A US magistrate judge ruled that the Federal Trade Commission overstepped its authority when the agency tried to pressure a generic drug company to enter into a business deal with a competitor. The slap on the FTC’s wrist could sway a debate occurring in the Senate as early as this week over whether to give the FTC additional power to enforce a ban on reverse-payment settlements.

Judge Alan Kay’s order sharply criticizing the FTC is the latest development in a dispute between the FTC and Watson. As first reported by MM&M, the case arose after the FTC tried to stop a reverse-payment settlement between Cephalon and Watson by threatening to investigate Watson if it did not relinquish marketing exclusivity to sell a generic copy of sleep drug Provigil (modafinil) and jointly market the copycat version with rival firm Apotex.

The FTC brought the Watson case as part of an ongoing campaign against reverse-payment settlements, which FTC chairman Jon Leibowitz believes are unfair but so far has been unsuccessful overturning in the courts.

Judge Kay sided with Watson: “The facts before us suggest that the FTC sought to place Watson between a rock and a hard place, where the only way Watson could clear its name and escape further FTC scrutiny was to give in to the pressure the FTC was placing on Watson to enter into the business deal with Apotex.”

In addition, while attempting to broker the Provigil deal, there is a “strong possibility,” the judge wrote, that FTC divulged Watson’s confidential information to Apotex regarding its first-filer status on a patent. This warrants further investigation.

The judge, however, denied Watson’s request that FTC staffer Markus Meier, the one whom Watson’s attorney argues threatened him with the investigation, be deposed, ordering instead that FTC answer interrogatories posed by Watson CEO Paul Bisaro.

The US House recently passed an amendment, tacked onto the War Funding Bill (H.R. 4899), that would give the FTC the power it seeks to restrict patent settlements, and the Senate could take up a companion bill this week.

But Judge Kay’s order raises doubts as to whether Leibowitz will become the reverse-payment settlement czar, especially in light of questions asked of Leibowitz by Sens. Orrin Hatch (R-Utah) and Arlen Specter (D-PA) last month. At a June hearing on antitrust law oversight, Hatch probed Leibowitz about Watson’s allegations, saying “What concerns me is that FTC apparently did not deny any of these allegations.” And Specter questioned whether FTC should get involved in determining the legality of reverse-payment settlements in the first place. “Isn’t it sufficient to have the settlement subject to court approval to make sure consumers are protected, without having the FTC intervene?” he asked.

The Generic Pharmaceutical Association (GPhA), which strongly opposes the House bill, took out an ad on Politico.com last week urging the Senate to strip out the ban. “GPhA believes that the current system where the Federal Trade Commission and the Department of Justice scrutinize each settlement on a case-by-case basis works for consumers by encouraging competition while also preventing bad settlements from happening,” a spokesperson told MM&M.