Fifth Circuit affirms FTC “reverse payment” decision
On April 13, 2021, the U.S. Court of Appeals for the Fifth Circuit upheld the Federal Trade Commission’s ruling that generic drug maker Impact Laboratories, LLC (now owned by Amneal Pharmaceuticals) engaged in an anticompetitive “reverse payment” settlement with brand manufacturer Endo Pharmaceuticals. This was an important win for the FTC, marking the first time an appellate court has weighed in on the merits of a “reverse payment” case prosecuted by the FTC since the Supreme Court’s 2013 decision in FTC v. Actavis holding that reverse payment settlements can violate the antitrust laws.
In 2016, the FTC alleged that the 2010 settlement agreement between Impax and Endo involved an illegal “reverse payment” that delayed generic entry by more than two years, in exchange for payments by Endo valued at over $100 million. The FTC argued that Impax could have introduced its generic version of extended release oxymorphone as an alternative to Endo’s Opana ER product in mid-2010, but instead, agreed to delay entry until January 1, 2013 in return for valuable concessions from Endo. Specifically, Endo agreed to (1) not sell an authorized generic version of Opana ER for 180-days after Impax launched its generic (which the court valued at $24.5 million); (2) pay Impax credits totaling $102 million if Opana ER fell by more than 50% prior to Impax’s launch; and (3) pay up to $40 million to Impax for a purported collaboration to develop treatment for Parkinson’s disease. The FTC also alleged that during the period of delayed entry, Endo sought to “product hop” by switching patients from Opana ER to an unnecessarily reformulated version.
Endo settled the FTC’s suit in 2017. Impax, however, litigated the FTC claims, arguing at the trial before an FTC Administrative Law Judge (“ALJ”) that the FTC failed to meet its burden of finding a violation under the rule of reason antitrust standard. The ALJ found that while the challenged settlement restricted competition, the procompetitive benefits involved outweighed the anticompetitive effects. The ALJ pointed to the fact that the settlement ended litigation and provided consumers access to generic Opana ER nine months before expiration of the initial patents and sixteen years before expiration of Endo’s later acquired patents. The ALJ ultimately concluded that the FTC’s allegations of anticompetitive harm were “largely theoretical,” and approved the agreement because of its “substantial procompetitive benefits.”
The FTC Staff appealed the decision to the full Commission which reversed the ALJ’s decision, finding that Impax had failed to establish that the settlement had any procompetitive effects because its purported benefits could have been achieved without a reverse payment for delayed entry.
Impax appealed, choosing the Fifth Circuit (an appellant from an FTC decision can appeal to the circuit of its choice). The Fifth Circuit ruled against Impax and affirmed the Commission’s decision. Specifically, the appellate court affirmed the FTC’s conclusions that (1) a large, unjustified reverse payment is anticompetitive regardless of the strength of the underlying patent litigation, and (2) reverse payment settlements are more anticompetitive than procompetitive if a less-restrictive alternative exists, such as an agreement without a payment that results in an earlier generic entry.
Standard of review
The Fifth Circuit applied the highly deferential standard of review applied to FTC decisions. While the court gave the Commission’s legal findings “some deference” under that standard, it held that its factual findings are to be affirmed so long as they are supported by “substantial evidence” in the record as a whole, which the court characterized as “even less than a preponderance” standard and similar to review of a jury verdict. Such deference for the FTC fact-finding is an important practice point, as it could very well be outcome determinative in appeals from FTC decisions, particularly when legal conclusions depend on hazy factual determinations and the weighing of legitimate procompetitive benefits against potential anticompetitive effects. As the Eleventh Circuit noted in 2015 in McWane v. FTC, the substantial evidence standard “forbids a court to ‘make its own appraisal of the testimony, picking and choosing for itself among uncertain and conflicting inferences.’” Instead, the court explained, the “possibility of drawing two inconsistent conclusions from the evidence does not prevent an administrative agency’s finding from being supported by substantial evidence.”
The Fifth Circuit’s analysis
Anticompetitive effects: “large and unjustified payment” is sufficient to find a violation
The Fifth Circuit first analyzed whether the settlement agreement had anticompetitive effects by determining whether the payment by Endo to delay the entry of Impax’s generic product was “large and unjustified.” The court declared that it was clear that there was a reverse payment given Endo’s commitment “to not market an authorized generic, which increased Impax’s projected profits by $24.5 million.” Impax had not even challenged the fact that it had received a large payment from Endo in return for the delayed entry of Impax’s generic product. The court also concluded that Endo’s commitment to pay Impax cash for any reduced market share Impax would have suffered if Endo’s reformulated Opana ER succeeded was evidence of a large payment, noting that “the $102 million Endo ultimately paid is likely a good approximation of the parties’ expected value for those credits.” Finally, as to the $10 million Endo paid to Impax regarding the research collaboration for the treatment of Parkinson’s, the appellate court concluded that “even assuming that the collaboration is relevant and that the $10 million Parkinson’s research agreement constituted payment for services, over $100 million of Endo’s payment remains unjustified.” The Fifth Circuit ultimately agreed with the FTC that “[t]he size of these payments is comparable to other cases where courts have inferred anticompetitive effect.”
Impax had argued that to establish anticompetitive impact, the FTC needed to evaluate “the patent’s strength, which is the expected likelihood of the brand manufacturer winning the litigation.” Impax argued that if the brand manufacturer was likely to win its patent infringement suit, allowing generic entry at any time before patent expiration could not be anticompetitive. The Fifth Circuit rejected this argument, stressing that Actavis does not require the FTC to assess the likely outcome of the patent case in order to find anticompetitive effects. The court determined that “[t]he fact that generic competition was possible, and that Endo was willing to pay a large amount to prevent that risk, is enough to infer anticompetitive effect.” The court went on to state that “Actavis squarely rejected Impax’s argument” when the Supreme Court held that “the size of the unexplained reverse payment can provide a workable surrogate for a patent’s weakness, all without forcing a court to conduct a detailed exploration of the validity of the patent itself.” The Fifth Circuit noted that “[i]f the parties thought Endo was highly likely to win the infringement suit, then Impax would have been happy with a deal giving it nothing more than entry months in advance of the likely-valid patent’s expiration. Reverse payments would have been a windfall. The need to add that substantial enticement indicates that at least some portion of that payment is for exclusion beyond the point that would have resulted, on average, from simply litigating the case to its conclusion.”
Procompetitive benefits outweighed by less restrictive alternative
The Fifth Circuit then analyzed whether Impax’s purported procompetitive benefits—entry before the patents were set to expire and a license on other patents—were sufficient to offset Endo’s payment’s anticompetitive effects. The court determined that it did not need to assess whether there were procompetitive benefits because any of the purported benefits of giving Impax an earlier license could have been achieved with a less restrictive alternative. Specifically, the court upheld the FTC’s determination that Impax and Endo could have negotiated a settlement with an earlier entry date without a reverse payment. In making this determination, the FTC had relied on “industry practice, economic analysis, expert testimony, and adverse credibility findings discounting the testimony of Impax’s lead settlement negotiator.” The Fifth Circuit declared that determining the viability of a less-restrictive alternative is a “question of fact,” and an appellate court should give the FTC deference with respect to its findings of fact under the “substantial evidence” standard.
The Fifth Circuit also rejected two of Impax’s legal arguments. First, it dismissed Impax’s proposition that the Commission only found an “equally restrictive alternative” when it considered whether entry on the same date without a reverse payment was feasible. The court declared that the FTC had found substantial evidence to support its determination that an agreement that provided for earlier entry was feasible. The court also rejected Impax’s argument that the FTC impermissibly had shifted to Impax the burden of disproving a less-restrictive alternative, declaring that it was proper to require Impax to rebut evidence of the feasibility of the less-restrictive alternative once the FTC had made a “strong showing” of feasibility.
Denying Impax’s appeal, the Fifth Circuit held that “the reverse payment settlement was an agreement to preserve and split monopoly profits that was not necessary to allow generic competition before the expiration of Endo’s patent. As a result, Impax agreed to an unreasonable restraint of trade.”
Conclusion and take-aways
This decision is a strong affirmation of the FTC’s approach to reverse payment settlements. The Fifth Circuit rejected the need to analyze the underlying patent litigation to establish the anticompetitive effects of a “large and unjustified payment,” and confirmed that the only allowable justifications for a “reverse” monetary payment are saved litigation expenses and the fair market value of any promised services. The court further ruled that a plaintiff can establish that a less-restrictive alternative exists by showing through expert testimony that an agreement permitting the generic challenger’s earlier market entry would have produced a smaller payment or no payment – a “fairly obvious” observation that likely exists in the vast majority of reverse payment settlements.
The Fifth Circuit’s rulings in the Impax case are in line with decisions of other courts of appeals, including in particular the Third Circuit’s decision in FTC v. AbbVie determining that a favorable supply agreement could constitute a reverse payment, and the First Circuit’s decision in In re Loestrin 24 Fe Antitrust Litig., declaring that “no-AG agreements or licenses can be reverse payments.” If this decision-making framework is adopted by other circuits, reverse payment settlement agreements will face significant challenges to attempted justifications for settlement agreements.
Tamara Freilich is an Associate in the Philadelphia office.
 Impax Labs., Inc. v. FTC, No. 19-60394 (5th Cir. 2021).
 FTC v. Actavis, Inc., 570 U.S. 136 (2013).
 In the Matter of Impax Laboratories, Inc., No. 9373 (ALJ decision, May 18, 2018).
 In the Matter of Impax Laboratories, Inc. , No. 9373 (Opinion of the Commissioner, March 28, 2019).
 Impax Labs, No. 19-60394 at 9.
 McWane v. FTC, 783 F.3d 814 (11th Cir. 2015) (quoting FTC v. Algoma Lumber Co., 291 U.S. 67, 73 (1934)).
 Id. (citing Consolo v. Fed. Mar. Com’n, 383 U.S. 607, 620 (1966).
 Impax Labs, No. 19-60394 at 13.
 Id. at 15.
 Id. at 13.
 Id. at 15.
 Id. at 15.
 Id. at 16 (internal citations omitted).
 Id. at 21.
 Id. at 22.
 Id. at 25.
 Id.at 24 (internal citations omitted).
 976 F.3d 327, 356 (3d Cir. 2020).
 814 F.3d 538, 551-52 (1st Cir. 2016).