In a significant ruling involving both intellectual property rights and competition policy, the Supreme Court of the United States held in a 5–3 decision issued on June 17 that patent litigation settlements involving “reverse payments” are not immune from antitrust review and are subject to a rule-of-reason antitrust analysis to determine if they are likely to result in unjustified anticompetitive harm. The Supreme Court’s ruling means that reverse payment settlements may be subject to challenges by regulators and private litigants in the United States as a form of anticompetitive agreement among competitors. The Court’s decision will likely have significant implications for the pharmaceutical industry and other intellectual property (IP) rights holders, and may open the door to similar challenges in Canada.
In Federal Trade Commission v. Actavis, Inc., 570 U.S. ___ (June 17, 2013) (slip. op.), the U.S. Supreme Court resolved a stark split among U.S. appellate courts about the application of antitrust laws to patent litigation settlements in which an alleged infringer (typically, a generic pharmaceutical company) agrees not to market a patented product for some time prior to patent expiry in return for a significant payment by the patent holder (the so-called reverse payment). In the short term, the Court’s decision will affect the structuring of such patent settlements if the reverse payment is in excess of litigation costs. Over the longer term, the Court’s decision will significantly modify the incentives of parties to settle patent litigation and may, as predicted by the Court’s dissenters, even decrease the incentives of generic pharmaceutical companies to undertake patent challenges.
The Actavis case arose as a result of two litigation settlements entered by Solvay Pharmaceuticals with generic drug manufacturers Actavis (formerly Watson Pharmaceuticals) and Paddock Laboratories in connection with the testosterone product AndroGel. Following Watson’s and Paddock’s respective applications to the Food and Drug Administration for approval to launch generic versions of AndroGel, Solvay initiated patent infringement actions against each of them After three years of litigation, the parties settled. In separate agreements, Solvay agreed to license Actavis and Paddock to launch a generic version of AndroGel five years before patent expiry, in exchange for significant payments. Each generic company also undertook to provide certain marketing and manufacturing services to Solvay.
The Federal Trade Commission (FTC) challenged the settlements under section 5 of the FTC Act, which prohibits “unfair or deceptive acts or practices in or affecting commerce.” The FTC argued that the settlements were anticompetitive because Solvay was unlikely to prevail in the patent infringement case and, therefore, Actavis and Paddock would each have been able to begin selling their competing formulations well before their negotiated market entry dates. The FTC argued that the settlements amounted to an anticompetitive attempt to share in the profits afforded by a patent that, but for the agreements, would have been held invalid in court.
The District Court dismissed the complaint for failure to state a claim, and the Eleventh Circuit Court of Appeals affirmed. Following the majority of U.S. courts that have considered the issue, the Court of Appeals held that, with a few narrow exceptions, settlements that do not expand the exclusionary scope of patents are not subject to antitrust challenge. In light of the public policy favouring settlement of disputes, it held that parties could not be required to continue to litigate to avoid antitrust liability.
The Supreme Court’s Decision in Actavis
The Supreme Court reversed the Eleventh Circuit. Writing for the majority, Justice Breyer held that the AndroGel patent, if it were found to be valid and infringed, might have allowed the parties to enter into the settlements at issue. But in the majority’s view, the existence of a patent does not isolate from antitrust review the settlement of litigation directed at the patent’s validity or actual preclusive scope. The Supreme Court articulated five sets of considerations to support its view that the FTC should not have been barred from pursuing its action, in spite of the general legal policy favouring settlement of disputes:
Reverse payments have the potential for genuine adverse effects on competition because they may be used to purchase an exclusive right to sell a product by inducing the most motivated patent challengers to abandon their efforts, particularly in the context of the Hatch-Waxman Act.
While the anticompetitive consequences of reverse payments may sometimes be justified, this will sometimes not be the case, so reverse payments patent settlements must be analyzed. The Court cited as examples of potential legitimate justifications reverse payments that amount to no more than (i) a rough approximation of the litigation expenses saved through the settlement, or (ii) compensation for other services such as distribution or marketing.
If a reverse payment threatens to cause unjustified anticompetitive harm, the patentee likely possesses the power to bring that harm about in practice. Such market power is reflected in the size of the reverse payment and the patentee’s ability to recover the reverse payment by charging higher than competitive prices.
Litigation of the patent’s validity is not normally necessary to complete the antitrust rule-of-reason analysis. An unjustifiably large reverse payment will normally suggest that the patentee has serious doubts about the patent’s validity and that the payment’s main objective is to maintain supra-competitive prices.
Patent litigation may be settled in ways not involving reverse payments, for example by agreeing to allow earlier market entry prior to expiry of the patent.
The Supreme Court also rejected the FTC’s position that reverse payment settlements should be presumptively unlawful. In the Court’s view, such agreements should be reviewed under the antitrust rule of reason rather than the “quick look” approach used for presumptively anticompetitive agreements, because the “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 other convincing justification.”
In a dissent joined by two other justices, Chief Justice Roberts would have affirmed the decision of the Eleventh Circuit on the ground that the settlement of patent litigation cannot violate antitrust law provided that the patent holder acts within the scope of its patent, subject to the traditional exceptions relating to sham litigation and patents obtained by fraud.
Although the U.S. Supreme Court did not find reverse payment settlement agreements to be presumptively unlawful, the majority did make some statements to suggest that it will be difficult for reverse payment settlements to withstand antitrust scrutiny if the payments are significant. For example, the Court stated:
An unexplained large reverse payment itself would normally suggest that the patentee has serious doubts about the patent’s survival. And that fact, in turn, suggests that the payment’s objective is to maintain supracompetitive prices to be shared among the patentee and the challenger rather than face what might have been a competitive market—the very anticompetitive consequence that underlies the claim of antitrust unlawfulness. The owner of a particularly valuable patent might contend, of course, that even a small risk of invalidity justifies a large payment. But, be that as it may, the payment (if otherwise unexplained) likely seeks to prevent the risk of competition. And, as we have said, that consequence constitutes the relevant anticompetitive harm. In a word, the size of the unexplained reverse payment can provide a workable surrogate for a patent’s weakness, all without forcing a court to conduct a detailed exploration of the validity of the patent itself.
This certainly will embolden the FTC. It is not surprising that following the release of the decision, FTC Chairwoman Edith Ramirez declared victory, stating: “The Supreme Court’s decision is a significant victory for American consumers, American taxpayers, and free markets. The Court has made it clear that pay-for-delay agreements between brand and generic drug companies are subject to antitrust scrutiny, and it has rejected the attempt by branded and generic companies to effectively immunize these agreements from the antitrust laws. With this finding, the Court has taken a big step toward addressing a problem that has cost Americans $3.5 billion a year in higher drug prices.”
Chairwoman Ramirez also announced that the FTC will be moving ahead with the Actavis litigation. It will be important to see how the District Court applies the Supreme Court decision to the facts of Solvay’s reverse payment settlements.
Likely Impact of Actavis on Canadian Settlements and Competition Law
The U.S. Supreme Court decision in Actavis is likely to rekindle the interest of the Competition Bureau and Canadian private litigants in the competitive implications of reverse payment patent settlements, which have never been judicially considered in Canada. Yet there are significant differences between the U.S. Hatch-Waxman Act and the Canadian Patented Medicines (Notice of Compliance) Regulations, notably the availability of section 8 damages under the Canadian regulations, as well as the weaker presumption of validity attaching to Canadian patents. Both of these considerations are likely to affect the way reverse payment patent settlements are analyzed in Canada.
As a general matter, the Federal Court of Canada and the Competition Tribunal have previously held that the mere exercise of an IP right does not constitute an anticompetitive practice regardless of the degree to which competition may be affected. This general principle is reflected in the Bureau’s Intellectual Property Enforcement Guidelines. The Bureau defines the mere exercise of an IP right as the exercise of the owner’s right to unilaterally exclude others from using the IP and the owner’s use or non-use of the IP. The Bureau has not provided guidance on whether it views reverse payment patent settlements as something more than a mere exercise of an IP right or whether such agreements may be challenged under section 45 (criminal conspiracy), section 90.1 (civil agreement between competitors) section 79 (abuse of dominance) or section 32 (special remedy) provisions of the Canadian Competition Act.
In our view, it would be unlikely for the Bureau to characterize a reverse payment settlement that does not result in entry being delayed beyond the expiry of a patent as a naked restraint on competition, deserving of criminal condemnation under Canada’s per se conspiracy provisions in section 45 of the Competition Act. The Actavis decision supports such a view since the U.S. Supreme Court explicitly held that reverse payment settlements are not presumptively unlawful and instead held that a rule-of-reason analysis, rather than a per se rule, must apply to determine if they violate antitrust law.
The most likely provision of the Competition Act, under which such reverse payment patent settlements may be challenged is section 90.1, which empowers the Tribunal to make orders whereby, upon application of the Commissioner of Competition, it determines that an agreement is likely to result in a substantial lessening or prevention of competition in a relevant market, akin to a U.S. rule of reason analysis. The test under section 90.1 is less onerous for the Commissioner to satisfy than the test in the abuse of dominance provisions of section 79, albeit it does not have the explicit immunity for an act engaged in pursuant only to the exercise of any right or enjoyment of any interest derived under any of the federal statutes regulating intellectual property (including the Patent Act). Section 90.1 does specify “regulatory control over entry” as a factor the Tribunal may consider when determining whether an arrangement is likely to lessen competition substantially in a market. This suggests that, in the case of patent settlements, the Tribunal will consider whether the adverse impact on competition is the result of the agreement between competitors, or whether it merely flows from the patent rights, in which case it would not be attributed to the agreement. It is important to recognize that there is no right of private action under the section 90.1 (or section 79) and the Tribunal is limited to making orders prohibiting any person for doing anything under the agreement or requiring any person (with the consent of such person and the Commissioner) to take some action.
The Competition Act also contains a seldom-used provision, section 32, which endows the Federal Court with broad powers to prevent the use of intellectual property rights to unduly restrain trade or lessen competition. In contrast with the other provisions in the Competition Act, even the mere exercise of an IP right may attract scrutiny under the section 32. While the Federal Court’s remedial powers under section 32 are quite broad, only the Attorney General of Canada may initiate a proceeding and, in practice, would likely only do so on the recommendation of the Commissioner of Competition. The Bureau indicates that recourse to section 32 to be necessary “only in certain narrowly defined circumstances,” and outlines these three factors that must each be satisfied for the Bureau to recommend an application under section 32: (i) the IP holder must be dominant in the relevant market; (ii) the IP must be an essential input or resource for firms participating in the relevant market; and (iii) the Bureau must be satisfied that invoking a special remedy would not adversely alter the incentives to invest in research and development in the economy.
As section 32 has rarely been used throughout its 100-year existence, it is reasonable to expect that the Bureau’s future scrutiny of reverse payment patent settlements will be conducted under section 90.1 or even section 79. However, private litigants may still seek to challenge such reverse payment settlements as a form of criminal conspiracy under section 45, since there is a private right of action under section 36 that is available to any person who has allegedly suffered harm as a result of criminal conduct under the Act. While the Bureau’s characterization of the agreement may have some persuasive force, the Bureau’s determination would arguably not bar a private proceeding. Given the significant stakes associated with IP settlements, private litigants in Canada may have their own incentives for pursuing challenges to reverse payment settlements, and they may invoke the U.S. Supreme Court’s decision as persuasive authority that such settlements are not immune from antitrust review.