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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.