicans, the FTC has shown signs of partisan division in its approach to reverse-payment settlements: both Republican commissioners reportedly opposed filing the complaint in AbbVie. And, internal debates aside, the FTC’s relations with the new, Republican-dominated Congress will need careful managing. But to judge by the energy and determination the FTC has devoted to reverse-payment settlements and patent assertion entities as 2014 comes to a close, we can expect it to continue making its formidable presence felt at the expanding intersection of antitrust and IP law in 2015. Stay tuned.
Carl W. Hittinger is a senior partner in BakerHostetler’s antitrust group and litigation group coordinator for the firm’s Philadelphia office. He concentrates his practice on complex commercial and civil rights trial and appellate litigation, with a particular emphasis on antitrust and unfair competition matters. He can be reached at email@example.com. Jeffry W. Duffy is counsel in the firm’s litigation group, where he concentrates his practice in complex commercial litigation and international disputes, including antitrust, unfair competition and immigration matters. He is resident in the Philadelphia office and can be reached at 215-564-2916 or firstname.lastname@example.org
Reprinted with permission from the December 1, 2014 issue of The Legal Intelligencer. Copyright 2014. ALM Media Properties, LLC. Further duplication without permission is prohibited. All rights reserved.