Busy Times At The FTC

The decline in merger activity has not led to long vacations at the Federal Trade Commission.1 When the administrations changed and, Timothy Muris replaced Robert Pitofsky as FTC chairman, Muris repeatedly claimed that any changes in antitrust enforcement would be at the margins. "Change at the margins" has turned into filling every bit of space on the page, as the FTC has been more active - especially in challenging alleged anticompetitive conduct - than at any time in the past 20 years.2 There are now several cases pending decision before the full FTC, one pending ALJ decision, and two more pending administrative trial. The FTC's decisions in these cases, and in some recent consent orders, will provide new guidance on antitrust limitations on business activity in at least four areas:

Antitrust restrictions on the assertion of patent rights;

Antitrust liability for interactions with state regulators - both in seeking regulatory action, and in complying with regulatory mandates;

Limitations on the scope of joint ventures; and

Whether - and how - a merger can be undone after it has been consummated.

This Bulletin summarizes the issues presented in these cases. As the FTC's decisions come out, we will keep you informed.

Patents, standard setting and patent settlements.

In three pending cases, the FTC is challenging the assertion of patent rights as violations of the antitrust laws. While government antitrust challenges to patent claims were once common, the antitrust agencies largely abandoned this enforcement program in the 1980s, famously asking "Whatever Happened to the Nine No-Nos?" For a decade, the answer was that there were no no-nos, but that began changing in the 1990s.3 The level of interest and activity in patent antitrust issues at the FTC has again now increased significantly.

In Schering-Plough, D-9297, one of the two cases now pending decision before the full Commission, the FTC is expected shortly to decide what limitations the antitrust laws place on patent settlements between innovator and generic drug companies.4 The FTC has challenged three innovator/generic patent settlements in which the FTC alleged that the innovator drug company paid the generic entrant to stay out of the market.5 While the respondents in Abbott and Hoechst settled, the Schering respondents proceeded to trial, and won before an Administrative Law Judge. The FTC is now about to render its first adjudicated decision on the question. Its decision could set out new limitations on terms that can be incorporated in patent settlementsor clear the field for settlements that preserve patent exclusivity based on follow-on patentsor it could be limited to the facts of the case, and provide only limited guidance.

Under the Hatch-Waxman Act, 21 U.S.C. 355, a firm seeking to manufacture a generic version of a drug coming off NDA exclusivity may submit an Abbreviated New Drug Application ("ANDA") to the FDA. The ANDA applicant must certify that remaining patent(s) (listed by the innovator drug company in the FDA's "Orange Book") is "invalid or is not infringed by the generic product." The first ANDA filer obtains the exclusive right to market the generic version for 180 days. In August 1995, Upsher-Smith filed an ANDA to manufacture and sell a generic version of Schering's sustained-release potassium chloride product, K-Dur 20. Schering sued Upsher-Smith for patent infringement, triggering the Hatch-Waxman Act's 30 month automatic stay.6

In June 1997, Schering and Upsher settled the patent suit; Upsher-Smith agreed not to enter the generic market for sustained-release potassium chloride until September 2001, and to licenses five of its pending products (in particular, a niacin product, Niacor), in exchange for payments of approximately $60 million. The FTC challenged this settlement in 2001, alleging that the settlement agreement essentially constituted a payment by Schering to keep Upsher from competing. Schering countered that its payment was (at least in part) for the licenses to other products, including Niacor, even though Schering later abandoned pursuing those products.7 The FTC voted unanimously to bring this administrative adjudication, but its ALJ completely rejected the case after an administrative trial, finding that FTC staff failed to prove that Schering's payments were for delay rather than for other consideration.

The case has been briefed and argued to the full Commission, which now will revisit (with the benefit of a full evidentiary record) its theory that the antitrust laws are violated when innovator drug companies pay generics to settle patent disputes (brought by the innovator company) and delay generic entry. The FTC's theory has been that these patent settlements are anticompetitive when payments flow "the wrong way," from patent-holder to alleged infringer, and the effect is that competition...