Reverse Payment Settlements in Jeopardy Following Supreme Court Ruling in FTC v. Actavis
In Federal Trade Commission v. Actavis, Inc., a sharply divided Supreme Court ruled that “reverse payment” settlement agreements between branded and generic pharmaceutical companies to resolve patent litigation are not immune from attack under the antitrust laws, because they may unreasonably diminish competition. A typical reverse payment settlement is one in which a branded pharmaceutical company, the patentee of a drug, resolves a lawsuit that it has brought against an alleged infringer, a generic pharmaceutical company, by making a payment to that company in exchange for its agreement not to enter the patentee’s market with a generic version of the drug for a specified time period during the life of the patent.
In the Court’s view, reverse payment settlements “can sometimes violate the antitrust laws.” Rejecting both the FTC’s argument that reverse payment settlements are presumptively unlawful and the dissent’s view that such agreements are not subject to antitrust scrutiny unless they involve sham litigation or a patent obtained through fraud on the Patent and Trademark Office (“PTO”), the Court instead adopted a middle-ground approach. When a reverse payment settlement agreement is legally challenged, the reviewing court must now evaluate the agreement under a “rule of reason” analysis.
This decision places significant, new limitations on the ability of branded pharmaceutical companies to settle patent infringement disputes with generic drug manufacturers and likely will subject such settlements to heightened scrutiny by both regulators and consumer advocates. Given the historical complexity and expense of antitrust litigation, the Court’s decision will fundamentally alter the framework for resolution of litigation under the Hatch-Waxman Act.
Solvay Pharmaceuticals owns the patent on AndroGel, a synthetic testosterone gel. The Food and Drug Administration (“FDA”) approved the drug in 2000, and by 2007 AndroGel sales in the United States exceeded $1.8 billion.1 In 2003, Solvay commenced patent litigation against Watson Pharmaceuticals, a generic drug company, after Watson stated its intention to market a generic version of AndroGel. Watson then claimed that its generic product either did not infringe Solvay’s patent or that Solvay’s patent was invalid. In January 2006, the 30-month stay on FDA approval triggered by the commencement of the lawsuit expired, and Watson was granted approval for its generic product.2 Thus, Solvay was confronted with the possibility of losing its monopoly position as a provider of synthetic testosterone gel. Shortly thereafter, the parties settled their disputes, with Solvay agreeing to make multimillion-dollar payments to Watson and other generic manufacturer defendants in exchange for the defendants’ agreements not to market generic versions of AndroGel until 2015. 3
The FTC sued the settling parties in federal district court in 2009, alleging that they violated the antitrust laws by participating in an unlawful, anticompetitive arrangement to restrict competition in the market for synthetic testosterone gel. The district court dismissed the complaint, ruling that Solvay’s engagement in settlements was a lawful exercise of its monopoly power derived from the patent. The Eleventh Circuit affirmed, holding that parties to a reverse payment settlement agreement are immune from antitrust liability “if the anticompetitive effects of their settlement fall ‘within the scope of the exclusionary potential of the patent.’”4 In reaching its decision, the Eleventh Circuit observed that a contrary ruling would require courts to engage in trials within trials in order to ascertain the validity of the patents in question, greatly taxing the resources of the courts and frustrating the strong public policy favoring settlement of litigation.5
The Supreme Court’s Decision
Justice Breyer, writing for a majority of the Court,6 concluded that the Eleventh Circuit erred in affirming the dismissal of the FTC’s complaint. In holding that “reverse payment settlements . . . can sometimes violate the antitrust laws,” the Supreme Court criticized the Eleventh Circuit’s (and the dissent’s) promotion of the patent laws’ goal of encouraging innovation over the competing antitrust laws’ intent to promote unrestricted competition. The Court cited several older decisions supporting the application of the antitrust laws in cases where patentees attempted to abuse their patent rights in an anticompetitive fashion. Ultimately, the majority determined that the Eleventh Circuit’s decision “throws the baby out with the bath water” by sacrificing the pro-competition policies underlying the antitrust laws because of the difficulties associated with conducting a rule-of-reason analysis.7
The majority provided five rationales for its conclusion: first, reverse payment settlements risk “significant” anticompetitive effects; second, those anticompetitive effects can be unjustified; third, based on the magnitude of some payments, the party making the payments likely has power to quell competition; fourth, the administrative burden associated with resolving these cases is less onerous than feared, because “it is normally not necessary to litigate patent validity to answer the antitrust question”; and fifth, possible antitrust liability for “large, unjustified” reverse payments does not discourage parties from entering into legitimate settlements of litigation.8 Significantly, the magnitude of the reverse payment is a pronounced theme in the Court’s recitation of these factors, suggesting that district courts will carefully scrutinize settlements involving significant payments by the patentee. 9
Importantly, the Court rejected the FTC’s argument that reverse payment agreements are presumptively unlawful, which had previously been endorsed by the Third Circuit in the In re K-Dur Antitrust Litigation.10 Instead, the Court held that the appropriate standard for analysis is the “rule of reason” approach, common in the antitrust law, in which the complaining party must prove that the anticompetitive effects resulting from the allegedly wrongful conduct outweigh any pro-competitive benefits associated with the same conduct.11 The rule-of-reason analysis is notorious among antitrust practitioners (and litigants) for its fact-intensive nature and overall complexity, both of which increase litigation costs.
In a somewhat strident dissent, Chief Justice Roberts maintained that the majority had announced a new rule grounded in faulty reasoning. In the dissent’s view, a settlement of a patent dispute is not subject to antitrust scrutiny, provided that the patent holder acted within the scope of the patent. The dissent explained that there are two exceptions to this principle: (1) when parties settle sham litigation, and (2) when the litigation involves a patent obtained through fraud on the PTO. Noting that neither exception was present, the dissent characterized the settlement of the AndroGel litigation, which “had been dragging on for three years,” as a “good thing.” The dissent further criticized the majority for giving insufficient weight to the policies underlying the patent laws as a means of encouraging innovation and predicted that the ruling will discourage the settlement of patent litigation and transform questions of patent validity into burdensome antitrust litigation. 12
The Actavis decision reflects a growing deep division within the Court on how to address the competing interests underlying the patent and antitrust laws. While the patent laws promote a temporary monopoly as a means of encouraging innovation, the antitrust laws are hostile to monopolistic activity, which can result in higher prices for consumers and diminish overall economic welfare. The decision represents the latest statement in that running commentary, with a majority of the Court deciding, for now, in favor of the policies underlying the antitrust laws.
Although the Court declined to endorse the FTC’s position that reverse payment settlement agreements are presumptively unlawful, the decision nevertheless was a victory for the FTC because it abrogated the substantial deference previously granted to such agreements by the lower courts.13 As a practical matter, the impact of Actavis will be considerable. Manufacturers of pharmaceuticals, both branded and generic, must carefully consider whether patent disputes can continue to be resolved by reverse payment settlement agreements, given the likelihood that such settlements will trigger costly litigation challenging their validity under the antitrust laws. The terms of reverse payment settlement agreements, including settlement payments and collaborative research and development agreements between the parties, weighed against their potential litigation costs, burdens, and risks in continuing the lawsuit, will now be rigorously examined under a regulatory microscope. Moreover, while the Court’s ruling in Actavis targets a specific means of settling patent cases primarily within the pharmaceutical industry, when viewed in conjunction with the Court’s recent decisions in Association for Molecular Pathology v. Myriad Genetics, Inc.,14 and Mayo Collaborative Services v. Prometheus Laboratories, Inc.,15 the opinion may signal the beginning of a trend in which the Court is narrowing both the reach and scope of the patent laws.
1. Federal Trade Comm’n v. Watson Pharm., Inc., 677 F.3d 1298, 1304 (11th Cir. 2012), rev’d sub nom. Federal Trade Comm’n v. Actavis, Inc., — S. Ct. —, 2013 WL 2922122, No. 12-416 (June 17, 2013). 2. See 21 U.S.C. § 355(j)(5)(B)(iii). 3. Federal Trade Comm’n v. Actavis, supra, 2013 WL 2922122, at *5. The Supreme Court’s decision indicates that Solvay agreed to pay between $243 million and $342 million to the generic drug manufacturers as part of this agreement. Id. 4. Watson, 677 F.3d at 1312 (citation omitted). 5. Id., at 1314-15. 6. Joining Justice Breyer were Justices Kennedy, Ginsburg, Sotomayor, and Kagan. Chief Justice Roberts and Justices Scalia and Thomas dissented. Justice Alito did not participate in the decision. 7. Actavis, 2013 WL 2922122, at *12. 8. Id., at *10-13. 9. E.g., Id., at *10, observing the lost revenues to holders of invalid patents that would flow to consumers (in the form of lower prices) in the absence of an unlawful reverse payment; *12 (“the size of the payment from a branded drug manufacturer to a prospective generic is itself a strong indicator of [market] power”); Id. (“the size of the unexplained reverse payment can provide a workable surrogate for a patent’s weakness, all without forcing a court to undertake a detailed exploration of the validity of the patent itself”). These comments indicate that the large amounts of money at issue (ranging from $243 million to $342 million) in the reverse payment under scrutiny in this case were a significant source of concern to the Court. 10. 686 F.3d 197 (3d Cir. 2012). 11. Actavis, 2013 WL 2922122, at *13. 12. Id., at *14, *22 (“The majority . . . misses the basic point that patent laws promote consumer interests in a different way, by providing protection against competition.”) (Roberts, C.J., dissenting). 13. The FTC has estimated that reverse payment settlements cost consumers approximately $3.5 billion per year in the form of higher drug prices. Watson, 677 F.3d at 1302; K-Dur, 686 F.3d at 208. 14. — S.Ct. —, 2013 WL 2631062 (June 13, 2013). 15. 132 S.Ct. 1289 (2012).
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