Supreme Court Issues Significant Patent Antitrust Decision Rejecting The “Scope Of The Patent” Rule

In the most significant patent antitrust decision in decades, Federal Trade Commission v. Actavis, Inc., No. 12-416, 2013 WL 2922122 (June 17, 2013), the Supreme Court has held, by a 5-3 vote with Justice Alito recused, that reverse payment patent settlements are subject to antitrust scrutiny.  Although the Court rejected the Federal Trade Commission’s request that it go further and deem such settlements presumptively anticompetitive, the Court’s decision resolves a circuit split under which most courts had held that a settlement was not subject to antitrust review so long as it fell within the legitimate scope of the patent’s exclusionary power.  Monday’s decision expressly rejects that “scope of the patent” rule.

Background

In 2003, Watson Pharmaceuticals (now known as Actavis, Inc.) filed an Abbreviated New Drug Application seeking approval to market a generic drug modeled on a patented synthetic testosterone, AndroGel.  The owner of the patent, Solvay Pharmaceuticals, filed suit against Actavis and others for patent infringement.  The cases soon settled.  Under the terms of the settlement agreement, Solvay (the patent owner) agreed to pay Actavis (the alleged infringer) $19-30 million per year for nine years, while Actavis agreed to promote AndroGel and to delay entry into the market until August 31, 2015, about five years before the patent’s expiration.  Other proposed generic manufacturers entered into similar settlements. 

Such settlements are often referred to as “reverse payment settlements,” and the practice is commonly referred to as “pay for delay.”  Proponents of the practice argue that a patent holder is entitled to refuse to license its patent and that such settlements often enhance competition by permitting the alleged infringer to enter the market before expiration of the term.  Opponents argue that such agreements are merely tools to avoid a judgment that the patent is invalid or not infringed and are no different than any other agreement aimed at avoiding competition and dividing the market (and the monopoly profits), to the detriment of consumers. 

In 2009, the Federal Trade Commission (FTC) filed suit against the settling parties, alleging that the payments, the agreement to abandon the patent challenge and the agreement not to compete violated Section 5 of the Federal Trade Commission Act, 15 U.S.C. § 45.  The district court dismissed the complaint for failure to state a claim, and the Eleventh Circuit affirmed, holding 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 Pharm., Inc., 677 F.3d 1298, 1312 (11th Cir. 2012).

The Eleventh Circuit ruling followed precedent in its own circuit as well as from the Federal Circuit and Second Circuit.  Numerous district courts and some state courts (e.g., the California Supreme Court) followed the same “scope of the patent” approach.  Authority to the contrary was more sparse, with the most notable exception being the Third Circuit’s decision in In re K-Dur Antitrust Litigation, 686 F.3d 197 (3d Cir. 2012), which not only rejected the “scope of the patent” test but also held that reverse payments to generic competitors should be deemed  presumptively anticompetitive and unlawful.  That split in authority, and the widespread practice of reverse payments, led the Supreme Court to grant certiorari.

The Supreme Court Ruling

In Monday’s decision, Justice Breyer, writing for a five-member majority including Justices Kennedy, Ginsburg, Sotomayor, and Kagan, expressly rejected the Eleventh Circuit’s holding that reverse-payment agreements are immune from antitrust scrutiny where the agreement’s “anticompetitive effects fall within the scope of the exclusionary potential of the patent.”  “For one thing,” reasoned the majority, “to refer, as the Circuit referred, simply to what the holder of a valid patent could do does not by itself answer the antitrust question.  The patent here may or may not be valid, and may or may not be infringed.”  Actavis, 2013 WL 2922122, at *7.  Additionally, the Court observed, settlements of this type tend to have significant adverse effects, and it is inappropriate to measure the settlement’s anticompetitive effects solely against patent law policy:  “[P]atent and antitrust policies are both relevant in determining the ‘scope of the patent monopoly’—and consequently antitrust law immunity—that is conferred by a patent.”  Id.  Thus, the Court held, “Whether a particular restraint lies ‘beyond the limits of the patent monopoly’ is a conclusion that flows from that analysis and not . . . its starting point.”  Id.

Although the Court thus rejected the “scope of the patent” rule, it acknowledged that the Eleventh Circuit’s conclusion found some support in general policy considerations favoring settlement—particularly the practical concern that antitrust scrutiny of reverse payment settlements would prove time-consuming, complex and expensive.  These considerations, however, were outweighed by (1) the potential for adverse effects on competition (exclusion and supracompetitive profits); (2) the possibility that these adverse effects may be unjustified; (3) the fact that such settlements are more likely to be entered into by companies with important patents and potentially significant market power; (4) the Court’s view that the administrative burdens may not be as difficult as perceived (i.e., the size of the reverse payment may act as a surrogate for a patent’s weakness, thereby avoiding a trial on validity or infringement); and (5) the fact that the Court’s ruling and the increased risk of liability will not prevent litigants from settling their lawsuits.  Id. at *10-12.

Recognizing that there may be procompetitive justifications for reverse payment settlements (e.g., eliminating future litigation costs), the Court also rejected the FTC’s request that such settlements be deemed presumptively anticompetitive and rejected after just a “quick look.”  Instead, plaintiffs (including the FTC here) will have to affirmatively prove the anticompetitive effect of the challenged settlement under the traditional “rule of reason.”  Id. at *13.

In a strongly worded dissent, Chief Justice Roberts, joined by Justices Scalia and Thomas, characterized the majority opinion as adopting a “novel” approach without support.  The dissent argued that so long as a patent holder’s actions are “within the scope of the patent, they are not subject to antitrust scrutiny, with two exceptions . . . (1) when the parties settle sham litigation; and (2) when the litigation involves a patent obtained through fraud on the Patent and Trademark Office.”  Id. at *15 (Roberts, J., dissenting) (citations omitted).  In rejecting the dissent’s characterization, the majority countered:  “What does appear novel are the dissent’s suggestions that a patent holder may simply ‘pa[y] a competitor to respect its patent’ and quit its patent invalidity or noninfringement claim without any antitrust scrutiny whatever . . . and that ‘such settlements . . . are a well-known feature of intellectual property litigation’ . . . .”  Id. at *9.

Implications for Future Patent Settlements

The holding of Actavis was specific to a reverse payment settlement between pharmaceutical companies and arose as a result of filings under the Hatch-Waxman Act, which seeks to regulate generic competitors’ entry into the market of a branded competitor.  The decision itself, however, is not specific to pharmaceuticals or Hatch-Waxman Act filings and will have broader application to private settlements involving reverse payments.  The precise contours of such review and the scope of the ruling have largely been left for the lower courts to decide.  But while the dissent indicated concern that the ruling may apply to more ordinary settlements of patent litigation, the opinion expressly declared that it did not intend to alter the understanding that such settlements are not subject to liability.  Thus, payments to alleged infringers to settle counterclaims and payments to patent holders of less than the amount initially demanded should not give rise to antitrust liability.  The opinion was less clear about other forms of payment.  Cf. In re Lamictal Direct Purchaser Antitrust Litig., Civ. No. 12-995 (WHW), 2012 WL 6725580 (D.N.J. Dec. 6, 2012) (non-cash payment did not trigger K-Dur presumption of unlawfulness).

The implications of the decision beyond reverse payment cases are yet to be determined.