Federal Trade Commission v. Actavis, Inc. et al. – Supreme Court Holds Reverse Payment Settlement Agreements to be Analyzed under “Rule of Reason” Approach

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On June 17, 2013, the Supreme Court of the United States ruled 5-3 in favor of the Federal Trade Commission and issued its long-awaited decision in Federal Trade Commission v. Actavis, Inc. et al. 570 U.S. __ (2013), Slip Op. In Actavis, the majority opinion held that “reverse payment” or “pay for delay” settlement agreements requiring a patent holder to pay an alleged infringer to stay out of the market until a defined period of time must be analyzed under a “rule of reason” approach taking into account any anti-competitive effects of such agreements by considering traditional antitrust factors. Previously, the Court of Appeals for the Eleventh Circuit had upheld a Northern District of Georgia decision dismissing an FTC complaint and ruled that where the any perceived anti-competitive effects of a “reverse payment” settlement between a drug maker and a generic challenger in ANDA litigation were within the scope of the patent at issue, the “reverse payment” settlement would not be subject to antitrust attack. FTC v. Watson Pharms., 677 F.3d 1298 (11th Cir. 2012). Although the Supreme Court reversed the decision of the Eleventh Circuit and recognized that some “reverse payment” settlement agreements could violate antitrust laws, the majority opinion expressly declined to adopt the FTC’s position that “reverse payment” settlement agreements in the ANDA litigation context are presumptively unlawful.

In September of 2006, patent holder Solvay Pharmaceuticals entered into a series of “reverse payment” settlement agreements with Watson Pharmaceuticals, Inc. (later becomes Actavis. Inc.), Paddock Laboratories, Inc. and Par Pharmaceutical Companies, Inc. covering generic AndroGel, a product used for treating low testosterone levels in patients. The settlement agreements amounted to a dismissal of the patent infringement actions in return for an agreement from the generic competitors that no generic version of AndroGel would be marketed until 2015. Additionally, the generics agreed to promote AndroGel to urologists and entered into an agreement with Solvay whereby the competitors would share in a significant portion of the profits collected by the patent holder.

Later, in 2009, the FTC examined the same settlement agreements, and alleged in its amended complaint, inter alia, violations of Section 5a of the Federal Trade Commission Act under 15 U.S.C. § 45(a)(1). The suit was transferred to the Northern District of Georgia and the district court ultimately held that that FTC’s allegations did not set forth an antitrust violation and dismissed the action. In re Androgel Antitrust Litigation (No. II), 687 F. Supp. 2d 1371, 1379 (N.D. Ga. 2010). On appeal, the Eleventh Circuit affirmed the district court and held “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.” 677 F.3d at 1312 (emphasis added).

In taking up the case for review, the Supreme Court noted that several Circuit Courts, including the Second, Third and Federal Circuits, had reached opposing decisions regarding the intersection of antitrust laws and “reverse payment” settlement agreements in ANDA patent litigations. The majority opinion led by Justice Breyer (joined by Justices Kennedy, Ginsburg, Sotomayor, and Kagan) noted that while the “reverse payment” settlement agreements “anticompetitive effects fall within the scope of the exclusionary potential of the patent,” this fact is not sufficient to “immunize the agreement from antitrust attack.” 570 U.S. __ (2013), Slip Op. at 8. The majority then went on to closely consider a myriad of Hatch-Waxman, patent and antitrust law policies that it deemed were “relevant in determining the ‘scope of the patent monopoly’ – and consequently anti-trust law immunity – that is conferred by the patent.” Id. at 9. The Supreme Court acknowledged that it had previously determined whether certain patent uses ran afoul of antitrust laws by “considering traditional antitrust factors such as likely anticompetitive effects, redeeming virtues, market power, and potentially offsetting legal considerations present in the circumstances, such as here those related to patents.” Id. at 9-10 (internal cit. omitted). For example, the Court had previously “struck down overly restrictive patent licensing agreements – irrespective of whether those agreements produced supra-patent-permitted revenues.” Id. at 10-11. The Court further noted that “[t]hese [patent] cases do not simply ask whether a hypothetically valid patent’s holder would be able to charge, e.g., the high prices that the challenged patent-related term allowed. Rather, they seek to accommodate patent and antitrust policies, finding challenged terms and conditions unlawful unless patent law policy offsets the antitrust law policy strongly favoring competition.” Id. at 12.

The Supreme Court expressly rejected the Eleventh Circuit’s view that “the only pertinent question is whether ‘the settlement agreement. . . fall[s] within’ the legitimate ‘scope’ of the patent’s ‘exclusionary potential’” and distinguished settlements in which a patent holder settles an infringement claim for less than the amount of claimed damages from “reverse payment” settlements, in which a party without a monetary claim “walks away with money simply so it will stay away from the patentee’s market.” Id. at 9 – 13. Accordingly, the Court agreed with the FTC that reverse payments could sometimes violate the antitrust laws and should be examined under a “rule of reason” analysis by the district courts when challenged.  Specifically, the Court highlighted the unexplained size of a “reverse payment” offered by a drug manufacturer to be potential evidence that the manufacturer did not believe the patent would survive a validity challenge. Id. at 18.

Although advocating a “rule of reason” analysis rather then a “quick look” approach for determining potentially anti-competitive agreements, the Court did not set forth a clear structure for reviewing settlement agreements and left this job to the district courts. Id. at 20-21. Rather, the majority opinion merely directed the lower courts by stating “trial courts can structure anti-trust litigation so as to avoid, on the one hand, the use of anti-trust theories too abbreviated to permit proper analysis, and, on the other, consideration of every possible fact or theory irrespective of the minimal light it may shed on the basic question—that of the presence of unjustified anticompetitive consequences.” Id. at 21. It will be interesting to follow whether Actavis will create enhanced litigation challenges to settlement agreements in ANDA patent litigations and how the Supreme Court’s ruling will alter practical counseling to litigants that desire to settle such lawsuits.