After Actavis: Crafting Pharmaceutical Settlements that Avoid Antitrust Scrutiny

by Robins Kaplan LLP

Last year’s Supreme Court decision in FTC v. Actavis[1] cleared the way for more antitrust challenges to settlements between generic and branded pharmaceutical companies resolving Hatch-Waxman patent litigation.  As a result, interested parties can now expect increased scrutiny of, and additional challenges to those kinds of settlements by the FTC, state attorneys general, and private plaintiffs.[2]

Going forward, companies embroiled in Hatch-Waxman litigation can minimize the risk of that unwanted scrutiny by understanding the settlement terms and circumstances most likely to trigger antitrust red flags. These include:

  • Large consideration paid by the branded manufacturer to the generic
  • Significant delay by the generic into the market
  • External indications of patent “weakness”
  • Settlements involving formulation patents
  • Covenants related to authorized generics

Because the Actavis Court left most of the definition of permissible reverse payments to the lower courts and the FTC, for now these attributes serve as counsel’s best guidance for creating a comprehensive risk management strategy.

Size and Type of Consideration

The Supreme Court’s prerequisite for reverse-payment liability was a “large, unexplained payment” from brand to generic. The Court did not specify how “large” a payment constituted an illegal settlement, nor did the Court specify whether the payment had to be monetary. 

Further, neither the courts nor the FTC have yet clarified what amount of consideration will trigger antitrust scrutiny. Private lawsuits filed after Actavis have alleged a value of brand-to-generic consideration between $75 million and $125 million. While these allegations do not establish a bar for antitrust scrutiny, they shed some light, at least on what the private bar views as “large.”[3]

Actavis also did not answer whether settlements that include valuable non-monetary consideration are inherently suspect.[4] The lower courts, however, have provided some guidance—albeit conflicting.[5] The FTC and private plaintiffs have both pushed ahead with claims that base liability on certain forms of non-monetary     consideration.[6]

Until the consideration issue is settled, those contemplating settlement should closely consider the size of both monetary and non-monetary consideration required in the deal when evaluating the prospects of antitrust scrutiny.

Delayed Market Entry

Reverse-payment cases define the harm to competition as the generic refraining from entering the market. Accordingly, the length of time in which the generic agrees to stay off the market will likely become a key factor in assessing whether a Hatch-Waxman settlement could potentially be viewed as anticompetitive.

For example, a long delay between settlement and agreed-upon entry, or an entry date that is only slightly before patent expiration, could end up attracting the attention of government or private enforcers. A review of FTC enforcement actions and post-Actavis private actions confirms that the length of delay has often served as one of the most important factors in the government’s decision to challenge or allow an agreement settling a Hatch-Waxman dispute.[7]  

Patent Weakness

A patent perceived to be “weak” is more likely to provoke the suspicion of government and private enforcers. Although all issued patents are presumed valid, certain elements or details can end up making some patents “weaker” than others. In Actavis—as in other FTC enforcement actions— the FTC looked to extrinsic factors to assess the patent’s strength. These factors include:

  • Preliminary rulings on patent scope or validity that contain direct evidence of the strength of the patent.
  • Internal documents, especially those that assess the likelihood of generic entry. For example, analysts’ reports are often easily digested and provide what enforcers believe to be “honest” assessments of the commercial landscape, including patent-protected assets.
  • Multiple ANDA filers challenging a patent showing that several firms shared the independent belief that each could prevail in patent litigation.

In Actavis, the Court implicitly endorsed the view that a patent does not give the patent holder the right to exclude others, but rather the right to try to exclude others. Thus, the Court reasoned that a settlement could be anticompetitive even if the generic entered before a patent expired, especially if the patent was viewed as “weak.” At the same time, the Court did not endorse the view—at least not in the context of a challenge under Section 5 of the FTC Act—that a court had to hold a “mini-trial” to assess the patent’s strength.

Formulation Patents

Settlements covering a formulation patent attract more suspicion  than those involving a composition patent. Difference between the two kinds of patent help to explain why:

  • Composition patents cover the active compound and usually issue by pointing to an identifiable novel or non-obvious improvement over the prior art.
  • Formulation patents, on the other hand, cover the preparation of the compound into the form administered to a patient. Often the compound is simply packaged into a particular form that has been used for other compounds in the past, raising obviousness concerns.

Branded manufacturers have turned to formulation patents as a tool to delay generic entry. In a practice often referred to as “evergreening,” a branded manufacturer might introduce a slight change to the formulation that, if separately patented, could extend patent protection and exclude generics that are no longer equivalent to the prescribed brand.

For these reasons the industry generally views formulation patents covering a drug to be “weaker” than the corresponding composition patents. As a result, settlements that relate only to formulation patents thus run an increased risk of attracting the attention of the FTC or private enforcers.

Covenants Concerning Authorized Generics

Settlement terms relating to authorized generics are particularly likely to attract antitrust scrutiny. An authorized generic is a generic form of a pharmaceutical treatment, which is produced either by the branded manufacturer itself or by a selected generic manufacturer, pursuant to a license from the branded firm. Authorized generics can potentially be procompetitive, when the authorized generic competes in the generic market alongside other generic firms or introduces a generic form of a drug that would not otherwise exist.

In the view of the FTC and private plaintiffs, however, authorized generics can be used anticompetitively in Hatch-Waxman settlements. For example, the branded firm might agree to forego producing an authorized generic as part of its consideration to the settling generic. Or the branded manufacturer might simply name the generic challenger as its authorized generic as part of a deal. Either way, a government enforcer or private plaintiff could view this type of an arrangement as an attempt to deprive the marketplace of an additional generic competitor.

Thus, even though the courts have yet to endorse the theory that a settlement agreement involving an authorized generic constitutes a “reverse payment,” due to the interest in these types of settlement agreements, parties should consider the risk of an antitrust suit or investigation. 


Actavis and other challenges to generic-branded settlement agreements demonstrate that settling parties need to seriously contemplate the prospect of antitrust scrutiny when crafting their agreements. Yet, as Actavis emphasized, every Hatch-Waxman settlement is different, making it difficult to state a single standard needed for generic pharmaceutical settlements to “pass” antitrust review. Despite this challenge, parties can avoid unwanted antitrust scrutiny by recognizing the settlement elements most likely to attract enforcement attention. Before the final inking any settlement of Hatch-Waxman claims parties that consider size and type of consideration, delayed market entry, strength and type of patent, and covenants involving authorized generics stand the best chance of reaching a final and complete resolution of all claims.

[1] Federal Trade Comm’n v. Actavis, Inc., 570 U.S. ___, 133 S.Ct. 2223 (2013).
[2] State attorneys general may investigate and challenge agreements under state laws, which may impose more strict liability standards than federal law.[2] In addition, Actavis has led to an increased number of challenges to reverse-payment settlements by private plaintiffs, including several groups of direct purchasers suing under federal law (large retailers and wholesalers) and indirect purchasers suing under state laws (third-party payors and individual consumers).
[3] See, e.g., Compl. Am. Sales Co., LLC v. Endo Pharmaceuticals, Inc., No. 3:14cv22 (N.D. Cal.) (Between $96 million and $261 million of free product, less a royalty on the generic’s sales during the exclusivity period); Compl., United Food & Commercial Workers Local 1776 v. Teikoku Pharma. USA, No. 3:13cv5257 (N.D. Cal.) ($96 million in free product, plus agreement not to market authorized generic, valued at $24 million); Compl., City of Providence v. Abbvie, 1:13cv292 (E.D. Pa. Sept. 26, 2013) (At least $77 million in royalties in exchange for agreement not to license authorized generic); Compl., Int’l Union of Operating Engineers Local 132 v. Medicis Pharmaceuticals Corp., 2:13cv5108 ($63 million in payments under a joint-development agreement plus 50% of profits from jointly developed products).
[4] Past agreements in the industry featured forms of nonmonetary consideration, such as licensing, distribution, or supply agreements; an agreement to name the ANDA applicant the “authorized generic” of the branded firm; or an agreement by the branded firm not to name an authorized generic.
[5] For example, the court in In re Lamictal Direct Purchaser Antitrust Litigation concluded that a covenant by the branded manufacturer to refrain from marketing an authorized generic to compete with the ANDA applicant during the ANDA applicant’s exclusivity period was not a “reverse payment” subject to antitrust scrutiny.[5] The court reasoned that Actavis applied only to settlements involving cash, leaving untouched those settlements that have strictly non-monetary terms. The court distinguished earlier opinions that arguably opened the door to scrutiny of non-monetary consideration.
[6] See Br. of Amicus Curiae FTC, In re Effexor Antitrust Litigation, No. 11-cv-5479 (D.N.J. Aug. 16, 2013).
[7] See, e.g., Compl. Am. Sales Co., LLC v. Endo Pharmaceuticals, Inc., No. 3:14cv22 (N.D. Cal. Jan. 7, 2014) (Generic Lidoderm entry 16 months after settlement but 6 months before patent expiration); Compl., Giant Eagle v. Pfizer Inc., No. 3:13-cv-2478 (D.N.J. Apr. 18, 2013) (alleging entry after patent expiration); Compl., Plumbers & Pipefitters Local 178 Health & Welfare Trust v. Teikoku Pharma USA, Inc., No. 3:13-cv-5938 (N.D. Cal. Dec. 23, 2013) (alleging 7 years between settlement and entry, which could occur 6 months prior to patent expiration); Compl., City of Providence v. Abbvie, 1:13cv292 (E.D. Pa. Sept. 26, 2013) (Approximately 7-year alleged delay in entry of generic Niaspan, which occurred 4 years before expiration).


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.

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