Locke Lord QuickStudy: FTC v. Shire ViroPharma

The U.S. Court of Appeals for the Third Circuit affirmed the district court’s dismissal of ‎the FTC’s complaint against Shire ViroPharma, rejecting the FTC’s argument that Section 13(b) ‎of the FTC Act is “satisfied by showing a past violation and a reasonable likelihood of recurrent ‎future conduct.” Fed. Trade Comm’n v. Shire ViroPharma Inc., No. 18-1807, slip op. at 5 (3d ‎Cir. Feb. 25, 2019). Instead, the Third Circuit held that the meaning of the phrase “is violating, or ‎is about to violate” in Section 13(b) is limited to the “clear text” and, because the FTC admitted ‎that Shire is “not currently violating the law” and “the complaint fails to allege the Shire is about ‎to violate the law,” the case must be dismissed. Id.‎

You can read Locke Lord’s article on the district court’s dismissal of the complaint here.‎

The FTC’s complaint detailed Shire’s misconduct years earlier with respect to its ‎blockbuster drug Vancocin^®, an antibiotic used to treat a serious gastrointestinal infection. Id. at ‎‎8. Sales of Vancocin^® totaled nearly $300 million in 2011. Id. at 9. Although Vancocin^® “lacked ‎both patent and regulatory exclusivity,” generic drug manufacturers still faced one big problem—‎‎“the FDA’s recommendation that generic manufacturers seeking to demonstrate bioequivalence ‎conduct in vivo clinical endpoint studies.”  Id. Unfortunately for the generic manufacturers, these ‎studies were more costly than those that Shire had conducted to gain approval of Vancocin^® in ‎the first place.  Id.‎

‎“Shire became increasingly concerned that the FDA might allow generic manufacturers to ‎demonstrate bioequivalence using in vitro data.” Id. Indeed, the FDA in February 2006 advised a ‎generic manufacturer that it would allow the manufacturer to demonstrate bioequivalence using ‎in vitro dissolution testing data. Id. at 10. In 2007, three generic manufacturers filed ANDAs to ‎market generic versions of Vancocin^®. Id.‎

Shire wanted to protect its lucrative drug from competition. Id. The Court first noted that, ‎‎“[a]mong [Shire’s] options was a citizen petition.” Id. And in the very next breath, the Court ‎stated that “[t]he First Amendment guarantees individuals the right to petition the government.” ‎Id. The citizen-petition regulatory process allows any person or entity to submit a citizen petition ‎to FDA requesting that the agency “issue, amend, or revoke a regulation or order or take or ‎refrain from taking any other form of administrative action.” 21 C.F.R. § 10.30(b)(3).‎

The Court acknowledged that “[t]he filing of a citizen petition can substantially delay ‎approval of a generic drug.” Shire, slip op. at 11. At the time Shire began filing citizen petitions ‎for Vancocin^®, “the FDA automatically suspended ANDA approval if a branded manufacturer ‎filed a citizen petition.” Id. FDA regulations required it to respond to each citizen petition within ‎‎180 days, “[b]ut the FDA’s response need not dispose of the entire petition within that time.” Id. ‎at 12.‎

Shire submitted to the FDA forty-three filings—including a citizen petition and ‎amendments thereto—over a period of about six years. Id. Shire sought to delay generic approval ‎‎“by convincing the FDA to require ANDA applicants to conduct in vivo clinical endpoint ‎studies.” Id. At the end of this filing spree, the FDA rejected Shire’s citizen petition because ‎‎“Shire’s scientific challenges to the bioequivalence recommendation ‘lack[ed] merit] and ‘were ‎unsupported.’” Id. On the same day of this rejection, the FDA approved three ANDAs. Id. ‎Shire’s sales plummeted by 70% within three months. Id. at 13.‎

The Court noted that the FTC had sued Shire five years later and described only past ‎misconduct in detail. Id. In its complaint, “[t]he FTC claimed that Shire’s conduct—submitting ‎serial, meritless filings—had harmed consumers and competition because it enabled Shire to ‎maintain and extend its monopoly by delaying the FDA’s approval of generic alternatives” of ‎Vancocin^®. Id. The FTC further claimed that there was a real danger that Shire would continue to ‎engage in this sort of conduct in the future. Id. The FTC based its allegations “on Shire’s (1) ‎knowledge that its petitioning campaign would enrich it at the expense of consumers; (2) ‎incentive to engage in similar conduct in the future; and (3) opportunity to engage in similar ‎conduct in the future.” Id.‎

Shire moved to dismiss, claiming the complaint was deficient and that ‎Shire was “immune from antitrust challenge pursuant to the Noerr-Pennington doctrine.” Id. at ‎‎14. The FTC countered that “sham petitioning” is not protected under Noerr-Pennington. Id. As ‎we stated in our previous article, the district court ruled in favor of Shire, holding that “the FTC ‎had failed to plead sufficient facts to show that Shire ‘is violating, or is about to violate’ the law” ‎and “flatly reject[ing] the FTC’s contention that Shire was about to violate the law merely ‎because it had the incentive and opportunity to engage in similar conduct in the future.” Id. The ‎FTC appealed.‎

The Third Circuit skirted the issue of whether Shire’s petitioning activity was immune ‎from antitrust challenge, stating in a footnote that, because it was affirming the district court’s ‎dismissal of the complaint, “Shire’s Noerr-Pennington defense is not before us on appeal.” Id. ‎Instead, the Court began by addressing whether the limitations of Section 13(b) imposed a ‎jurisdictional requirement. Id. at 15. The Court held that “Section 13(b)’s ‘is’ or ‘is about to ‎violate’ requirement is nonjurisdictional.” Id. at 16-18.‎

Section 13(b) amended the FTC Act to allow the FTC “to quickly enjoin ongoing or ‎imminent illegal conduct.” Id. at 21. This amendment “allow[s] the FTC to obtain a temporary ‎restraining order or preliminary injunction in federal court whenever it ‘has reason to believe’ that ‎violations of the FTC Act are occurring or are about to occur.” Id. But the FTC must “have ‎reason to believe a wrongdoer ‘is violating’ or ‘is about to violate’ the law.” Id. at 23.‎

The Court held: The “language [of Section 13(b)] is unambiguous; it prohibits existing or ‎impending conduct. Simply put, Section 13(b) does not permit the FTC to bring a claim based on ‎long-past conduct without some evidence that the defendant ‘is’ committing or ‘is about to’ ‎commit another violation.” Id. at 23-24. Further, “[t]he provision was not designed to address ‎hypothetical conduct or the mere suspicion that such conduct may yet occur.” Id. at 24.‎

The Court rejected the FTC’s argument that “relief under Section 13(b) is appropriate ‎when it shows a reasonable likelihood that past violations will recur,” stating that “none of the ‎cases cited by the FTC considers the issue presented here—the meaning of Section 13(b)’s ‎threshold requirement that a party ‘is’ violating or ‘is about to’ violate the law.” Id. at 24-25.‎

The Court also rejected the FTC’s argument that the court’s interpretation of Section ‎‎13(b) “would make it harder to get in the courthouse door than to win injunctive relief.” Id. at 28. ‎The FTC’s interpretation, which would require only reasonable likelihood of recurrence, “cannot ‎overcome Congress’s plain language in Section 13(b), which requires the FTC to plead, at the ‎time it files suit, that a violation ‘is’ occurring or ‘is about to’ occur.” Id. In addition, the Court ‎declined to give weight to the FTC’s citation of securities law cases that involved similar ‎language. Id. at 29.‎

In its briefing, the FTC had warned that “[l]imiting the FTC’s Section 13(b) authority to ‎cases of ongoing or imminent violation would make it easy for wrongdoers to evade Congress’ ‎purposes in creating the regime. As soon as a potential defendant got wind that the FTC was ‎investigating its activities, it could simply stop those activities and render itself immune from suit ‎in federal court unless the FTC could allege and prove an imminent re-violation.” Id. at 30-31. ‎Nevertheless, the Court was unconcerned. Id. at 31 (“[T]here is no reason to believe that our ‎decision today unnecessarily restricts the FTC's ability to address wrongdoing.”)‎

The Court noted that, “[i]f the FTC wants to recover for a past violation—where an entity ‎‎‘has been’ violating the law—it must use Section 5(b).” Id. But, “[i]f the FTC instead chooses to ‎use Section 13(b), it must plead that a violation of the law ‘is’ occurring or ‘is about to” occur.’” ‎Id.‎

The Court summarized: “In short, we reject the FTC's contention that Section 13(b)’s ‘is ‎violating’ or ‘is about to violate’ language can be satisfied by showing a violation in the distant ‎past and a vague and generalized likelihood of recurrent conduct. Instead, ‘is’ or ‘is about to ‎violate’ means what it says—the FTC must make a showing that a defendant is violating or is ‎about to violate the law.” Id. at 32.‎

The Court stated that “the FTC waited until five years after Shire had stopped its ‎allegedly illegal conduct before seeking an injunction under Section 13(b)” and the complaint ‎‎“fails to allege that Shire ‘is violating’ or ‘is about to violate’ the law.” Id. at 33. The Court gave ‎short shrift to the FTC’s allegations, stating that “[t]he few factual allegations in the FTC’s forty-‎five page complaint that suggest Shire ‘is about to violate’ the law are woefully inadequate to ‎state a claim under Section 13(b).” Id. The FTC alleged that “[Shire] knowingly carried out its ‎anticompetitive and meritless petitioning campaign to preserve its monopoly profits. It did so ‎conscious of the fact that this conduct would greatly enrich it at the expense of consumers.” Id. ‎at 34. Further, Shire “has the incentive and opportunity to continue to engage in similar conduct ‎in the future. At all relevant times, [Shire] marketed and developed drug products for commercial ‎sale in the United States, and it could do so in the future. Consequently, [Shire] has the incentive ‎to obstruct or delay competition to these or other products.” Id.‎

Nevertheless, the Court agreed with Shire: “Taking the factual allegations in the ‎complaint as true, Shire stopped its sham petitioning campaign in 2012 when the FDA approved ‎generic equivalents to Vancocin. The complaint contains no allegations that Shire engaged in ‎sham petitioning in the five-year gap between the 2012 cessation in petitioning and the 2017 ‎lawsuit. The complaint also lacks specific allegations that Shire is ‘about to violate’ the law by ‎petitioning as to Cinryze, the only other drug mentioned.” Id. at 34-35.‎

“[G]iven the paucity of allegations in the complaint, the FTC fails to state a claim under ‎any reasonable definition of ‘about to violate,’” the Court held. Id. at 35. Thus, the Court ‎decided it would “leave for another day the exact confines of Section 13(b)’s ‘about to violate’ ‎language.” Id. at 35-36.‎

The Court further stated in the last paragraph of its opinion that “[t]he FTC’s improper ‎use of Section 13(b) to pursue long-past petitioning has the potential to discourage lawful ‎petitioning activity by interested citizens—activity that is protected by the First Amendment. ‎Because we affirm the District Court's judgment dismissing the complaint, we need not address ‎the issue further but suggest that the FTC be mindful of such First Amendment concerns.” Id. at ‎‎36.‎

Although the Court’s opinion appears to limit the FTC’s ability to pursue relief under ‎Section 13(b) if the FTC has not specifically alleged that unlawful conduct is occurring or is ‎about to occur, the opinion does not foreclose the FTC from bringing an action after at least one ‎citizen petition has been filed that gives the FTC “reason to believe” that wrongdoing is taking ‎place or is about to take place.‎