The Federal Trade Commission has reached a settlement resolving the Commission’s antitrust suit charging Cephalon, Inc. with illegally blocking generic competition to its blockbuster sleep-disorder drug Provigil. The settlement ensures that Teva Pharmaceutical Industries, Ltd., which acquired Cephalon in 2012, will make a total of $1.2 billion available to compensate purchasers, including drug wholesalers, pharmacies, and insurers, who overpaid because of Cephalon’s illegal conduct.

Some of these purchasers have settled related litigation and payments made by Teva in those or other actions can be credited against the FTC fund according to the terms of the stipulated order for equitable monetary relief. Any remaining funds will be paid to the U.S. Treasury.

As part of the settlement, Teva also has agreed to a prohibition on the type of anticompetitive patent settlements that Cephalon used to artificially inflate the price of Provigil. Teva is the largest generic drug manufacturer in the world, and this prohibition applies to all of its U.S. operations.

“Today’s landmark settlement is an important step in the FTC’s ongoing effort to protect consumers from anticompetitive pay for delay settlements, which burden patients, American businesses, and taxpayers with billions of dollars in higher prescription drug costs,” said FTC Chairwoman Edith Ramirez. “Requiring wrongdoers to give up their ill-gotten gains is an important deterrent.”

Provigil is a prescription drug approved to treat excessive sleepiness in patients with sleep apnea, narcolepsy, and shift-work sleep disorder. In the year before generic entry, Provigil sales in the United States exceeded $1 billion.

The settlement stems from a 2008 FTC lawsuit, which charged that Cephalon unlawfully protected its Provigil monopoly through a series of agreements with four generic drug manufacturers in late 2005 and early 2006. The FTC alleged that Cephalon sued the generic drug makers for patent infringement and later paid them over $300 million in total to drop their patent challenges and forgo marketing their generic products for six years, until April 2012.

This type of settlement, in which the generic drug firm agrees not to market its product for a period of time and the brand name drug manufacturer pays the generic— whether in monetary or non-monetary form – is commonly referred to as a “reverse-payment” patent settlement. In 2013, in FTC v. Actavis, the Supreme Court confirmed that reverse payments can violate the antitrust laws.

Trial in the case is scheduled to begin June 1 in the U.S. District Court for the Eastern District of Pennsylvania. If approved by the court, the settlement will resolve the FTC’s charges.

Today’s settlement represents the first FTC case to be resolved since the Supreme Court’s 2013 ruling in FTC v. Actavis made clear that reverse payment patent settlements are subject to the same antitrust rules that govern U.S. business conduct generally.

Under the stipulated order for permanent injunction, Teva is prohibited from engaging in certain types of reverse payment agreements. This provision is aimed primarily at the type of reverse payments that Cephalon used, that is, business transactions entered at the same time as the settlement that serve as a form of compensation. In this case, Cephalon agreed to pay the generics principally for active pharmaceutical ingredients and intellectual property, business deals the FTC was prepared to prove at trial made no economic sense for Cephalon except as payments not to compete.

The order bars Teva from entering into a business deal with a competitor within 30 days of, or expressly conditioned on, a patent litigation settlement that restricts that competitor’s generic entry. This provision will not prevent Teva from entering into truly independent business transactions, and it preserves Teva’s ability to enter other types of settlement agreements in which the value transferred is unlikely to present antitrust concerns, such as those providing payment for saved future litigation expenses (up to $7 million).

The prohibition also does not cover all possible forms of reverse payments that could raise antitrust concerns. For example, it does not cover a branded firm’s grant of an exclusive license to the generic, though some exclusive licenses in effect amount to an agreement by the branded drug firm not to market an “authorized generic.” While such a promise can function as an anticompetitive reverse payment, it was not at issue in this case.

The Commission vote approving the proposed stipulated order was 5-0. The Commission issued a statement, and Commissioners Maureen K. Ohlhausen and Joshua D. Wright issued a separate statement. The FTC filed the proposed consent decree in the U.S District Court for the Eastern District of Pennsylvania.

NOTE: Stipulated final orders have the force of law when signed and entered by the District Court judge.

The FTC’s Bureau of Competition works with the Bureau of Economics to investigate alleged anticompetitive business practices and, when appropriate, recommends that the Commission take law enforcement action. To inform the Bureau about particular business practices, call 202-326-3300, send an e-mail to antitrust{at}ftc{dot}gov, or write to the Office of Policy and Coordination, Bureau of Competition, Federal Trade Commission, 600 Pennsylvania Ave., NW, Room CC-5422, Washington, DC 20580. To learn more about the Bureau of Competition, read Competition Counts. Like the FTC on Facebook (link is external), follow us on Twitter (link is external), and subscribe to press releases for the latest FTC news and resources.