Supreme Court, in FTC v. Actavis, rejects the “scope of the patent” test, holding that antitrust law’s “rule of reason” analysis can pierce the shield of patent rights

by Cadwalader, Wickersham & Taft LLP
Contact

Introduction

Patent rights and antitrust law contain inherently antagonistic policies: While antitrust law is aimed at preventing monopolies and promoting competition,1 patent law explicitly rewards inventors with a time-limited right to exclude others. The Supreme Court in FTC v. Actavis2 addresses the age-old tug of war between antitrust and patent law in the context of "reverse payments." Reverse payments, also known as "pay-for-delay," are settlements from Hatch-Waxman litigation, in which a branded pharmaceutical company ("Branded") pays a generic pharmaceutical company ("Generic") in exchange for the Generic to refrain from marketing its generic version of the drug for a certain period of time. Importantly, "[t]he Hatch Waxman Act created an environment that encourages [reverse payment settlements] because unlike traditional infringement suits where the patent holder can negotiate by agreeing to forego the infringement damages it expects to recover, there usually are no infringement damages in Hatch Waxman suits."3

Pre-Actavis Approach to Reverse Payments: Circuits Split Between Applying "Scope of the Patent" test and Traditional Antitrust Scrutiny.

The Second, Eleventh, and Federal Circuits have utilized the scope of the patent test, which holds any agreement resolving Hatch-Waxman patent infringement litigation to be shielded from antitrust scrutiny unless: (1) the patent was fraudulently obtained; (2) the suit for the patent's enforcement is shown to have been objectively baseless in the sense that no reasonable litigant could realistically expect success on the merits; or (3) the agreement unreasonably restrains competition beyond the subject matter or temporal scope of the patent.4 The scope of the patent test prioritizes patent law over antitrust law, holding that the legal monopoly of patent rights shields the agreement from antitrust scrutiny. Thus, it's no surprise that numerous patent bar associations, including the New York Intellectual Property Law Association ("NYIPLA"), American Intellectual Property Law Association ("AIPLA"), and the Intellectual Property Owners Association ("IPO"), have advocated for the retention of the "scope of the patent" test.5

In contrast, the Third, Sixth, and DC Circuits have applied antitrust scrutiny to reverse payment agreements.6  Under the Sherman Act, there are three different standards for determining unreasonable restraint on trade (in order of increasing leniency): (1) a "per se" presumption that an agreement is invalid because it falls within a category of facially anti-competitive, impermissible restraints (e.g. horizontal price fixing); (2) a "quick look" approach wherein restraints similar to facially impermissible restraints are invalid in the absence of a defendant showing a pro-competitive rationale; and 3) a "rule of reason" analysis that involves a more extensive balancing of pro- and anti-competitive effects. As stated in In re K-Dur Antitrust Litig., a "rule of reason" analysis seeks to determine "whether the questioned practice imposes an unreasonable restraint on competition."7

The "rule of reason" test has three parts:

  1. The plaintiff must show that the challenged conduct has produced anti-competitive effects within the market. If yes, then:
  2. Defendant must show that the challenged conduct promotes a sufficiently pro-competitive objective.
  3. The plaintiff can rebut defendant's pro-competitive justification by showing that the restraint is not reasonably necessary to achieve the pro-competitive objective.8

Key Facts Surrounding the Reverse Payment Agreement in Actavis

Here, Actavis, Inc.9 filed an Abbreviated New Drug Application ("ANDA") for a generic version of the drug AndroGel produced by Solvay Pharmaceuticals.10 Paddock Pharmaceuticals then filed its own ANDA and both Actavis and Paddock11 filed Paragraph IV certifications stating that Solvay's patent on AndroGel was invalid and their generic products did not infringe Solvay's patent.12 In response, Solvay filed a Paragraph IV lawsuit13 against Paddock and Actavis. Although the FDA eventually approved Actavis's generic drug, the parties entered into a reverse payment settlement agreement in which Actavis would delay the entry of its generic product into the AndroGel market14 and Solvay would pay $19-$30 million annually for a nine-year period. Notably, "[t]he companies described these payments as compensation for other services the generics promised to perform."15 Specifically, Actavis agreed to market Solvay's AndroGel to urologists while Paddock agreed to act as a back-up AndroGel supplier and Par would try to get primary care physicians to use the drug.16 However, the FTC argued that these other services had little value and that "the true point of the payments was to compensate the generics for agreeing not to compete against AndroGel until 2015."17

Antitrust Scrutiny Trumps Exclusion Rights Granted by Patent in Actavis

Against this factual backdrop, the Supreme Court in Actavis held that the antitrust rule of reason analysis trumps the scope of the patent test. Under the rule of reason test, examining the scope of the patent is not outcome determinative, but rather the starting point for analyzing the validity of a reverse payment settlement.18 The Court notes that the likelihood of a reverse payment bringing about anticompetitive effects depends primarily upon four factors: (1) the size of the payment; (2) the scale of the payment relative "to the payor's anticipated future litigation cost;" (3) "its independence from other services for which it might represent payment;" and (4) "the lack of any other convincing justification."19 The Court also notes that "[t]he existence and degree of any anticompetitive consequence may also vary as among industries."20 The Court elaborated that even though "offsetting or redeeming virtues are sometimes present," it is still up to the antitrust defendant to "show in the antitrust proceeding that legitimate justifications are present, thereby explaining the presence of the challenged term and showing the lawfulness of that term under the rule of reason."21

The Court also considered the Eleventh Circuit's justification for its use of the scope of the patent test - the general policy favoring settlement over the litigation expense associated with invalidating the patent at issue - but held that the relative amount of the cash payment to the Generic could be used as a surrogate indicator of the relative strength of the patent at hand. The Court justified this position by stating that the payments to the Generic were so disproportionately large relative to the actual worth of the patents that it was reasonable for the court to make this leap. In other words, the size of a reverse payment can be used as a proxy for the patent-holder's lack of confidence in the validity of the patent, because, according to the Supreme Court, unusually large payments are often made to reduce the risk associated with litigating the validity of weak patents.22 The Court concluded that it is precisely this type of behavior - where the owner of a possibly invalid patent attempts to monetize a patent (in the form of increased revenue from consumers) that would have no value if asserted in court - that the Supreme Court is attempting to suppress.

The Supreme Court ultimately remanded the case and left the mechanics of applying the rule of reason test to the lower courts. While only time will tell with how the rule of reason will be applied by the lower courts, some authority already exists. The Third Circuit, in In Re K-Dur Antitrust Litigation, applied the rule of reason analysis to a reverse payment and found the agreement at issue to be anti-competitive.23 The court held that "the finder of fact must treat any payment from a patent holder to a generic patent challenger who agrees to delay entry into the market as prima facie evidence of an unreasonable restraint of trade, which could be rebutted by showing that the payment (1) was for a purpose other than delayed entry or (2) offers some pro-competitive benefit."24 The court in K-Dur further articulated its disfavor of reverse payments by noting that "situations where a reverse payment increases competition" are "probably rare."25 It is notable that the Third Circuit's decision is consistent with Actavis's key holdings that (1) certain, carefully structured reverse payments can pass muster under the rule of reason analysis, and (2) the Branded can provide "justification" for its payment(s) to Generic that can make the otherwise prohibited anti-competitive effects permissible.

Conclusion

Ultimately, the Supreme Court's holding in Actavis is quite narrow: the Eleventh Circuit erred by dismissing the FTC's complaint on the sole basis of the scope of the patent test; consequently, the case should be remanded for the lower court to apply antitrust scrutiny to the reverse payment agreement.

The "five sets of considerations" that led the Court to hold "that the FTC should have been given the opportunity to prove its antitrust claim" were: that (1) here, "the specific restraint at issue has the 'potential for genuine adverse effects on competition";26 (2) such "anticompetitive consequences will at least sometimes prove unjustified";27 (3) "the patentee likely possesses the power to" effect that "unjustified anticompetitive harm" because branded pharmaceutical companies possess huge financial resources they can leverage to pay generics to stay off the market;28 (4) "an antitrust action is likely to prove more feasible administratively than the Eleventh Circuit believed";29 and (5) subjecting reverse payments to antitrust scrutiny "does not prevent litigating parties from settling their lawsuit."30

It's still too early to predict how the Eleventh Circuit will apply an antitrust analysis when it reviews Actavis on remand, or the extent to which the Actavis decision will affect reverse payment settlements. This uncertainty is reflected by the fact that both Branded and Generic pharmaceutical companies are already claiming Actavis as at least a partial victory. For example, the Executive Vice President and General Counsel of Pharmaceutical Research and Manufacturers of America ("PhRMA"), Mit Spears stated that: "[w]e are pleased that the Court unanimously rejected the FTC's position that patent settlement agreements between innovator and generic pharmaceutical companies should be viewed as presumptively unlawful under the antitrust laws," while also expressing "disappoint[ment] that the majority failed to provide clear and unambiguous guidance as to how patent settlements could be structured to avoid antitrust exposure short of litigating a patent dispute to the end."31 Meanwhile, Ralph Neas, President and CEO of the Generic Pharmaceutical Association ("GPhA"), told reporters that "we are pleased that the Court clearly recognized that settlements require a case-by-case assessment. In establishing the 'rule of reason,' and leaving the decision to lower courts, the ruling continues to provide a lawful pathway for companies to resolve disputes through settlements."32 Neas also rationalized that "this preserves all options for generic manufacturers to bring lower-cost generic medicines to patients as soon as possible."33 Similarly (and ironically), consumer advocates such as New York Attorney General Eric Schneiderman are also claiming victory: "Today's ruling is a victory for millions of Americans who depend on generic drugs to treat illness and pain."34 

Despite the open question of how to interpret the Supreme Court's latest opinion on reverse payments, Actavis unequivocally signals that the parties in a Hatch-Waxman litigation will now need to be particularly creative in structuring future settlement agreements to avoid antitrust scrutiny.

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.

© Cadwalader, Wickersham & Taft LLP | Attorney Advertising

Written by:

Cadwalader, Wickersham & Taft LLP
Contact
more
less

Cadwalader, Wickersham & Taft LLP on:

Readers' Choice 2017
Reporters on Deadline

"My best business intelligence, in one easy email…"

Your first step to building a free, personalized, morning email brief covering pertinent authors and topics on JD Supra:
Sign up using*

Already signed up? Log in here

*By using the service, you signify your acceptance of JD Supra's Privacy Policy.
Privacy Policy (Updated: October 8, 2015):
hide

JD Supra provides users with access to its legal industry publishing services (the "Service") through its website (the "Website") as well as through other sources. Our policies with regard to data collection and use of personal information of users of the Service, regardless of the manner in which users access the Service, and visitors to the Website are set forth in this statement ("Policy"). By using the Service, you signify your acceptance of this Policy.

Information Collection and Use by JD Supra

JD Supra collects users' names, companies, titles, e-mail address and industry. JD Supra also tracks the pages that users visit, logs IP addresses and aggregates non-personally identifiable user data and browser type. This data is gathered using cookies and other technologies.

The information and data collected is used to authenticate users and to send notifications relating to the Service, including email alerts to which users have subscribed; to manage the Service and Website, to improve the Service and to customize the user's experience. This information is also provided to the authors of the content to give them insight into their readership and help them to improve their content, so that it is most useful for our users.

JD Supra does not sell, rent or otherwise provide your details to third parties, other than to the authors of the content on JD Supra.

If you prefer not to enable cookies, you may change your browser settings to disable cookies; however, please note that rejecting cookies while visiting the Website may result in certain parts of the Website not operating correctly or as efficiently as if cookies were allowed.

Email Choice/Opt-out

Users who opt in to receive emails may choose to no longer receive e-mail updates and newsletters by selecting the "opt-out of future email" option in the email they receive from JD Supra or in their JD Supra account management screen.

Security

JD Supra takes reasonable precautions to insure that user information is kept private. We restrict access to user information to those individuals who reasonably need access to perform their job functions, such as our third party email service, customer service personnel and technical staff. However, please note that no method of transmitting or storing data is completely secure and we cannot guarantee the security of user information. Unauthorized entry or use, hardware or software failure, and other factors may compromise the security of user information at any time.

If you have reason to believe that your interaction with us is no longer secure, you must immediately notify us of the problem by contacting us at info@jdsupra.com. In the unlikely event that we believe that the security of your user information in our possession or control may have been compromised, we may seek to notify you of that development and, if so, will endeavor to do so as promptly as practicable under the circumstances.

Sharing and Disclosure of Information JD Supra Collects

Except as otherwise described in this privacy statement, JD Supra will not disclose personal information to any third party unless we believe that disclosure is necessary to: (1) comply with applicable laws; (2) respond to governmental inquiries or requests; (3) comply with valid legal process; (4) protect the rights, privacy, safety or property of JD Supra, users of the Service, Website visitors or the public; (5) permit us to pursue available remedies or limit the damages that we may sustain; and (6) enforce our Terms & Conditions of Use.

In the event there is a change in the corporate structure of JD Supra such as, but not limited to, merger, consolidation, sale, liquidation or transfer of substantial assets, JD Supra may, in its sole discretion, transfer, sell or assign information collected on and through the Service to one or more affiliated or unaffiliated third parties.

Links to Other Websites

This Website and the Service may contain links to other websites. The operator of such other websites may collect information about you, including through cookies or other technologies. If you are using the Service through the Website and link to another site, you will leave the Website and this Policy will not apply to your use of and activity on those other sites. We encourage you to read the legal notices posted on those sites, including their privacy policies. We shall have no responsibility or liability for your visitation to, and the data collection and use practices of, such other sites. This Policy applies solely to the information collected in connection with your use of this Website and does not apply to any practices conducted offline or in connection with any other websites.

Changes in Our Privacy Policy

We reserve the right to change this Policy at any time. Please refer to the date at the top of this page to determine when this Policy was last revised. Any changes to our privacy policy will become effective upon posting of the revised policy on the Website. By continuing to use the Service or Website following such changes, you will be deemed to have agreed to such changes. If you do not agree with the terms of this Policy, as it may be amended from time to time, in whole or part, please do not continue using the Service or the Website.

Contacting JD Supra

If you have any questions about this privacy statement, the practices of this site, your dealings with this Web site, or if you would like to change any of the information you have provided to us, please contact us at: info@jdsupra.com.

- hide
*With LinkedIn, you don't need to create a separate login to manage your free JD Supra account, and we can make suggestions based on your needs and interests. We will not post anything on LinkedIn in your name. Or, sign up using your email address.