FTC v. Actavis: The Future of Pharmaceutical Patent Settlements After the Court’s Adoption of a “Rule of Reason” Framework

by Quinn Emanuel Urquhart & Sullivan, LLP

The recent Supreme Court decision in Federal Trade Commission v. Actavis was closely watched and anticipated because of the importance of patent litigation in the legal/regulatory scheme codified in the Hatch-Waxman amendments to the Federal Food Drug and Cosmetic Act. FTC v. Actavis, 133 S. Ct. 2223 (2013). On June 17, 2013 the United States Supreme Court reinstated the Federal Trade Commission’s complaint against pharmaceutical manufacturers which had entered into “reverse payment” settlements of patent infringement litigation where the brand name drug manufacturer had provided the potential generic competitors with economic benefits in return for the generic applicants’ agreement to hold their competitive products off the market for some time period prior to expiration of the patent. Due to provisions of the Hatch-Waxman amendments, which allow a generic drug manufacturer to challenge the validity of the patent to an already approved brand name drug, this type of settlement benefits both the brand name drug manufacturer and the generic manufacturer. The brand name drug manufacturer can continue to market and sell the drug without generic competition or fear of its patents being invalidated, while the generic manufacturer receives monetary compensation and an agreement as to the date on which it can enter the market prior to expiration of the patent. By reversing the lower court’s decision dismissing the FTC’s complaint, the Court rejected the position adopted by the Eleventh, Second, and Federal Circuits that economic arrangements between parties settling pharmaceutical patent litigation are generally not subject to antitrust scrutiny, even if they have anticompetitive effects, so long as the terms of the settlements stay within the “scope of the patent.” The Court, however, also declined to adopt the FTC’s longstanding position, adopted by the Third Circuit, that reverse payment settlements are presumptively unlawful. Instead, the Court instructed the lower courts to apply antitrust law’s longstanding “rule of reason” analysis to cases alleging violation of antitrust laws in instances of reverse payment settlements. Notably, and of significant concern to the industry and their legal teams, the Court left the details of how to apply the rule of reason to the nation’s trial and intermediate appellate courts to define.

Solvay Pharmaceuticals is the owner of the regulatory approvals and patents covering the branded drug AndroGel®, a gel used in testosterone replacement therapy. Subsequently, Actavis, Inc. (then known as Watson Pharmaceuticals) and Paddock Laboratories separately filed abbreviated new drug applications (“ANDAs”) seeking FDA approval to market generic equivalents of AndroGel®. The Hatch-Waxman Act requires the generic manufacturers to assure that the generic will not infringe the branded drug patents. Both generic manufacturers certified under Paragraph IV of the Hatch-Waxman Act that Solvay’s patent “is invalid or will not be infringed” by the manufacture, use, or sale of their proposed generic alternatives. 21 U.S.C. § 355(j). By invoking Paragraph IV, the generic manufacturers essentially conceded patent infringement. Such a concession frequently results in litigation, as occurred here where Solvay then sued Actavis and Paddock for patent infringement. 35 U.S.C. § 271(e)(2)(A); FTC v. Actavis, 133 S. Ct. at 2228. Although the FDA subsequently cleared the Actavis product for marketing, Actavis did not launch its product into commerce. Instead, pursuant to the terms of a settlement reached in the patent litigations, Actavis, Paddock, and another competing drug manufacturer agreed not to bring their generic drugs onto the market until 65 months prior to expiration of the patent (unless someone else marketed a generic drug sooner) in return for Solvay agreeing, among other things, to provide the settling generic applicants with cash payments and a license to market and promote branded AndroGel® to doctors while they were bound not to launch their generic equivalents. Id. at 2229.

The Federal Trade Commission (“FTC”) filed suit against all parties to the settlement claiming a violation of Section 5 of the Federal Trade Commission Act based on an alleged unlawful agreement to abandon patent challenges, refrain from bringing the low-cost generic drugs to market, and share in Solvay’s monopoly profits. The District Court dismissed the complaint, finding that it did not set forth an antitrust violation. In re Androgel Antitrust Litigation (No. II), 687 F. Supp. 2d 1371, 1379 (N.D. Ga. 2010). The Eleventh Circuit affirmed that decision, noting 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 Pharmaceuticals, Inc., 677 F.3d 1298, 1312 (2012). The Supreme Court granted the FTC’s petition for certiorari because of the split of authority between the Second, Eleventh, and Federal Circuits on the one hand which find these settlements generally permissible, and the Third Circuit which found such settlements to be generally impermissible. Compare In re Ciprofloxacin Hydrochloride Antitrust Litig., 544 F.3d 1323 (Fed. Cir. 2008) (settlements generally immune from antitrust attack); In re Tamoxifen Citrate Antitrust Litig., 466 F.3d 187 (2d Cir. 2006) (similar); with In re K-Dur Antitrust Litig., 686 F.3d 197, 214-218 (3d Cir. 2012) (settlements presumptively unlawful).

Majority Decision
In a 5-3 decision, (Justice Alito did not take part in consideration or decision of the case) the Court held that the Eleventh Circuit erred in dismissing the complaint, finding that although the anticompetitive effects of the reverse payment settlement may fall within the scope of Solvay’s patent, that fact does not immunize the agreement from antitrust liability. The Court noted that reverse payment settlements are unusual, because the plaintiff has paid the defendants millions of dollars even though they had no monetary claim against the plaintiff, and noted its concern that these forms of settlements may have an adverse effect on competition. FTC v. Actavis, 133 S. Ct. at 2231. Accordingly, the Court found that “it would be incongruous to determine antitrust legality by measuring the settlement’s anticompetitive effects solely against patent law policy, rather than by measuring them against precompetitive antitrust policies as well.” Id. The Court also declined to adopt the FTC’s position that reverse payment settlements are presumptively unlawful under a “quick look” approach. Instead, the Court indicated that a “rule of reason” approach should be applied to determine the legality of a reverse payment settlement. The Court did not elaborate on how this rule of reason should be applied to these types of antitrust lawsuits, instead leaving the structuring of rule of reason antitrust lawsuits to the lower courts. Id. at 2237.

The main concerns addressed by the majority opinion were the general legal policy favoring settlement of disputes and the related concern that antitrust scrutiny of reverse payment settlements would require time-consuming and costly litigation regarding the underlying validity of the patent. The Court laid out five sets of considerations leading to its decision that the FTC should be entitled to prove its antitrust claim. First, the specific restraint at issue has the “potential for genuine adverse effects on competition.” Id. at 2234-35. The Court reasoned that payments to keep a competitor out of the market allow the patentee to set market prices and divide the profits between the patentee and the challenger rather than allowing the consumer to benefit from lower prices. “Second, these anticompetitive consequences will at least sometimes prove unjustified;” therefore, the mere possibility that a settlement did not have anticompetitive effects does not justify outright dismissal of the lawsuit. Id. at 2235-36. “Third, where a reverse payment settlement threatens to work unjustified anticompetitive harm, the patentee likely has the power to bring about that harm in practice.” Specifically, the Court noted that the “size of the payment from a branded drug manufacturer to a prospective generic is itself a strong indicator of power.” Id. at 2236. “Fourth, an antitrust action is likely to prove more feasible administratively than the Eleventh Circuit believed.” The Court opined that on most occasions the lower courts would not have to consider whether the patent was valid because “[a]n unexplained large reverse payment itself would normally suggest that the patentee has serious doubts about the patent’s survival.” Id. at 2236-37. “Fifth, the fact that a large, unjustified reverse payment risks antitrust liability does not prevent litigating parties from settling their lawsuits” because the parties may settle in other ways, including by allowing the generic manufacturer to enter the patentee’s market before the patent expires without paying the challenger to stay out prior to that point. Id. at 2237. The Court concluded that the five considerations taken as a whole outweighed the interest in promoting settlements.

Chief Justice Roberts dissented from the majority opinion, joined by Justices Scalia and Thomas. The dissenting justices would have adopted the “scope of the patent” test, which would not subject a settlement to antitrust scrutiny if it was within the scope of the patent (in other words, would not extend the life of the patent in time or extend its scope to cover non-infringing variants) unless: (1) there was sham litigation; or (2) the patent was obtained through fraud on the Patent and Trademark Office. FTC v. Actavis, 133 S. Ct. 2223 (2013) (Roberts, C.J., dissenting). The dissent argued that applying the “amorphous” rule of reason to anticompetitive effects was without statutory support and would discourage settlement of patent litigation, which the dissent notes is particularly complex and costly. Id. at 2238, 2243-44. The dissent viewed the majority’s conclusion that parties will still be able to settle because they can negotiate for earlier entry into the market as unsupported and unconvincing, claiming that “parties are more likely to settle when they have a broader set of valuable things to trade.” Id. at 2247.

The dissent also took issue with the majority assumption that courts will not be required to undertake a detailed analysis of the validity of the patent because large payments generally indicate a patent owner’s doubt about the validity. The dissent noted that a party that is 95% sure that its patent is valid might pay a large sum of money to settle a lawsuit if the party is particularly risk averse. Id. at 2244-45.

Structuring Settlements Between Brand and Generic Drug Manufacturers After FTC v. Actavis
Although the Court largely defers to the lower courts in the application of the rule of reason to any alleged anticompetitive effects of a settlement, it does provide some guidance regarding which types of settlements are likely to be upheld. For example, in addressing concerns that the failure to adopt the scope of the patent rule will prevent parties from settling their lawsuits, the Court states that parties can “as in other industries, settle in other ways, for example, by allowing the generic manufacturer to enter the patentee’s market prior to the patent’s expiration, without the patentee paying the challenger to stay out prior to that point.” FTC v. Actavis, 133 S. Ct. at 2237.

The Court seems particularly wary of large payments from a branded drug manufacturer to settle a lawsuit, indicating that Courts will be more suspicious on balance of larger settlements. For example, the Court states: “[a]t least, the ‘size of the payment from a branded drug manufacturer to a prospective generic is itself a strong indicator of power’—namely, the power to charge prices higher than the competitive level.” Id. at 2236. Moreover, “[a]n unexplained large reverse payment itself would normally suggest that the patentee has serious doubts about the patent’s survival.” Id. This same sentiment is expressed throughout the decision: “[i]n 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.” Id. at 2236-37.

Notably the Court does not describe what constitutes a “large” payment. However, the Court did express skepticism over the size of the payments in the Actavis case—$12 million to Paddock, $60 million to Par, and an estimated $19-$30 million annually to Actavis for nine years. The Court states that “[t]he rationale behind a payment of this size cannot in every case be supported by traditional settlement considerations. The payment may instead provide strong evidence that the patentee seeks to induce the generic challenger to abandon its claim with a share of its monopoly profits that would otherwise be lost in the competitive market.” Id. at 2235.

The Court does acknowledge that there are legitimate reasons why companies may prefer to structure a reverse payment settlement. However, it notes that “if the basic reason is a desire to maintain and to share patent-generated monopoly profits, then, in the absence of some other justification, the antitrust laws are likely to forbid the arrangement.” Id. at 2237. Therefore, while the Court does not provide significant guidance about how to structure a settlement that is likely to withstand a lawsuit, reverse payment settlements for large sums of money without significant and documented mitigating circumstances will more likely face greater scrutiny.

Victory for Whom?
Both sides praised the majority opinion as a victory for American consumers. FTC Chairwoman Edith Ramirez issued a press release lauding the decision as having “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.” “Statement of FTC Chairwoman Edith Ramirez on the U.S. Supreme Court’s Decision in FTC v. Actavis, Inc.,” June 17, 2013, at http://www.ftc.gov/opa/2013/06/actavis.shtm. Actavis President and CEO Paul Bisaro stated: “We are pleased that the Court rejected the FTC’s proposed ‘quick look’ test, and did not rule that settlement agreements are presumptively unlawful. Rather, the Court has established that the ‘rule of reason’ be applied, and left it to the lower courts to determine if the benefits of the settlement outweigh harm to consumers.” “U.S. Supreme Court Reverses U.S. Court of Appeals Decision in FTC v. Actavis” June 17, 2013, at http://ir.actavis.com/phoenix.zhtml?c=65778&p=irol-newsArticle&ID=1830404.

These statements illustrate that both sides benefitted in some respect from the decision, though the exact bounds of the decision will remain unclear until these cases are litigated in the lower courts. In the interim, one thing is certain—by declining to adopt either side’s “bright line” test, the Supreme Court has guaranteed that branded companies who have invested hundreds of millions of dollars to develop their key franchises, and generic applicants seeking to gain early entry to those markets, will lack clear guidance on the proper paths to the settlement of patent disputes.

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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