Supreme Court Applies Rule of Reason in Antitrust Challenges to Reverse-Payment Patent Settlements

One of the most controversial antitrust issues for the pharmaceutical industry during the last decade has been the treatment of patent settlements in which a patent-holding branded manufacturer made payments to its generic competitors challenging the patents under procedures set forth in the Hatch-Waxman Act (so-called “reverse payments”). In return, the generic competitors agreed to honor the patent and refrain from competing with the branded product for some period of time. According to Federal Trade Commission statistics, there were 66 “reverse payment” settlements between 2004 and 2009. The FTC contends that the agreements protected at least $20 billion in sales of brand pharmaceuticals from generic competition and cost American consumers $3.5 billion per year. Those opposing such “reverse payment” settlements (including the FTC) argued that the settlements constitute agreements not to compete that violate the antitrust laws. Those favoring such settlements argued that they are lawful as long as the settlement agreement did not go beyond the exclusionary effect of the patent provided under patent law. Both sides could cite supporting decisions from the lower federal courts.

In Federal Trade Commission v. Actavis, Inc., the United States Supreme Court held, in a 5-3 decision, that reverse payment settlements are neither per se unlawful nor per se lawful, but must instead be evaluated under a traditional rule of reason analysis. Consequently, challenges to such settlements are going to be more fact-intensive and difficult to resolve on motions to dismiss or summary judgment. The Court’s decision may also open other types of patent settlements, and patent licenses, to antitrust challenge.

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