Supreme Court Subjects Reverse Payment Settlements to Antitrust Review

In a recent opinion with powerful implications for drug manufacturers, the U.S. Supreme Court decided in FTC v. Actavis that reverse payment settlement agreements can violate the antitrust laws despite the antitrust immunity provided by patents and public policy favoring settlement. Challenges to these settlements – common in the pharmaceutical industry and also known as “pay-for-delay” agreements – will now be assessed under antitrust’s rule-of-reason. This decision will likely prompt brand and generic drug manufacturers to rethink the way they resolve litigation related to generic drug manufacturers’ market entry. Below we discuss the opinion and its implications, including proposed legislation.

Summary

The Actavis case arises from litigation initiated by Solvay Pharmaceuticals to enforce its patent for AndroGel, a testosterone gel. Solvay was pressed to enforce its patent because Actavis and other generic manufacturers certified that Solvay’s patent was invalid or would not be infringed by their generic versions. This is known as a “paragraph IV” dispute because of the provision of the Hatch-Waxman Act that provides for this type of challenge to a drug manufacturer’s patent. In 2006, Solvay settled the patent litigation with the generic manufacturers under an arrangement known both as a “reverse payment” (because the plaintiff pays to settle) and “pay-for-delay” (because the brand manufacturer pays to ensure that the generic will stay out of the market for a set period of time). Under the terms of the settlement, the generic manufacturers agreed not to enter their versions of AndroGel in the market until more than five years prior to the patent’s expiration. In addition to millions of dollars in payments from Solvay to the generic manufacturers, the settlement involved agreements by the generics to promote and market AndroGel, and for one to serve as the back-up supplier.

The Federal Trade Commission challenged the settlement, alleging it violated section 5 of the FTC Act because the payment by Solvay was actually compensation for the generic manufacturers’ agreement not to compete in the market. The District Court dismissed the action, and the U.S. Court of the Appeals for the Eleventh Circuit affirmed, stating that “absent sham litigation or fraud in obtaining the patent,” a reverse payment settlement is immune from antitrust attack when its anticompetitive effects fall within the exclusionary scope of the patent. Certiorari was granted to resolve a split between circuits applying this “scope of the patent” test and the Third Circuit, which stood alone among U.S. courts of appeals addressing the issue in concluding that reverse payments are presumptively unlawful. (Following Actavis, the Third Circuit’s decision was vacated and remanded.)

A five-member majority of the Supreme Court rejected both the scope of patent and the presumption of unlawfulness approaches to analyzing reverse payments. The Court held that even though the anticompetitive effects may fall within the exclusionary potential of the patent, monetary payments to settle Hatch-Waxman paragraph IV litigation are properly assessed under the rule-of-reason. In rejecting the scope of the patent rationale, the Court reasoned that the question whether a restraint goes beyond the exclusionary potential of the patent is a conclusion to be drawn from the antitrust analysis, not its starting point. This marks the fundamental difference between the majority and the dissent. While the dissent favored applying the scope of the patent test at the threshold, the Court endorsed the traditional antitrust approach of considering “likely anticompetitive effects, redeeming virtues, market power, and potentially offsetting legal considerations present in the circumstances[.]” Slip Op. at 9-10. The Chief Justice, writing for a trio of dissenters (Justice Alito took no part in the case), wished district courts “[g]ood luck” in applying that standard.

In addition to concluding that reverse payment settlements are within the purview of the rule-of-reason, the majority wrestled with the argument that public policy favoring settlement weighs against opening the door to complex antitrust litigation. The Court considered five factors before deciding to favor antitrust litigation over the “single strong consideration of” settlement. Critical among the factors weighing against settlement were the competition-stifling effects of a large monetary payment to a potential competitor and the Hatch-Waxman Act’s built-in protection for first-entrants that would limit challenges by non-settling generic manufacturers. The Court also expressed a view that antitrust litigation would not require fully litigating the patent’s validity because an “unexplained reverse payment can provide a workable surrogate for a patent’s weakness[.]” Slip Op. at 19.

Implications

The Actavis decision has upended the status quo in pharmaceutical patent litigation settlements. Given the scope of the decision, it will necessarily change the approaches courts, drug company litigants, and lawmakers take to the issue of generic entry into a patented brand drug’s market.

  • District Courts: Trial courts are now saddled with the challenging work of resolving these cases under the rule-of-reason, rather than the more clear-cut scope of the patent test or the FTC’s preferred use of antitrust’s “quick look” analysis. The Court provided some guidance to district courts on this front, suggesting a middle path between “quick look” and full-blown rule-of-reason analysis that should focus “on the basic question – that of the presence of significant unjustified anticompetitive consequences.” Slip Op. at 21.
  • Drug Companies: Both brand and generic manufacturers are unlikely to be enthusiastic about the prospect of antitrust litigation determining the lawfulness of their patent settlements. This may lead to fewer settlements unless those parties can use Actavis as a guide to structure their settlements in a way that avoids scrutiny. There are two potential courses for doing so – one expressly provided in the opinion, the other implied.
    • First, the Court provides the following points that litigants can use to structure a monetary settlement in a way that is not competitively harmful: “[T]he likelihood of a reverse payment bringing about anticompetitive effects depends upon its size, its scale in relation to the payor’s anticipated future litigation costs, its independence from other services for which it might represent payment, and the lack of any convincing justification.” Slip Op. at 20. In short, a monetary settlement will be justified if the parties can show that it is not simply designed to divvy up monopoly profits. The Court also made clear that parties may settle in ways that do not include large monetary payments.
    • Second, a fundamental assumption underlying the Court’s conclusion that the rule-of-reason applies seems to be that Hatch-Waxman paragraph IV litigation puts the patent’s validity and scope “at issue[.]” Slip Op. at 8. But what if litigation did not put the patent at issue prior to a monetary settlement? Because patents are presumed valid, 35 U.S.C. § 282, the exclusionary scope of the patent would not be in doubt, and the patent’s antitrust immunity should apply. Accordingly, the stage at which the monetary settlement is reached could be critical. For example, rather than certifying under paragraph IV that a brand patent is invalid, a generic manufacturer could go directly to the brand manufacturer – armed with its generic version of the drug and its patent arguments – and strike a deal while the patent is unchallenged and presumptively valid. The benefit of the 180-day exclusivity period for first-entrants would be lost, but its value is diminished by the significant antitrust litigation costs Actavis imposes.
  • Congress: A bi-partisan group of Senators who feel the Actavis decision does not sufficiently protect consumers from the anticompetitive effects of pay-for-delay agreements will continue to push a bill to end the practice, known as the FAIR Generics Act.

In view of the complexity and expense associated with the Court’s prescription for addressing patent settlement antitrust concerns, reverse settlement payments may be chilled until another solution – whether settling before the patent is at issue or legislation to definitively end such settlements – is implemented.