Kathleen Gatti
St. John’s University School of Law
American Bankruptcy Institute Law Review Staff
Endo Pharmaceuticals (“Endo”) develops, manufactures, markets, and distributes prescription pharmaceutical products. Endo holds several patents covering an extended-release version of the opioid oxymorphone that is sold under the brand name Opana ER.[1] In 2007, Impax Labs (“Impax”) decided to market its own generic version of Opana ER after certifying to the Food and Drug Administration that Impax would not infringe upon Endo’s patent, which Impax asserted was invalid.[2] Endo and Impax reached an agreement in 2010 which, among other things, provided for a license from Endo to Impax for all of Endo’s patents involved in manufacturing, selling, and marketing generic Opana ER.[3] The parties thereafter entered into another agreement that “clarified” the scope of the license in exchange for a payment and a percentage of royalties relating to Impax’s gross oxymorphone ER profits.[4] The Federal Trade Commission (“FTC”) filed a complaint against Endo with the United States District Court for the District of Columbia.[5] According to the FTC, this exclusive patent licensing agreement was anticompetitive and harmful to consumers in violation of the Sherman Act and constituted an unfair method of competition in violation of the FTC Act.[6] The district court, however, dismissed the action for failure to state a claim.[7] The FTC appealed the district court’s decision.[8]
In 2022, while the appeal was pending, Endo and certain affiliates filed voluntary petitions for bankruptcy under chapter 11 of title 11 of the United States Code (the “Bankruptcy Code”) in the United States Bankruptcy Court for the Southern District of New York.[9] Section 362 of the Bankruptcy Code provides that a bankruptcy filing generally results in an automatic stay of any litigation against a debtor.[10] However, actions by “[a] governmental unit to enforce such governmental unit’s or organization’s police or regulatory power” are excluded from the automatic stay.[11] If the automatic stay applied, it would prevent the D.C. Circuit Court from hearing the appeal.[12] If the automatic stay did not, the appeal could proceed. Endo filed a notice of suggestion of bankruptcy and automatic stay of proceedings in the D.C. Circuit.[13] Upon this filing, the D.C. Circuit Court ordered the parties to “‘address in their briefs whether [it] had jurisdiction over the appeal.’”[14] Endo did not respond, but the FTC and Impax both asserted that the appeal proceedings should not be stayed pursuant to the regulatory power exception to the automatic stay.[15] As stated by the First Circuit, to determine whether the exception applies, a court will analyze whether the government’s action is to “effectuate a public policy,” in which case the exception would apply, or to “further its own pecuniary interest,” in which it would not.[16] The action will pass the public policy test if it is “designed primarily to protect the public safety and welfare.”[17]
In this instance, the D.C. Circuit Court found that the regulatory exception applied and that the FTC litigation could proceed.[18] According to the D.C. Circuit, the FTC litigation advanced a public policy, namely the prevention of unfair methods of competition.[19] The court noted that the litigation did not advance the FTC’s own pecuniary interest as evidenced by the lack of a request for monetary relief.[20] As such, “[b]ased on the Commission’s express purpose for this litigation,”[21] the Court concluded that the regulatory power exception to the automatic stay was applicable to the proceeding, and thus the Court of Appeals could hear the case notwithstanding the automatic stay.[22]
The automatic stay is broad, and it generally enjoins all litigation against a debtor.[23] However, the automatic stay is not absolute, and there are exceptions. One exception is the regulatory power exception.[24] Courts have found that the exception applies where the government action is to effectuate a “public policy,” but does not apply where the government is attempting to advance its own “pecuniary interest.”[25]
[1] FTC v. Endo Pharms. Inc., No. 22-5137, 2023 WL 5490337, at *1 (D.C. Cir. Aug. 25, 2023).
[2] Id. at *2.
[3] Id.
[4] Id.
[5] Id. at *3.
[6] Id.
[7] Id.
[8] Id.
[9] Id.
[10] 11 U.S.C. § 362(a)(1).
[11] 11 U.S.C. § 362(b)(4).
[12] Endo Pharms., 2023 WL 5490337, at *3.
[13] Id.
[14] Id.
[15] Id.
[16] Endo Pharms., 2023 WL 5490337, at *3 (quoting In re Kupperstein, 994 F.3d 673, 677–78 (1st Cir. 2021)).
[17] Id.
[18] Id.
[19] Id.
[20] Id.
[21] Id.
[22] Id.
[23] 11 U.S.C. § 362(a)(1).
[24] 11 U.S.C. § 362(b)(4).
[25] Endo Pharms., 2023 WL 5490337, at *3 (citation omitted).