A little more than one year ago, the U.S. Supreme Court decided Federal Trade Commission v. Actavis Inc.[1] and affirmed that antitrust principles apply to reverse payment settlement agreements — those in which a brand-name drug manufacturer pays a potential generic competitor to settle a patent infringement lawsuit filed under the Hatch-Waxman Act and to stay out of the market for a specified time.

Prior to Actavis, courts reviewing challenges to reverse payment settlements generally followed one of two approaches. Many, perhaps a majority, applied a “scope-of-the-patent” test, holding that reverse payment settlements were generally immune from antitrust scrutiny “so long as the anticompetitive effects fall within the scope of the exclusionary patent.”[2] Others applied an alternative “quick look” approach in which a reverse payment settlement was deemed presumptively unlawful, though this presumption could be rebutted in certain circumstances.[3]

Actavis rejected both approaches in favor of a “rule-of-reason” analysis. To determine whether a reverse payment might violate antitrust law, the court focused on the characteristics of the payment used to settle the patent litigation. According to the court, “the likelihood of a reverse payment bringing about anticompetitive effects depends on its size, its scale in relation to the payor’s anticipated litigation costs, its independence from other services for which it might represent payment, and the lack of any other convincing justification.”[4]

Though the court provided a general framework for lower courts to utilize in evaluating reverse payment cases, focusing primarily on the nature and scope of the reverse payments at issue, it expressly deferred to lower courts the task of “structuring” the rule-of-reason analysis announced in the case. Given this task, after more than a year of litigation, trial courts are taking divergent views in applying Actavis to the different types of reserve payment settlement agreements challenged on antitrust grounds.

Significantly, whether by design or not, the court did not explicitly define what constitutes a “reverse payment” subject to antitrust scrutiny under Actavis. In that case, the brand drug manufacturer resolved its patent infringement litigation against several potential generic competitors by paying each millions of dollars to abandon its patent challenge and remain off the market until a specific date.[5] Though such cash-only payments may have been emblematic of early reverse payment settlement agreements, they became increasingly rare because of growing Federal Trade Commission scrutiny. As a result, companies have turned to more sophisticated nonmonetary exchanges in which the value of the terms of the settlement agreement is more difficult to quantify — and more difficult to evaluate under the principles outlined in Actavis.

It is notable that of all of the district court decisions published in 2014 relating to reverse payment settlement agreements, none involved a cash-only payment like that described in Actavis. Rather, district courts repeatedly addressed whether and how Actavis might apply to settlements involving nonmonetary consideration. Of the seven published decisions that have addressed the issue during 2014, just two have held that Actavis is limited to reverse payment involving an exchange of money.[6]

The first decision to address the issue in 2014 was In re Lamictal Direct Purchaser Antitrust Litigation.[7] In that case private class plaintiffs alleged that GlaxoSmithKline PLC made an unlawful reverse payment to Teva Pharmaceuticals Industries Ltd. to settle a pending patent infringement case and to obtain an agreement by Teva not to introduce a generic version of GSK’s Lamictal until an agreed upon date.

Unlike the agreement challenged in Actavis, in Lamictal the reverse payment settlement agreement did not include a monetary payment. Instead, GSK agreed not to introduce an authorized generic to compete with Teva’s generic Lamictal upon U.S. Food and Drug Administration approval — a promise often referred to as a no-AG commitment. The no-AG commitment obviously conferred a valuable benefit upon Teva (as it ensured Teva would have no generic competitors if it entered the market with its own product); however, it was not, strictly speaking, a monetary benefit.[8]

The trial court dismissed the class plaintiffs’ antitrust case on the grounds that there was not a “reverse payment” because there had been no exchange of money.[9] In its decision, the court explained that “[f]inding that a settlement contains a reverse payment is a necessary prerequisite to undertaking the broader Actavis rule of reason analysis.”[10]

The court then turned to the question of whether the no-AG commitment constituted a reverse payment. Reviewing the facts and the express language of Actavis, the court concluded that “nothing in Actavis says that a settlement contains a reverse payment when it confers substantial financial benefits or that a no-AG agreement is a ‘payment.’”[11] Instead, according the court, a “reverse payment” must include an exchange of money.[12] Even though the no-AG commitment conferred substantial value, it was not an exchange of money, and therefore was not a “reverse payment” within the scope of Actavis, according to the court. The plaintiffs appealed the dismissal to the Third Circuit Court of Appeals, and though the matter has been fully briefed and argued, no opinion has issued yet.

About nine months after the Lamictal decision, in In re Loestrin 24 FE Antitrust Litigation,[13] the court reached a similar conclusion concerning the application of Actavis. In Loestrin, Watson Pharmaceuticals Inc. and Warner-Chilcott PLC entered into an “exclusion payment agreement” in which, among other things, Watson agreed to delay launch of its generic until a specified date, and Warner-Chilcott agreed not to launch an authorized generic to compete with Watson’s generic product once it came to market.[14]

Granting a motion to dismiss the plaintiffs’ antitrust claims, the Loestrin court observed that the “discussion of patent settlements in Actavis fixates on the one form of consideration that was at issue in that case: cash.”[15] The Loestrin court also focused on some of the practical challenges that might arise when using the rule-of-reason analysis to evaluate a reverse payment settlement agreement that includes non-monetary consideration. In the court’s view, the factors considered in Actavis (i.e., payment size, scale in relation to anticipated litigation costs, independence from other services for which it might represent payment) might be “reasonably measured” when the reverse payment is cash, but when the reverse payment settlement agreement involves non-monetary consideration, particularly with components that are “multifaceted and complex,” like a no-AG commitment, the task would be “almost impossible.”[16]

Notwithstanding the decisions in Lamictal and Loestrin, the majority of district courts have held that Actavis applies to any reverse payment — monetary or nonmonetary — that has value. These decisions generally focus on the absence of any language in Actavis explicitly limiting the scope of the decision to settlements involving an exchange of money.[17] In the In re Nexium (Esomeprazole) Antitrust Litigation[18] decision, for example, the court explained, “Nowhere in Actavis did the Supreme Court explicitly require some sort of monetary transaction to take place for an agreement between a brand and generic manufacturer to constitute a reverse payment.”[19] Further, the court reasoned that “[a]dopting a broader interpretation of the word ‘payment’ ... serves the purpose of aligning the law with modern day realities.”[20] As of the end of 2014, this appears to be the prevailing view among district courts evaluating reverse payment settlement agreements.

But many of these decisions face a special set of challenges. Where a reverse payment settlement agreement includes a nonmonetary component, the value of what is exchanged may be difficult to quantify with certainty, and this circumstance has led to divergent views among trial courts. Two courts dismissed complaints for failing to allege an adequate basis upon which to estimate the value of non-monetary consideration that constituted the reverse payment.[21] Each case has set forth slightly different standards for the plaintiffs to meet.

In the first case, In re Effexor XR Antitrust Litigation, the plaintiffs alleged an unlawful reverse payment that included the brand company’s no-AG commitment, valued by plaintiffs to be in the hundreds of millions of dollars. The court, relying on the pleading standards set forth in Twombly[22] and Iqbal,[23] granted the defendants’ motion to dismiss after finding the plaintiffs’ allegations were not plausible because they failed to properly estimate the alleged reverse payment.

To satisfy the pleading requirements, according to the court, “the non-monetary payment must be converted to a reliable estimate of its monetary value so that it may be analyzed against the Actavis factors.”[24] Not only did the plaintiffs need to provide some “reliable foundation to show that a reverse payment agreement was actually entered,” but they also needed to “present specific facts showing how the alleged non-monetary payment was calculated.”[25] Specifically, plaintiffs had to include in their complaint an explanation “as to how those estimations are used to formulate the approximate value of the no-authorized generic agreement.”[26] While the plaintiffs had alleged a general value associated with the reverse payment, they had failed to meet the specific standards outlined by the court, and on this basis their complaint was dismissed.

The plaintiffs in the In re Lipitor Antitrust Litigation[27] faced an even more difficult challenge because of the nature of the alleged reverse payment. In the Lipitor litigation, the plaintiffs alleged that a reverse payment settlement agreement between Pfizer Inc. and Ranbaxy Inc. included (among other things) a nonmonetary reverse payment — a promise by Pfizer to forego the potential recovery of damages against Ranbaxy in a patent infringement case arising from a separate Pfizer drug, Accupril.[28]

The issue, according to the court was “whether allegations are sufficient to make plausible that Pfizer made a large and unexplained reverse payment to Ranbaxy in support of antitrust activities.”[29] To demonstrate plausibility, and evaluate the alleged reverse payment in this manner, the court held that “the non-monetary payment must be converted to a reliable estimate of its monetary value so that it may be analyzed against the Actavis factors such as whether it is large once the subtraction of legal fees and other services provided by generics occurs.”[30]

In Lipitor, the plaintiffs had alleged that there was a substantial value associated with Pfizer’s claim for damages against Ranbaxy, though that claim was still contingent. According to the plaintiffs, one measure of the potential recovery might have been the amount of Ranbaxy’s allegedly improper sales of generic Accupril (estimated to be about $450 million). But the court in Lipitor concluded this was not sufficiently specific to meet plaintiffs’ burden.

As the court noted, even in strong cases, parties settle at a discount. Therefore, the plaintiffs had the burden not only to allege a reliable damages figure, but also to provide an evaluation of the risks perceived by the party seeking those damages at the time of the settlement and an appropriate discount.[31] In addition, the plaintiffs had the burden to allege with sufficient specificity the net value of the reverse payment by Pfizer. Thus, “even if the reverse payment is shown, any traditional settlement considerations or services provided by the generic are deducted to determine whether there is a net positive payment flowing from the patentee to the alleged infringer.”[32]

In affirming that antitrust principles applied to reverse payment settlement agreements, the Actavis decision settled an issue that had divided the courts of appeals, vexed companies seeking to resolve patent infringement litigation brought under Hatch-Waxman, and provided an avenue for plaintiffs to challenge anti-competitive reverse payments settlements. While the court provided a legal and economic framework to analyze the potential anti-competitive effects of these types of agreements, district courts over the course of the last year have faced the more practical problem of how to use that framework to evaluate the growing number of challenges to reverse payment settlements involving nonmonetary consideration. And, as the decisions issued during the last year illustrate, district courts responded with very different answers. Given the widely differing views of the district courts, and the substantial number of pending cases challenging reverse payment settlements, these issues will continue to occupy the courts during the next year.

[1] 133 S.Ct. 2223 (2013)

[2] 133 S.Ct., at 2229 (citing FTC v. Watson Pharmaceuticals, Inc., 677 F. 3d 1298, 1312 (11th Cir. 2012)).

[3] In re K-Dur Antitrust Litig., 686 F. 3d 197, 218 (3rd Cir. 2012)

[4] Actavis, 133 S.Ct, at 2237.

[5] Actavis, 133 S.Ct, 2229.

[6] In re Lamictal Direct Purchaser Antitrust Litig., No. 12-cv-995, (D.N.J. Jan. 24, 2014); In re Loestrin 24 FE Antitrust Litig., Case No. 13-md-2472, (D.R.I. Sept. 4, 2014).

[7] In re Lamictal Direct Purchaser Antitrust Litig., No. 12-cv-995, (D.N.J. Jan. 24, 2014).

[8] Lamictal.

[9] This was the second attempt by plaintiffs to successfully plead an antitrust violation. In August 2012, before the Actavis decision was announced, the trial court had dismissed the case on the grounds that the settlement did not constitute a “reverse payment” because there had not been an exchange of money. The plaintiffs appealed the order to the Third Circuit of Appeals, which stayed the proceedings pending the Supreme Court’s review of Actavis. After the Supreme Court issued its decision in that case, the Third Circuit remanded the case to the trial court for further action. Plaintiffs then sought reconsideration of the trial court’s prior order dismissing the case. Lamictal.

[10] Lamictal.

[11] Lamictal.

[12] Lamictal.

[13] In re Loestrin 24 FE Antitrust Litig., Case No. 13-md-2472, (D.R.I. Sept. 4, 2014)

[14] Loestrin 24.

[15] Loestrin 24.

[16] Loestrin 24.

[17] In re Nexium (Esomeprazole) Antitrust Litig., 968 F. Supp. 2d 367, 392 (D. Mass. 2013); In re Niaspan Antitrust Litig., 12-md-2460, (E.D. Pa. Sept. 5, 2014)(“the term reverse payment is not limited to a cash payment”); In re Lipitor Antitrust Litig., 12-cv-02389, (D. N.J. Sept. 12, 2014) (Actavis is not limited to cash payments, but plaintiffs must plead a “reliable foundation” on which to estimate value of non-monetary consideration); In re Effexor XR Antitrust Litig., No. 11-5479, (D. N.J. Oct. 6, 2014)(“Although Actavis addressed cash payments, reading the opinion as a whole, it is clear that the Supreme Court focuses on the antitrust intent of the settling parties rather than the manner of payment.”); Time Insurance Co., v. Astrazenca AB, (E.D. Pa. Oct. 1, 2014)(“reverse payments deemed anti-competitive may take forms other than cash payments”).

[18] Nexium, 968 F.Supp.2d 367, 393 (D. Mass. 2013). In October 2014, after years of litigation, the Nexium case went to trial, and the jury returned a verdict for the defendants on December 5, 2014.

[19] Nexium, 968 F.Supp.2d 367, 392 (D. Mass. 2013).

[20] Nexium, 968 F.Supp.2d 367, 393 (D. Mass. 2013).

[21] In re Lipitor Antitrust Litig., 12-cv-02389, (D. N.J. Sept. 12, 2014)(“This court applies the Twombly and Iqbal standards with the factors of Actavis in analyzing the plaintiffs’ complaint.)”; In re Effexor XR Antitrust Litig., No. 11-5479, (D. N.J. Oct. 6, 2014)(“ Simply alleging some sort of value …, absent a reliable foundation supporting that value, does not establish the plausibility required by Rule 12(b(6).”)

[22] Bell Atlantic v. Twombly, 550 U.S. 544 (2007).

[23] Ashcroft v. Iqbal, 129 S.Ct. 1937 (2009).

[24] In re Effexor XR Antitrust Litig., No. 11-5479, (D. N.J. Oct. 6, 2014); In re Lipitor Antitrust Litig., No. 12-cv-02389, (D.N.J. Sept. 12, 2014).

[25] In re Effexor XR Antitrust Litig., No. 11-5479, (D. N.J. Oct. 6, 2014).

[26] In re Effexor XR Antitrust Litig., No. 11-5479, (D. N.J. Oct. 6, 2014).

[27] In re Lipitor Antitrust Litig., 12-cv-02389, (D. N.J. Sept. 12, 2014).

[28] Ranbaxy had launched a generic version of Accupril “at risk,” and garnered roughly $450 million sales from sales of the drug. When Pfizer later obtained a favorable district court ruling strongly suggesting that Ranbaxy had infringed a Pfizer patent, and also obtained preliminary injunction that was affirmed on appeal, the claim for damages against Ranbaxy seemed compelling, though the amount of damages was uncertain. In re Lipitor Antitrust Litig., 12-cv-02389, (D. N.J. Sept. 12, 2014).

[29] In re Lipitor Antitrust Litig., 12-cv-02389, (D. N.J. Sept. 12, 2014).

[30] In re Lipitor Antitrust Litig., 12-cv-02389, (D. N.J. Sept. 12, 2014).

[31] In re Lipitor Antitrust Litig., 12-cv-02389, (D. N.J. Sept. 12, 2014).

[32] In re Lipitor Antitrust Litig., 12-cv-02389, (D. N.J. Sept. 12, 2014).