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:
The plaintiff must show that the challenged conduct has produced anti-competitive effects within the market. If yes, then:
Defendant must show that the challenged conduct promotes a sufficiently pro-competitive objective.
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.
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.