Settling a Patent Lawsuit Can’t Violate the Antitrust Laws

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So the court in Federal Trade Commission v. Watson Pharmaceuticals, Inc., No. 10-12729 (11th Cir. Apr. 25, 2012) held (or more accurately reconfirmed). I’ve written about this issue previously (see my 2009 article on “The Lawfulness of Antitrust Settlements” in the downloads section of this blog).

In Watson, despite previous rejections of its position, the FTC once again argued that a patent litigation settlement between a branded pharmaceutical manufacturer (the patentee) and a generic pharmaceutical manufacturer that results in a payment from the branded manufacturer to the generic in return for the generic’s agreement to stay off the market can violate the antitrust laws. The FTC added a new gloss in Watson: such an agreement violates the antitrust laws if, at the time of the patent settlement, the patent was more likely than not invalid.

The Eleventh Circuit rejected the FTC’s argument. Unless a patent is obtained fraudulently, or unless the patent litigation is itself a sham, a settlement of patent litigation cannot violate the antitrust laws. (The one exception to this rule: if the settlement imposes restrictions beyond the terms of the patent itself, e.g., if it restricts competition beyond the remaining term of the patent.) As the court wrote, “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.” (emphasis supplied).

The court articulated a number of rationales for its ruling, including the fact that patent litigation is usually high stakes, and parties rationally may want to settle even if the probability of a finding of validity or infringement is, strictly speaking, less than 50%. Additionally, the FTC’s approach would require an after-the-fact calculation of how “likely” a patent holder was to succeed in a settled lawsuit if it had not settled. Making such predictions is very difficult, and “is too perilous an enterprise to serve as a basis for antitrust liability and treble damages.” The FTC’s approach would also impose heavy burdens on the parties and the courts to essentially re-litigate patent issues. And finally, circuit courts other than the Federal Circuit have no expertise in the patent area, and they are not well-equipped to make determinations about patent infringement.

The best lines of the opinion are the following: “In closing, it is worth emphasizing that what the FTC proposes is that we attempt to decide how some other court in some other case at some other time was likely to have resolved some other claim if it had been pursued to judgment. If we did that we would be deciding a patent case within an antitrust case about the settlement of the patent case, a turducken task. Even if we found that prospect palatable, we would be bound to follow the simpler recipe for deciding these cases that is laid out in our existing precedent.”