The FTC accrued two important victories in the last two months: a trial victory banning “pharma bro” Martin Shkreli from future work in the pharmaceutical industry on January 14, and a December 7 settlement agreement with the company he ran. The settlement order casts a wide net of obligations and prohibitions on Vyera Pharmaceuticals, which are designed to reopen competition in the generic drug market.1 These decisions are an important warning that pharmaceutical executives and companies will face stiff remedies for exclusionary conduct that shields their branded drugs from generic competition. The result also sheds light on a strict standard that pharmaceutical companies may face going forward: a duty to deal on certain open access terms where Congress has designed a scheme to promote entry under the Hatch-Waxman Act.
In January 2020, the FTC and the New York Attorney General jointly sued Vyera Pharmaceuticals LLC, its former executive Martin Shkreli, Shkreli’s associate Kevin Mulleady, along with Vyera’s parent company.2 The FTC, and what eventually became seven states (California, Illinois, New York, North Carolina, Ohio, Pennsylvania, and Virginia), alleged that the defendants engaged in a monopolistic pricing scheme for the life-saving drug Daraprim.3 According to findings in the ruling against Shkreli, Daraprim is a drug used to treat toxoplasmosis, a condition that can lead to deadly infections in people with suppressed immune systems like HIV/AIDS patients.4 In 2015, the Defendants purchased Daraprim’s rights from the medicine’s only supplier.5 After instituting their monopolistic pricing scheme, they were able to effect a 4,000% price-hike from $17.50 to $750 per tablet.6 On December 7th, 2021, the Plaintiffs settled with Vyera Pharmaceuticals, Kevin Mulleady, and Vyera’s parent company Phoenixus AG.7 Shkreli went to trial and lost in front of Judge Denise Cote of the Southern District of New York.
The exclusionary conduct at the heart of the case is a mix of obvious antitrust red flags, as well as conduct that is sometimes considered protected from scrutiny. First, a traditional theory of liability: after acquiring Daraprim, defendants tightened their control over the market by signing exclusivity contracts with suppliers of Daraprim’s API, the active ingredient that provides the drug’s pharmacological activity.8 Next, two tactics with murkier status under antitrust law: (1) the company sought to dissuade potential generic entrants by concealing Daraprim’s profitability through an arrangement where it paid retailers to withhold sales data from third-party data aggregators, and (2) it made regulatory approval more difficult for those who did seek to enter by refusing to sell the medicine into channels where companies might use it to conduct bioequivalence trials.9 Given the protected status usually afforded competitively sensitive data, and the general skepticism courts usually apply to alleged duties to deal products or services in ways that would assist competitors, it is worth taking a closer look at what the Court said about this conduct.
First, to establish the standard for anticompetitive conduct, the Court cited to the Second Circuit’s decision in New York ex rel. Schneiderman v. Actavis PLC: “For there to be an antitrust violation, generics need not be barred from all means of distribution if they are barred from the cost-efficient ones.”10 It distinguished the company’s conduct “from growth or development as a consequence of a superior product, business acumen, or historic accident.”11
The Court relied on the fact that Shkreli “intended to block generic competition” and “failed to justify his choice of a closed distribution system,” which prevented distributors from freely dealing with potential entrants and data aggregators.12 It may have also been influential that “[f]or decades Daraprim was administered safely and without problems through open distribution” that would have allowed for independent decision-making by distributors.13 Although the Court found insufficient evidence that the data-blocking scheme was responsible for deterring entry, it did not suggest that any special analysis should be applied to a company’s right to protect its data.14
Interestingly, the Court departed from the usual focus on an accused competitor’s right to compete vigorously and, instead, repeatedly invoked the sense that the generic entrants had rights protected under the law: “Generic drug companies need not undertake herculean efforts to overcome significant anticompetitive barriers specifically erected to prevent their entry into the market.”15 Additionally, the Court noted the underlying public policy rationale for the Hatch-Waxman Act and other FDA policies, which it may have seen as creating rights for generic entrants: “Consistent with its policy of encouraging price competition for prescription pharmaceuticals, the FDA expresses the view that ‘a path to securing samples of brand drugs for the purpose of generic drug development should always be available.’”16 Under this reasoning, Shkreli’s “purpose” and “intent” were relevant to the infringement of the Court’s sense of those rights.
In a case so focused on elements of scienter, it is perhaps no surprise that the Court found Shkreli personally liable for the anticompetitive effects of the Company’s conduct. The outcome of the trial serves as a warning to executives who direct anticompetitive business strategies, especially where there are objective indicia of authority or control: Shkreli, for instance, was the company’s largest shareholder.
The FTC’s settlement agreement with the company defendants also serves as a warning of the sort of conduct the FTC may expect to see from branded pharmaceutical companies. Under the settlement, Vyera cannot enter into any future contract that restricts (1) a pharmaceutical drug company from selling a drug to a company seeking to develop a generic therapeutic equivalent, (2) an API supplier from selling an API to a pharmaceutical company, or (3) a drug retailer from selling sales data to a sales and distribution data aggregation business.17 Going even further to create a duty to deal directly, the Order obligates Vyera to sell Daraprim at list price, and provide sufficient supply, to any pharmaceutical company seeking to create a therapeutic equivalent.18 Additionally, Vyera cannot discontinue Daraprim sales until a generic enters the market.19
The result of the case also charts a path for the FTC’s reliance on state partners to help it secure victory on behalf of individual consumers. The Commission’s original complaint sought equitable relief to redress consumer harm.20 But the Supreme Court’s intervening decision in AMG Capital Management v. FTC, forced the Commission to withdraw that request.21 The plaintiff states retained their claims for equitable relief, relying on state statutes allowing the Attorneys General to collect redress on behalf of their citizens.22 Ultimately, the Court awarded the states disgorgement of $64.4 million, for which Shkreli is personally liable. Because Shkreli is jointly and severally responsible with the other defendants, that sum is reduced by the amount paid by the company under the states’ settlement.23 The settlement agreement requires Vyera to deposit $10 million upfront to a victims fund, and potentially up to $40 million more over ten years.24 Despite the limitations of AMG, the FTC was able to claim a victory in helping return money to consumers by suing in federal court with state partners, rather than in its own administrative court.25
It remains to be seen how the FTC will apply the principles in this case to other scenarios where companies restrict access to their products, services, or data, which entrants could use for a competitive advantage. In other contexts, the FTC has seemed sympathetic to a company’s interest in protecting its data in interactions with third parties, both for the competitive implications of copying and because of the ramifications it might have for privacy protections.26 But certainly, there is a unique public policy context favoring generics competition in the pharmaceutical industry, which might suggest this is an area where the FTC will push for more affirmative duties in the future.
1Federal Trade Commission, State of New York, State of California, State of Ohio, Commonwealth of Pennsylvania, State of Illinois, State of North Carolina, & Commonwealth of Virginia vs. Martin Shkreli, No. 20CV00706 (DLC), 2022 WL 135026 (S.D.N.Y. Jan. 14, 2022), Slip. Op. available at https://www.ftc.gov/system/files/documents/cases/865_2022.01.14_opinion_and_order.pdf; See Joint Motion for Entry of Stipulated Order for Permanent Injunction, FTC, et al v. Vyera Pharmaceuticals, LLC, et al, No. 1:20-cv-00706-DLC, at 3 (S.D.N.Y 2021), available at https://www.ftc.gov/system/files/documents/cases/753_2021.12.07_joint_motion_for_entry_of_stipulated_order_re_mulleady_corp_settlement.pdf.
2See Am. Compl., FTC, et al v. Vyera Pharmaceuticals, LLC, et al, No. 1:20-cv-00706-DLC (S.D.N.Y 2020), available at https://www.ftc.gov/system/files/documents/cases/161_001_vyera_pharm_-_amended_complaint_-_redacted.pdf.
4Slip Op. at 28.
6Id. at 32.
7Joint Motion for Entry of Stipulated Order for Permanent Injunction, FTC, et al v. Vyera Pharmaceuticals, LLC, et al, No. 1:20-cv-00706-DLC, at 3 (S.D.N.Y 2021), available at https://www.ftc.gov/system/files/documents/cases/753_2021.12.07_joint_motion_for_entry_of_stipulated_order_re_mulleady_corp_settlement.pdf.
8Slip Op. at 100.
9Id. at 99, n. 35; Id. at 100.
10Id. at 119 (quoting 787 F.3d 638, 656 (2d Cir. 2015)).
11Id. at 100 (quoting United States v. Grinnell Corp., 384 U.S. 563, 570–71 (1966); United Food & Com. Workers Loc. 1776 & Participating Emps. Health & Welfare Fund v. Takeda Pharm. Co. Ltd., 11 F.4th 118, 137 (2d Cir. 2021).
12Id. at 109; Id. at 111; Id. at 99, n.35.
13Id. at 111.
14Id. at 99, n.35.
15Id. at 119.
16Id. at 20 (quoting Statement from FDA Commissioner Scott Gottlieb, M.D., on New Agency Efforts to Shine Light on Situations Where Drug Makers May Be Pursuing Gaming Tactics to Delay Generic Competition, FDA (May 17, 2018), https://www.fda.gov/news-events/press-announcements/statement-fda-commissioner-scott-gottlieb-md-new-agencyefforts-shine-light-situations-where-drug).
17See Joint Motion for Entry of Stipulated Order for Permanent Injunction, FTC, et al v. Vyera Pharmaceuticals, LLC, et al, No. 1:20-cv-00706-DLC, at 6 (S.D.N.Y 2021), available at https://www.ftc.gov/system/files/documents/cases/753_2021.12.07_joint_motion_for_entry_of_stipulated_order_re_mulleady_corp_settlement.pdf.
18Id. at 10.
20Khorri Atkinson, FTC Can’t Seek Restitution From Shkreli Until Congress Acts, Law360 (June 3, 2021), available at https://www.law360.com/articles/1390841/ftc-can-t-seek-restitution-from-shkreli-until-congress-acts.
22Slip Op. at 94-99.
23Id. at 132-33.
24See Joint Motion, supra n. 1, at 11.
26See, e.g., Ben Unglesbee, Bloomberg: FTC Investigates Amazon’s Marketplace Practices, RetailDive (Sept. 11, 2019), available at https://www.retaildive.com/news/bloomberg-ftc-investigates-amazons-marketplace-practices/562704/.
ABOUT BAKER BOTTS L.L.P.
Baker Botts is an international law firm whose lawyers practice throughout a network of offices around the globe. Based on our experience and knowledge of our clients' industries, we are recognized as a leading firm in the energy, technology and life sciences sectors. Since 1840, we have provided creative and effective legal solutions for our clients while demonstrating an unrelenting commitment to excellence. For more information, please visit bakerbotts.com.