Reverse Payment Agreements Under Hatch-Waxman


On March 25, 2013, the Supreme Court heard oral argument in Federal Trade Commission v. Actavis, Inc. No. 12-416.  The question presented in the writ of certiorari concerned whether reverse payment agreements are per se lawful or presumptively anticompetitive, to resolve the circuit split concerning reverse payment agreements in certain patent litigation brought under Hatch-Waxman Amendments, also referred to as “pay for delay” settlements.

Under the Hatch-Waxman Amendments, a generic drug manufacturer may seek to file an abbreviated new drug application (ANDA) to market a competitor product – usually by establishing that the generic drug is biologically equivalent to, and contains the same active ingredients, as the brand name drug.  Caraco Pharmaceutical Labs. v. Novo Nordisk, 132 S. Ct. 1670, 566 U.S. __, 182 L. Ed. 2d 678 (2012).  Such ANDA applications may result in patent infringement litigation between the brand manufacturer and the generic manufacturer.  The parties engaged in such patent infringement litigation may enter into a reverse-payment agreement, which the Actavis petitioner, the Federal Trade Commission, argues is presumptively unlawful.


In Actavis, the reverse payment settlement involved AndroGel®, a prescription drug indicated for the treatment of hypogonadism.  The parties settled the patent infringement litigation with a reverse payment agreement.  The FTC filed alleging that the reverse payment settlement violated Section 5 of the Federal Trade Commission Act under 15 U.S.C. § 45(a)(1), alleging that the settlement was anti-competitive.  The district court rejected the FTC’s allegations, and on appeal, the the 11th Circuit Court of Appeals affirmed noting 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.”  FTC v. Watson Pharmaceuticals, Inc., 677 F.3d 1298, 1312 (11th Cir. 2012).  The 11th Circuit’s approach was rejected by the Third Circuit Court of Appeals in In re K-Dur Antitrust Litig., which found that such reverse payments should be found as “prima facie evidence of an unreasonable restraint of trade.”  In re K-Dur, 686 F.3d 197, 218 (3d Cir. 2012).


Oral Argument
The government opened its oral argument stating, “a payment from one business to another in exchange for the recipient’s agreement not to compete is an paradigmatic antitrust violation. . . . Reverse payments to settle Hatch-Waxman suits . . . subvert the competitive process by giving generic manufacturers an incentive to accept a share of their rival’s monopoly profits as a substitute for actual competition.”  Tr. 3:11-24.  According to the government, reverse payment settlements give generics the opportunity to obtain something more than they would have received if the patent infringement suit were litigated to conclusion, namely that if the generic manufacturer prevails, it may enjoy 180 days of a duopoly or nothing if found to be infringing.   


The government noted that its per se presumption of anticompetitive conduct may be rebutted in one of two ways, but that its rule provided clearer guidance for the courts: “We’re saying payments not to compete are generally disfavored. . . . And therefore, we’ll look upon [the reverse payment settlement] with suspicion, but we’ll give the parties adequate opportunities to rebut.”  Tr. 24:17 – 25:1. 


Respondents argued that a per se presumption is too restrictive, and that the courts should not disturb reverse payment settlements unless the underlying patent litigation is found to be a sham or the patent was obtained by fraud.  Respondents argued that FTC’s objections to the delayed entry to the market by generics in reverse payment settlements are similar to royalty payments made under licensing agreements.  “There’s always an argument to be made with any delayed entry situation that monopoly profits are shared.  That’s just – just inherent in the nature of it.”  Tr. 28:11-13. 


Respondents also acknowledged that the Hatch Waxman Amendments created a unique opportunity for generics to challenge patents, because the generic does not require actual development, manufacture, and sale of a competitor product.  Respondents also noted that the Hatch Waxman Amendments provided a structure to encourage challenges, but not to require the parties to litigate to a conclusion.  Adopting the FTC’s approach, making these settlements more difficult to achieve in order to address an extreme outlier situation, would be administratively difficult and result in fewer challenges by generics.


The Court did not ask questions suggesting that it would adopt a per se anticompetitive approach.  Rather, they questioned why current antitrust jurisprudence is insufficient.  Justice Scalia asked the government, “why should we overturn understood antitrust laws just to --  just to patch up a mistake that Hatch-Waxman made?”  Tr. 11:14-17.  Similarly, Justice Breyer asked, “If you were asking us to produce some kind of structure . . . a whole set of complex per se burden of proof rules that I have never seen in other antitrust cases.”  Tr. 14:14-20.  Justice Breyer further asked “why isn’t the government satisfied with an opinion of the Court that says, yes, there can be serious anticompetitive effects.  Yes, sometimes there are business justifications . . . In other words, it’s up to the district court, as in many complex cases, to structure their case with advice from the attorneys.”  Justice Sotomayor noted that “It’s rare that we find a per se antitrust violation.  Most situations we put it into rule of reason.”  Tr. 21:3-5.


Counsel for the respondents faced several questions about the scope of the benefit of the 180-day exclusivity for generic challengers, and whether there were other methods (e.g., limiting settlement terms to earlier entry date or establishing royalty payments, or placing caps on the amounts generics can obtain) “and then we won’t have a real concern with the restraint of trade, or we’ll have a lesser concern.”  Tr. 42:20-22. 


Supreme Court Decision
Justice Alito recused himself from the case, resulting in speculation of a 4-4 split.  However, in a 5-3 decision issued on June 17, 2013, the Court reversed the 11th Circuit’s scope of the patent test, which had held that absent sham litigation or fraud a reverse payment settlement is immune from antitrust attack.  FTC v. Actavis, Inc., 570 U.S. ___ (2013). 


The Court identified the following considerations, which affected its determination that FTC should be permitted the opportunity to challenge reverse payment settlements: (1) the reverse payment as the “potential for genuine adverse effects on competition” (slip op. at 14); (2) the “anticompetitive consequences will at least sometimes prove unjustified,” and the patent holder may show that “legitimate justifications” for the reverse payment exist (slip op. at 17-18); (3) “where a reverse payment threatens to work unjustified anticompetitive harm, the patentee likely possesses the power to bring that harm about in practice” (slip op. at 18); (4) litigating the antitrust action “is likely to prove more feasible administratively than the Eleventh Circuit believed,” because it is not usually necessary to litigate patent validity, and suggesting that an otherwise unexplained large payment may “provide a workable surrogate for a patent’s weakness,” (slip op. at 18-19); (5) a “large, unjustified reverse payment risks antitrust liability does not prevent litigating parties from settling their lawsuit,” including ways to settle that do not use large reverse payments (slip op. at 19-20).


Justice Breyer, writing for the majority, however, explicitly declined to adopt FTC’s argument that reverse payment settlements are presumptively unlawful.  Rather, the Court noted that FTC “must prove its [antitrust] case as in other rule-of-reason cases.”  Slip op. at 20-21.  Following the Actavis decision, trial courts are left to structure the litigation to preserve the rule of reason approach – employing a sliding scale and “the quality of proof required should vary with the circumstances.”  Slip op. at 21.

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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