FTC Challenge to Patent-Settlement Tactics Transferred to Federal Court in Pennsylvania

This posting was written by Jeffrey May, Editor of CCH Trade Regulation Reporter.

A closely-watched Federal Trade Commisison (FTC) case against Cephalon, Inc.—the manufacturer of the prescription wakefulness drug Provigil—for impeding the entry of generic substitutes through patent settlement arrangements has been transferred from the federal district court in Washington, D.C. to the federal district court in the Eastern District of Pennsylvania. Cephalon had requested the transfer to the federal court in Pennsylvania, where putative class actions alleging antitrust claims against the company are pending.

The FTC filed the case in the federal district court in Washington, D.C. in February, challenging Cephalon’s patent settlement agreements with four drug manufacturers that each planned to sell a generic version of Provigil. Cephalon purportedly paid the firms to refrain from selling generic Provigil until 2012.

The agency contended that the conduct denied patients access to lower-cost, generic versions of Provigil and forced consumers and other purchasers to pay hundreds of millions of dollars a year more for Provigil.

Pay-for-Delay Settlement Tactics

The FTC contended that the conduct involved "pay-for-delay" settlement tactics that threatened the Hatch-Waxman statute, which was designed to encourage the speedy introduction of generics. The agency has targeted these types of agreements before; however, two recent federal appellate court decisions have rejected antitrust challenges to a patent holder’s compensation to a generic rival.

FTC Grounds for Opposing Transfer

The FTC opposed transfer on three grounds: (1) that Cephalon failed to make an adequate case for transfer; (2) that the United States was entitled to deference in choosing its forum for antitrust actions; and (3) that transfer to the Eastern District of Pennsylvania would unduly delay the government’s prosecution of the case to the detriment of consumers nationwide.

First, the court addressed the “threshold question”: whether the FTC could have brought this case in the Eastern District of Pennsylvania. Cephalon both resided and transacted business there. Moreover, the operative settlement agreements were all negotiated from that location. Thus the bulk of the events giving rise to this claim occurred within the Eastern District of Pennsylvania, the court decided.

Deference for FTC Choice of Forum

While the FTC’s choice of venue was entitled to heightened respect, there were no meaningful ties between the District of Columbia and the events or parties that gave rise to the action. Therefore, the FTC’s selection of the District of Columbia as its chosen forum was not entitled to substantial deference. The convenience of the parties and witnesses tipped slightly in favor of Cephalon, in the court’s view.

Risk of Inconsistent Judgments

The interest of justice also dictated that transfer was appropriate to avoid subjecting Cephalon to the risk of inconsistent judgments. Absent transfer to the Eastern District of Pennsylvania, Cephalon would have been forced simultaneously to litigate two cases in two different courts arising out of precisely the same conduct.

The court suggested that the FTC might have an interest in inconsistent judgments. Cephalon had argued that the Commission was “openly shopping for a circuit split on the issue of reverse-payment Hatch-Waxman settlements.” Whatever legitimate interest the FTC may have in achieving a circuit split and getting the issue before the U.S. Supreme Court, the court refused to subject one defendant to the burden of inconsistent judgments based on the same events.

The April 28, 2008, decision in FTC v. Cephalon, Inc., Civil Action No. 08-0244 (JDB), will appear in CCH Trade Cases.