On June 17, 2015, the U.S. District Court for the Eastern District of Pennsylvania approved a consent order (the Consent Order) between the Federal Trade Commission and defendants Cephalon, Inc. and its parent, Teva Pharmaceutical Industries Ltd., resolved long-running antitrust litigation stemming from four reverse payment settlements of Hatch-Waxman patent infringement cases involving the branded drug Provigil. Pursuant to its settlement with the FTC (the Consent Order), Cephalon agreed to disgorge $1.2 billion and to limit the terms of any future settlements of Hatch-Waxman cases. The FTC and its Staff have celebrated and promoted the terms of the settlement as setting a new standard for resolving reverse-payment cases. But their enthusiasm may be more wishful thinking than reality, and their speculation that the agreement may exert force on market behavior does not appear to be supported by a fair assessment of the state of the law. First, the restrictions on Cephalon's ability to enter into settlements of Hatch-Waxman cases exceed anything a court has ever required, and conflict with settlement terms apparently approved in the U.S. Supreme Court's seminal reverse-payment decision, Federal Trade Commission v. Actavis, 133 S. Ct. 2223 (2013). Second, the FTC's use of disgorgement as a remedy remains controversial and Cephalon, despite initial opposition, might have voluntarily embraced that remedy as part of a strategy to achieve a global resolution of remaining private litigation. We write to put the Consent Order in perspective, so that industry participants can better assess its meaning.
The FTC filed a complaint against Cephalon in U.S. District Court for the District of Columbia on February 12, 2008. At the time, Cephalon marketed a brand prescription drug called Provigil, which treats narcolepsy, sleepapnea, and shift work sleep disorder. The complaint alleged that Provigil was, at the time of its approval, the only FDA-approved prescription medicine for those uses. The product was successful: Cephalon's U.S. sales of Provigil grew from $25 million in 1999 to more than $800 million in 2007.
The original patent for Provigil expired in 2001, but Cephalon had obtained a second patent for a formulation of the particle size of Provigil's active ingredient, modafinil, which was set to expire in April 2015. Apparently, however, the particle size patent could be easily circumvented. Thus, in December 2002 the earliest possible date four generic manufacturers each submitted an ANDA for generic Provigil, stating that its version of the drug did not infringe the particle size patent. Cephalon understood that the generic modafinil would likely be priced 75 to 90 percent below the price of Provigil, resulting in a $400 million annual reduction in the brands sales within a year.
Cephalon sued the generic companies for patent infringement in March 2003. It eventually settled all the cases, with each generic agreeing to refrain from marketing any modafinil product until April 2012 unless another generic launched prior to that date. At the same time, Cephalon entered into 13 purportedly independent business transactions resulting in payments to those companies totaling in excess of $200 million. The FTC's complaint quoted Cephalons CEO as stating that the arrangements secured six more years of patent protection for his company, resulting in an additional $4 billion in sales.
The FTC's complaint alleged that Cephalon's settlements constituted unfair methods of competition in violation of Section 5(a) of the FTC Act, 15 U.S.C. 45(a). The complaint sought an injunction prohibiting Cephalon from enforcing terms of the agreements that barred the generic manufacturers from marketing generic versions of Provigil or successor products before April 2012.
The Supreme Court decided Actavis while the FTC's lawsuit was pending. The Court held that reverse-payment settlements can raise antitrust concerns and that their lawfulness should be judged under the Rule of Reason. In January 2015, the district court applied Actavis to the settlements and denied Cephalon's motion for summary judgment. Recognizing that Actavis left much of the Rule of Reason analysis to be fleshed out by the lower courts, the district court discussed the range of approaches that had then been taken in the wake of the Supreme Court's decision, most notably with respect to what was meant by the phrase, a large and unjustified payment by a brand to a generic to settle a Hatch-Waxman infringement case. Ultimately, the district court found that the FTC (and private plaintiffs in the now-consolidated cases) satisfied their burden of presenting evidence of anticompetitive effects, which includes a large reverse payment, and also found there was a genuine dispute of material fact as to whether Cephalon's procompetitive justifications were pretextual. That is, Plaintiffs have provided significant direct and circumstantial evidence that, if believed, could lead a reasonable jury to conclude that the side-deals between Cephalon and the Generic Defendants were simply a means of providing payments for delay, in violation of law.
In a separate decision rendered on April 15, 2015, the district court denied Cephalon's motion to preclude the FTC from seeking disgorgement of Cephalon's profits for the years 2007-2012. It is important to place the courts ruling in context: It decided only that the FTC was not precluded from seeking disgorgement, and that ruling was based at least in part on the FTC's explanation that the disgorged funds would be placed in a Consumer Relief Fund that would be used to satisfy any claim from private plaintiff cases.
The FTC took no time heralding the settlement agreement, describing it as precluding the largest generic drug company in the United States from entering into one of the most common forms of anticompetitive reverse payments in the future. In an interview given to Law360, Markus Maier, the Assistant Director of the FTC's Health Care Division, went further. He said that the Consent Order sends a strong and important message to the industry, and that the FTC would look to the settlement in future discussions with other companies. Mr. Maier added that, despite the fact that future deals might not be identical in all respects, there's a meaningful potential that this settlement will set a standard for the industry. The question is: Are other companies going to fall in line or not?
Whether the Consent Order will serve as a template to resolve future reverse-payment cases remains to be seen, but any claim by the FTC Staff that the agreement reflects existing law, or that its terms and structure should be generally applicable in all litigation contexts, is overstated. Consent orders often make bad law. In the M&A context, for example, parties frequently embrace nonmaterial but debatable divestitures in order to close transactions that would otherwise be in limbo during a period of litigation. The same may be true in the litigation context, where agencies institutional interests may drive settlement terms with private parties lacking an incentive to litigate the points, or having different strategic objectives in mind. Here, the Consent Order appears to reflect terms that could not be won in court by the FTC, and the terms of the settlement may be less important to Cephalon than the strategic opportunities the settlement offers for settling the entire litigation. Even within the FTC, the terms of the Consent Order tapped into a simmering dispute over the proper role of disgorgement in Section 5 cases. All of these factors may limit the influence of the Cephalon settlement.
A. The Settlement Prohibitions: Are Arms Length Side Deals Lawful?
The Consent Order sweeps within its bounds a class of transactions of tremendous potential importance to branded drug manufacturers in settling Hatch-Waxman cases, but whose putative illegality has never been tested. The core of the agreement is the prohibition against future settlements by Cephalon involving cash and other compensation to generics in excess of litigation costs, if tied to delayed generic entry. To be included within the prohibition, a payment must be a transfer of value by the patentholder to the generic challenger (including, but not limited to, money, goods or services), regardless of whether the generic challenger purportedly transfers value in return, so long as the value is in excess of agreed upon saved future litigation expenses. In other words, so long as a proposed Hatch-Waxman settlement is conditioned upon or proximately close enough in time with a settlement of the patent infringement litigation, any side deal providing compensation to the generic in excess of saved litigation costs is prohibited, regardless of whether the side deal includes arms length financial terms or is otherwise commercially justifiable.
Whether the law is violated by even a sweetheart side deal in which the generic pays less than market value for goods or services as part of a Hatch-Waxman settlement remains an open and hotly debated question in the lower courts. But no court (or even the FTC) has declared an arms length side deal to be an unlawful component of such a settlement in an adjudicated case. Indeed, the Supreme Court in Actavis seemed to reject the Consent Orders approach, identifying among the justifiable components of a settlement with a generic a payment that may reflect compensation for other services that the generic has agreed to perform such as distributing the patented item or helping to develop a market for that item. These activities, specifically sanctioned by the Supreme Court, would be prohibited under the Consent Order. More generally, the Supreme Courts decision in Actavis rejected the Consent Orders per se ban on payments in excess of presumed litigation expenses, declining to subject reverse-payment settlements to per se illegality or quick look antitrust analysis, as the FTC has proposed. Rather, the Court found the presence of large and unjustified payments to be the basis for Rule of Reason analysis.
The Cephalon case itself does not even provide the factual framework for declaring arms length transactions unlawful in the context of settlements. The FTC's own characterization of the side deals at issue in the case makes the point: The challenged agreements were (i) to supply active ingredients to Cephalon despite evidence that Cephalon already had adequate supply available at significantly lower prices, (ii) intellectual property licenses where Cephalon had previously rejected any concerns about possible infringement risk, and (iii) aimed at product development, despite internal projections showing a negative net present value to Cephalon. As of now, there simply is no authority for the proposition that arms length transactions prohibited by the Consent Order are unlawful.
B. The Disgorgement Order
The FTC's ability to require equitable disgorgement orders in competition cases under Section 5 of the FTC Act finds support in the case law, but has not been definitively established. Separate from the question of authority is an issue of administrative discretion to employ the remedy. Disagreements within the Commission over this subject bubbled to the surface in connection with the unanimous approval of the Consent Order.
The FTC's statement describing the proposed settlement was signed only by Chairwoman Ramirez and Commissioners Brill and McSweeny. The two Republican appointees, Commissioners Ohlhausen and Wright, wrote separately (the Cephalon Minority Statement) to explain why they supported the proposed disgorgement remedy in the case, and to address what they called their concerns about the lack of guidance the Commission has provided on the use of this extraordinary remedy in competition cases. The problem, they explained, came with the FTC's 2012 withdrawal of its 2003 guidelines, and the Commission's failure to articulate a replacement methodology, guideline, or policy. The importance of the question is underscored by the fact that, in the three years since the disgorgement policy statement was withdrawn, the FTC has sought the remedy three times, compared with twice in the nine years the policy was in effect. The withdrawal of the policy statement might thus be seen not merely as the product of an ideological disagreement but as a specific effort by some at the Commission to be freed from guidelines that kept them from seeking disgorgement in more cases. That all three of the recent examples of such enforcement efforts were against health care companies (against AbbVie and Cardinal Health, in addition to Cephalon) regular targets of FTC scrutiny brings together the elements of means, motive, and opportunity. The FTC minority called upon the majority either to reinstate the guidelines or to provide alternative guidance.
The majority responded by explaining that its support for disgorgement in the Cephalon case was based on three factors. First, it said that the monetary remedy might be necessary to deter unlawful conduct because economic incentives to engage in reverse-payment settlements encouraged companies to collude rather than compete. Second, the majority thought the remedy appropriate as punishment for Cephalon's success in delaying a judicial resolution of the case for six years while the generic remained off the market, and a statement to investors by Cephalon's general counsel that the FTC would have no practical remedy in light of the delay (the majority did not suggest that any of Cephalon's litigation tactics were unlawful or violated Rule 11). Finally, the majority stated that disgorgement was appropriate because the settlements arose out of litigation over a patent that the majority said had been procured by fraud.
To the extent this last factor can be seen as meaning that the alleged violation of law was clear, it corresponds to the first and most important criterion identified in the now-abandoned guidelines. The majority's decision not to acknowledge that possible relationship, and to list it last, gives little comfort to potential respondents that they will not be subject to a disgorgement claim even where their conduct was arguably lawful. More generally, the fact-specific nature of the majority's explanation provides only limited guidance as to future efforts to seek disgorgement. The internal political divisions within the FTC suggest the absence of a bipartisan consensus on the question, leaving future policies likely subject to the results of presidential elections.
The question whether the Consent Order will, as the FTC Staff desires, exert sufficient gravitational force to cause industry participants to fall in line with its terms is also colored by the possibility that the disgorgement remedy might have been actively supported by Cephalon in this particular instance. Cephalon's agreement to pay $1.2 billion to settle litigation can only reasonably be seen as reflecting significant concerns over the ultimate outcome of the cases and damage awards as does its earlier settlement of $512 million with the direct-purchaser plaintiffs. The $1.2 billion is, literally, a floor for Cephalon's liability. But Cephalon may also think it could be used to set a ceiling. One can easily imagine Cephalon's lawyers pursuing a global settlement with the remaining plaintiffs in connection with approval of the Consent Order. They might argue that the remaining fund is enormous, available immediately, would be seen as having been blessed by the FTC as to a reflection of genuine damages, and that absent a deal Cephalon would litigate until the end. Faced with a substantial recovery that plaintiff's counsel could defend as reflecting actual injury, and an uncertain ability to collect more without significant effort, delay, and risk, the offer could be appealing. This is speculation to be sure, but defendants willing to pay $1.2 billion to settle litigation could be happy to have the mechanism of the disgorgement fund to assist in trying to achieve a global settlement.
The FTC's settlement with Cephalon is an important development in the evolving history of antitrust litigation over reverse-payment settlements. But the FTC Staff may be overplaying its hand in declaring that the terms of the settlement will form the template of industry conduct and litigation settlements from now on.
 Teva acquired Cephalon in October 2011, after many of the relevant events occurred. For ease of discussion, Cephalon and Teva will be referred to collectively as Cephalon, although certain historical statements apply only to Cephalon itself.
 The Consent Order may be found at: https://www.ftc.gov/system/files/documents/cases/150617cephalonstip.pdf.
 Complaint, Federal Trade Commission v. Cephalon, Inc., No. 2:08-cv-2141-MSG (D.D.C. 2008).
 Id. 26.
5] Id. 1.
 Id. 32-36.
 Id. 36.
 Id. 39.
 Id. 58-59.
 Id. 56.
 Id. 4.
 King Drug Co. of Florence v. Cephalon, Inc., No. 2:08-cv-2141, 2015 U.S. Dist. LEXIS 9545 (E.D. Pa. Jan. 28, 2015).
 Actavis, 133 S. Ct. at 2237.
 King Drug Co., 2015 U.S. Dist. LEXIS 9545, at 25.
 Id. at 64.
 Federal Trade Commission v. Cephalon, Inc., No. 2:08-cv-2141, 2015 U.S. Dist. LEXIS 49333, at 9 (E.D. Pa. Apr. 15, 2015).
 Id. at 21.
 Readers are advised to consult the Consent Order for a full statement of its terms.
 Cephalon's $1.2 billion payment to the Consumer Relief Fund presumably will be used in part to fund its $512 million settlement with direct-purchaser plaintiffs, announced in court filings on April 17, 2015 in the consolidated litigation in the Eastern District of Pennsylvania. Indirect purchaser and third-party payor claims remain unsettled.
 Statement of the Federal Trade Commission, FTC v. Cephalon, Inc., May 28, 2015 (reflecting the views of Chairwoman Ramirez and Commissioners Brill and McSweeny) at 3, appearing at: https://www.ftc.gov/system/files/documents/cases/150528cephalonstatement.pdf. (Cephalon Majority Statement).
 M. Lippman, FTC Health Care Chief: $1.2B Cephalon Deal A Strong Warning," Law360 (May 28, 2015).
 Consent Order, 21, 21(a).
 Compare In re Lipitor Antitrust Litig., No. 3:12-cv-02389 (PGS), 2014 U.S. Dist. LEXIS 127877 at 62 (D.N.J. Sept. 12 2014) (reverse payments not limited to monetary payments), In re Niaspan Antitrust Litig., MDL No. 2460, 2014 U.S. Dist. LEXIS 124818, at 54 (E.D. Pa. Sept. 5, 2014) (same), and In re Nexium (Esomeprazole) Antitrust Litigation, 42 F. Supp. 3d 231, 262 (D. Mass. 2014) (same) with FTC v. AbbVie, Inc., Civil Action No. 14-5151, 2015 U.S. Dist. LEXIS 59115, at 18-20 (E.D. Pa. May 6, 2015) (below-market supply agreement to support generic entry prior to patent expiration pro-competitive, and not a reverse payment), In re Loestrin 24 Fe Antitrust Litigation, 45 F. Supp. 3d 180, 192 (D.R.I. 2014) (reverse payments under Actavis limited to cash payments or their very close analogue), and In re Lamictal Direct Purchaser Antitrust Litig., 18 F. Supp. 3d 560, 567-69 (D.N.J. 2014) (Actavis limited to reverse payments of money).
 By using the term arms length, we do not mean to define or limit the universe of payments that would be justified under Actavis, and thus lawful. It just allows a ready contrast with the terms of the Consent Order, and seemingly describes a wide range of potential commercial transactions.
 133 S. Ct. at 2236. In its recent decision on the lawfulness of reverse-payment settlements under California law, the California Supreme Court built on this provision in Actavis. The California court held that one of the express elements of a plaintiffs prima facie claim in a reverse-payments case is an allegation that the settlement includes cash or equivalent financial consideration that exceeds the value of goods and services provided by the generic challenger to the brand. In re Cipro Cases I & II, 61 Cal.4th 116, 151 (Cal. 2015).
27] Id. at 2237.
 Cephalon Majority Statement at 2 n.7.
 The statement of Commissioners Ohlhausen and Wright appears at: www.ftc.gov/system/files/documents/cases/150528cephalonohlhausenwright.pdf.
 Fed. Trade Commn, Policy Statement on Monetary Equitable Remedies in Competition Cases, 68 Fed. Reg. 45820 (Aug. 4, 2003); Fed. Trade Commn, Withdrawal of the Commissions Policy Statement on Monetary Equitable Remedies in Competition Cases, at 1 (July 31, 2012), available at https://www.ftc.gov/system/files/documents/public_statements/296171/120731commstmt-monetaryremedies.pdf.
 Dissenting Statement of Commissioner Maureen K. Ohlhausen in the Matter of Cardinal Health, Inc., at 2, available at https://www.ftc.gov/system/files/documents/public_statements/637761/150420cardinalhealthohlhausen.pdf.
 Cephalon Minority Statement at 3.
 Cephalon Majority Statement at 3.
 Id. at 4.
 Policy Statement on Monetary Equitable Remedies in Competition Cases, supra note 31, at 2.