Home > Legal Library > Article




Join Matindale-Hubbell Connected


Supreme Court Rules That Reverse-Payment Patent Litigation Settlements are Subject to Judicial Review Under the Antitrust Rule of Reason




by:
John J. Elliott
Greenberg Traurig, LLP - New York Office

 
August 22, 2013

Previously published on August 19, 2013

On June 17th, the U.S. Supreme Court resolved a decade of conflicting circuit court opinions when it held in Federal Trade Commission v. Actavis, Inc., 1 that “reverse-payment” settlements of Hatch-Waxman Act patent lawsuits “can sometimes violate the antitrust laws,” 2 and for that reason are to be analyzed under the rule of reason standard. These settlements have become a common method of settling patent disputes between branded and generic pharmaceutical companies, yet their legality under the antitrust laws had been in sharp dispute in the federal appellate courts.

The Supreme Court’s decision to apply the rule of reason standard was novel, as the Circuit Courts had previously either found such settlements presumptively unlawful (subject to a “quick look” review standard) or generally permissible. Chief Justice Roberts’ dissent vigorously attacked the majority’s “unruly” rule of reason standard, wishing “[g]ood luck” to the district courts that must apply it. 3

Regulatory Background: The Hatch-Waxman Act and Why Reverse-Payment Settlements Exist

The Hatch-Waxman Act (formally, The Drug Price Competition and Patent Term Restoration Act) was passed by Congress in 1984 to encourage innovation and increase the availability of low cost generic drugs. 4 It sought to do this by, among other things, making it easier for generic drug companies to challenge patents covering branded drugs.5 Under the Act, a pharmaceutical company that wishes to sell the generic form of a branded drug must file an Abbreviated New Drug Application (ANDA) with the FDA. The first generic company to file an ANDA obtains a 180-day exclusivity period during which it is the only generic company authorized to compete with the brand-name drug. However, to obtain such exclusivity, the manufacturer must certify under paragraph IV of the Act that its generic product either does not infringe the patent(s) protecting the branded drug patents, or that those patents are invalid.6 The generic manufacturer’s act of certifying that its product does not infringe the innovator’s patents (or that those patents are invalid) “automatically counts as patent infringement; however, the ANDA is automatically stayed for 30 months if the patent owner files a patent infringement lawsuit within 45 days of the ANDA filing.7  During the stay, the FDA is prohibited from approving another ANDA. The patent-holder is thereby incentivized to accept the generic’s challenge to its patent and file a lawsuit.8

The Hatch-Waxman Act inadvertently encourages reverse-payment settlements through these provisions. The generic manufacturer does not have to risk damages in order to challenge the patent in court. Conversely, the innovator does not sue in search of damages; rather, it only seeks to protect its patents. Typical settlement considerations are thereby reversed. The innovator, while nominally the plaintiff, is de facto the defendant, willing to provide some form of consideration to the upstart generic manufacturer, the nominal defendant, to stop challenging its patents. A reverse-payment settlement, pursuant to which the generic manufacturer agrees to keep its generic product off the market for a period of time, may constitute consideration acceptable to the generic manufacturer. Such agreements have been challenged a number of times by the FTC and private parties as antitrust violations.

Antitrust Challenges to Hatch-Waxman Act Reverse Payment Settlements: The Circuit Court Decisions

The Federal Trade Commission first challenged the validity of reverse-payment patent settlements as unreasonable restraints of trade in the late 1990s. It argued, and continues to argue, that by paying the generic manufacturer to settle, the patent holder obtains protection from competition in the market (i.e. by precluding the possibility of the patent being held invalid or not infringed), while the generic manufacturer shares in the patent holder’s monopoly profits instead of competing.9 Five circuit courts have weighed in: the Second, Eleventh, and Federal Circuits essentially immunized such settlements if market foreclosure did not extend beyond the statutory exclusionary period granted to a patent holder,10 and the Third and Sixth Circuits have considered them presumptively illegal.11

The Supreme Court granted certiorari to the Eleventh Circuit’s decision in F.T.C. v. Watson Pharmaceuticals, Inc.12  to address this circuit split. In Watson, the FTC had claimed that a reverse-payment settlement agreement between Solvay Pharmaceuticals Inc., the branded manufacturer of AndroGel, a testosterone supplement, and Actavis, Inc. (among others) violated Section 5(a) of the Federal Trade Commission Act. The 2006 settlement at issue resolved Solvay’s patent infringement lawsuit against Actavis and the other generic manufacturers which had filed an ANDA with the FDA. The defendants had agreed not to enter their generic versions of AndroGel into the market until more than five years prior to the patent’s expiration, and agreed in the interim to promote AndroGel to doctors. In return Solvay agreed to pay the defendants tens of millions of dollars.13  The FTC contended that the settlement agreements were “attempts to ‘defer’ generic competition with branded AndroGel by postponing the entry date of the generic drugs, thereby maintaining Solvay’s monopoly and allowing the parties to share monopoly profits at the expense of the consumer savings that would result from price competition.”14

The Eleventh Circuit affirmed dismissal of the FTC’s complaint. While recognizing that the “antitrust laws typically prohibit agreements where one company pays a potential competitor not to enter the market,” the “proper analysis” in a case involving patents, the Eleventh Circuit held, requires “evaluation of whether the settlement agreements contain provisions that restrict competition beyond the scope of the exclusionary potential of the patent.”15  This analysis is known as the “scope of the patent” approach. The Court found that the anticompetitive effects of the agreement fell “within the scope of the exclusionary potential of the patent” because it allowed generic entry before the expiration of the patent.16  Accordingly, the Eleventh Circuit held that the agreement was “immune from antitrust attack.”17

Shortly thereafter,  the Third Circuit explicitly rejected the “scope of the patent” test in In re K-Dur Antitrust Litigation, disagreeing with what it characterized as the “test’s almost un-rebuttable presumption of patent validity.” It concluded that “reverse payments permit the sharing of monopoly rents between would-be competitors without any assurance that the underlying patent is valid.”18  The Third Circuit remanded the case, and directed the district court to apply a “quick look” rule of reason, “treat[ing] any payment from a patent holder to a generic patent challenger as prima facie evidence of an unreasonable restraint of trade, which could be rebutted by showing that the payment (1) was for a purpose other than delayed entry or (2) offers some pro-competitive benefit.”19

The Supreme Court’s Decision: A Novel Approach to Reverse-Payment Settlements

In a 5-3 opinion written by Justice Breyer, the Supreme Court declined to adopt either the  Second, Eleventh and Federal Circuits’ “scope of the patent” test or the Third and Sixth Circuits’ (and FTC’s) “quick look” rule of reason test. The Court rejected the “scope of the patent” test for several reasons, chief among them because “what the holder of a valid patent could do does not by itself answer the antitrust question,” because “patent and antitrust policies are both relevant in determining the ‘scope of the patent monopoly.’”20   The patent, in a reverse-payment settlement, according to the Court, does not preclude antitrust examination because the “patent may or may not be valid, and may or may not be infringed.”21   Paying the challenger to settle, and stopping consideration of those questions, is not only “unusual,” it “tend[s] to have significant adverse effects on competition.22    Those adverse effects cannot be measured “solely against patent law policy;” procompetitive antitrust policies must be considered as well.23

The Court declared that the best way to consider these various “complexities” is under the rule of reason test, rejecting the FTC’s argument that a quick look approach was appropriate. According to the majority decision, a “quick look” is only appropriate when the anticompetitive effects of a challenged practice are clear to an “observer with even a rudimentary understanding of economics.”24  Reverse payments are not so easily considered: the “likelihood of a reverse payment bringing about anticompetitive effects depends upon its size, its scale in relation to the payor’s anticipated future litigation costs, its independence from other services for which it might represent payment, and the lack of any other convincing justification.”25

Declaring that “the FTC should have been given the opportunity to prove its antitrust claim,”26  Justice Breyer offered five “considerations” for the majority’s conclusion: (1) reverse payment patent settlements have the “potential for genuine adverse effects on competition,” because the patentee is in effect “purchas[ing]” the right to sell its product exclusively - a right it could lose if it lost the patent litigation;27  (2) the “anticompetitive consequences will at least sometimes prove unjustified;”28  (3) “where a reverse payment threatens to work unjustified anticompetitive harm, the patentee likely possesses the power to bring that harm about in practice;”29  (4) “it is normally not necessary to litigate patent validity to answer the antitrust question ... An unexplained large reverse payment itself would normally suggest that the patentee has serious doubts about the patent’s survival” and can “provide a workable surrogate for a patent’s weakness;”30  and (5) there are means of settling patent litigations without “large, unjustified reverse payments” to the challenger in return for staying out of the market for a period of time.31

While perhaps providing some guidance to the lower courts, Justice Breyer concluded with the following question to be considered on remand and in future reverse-payment cases: What are the reasons for including a reverse payment in the settlement? “If the basic reason is a desire to maintain and to share patent-generated monopoly profits, then, in the absence of some other justification, the antitrust laws are likely to forbid the arrangement.” 32

Chief Justice Roberts’ dissent took issue with nearly every statement in the majority opinion, arguing that “this is a fairly straightforward case” because under the Court’s precedent, if a patent holder’s actions “are within the scope of the patent, they are not subject to antitrust scrutiny.”33  This is so, according to the dissent, because the scope of the patent, “i.e., what rights are conferred by the patent - should be determined by reference to patent law.”34   Further, the dissent noted, each of the cases cited by the majority were distinguishable because they all involved a defendant acting outside the scope of its patent: “The majority points to no case where a patent settlement was subject to antitrust scrutiny merely because the validity of the patent was uncertain. Not one. It is remarkable, and surely worth something, that in the 123 years since the Sherman Act was passed, we have never let antitrust law cross that Rubicon.” 35

The dissent then turned to the five “considerations” offered by the majority, contending that they were nearly all “unresponsive” to the practical concern they supposedly addressed: that reverse-payment antitrust cases will inevitably address the patent’s validity. Contrary to the majority, Chief Justice Roberts warned that the patent holder will always raise the validity of its patent as a defense, and that “depriving him of such a defense - if that’s what the majority means to do - defeats the point of the patent, which is to confer a lawful monopoly on its holder.”36

Finally, the dissent took issue with the “unruly rule of reason,” wishing “[g]ood luck to the district courts that must, when faced with a patent settlement, weigh the ‘likely anticompetitive effects, redeeming virtues, market power, and potentially offsetting legal considerations present in the circumstances.’”

Analysis

The Actavis Court provided suggestions to the lower courts to look for indicators of illegality, particularly payments to the generic challenger “even larger than what the generic would gain in profits” if it won the lawsuit.37   Working through the factors involved will be no easy task, but the majority commented, “[a]s in other areas of law, trial courts can structure antitrust litigation [to best suit the facts of the case].”38   Ultimately, the majority declared that it would “leave it to the lower courts the structuring of the present rule-of-reason antitrust litigation.”39   Chief Justice Roberts’ concern that each patent holder will raise its patent in defense, however, likely can be expected.

The majority also pointed out that the Hatch Waxman Act requires “parties to a patent dispute triggered by a paragraph IV filing to report settlement terms to the FTC and the Antitrust Division of the Department of Justice.”40   It is possible that, just as the Hart-Scott-Rodino Act requires preclearance, and any concerns raised by the FTC and DOJ typically result in the renegotiation of the proposed merger, the FTC and DOJ may raise their concerns about planned reverse-payment settlement agreements. The setting parties may respond by renegotiating the reverse payment settlement, lowering the proposed payment to the generic company, and potentially allowing the generic to enter the market earlier than originally agreed.

In Actavis, the fundamental public policy goals of encouraging innovation and promoting competition clearly collided. Calling on the antitrust laws to reign in potential abuses of patent law, particularly when a patent is not strong, is the result. The issue facing lower courts, of course, will be how to determine whether the patent is strong and what settlement payment is “unduly large,” taking into consideration the services that the generic manufacturer may agree to provide to the patent holder in return for the payment. The Supreme Court has offered little guidance in that regard.


1  Federal Trade Commission v. Actavis, Inc., Case No. 12-416 (June 17, 2013), Slip Opinion (“Slip Op.”), available at http://www.supremecourt.gov/opinions/12pdf/12-416&under;m5n0.pdf.

2   Slip Op. at 2.

3  Slip Op. at 15.

  H.R. Rep. No. 98-857, pt. 1, at 14, reprinted in 1984 U.S.C.C.A.N. 2647 at 2647.

5  S. Rep. No. 107-167, at 4 (2002) (“Under Hatch-Waxman, manufacturers of generic drugs are encouraged to challenge weak or invalid patents on brand name drugs so consumers can enjoy lower drug prices.”).

6 21 U.S.C. §§355(j)(2)(A)(ii), (iv).

7 Slip Op. at 4.

8 Slip Op. at 4 (citing 35 U.S.C. §271(e)(2)(A) (2006 ed., Supp. V)).

9 Slip Op. at 6.

10 Ark. Carpenters Health & Welfare Fund v. Bayer AG, 604 F.3d 98, 106 (2d Cir. 2010) (applying scope of the patent test); In re Ciprofloxacin Hydrochloride Antitrust Litig., 544 F.3d 1323, 1333 (Fed. Cir. 2008) (applying scope of the patent test); In re Tamoxifen Citrate Antitrust Litig., 466 F.3d 187, 213 (2d Cir. 2006) (applying scope of the patent test); Schering-Plough Corp. v. FTC, 402 F.3d 1056, 1076 (11th Cir. 2005) (applying scope of the patent test); Valley Drug Co. v. Geneva Pharms., Inc., 344 F.3d 1294, 1308 (11th Cir. 2003) (applying scope of the patent test).

11 In re K-Dur Antitrust Litig., 686 F.3d 197, 214 (3d Cir. 2012) (holding that the district court should have applied “quick look” rule of reason test because reverse payments are prima facie evidence of unreasonable restraint of trade);  In re Cardizem CD Antitrust Litig., 332 F.3d 896, 908 (6th Cir. 2003) (finding agreement per se illegal where generic drug maker not only agreed to stay out of the market, but also agreed (using a statutory idiosyncrasy since corrected) to block all other generic makers from proceeding with their own patent challenges).

12 F.T.C. v. Watson Pharm., Inc., 677 F.3d 1298, 1312 (11th Cir. 2012) (applying scope of the patent test).

13 Slip Op. at 5-6.

14  Watson Pharm., Inc., 677 F.3d at 1305.

15   Id. at 1307, 1310.

16   Slip Op. at 2.

17   Watson Pharm., Inc., 677 F.3d at 1312 (noting the only time such agreements were not immune involved sham litigation or fraud in obtaining the patent).

18  In re K-Dur Antitrust Litig., 686 F.3d at 214, 216.

19   Id. at 218.

20  Slip Op. at 8-9.

21  Id. at 8.

22  Id.

23 Id. at 9.

24  Id. at 20.

25 Id.

26 Id. at 14.

27 Slip Op. at 14-15.

28 Id. at 17.

29 Id. at 18.

30 Id. at 18-19.

31 Id. at 19.

32  Slip Op. at 19.

33 Dissent at 3 (also noting two inapplicable exceptions: sham litigation and a fraudulently issued patent).

34 Id. at 5.

35 Id.at 8.

36 Id. at 12.

37 Slip Op. at 15.

38 Id. at 21.

39 Id.

40  Id. at 13.



 

The views expressed in this document are solely the views of the author and not Martindale-Hubbell. This document is intended for informational purposes only and is not legal advice or a substitute for consultation with a licensed legal professional in a particular case or circumstance.
 

View More Library Documents By...

 
Author
 
John J. Elliott
 
Greenberg Traurig, LLP Overview