Judge Rules Cephalon, Inc.’s Profits are Fair Game in FTC Suit

FTC vs. ProvigilA federal judge in Pennsylvania recently ruled that the FTC could go after six years of Cephalon, Inc.’s profits in a reverse-payment settlement case against the pharmaceutical company.  Reverse-payment settlements are made by major pharmaceutical companies with generic drug makers in order to keep the cheaper generic drugs off the market.  In Cephalon’s case, Cephalon made deals with four generic drug makers ranging from $25 million to $164 million to protect its name-brand wakefulness drug, Provigil.  However, the FTC took issue with these settlements.  Initially, the FTC only sought injunctive relief to keep Cephalon from enforcing the settlements and making new ones in the future.  However, following a 2011 ruling in a related case that found the patent for the active ingredient in Provigil invalid, the FTC was prompted to change course and pursue disgorgement.

In his opinion, Judge Mitchell S. Goldberg wrote:

The FTC persuasively argues that the finding that Cephalon procured its patent by fraud as well as the entry of generic Provigil into the market in 2012 are “dramatic changes in circumstances since it brought its case” and necessitate a change in the relief requested.

Cephalon objected to this line of reasoning, arguing that the section of the FTC Act under which the case was brought doesn’t allow the commission to seek equitable monetary relief.  According to Cephalon, that section gives the FTC the power to bring cases against entities that have violated the law that the FTC enforces, but it doesn’t explicitly say that the commission can seek monetary relief.  The judge responded to Cephalon’s arguments by saying, “The FTC counters that courts have uniformly concluded that Section 13(b) grants district courts authority to order monetary equitable relief. The weight of precedent supports this position,” Goldberg said, citing to eight circuit court opinions that ruled that way and dicta from the U.S. Court of Appeals for the Third Circuit, which hasn’t ruled directly on the question.

Judge Goldberg noted that in finding that courts can have the authority to grant monetary equitable relief under Section 13(b), other circuits have looked to a pair of U.S. Supreme Court cases—Porter v. Warner Holding, decided in 1946, and Mitchell v. Robert DeMario Jewelry, decided in 1960.  “According to Third Circuit precedent, Porter and Mitchell have ‘charted an analytical course that seems fairly easy to follow. … A district court sitting in equity may order restitution unless there is a clear statutory limitation on the district court’s equitable jurisdiction and powers,'” Goldberg said, quoting from the Third Circuit’s 2005 opinion in United States v. Lane Labs-USA.

The judge also rejected Cephalon’s reading of an intervening case from the U.S. Supreme Court in 1996, Meghrig v. KFC Western, which had a narrower ruling than the company described.  “Nothing in the FTC Act creates a necessary and inescapable inference that a district court’s equitable power under Section 13(b) is limited. Eight circuit courts of appeals have reached this conclusion. I find that the FTC is permitted to seek disgorgement in cases brought pursuant to Section 13(b),” Goldberg said.

The Cephalon case raises an important issue as it relates to remedies that may be sought throughout the lifetime of a lawsuit.  Cephalon argued that the FTC only sought disgorgement following the judge’s decision in the related 2011 case.  In Cephalon’s opinion, the FTC should not be allowed to go back on its initial course of action to now seek disgorgement.  Judge Goldberg was unconvinced by these arguments saying the circumstances of the case have changed in the seven years since the FTC first brought it. These changes have necessitated a change in relief, he said.  A trial is scheduled for later this year, and it will be interesting to see whether the FTC will be successful in requiring Cephalon to disgorge its profits from the drug Provigil, which some estimate to be between $3 and $6 billion.  If Cephalon loses at trial, then it will certainly appeal the judge’s decision.  This is especially true given the fact that the FTC Act is not entirely clear regarding the remedy of disgorgement.

More about Cephalon.