April 2013: Life Sciences Litigation Update: Will the Supreme Court Resolve Circuit Split on Settlement of ANDA Disputes?

On March 25, 2013, the U.S. Supreme Court heard oral argument in Federal Trade Commission v. Actavis, Inc. (Docket No. 12-416). The Actavis case centers around the debate over the type of antitrust analysis that should apply to settlement agreements in patent litigation between branded and generic drug companies that include an element of consideration running from the brand to the generic (referred to by regulators and legislators alternatively as “reverse payment agreements” or “pay-for-delay agreements”). The Supreme Court agreed to hear the case after the development of a circuit split on the question.

A majority of the circuits addressing the issue (among them the Second, Eleventh and Federal) have adopted the so-called “scope of the patent test,” holding that “absent sham litigation or fraud in obtaining the patent, a reverse payment settlement is immune from antitrust attack so long as its anticompetitive effects fall within the scope of the exclusionary potential of the patent.” See, e.g., FTC v. Watson Pharmaceuticals, Inc., 677 F.3d 1298, 1312 (11th Cir. 2012). On the other hand, the Third Circuit has adopted the “quick look” rule of reason test advocated by the FTC. Under that rule, the court must apply a rebuttable presumption that “any payment from a patent holder to a generic patent challenger who agrees to delay entry into the market [is] prima facie evidence of an unreasonable restraint of trade.” In re: K-Dur Antitrust Litigation, 686 F.3d 197 (3d Cir. 2012). In adopting the “quick look” rule, the Third Circuit was highly critical of the rationale behind the “scope of the patent test,” arguing that it depends upon an “unrebuttable presumption of patent validity,” and that “courts must be mindful of the fact that ‘[a] patent, in the last analysis, simply represents a legal conclusion reached by the Patent Office.’”

At the recent oral argument in the Actavis case, the Supreme Court showed signs that neither test may be entirely appropriate, and that instead the district courts should have the flexibility to examine pay-for-delay agreements on a case-by-case basis. Justice Stephen Breyer asked whether the Court should simply instruct district judges to “pay attention to the [Justice] department when it says that these [agreements] . . . can be anticompetitive,” and then “ask the [drug companies] why [they’re] doing it.” Justices Antonin Scalia and Anthony Kennedy suggested that the key to the inquiry is the strength or weakness of the patent, calling this factor “the elephant in the room.” Justice Scalia also asked why the Court should overturn settled antitrust law “just to patch up a mistake that Hatch-Waxman made.”

Other justices focused on other factors, such as the burden of proof and the effect of these agreements on consumers. For example, Justice Sonia Sotomayor noted that “the burden of proving that the payment for services or the value given was too high” should be on the government, not the drug companies. And Justice Elena Kagan stated her opinion that “[i]t’s clear what’s going on here is that [the drug companies are] splitting monopoly profits, and the person who’s going to be injured are all the consumers out there.”

All in all, it’s difficult to predict how the Court will rule in this case, but what seems clear is that the majority of justices have concerns over the legitimacy of pay-for-delay deals but are unclear as to how best to approach the matter. One interesting point is that the Court is operating in this case with only eight justices after Justice Samuel Alito recused himself. There is the very real possibility that the Court could wind up splitting four to four. If that happens, the 11th Circuit ruling would stand, and the circuit split will remain. At that point, the controversy would likely turn back to Congress, where bills barring reverse payment settlements have been introduced, debated, and rejected over the last several years.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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