FTC v. Actavis: What Does It Mean for Reverse-Payment Settlements?

by Sheppard Mullin Richter & Hampton LLP
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On June 17, 2013, the United States Supreme Court announced a rule that blurs the lines between antitrust and patent law in the context of Hatch-Waxman litigation. In FTC v. Actavis, 570 U.S. 756 (2013), the Federal Trade Commission (“FTC”) prevailed when the Supreme Court held in a 5-to-3 decision [1] that reverse payment settlements in Hatch-Waxman cases are subject to antitrust scrutiny, resolving a circuit split and impassioned debate among antitrust lawyers. This is only the second antitrust case in 20 years where the enforcers have prevailed. The Court, however, rejected the FTC’s position that reverse-payment settlements were presumptively illegal, ruling that they are subject to scrutiny under the rule of reason.

As a result of the Actavis decision, we predict the following:

  • The settlement of Hatch-Waxman patent litigation will be discouraged. Although the Court stopped short of declaring reverse-payment arrangements presumptively illegal, the U.S. Department of Justice and FTC will undoubtedly challenge more of them in wake of Actavis. Those settlements that appear to end-run the goal of the majority’s opinion—to preclude patentees from unjustifiably thwarting competition in the relevant market—will also face increased scrutiny under the Actavis five-factor framework, described below. In contrast, settlements that allow for early entry of a genetic product may be deemed procompetitive.
  • The lower courts are now saddled with the task of parsing through the specific facts of each case to determine whether the proposed reverse-payment agreement is permissible under a rule-of-reason analysis. This will be an intensive process that requires the fact-finder to weigh the anticompetitive effects against the procompetitive justifications of the agreement in question. We expect that this leeway will generate inconsistent decisions and create uncertainty for those parties trying to craft a reverse-payment that can withstand antitrust scrutiny.
  • n a similar vein, to the extent that the rule-of-reason analysis requires the court to inquire as to whether the proposed settlement approximates the “fair value for services,” we may see a rise in valuation trials in reverse-payment cases. If this trend comes to fruition, it will obviously increase both the time and expense of reverse-payment litigation.

The Reverse Payment Controversy Explained

In a nutshell, reverse payment patent settlements, also known as “pay-for-delay” agreements, “occur after a brand-name drug manufacturer sues a generic manufacturer for patent infringement. In settling the case, the companies enter a pay-for-delay agreement, whereby the generic accepts a payment to stay out of the marketplace for a certain period of time.”[2]

In FTC v. Actavis, Solvay Pharmaceuticals filed a New Drug Application for a brand-name drug called AndroGel.[3] The Federal Food and Drug Administration (“FDA”) approved the application in 2000. Solvay obtained the relevant patent and notified the FDA of this event in 2003. Subsequently, Actavis, Inc. and Paddock Laboratories filed separate Abbreviated New Drug Applications pursuant to the Hatch-Waxman Act (21 U.S.C. § 355) for their generic drugs modeled after AndroGel, asserting under Paragraph IV that Solvay’s patent was invalid and their respective generic drugs did not infringe it. Par Pharmaceutical backed Paddock by agreeing to share the patent litigation costs if it obtained approval for its generic product.

Solvay brought suit against Actavis and Paddock. The FDA approved Actavis’ first-to-file generic product, which entitled Actavis to 180 days of exclusivity from the initial commercial marketing of its drug. In 2006, all parties to the patent litigation reached a settlement, which provided that the generic manufacturers (i) would not bring their products to market until August 31, 2015, 65 months before Solvay’s patent expired, unless another party marketed a generic sooner; and (ii) would promote AndroGel to urologists. In exchange, Solvay paid $12 million to Paddock, $60 million to Par and $19-$30 million annually for nine years to Actavis.

The FTC brought suit alleging that all parties to the patent litigation violated Section 5 of the FTC Act (15 U.S.C. § 45) by unlawfully agreeing “to share in Solvay’s monopoly profits, abandon their patent challenges, and refrain for launching their low-cost generic products to compete with AndroGel for nine years.” The District Court dismissed the case on grounds that there was no antitrust violation. The Eleventh Circuit affirmed, reasoning 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.” The FTC filed a petition for a writ of certiorari, which the Supreme Court granted noting the circuit split on the issue of whether such settlements were immune from antitrust attack or presumptively unlawful.

The Supreme Court Strikes a Middle Ground

The majority opinion, authored by Justice Stephen Breyer, flatly rejected the idea that the anticompetitive effects of reverse payment settlements “fall within the scope of the exclusionary potential of the patent.”[4] Citing Supreme Court precedent, Justice Breyer observed that “this Court has indicated that patent and antitrust policies are both relevant in determining the ‘scope of the patent monopoly’—and consequently antitrust law immunity—that is conferred by a patent.” While acknowledging “a general legal policy favoring the settlement of disputes,” the majority set forth five reasons that the FTC should be allowed to proceed with its lawsuit:

  • First, “the specific restraint at issue has the potential for genuine adverse effects on competition.”[5] Specifically, “settlement on the terms said by the FTC to be at issue here—payment in return for staying out of the market—simply keeps prices at patentee-set levels.” The fact that the Hatch-Waxman Act awards only the first challenger with 180 days of exclusive rights to sell the generic version exacerbated the potential for ill-gotten monopoly profits.
  • Second, the traditional justifications for settlement, such as avoiding litigation costs or fair value for services, did not offset the anticompetitive consequences—i.e., leveraging monopoly profits to avoid patent invalidation or a finding of non-infringement—associated with some reverse payment arrangements.
  • Third, in those cases in which a reverse payment poses a threat of unjustified anticompetitive harm, the patentee usually possesses the market power to charge supra-competitive prices.
  • Fourth, determining a patent’s validity would not necessarily consume an inordinate amount of judicial resources. For example, “the size of the unexplained reverse payment can provide a workable surrogate for a patent’s weakness.”
  • Fifth, despite the red flag that a large, unjustified reverse payment would raise to antitrust authorities, parties to the Paragraph IV litigation could still pursue other legitimate means of settling.

At the same time, however, the majority opinion rejected the “quick look” standard advocated by the FTC. Noting that potential anticompetitive effects depend on the size of the reverse payment, its relationship to projected litigation costs and the predicted magnitude of the harm, the Court insisted that “the FTC must prove its case as in other rule-of-reason cases.”

Conclusion

The Actavis decision will generate increased uncertainty for parties contemplating reverse-payment settlements and absorb judicial resources as courts struggle to balance whether the procompetitive justifications of these agreements outweigh any anticompetitive effects. We would be pleased to discuss further the potential implications of Actavis at your convenience.


[1] Justice Alito did not participate in the decision.

[2] Deborah M. Shelton, et al., Reverse Payment Issue Continues to Sizzle (June 29, 2009), available at http://www.fdalawblog.com/2009/06/articles/reverse-payments/reverse-payment-issue-continues-to-sizzle/.

[3] AndroGel is used to treat low testosterone. See Benefits of AndroGel 1.62%, available at http://www.androgel.com/benefits-of-androgel.aspx.

[4] Citing the Eleventh Circuit decision in FTC v. Watson Pharmaceuticals, Inc.

[5] Citing FTC v. Indiana Federation of Dentists.

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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