A magistrate judge in Washington, D.C., has granted a rarely approved request for discovery in a CEO's fight to avoid a subpoena in an FTC investigation that stems from a reverse-payment settlement between Frazer, Pa.-based Cephalon Inc. and Watson Pharmaceuticals.
Watson Chief Executive Officer Paul M. Bisaro sought discovery in the U.S. Federal Trade Commission's court action against him in its efforts to enforce a subpoena it issued last year.
Bisaro alleged the FTC went outside the scope of its regulatory and enforcement authority by trying to broker a deal between Watson and another generic pharmaceutical company so that Watson would give up any exclusivity it may have had in regard to marketing its generic form of Cephalon sleep-disorder drug Provigil.
Bisaro claimed the subpoena was only an attempt to pressure Watson to enter the deal, according to court papers. Relinquishing its "first-filer" exclusivity rights would have essentially voided the reverse-payment -- or pay-for-delay -- settlement Watson had entered with Cephalon and allowed other generics to market earlier.
The FTC argued in the filings that it didn't divulge any confidential information to third-party generic manufacturer Apotex in an effort to strike a deal between Apotex and Watson. It also argued, according to court papers, that the subpoena issued to Bisaro was simply a continuation of an investigation into the Provigil deal that began in 2006.
But U.S. Magistrate Judge Alan Kay saw it differently, ruling Tuesday that the "extraordinary circumstances" needed to compel discovery in what would normally be a summary procedure of a subpoena enforcement proceeding were present in this case. The judge said he could cite only one other time in the D.C. Circuit where discovery was permitted in such a proceeding -- the 1977 case of United States v. Fensterwald.
The relevant challenge from Bisaro, Kay said, was whether the subpoena was issued for an improper purpose.
"This court finds that the facts before it present a strong possibility that the FTC did share confidential information with Watson's competitor, that it did attempt to broker a deal between Apotex and Watson that would require Watson to relinquish any statutory 'first-filer' rights it had acquired, and that it did initiate this investigation to pressure Watson to relinquish these rights and to harass it when it refused," Kay said in a 12-page opinion in FTC v. Bisaro.
In citing the U.S. Supreme Court's 1964 decision in United States v. Powell, Kay said it is an abuse of process to enforce a subpoena that was issued for an improper purpose, such as harassment or to put pressure on a party to settle a related matter.
"The facts before us suggest that the FTC sought to place Watson between a rock and a hard place, where the only way Watson could clear its name and escape further FTC scrutiny was to give in to the pressure the FTC was placing on Watson to enter into the business deal with Apotex," Kay said.
In ruling that Bisaro made a "colorable claim" that the FTC may have exceeded its authority in issuing the subpoena, Kay granted his request for the FTC to answer interrogatories within 10 days of the order. Kay denied, however, Bisaro's request to depose Markus H. Meier, the assistant director of the health care division of the FTC's Bureau of Competition. Kay said he didn't believe a deposition of an FTC official was appropriate and couldn't find any instances where the court permitted such an action in the course of a subpoena enforcement proceeding.
In a statement from Bureau of Competition Director Richard Feinstein, the FTC said it strongly disagrees with Kay's preliminary findings.
"The FTC has done nothing improper in this matter, and is simply trying to complete a law enforcement investigation into whether there is an agreement to keep generic drugs off the market and out of the hands of consumers," Feinstein said. "We are disappointed that our investigation has been sidetracked by the unfounded implications of opposing counsel and currently are considering our options."
Reverse payment settlements stem from a generic company filing an application with the U.S. Food and Drug Administration under the Hatch-Waxman Act to begin marketing a generic version of a brand drug. The generics argue their drug is either different from the patented drug or that the brand patent is invalid. The brand company then files a patent infringement suit.
The settlements entail the brand company agreeing to allow the generic to market sometimes years before the patent expires and include a payment to the generic company for their agreeing to settle the case and delay entry.
The brand companies argue the settlements guarantee a few more years of exclusivity and provide time to plan for new drugs. The generics argue the settlements guarantee earlier entry into the market than if they lost the patent litigation. The FTC has repeatedly come out against the settlements and has brought lawsuits across the country to challenge them.
So far, the agency has been unsuccessful, with most courts ruling the settlements are lawful as long as the terms don't extend beyond the life of the patent.
Cephalon entered into such a settlement in 2006 with four generic pharmaceutical companies who all filed applications on the same day regarding one of the patents for Provigil. Watson later filed an application regarding a separate Provigil patent and is believed to be the first-filer in that case, though only the FDA knows which company was the first to file a complete application. Watson and Cephalon entered into their own reverse-payment settlement later in 2006.
The FTC filed suit against Cephalon and the four generics in the Eastern District of Pennsylvania regarding their settlement and that case is still ongoing. In 2006, the FTC began an investigation into the settlement between Watson and Cephalon, according to Kay's order.
It wasn't until March 2009 that Meier called Watson's outside counsel, Steven C. Sunshine of Skadden Arps Slate Meagher & Flom in Washington, and suggested it might be in Watson's financial interest to relinquish any exclusivity regarding Provigil, Kay said.
According to Sunshine's declaration filed with the court, Meier suggested he was in contact with the FDA about whether Watson was in fact the first filer. Meier also asked Sunshine whether Watson would be interested in receiving a call from another generic pharmaceutical company looking to launch a generic Provigil product. A week later, Apotex called Watson, Kay said.
While Watson was considering the offer from Apotex, according to Sunshine's declaration, Meier called Sunshine and suggested a front office investigation by the FTC might be opened if Watson didn't waive its exclusivity. Soon thereafter, the FTC issued "civil investigative demands" and a subpoena to Watson's general counsel. The FTC was looking into whether the settlement with Cephalon banned Watson from waiving exclusivity, which Watson said it did not. After the general counsel responded, a subpoena was sent to Bisaro, which resulted in this enforcement action.
Cephalon General Counsel Gerald J. Pappert said Kay made clear that federal courts give great latitude and deference to regulatory agencies in the course of their work and Kay found only one case from 1977 that found there were serious enough allegations to rise to the extraordinary circumstances that would lead the court to "abandon that deference."
"I think what's most startling about this is that the judge has found that these allegations are credible, that they rise to that level and has issued an order and an opinion that is exceedingly rare and, again, should be a cause for serious alarm for any companies, not just in Pennsylvania, but elsewhere, that are regulated by the FTC," Pappert said.
Sunshine, who represented both Bisaro and Watson in the enforcement matter, didn't return a call for comment.