The U.S. Supreme Court issued its much-anticipated opinion today in FTC v. Actavis, Inc., ruling that so-called “reverse payment” patent settlements between innovator and generic pharmaceutical manufacturers that are challenged as antitrust violations should be reviewed under a traditional rule of reason analysis.

The Court reversed the U.S. Court of Appeals for the Eleventh Circuit, which along with other circuits had held that such settlements were immune from antitrust scrutiny provided the settlement was within the “scope of the patent.” Yet the Court also rejected the Federal Trade Commission’s request that the settlements be held presumptively illegal under the antitrust laws, a position adopted by the Third Circuit in another case. By subjecting such settlements to the fact-intensive rule of reason inquiry, the decision likely will result in increased litigation challenging such settlements on antitrust grounds.

In Actavis, the FTC brought an antitrust challenge against a settlement between an innovator and several generic drug companies that contained cash payments from the innovator to the generic drug companies. The settlement also provided that the generic companies would not seek to enter the market for a set period of time. Under the statutory scheme for generic drug approval, known as the Hatch-Waxman Act, a generic drug manufacturer must file an Abbreviated New Drug Application (ANDA) with the FDA before marketing its drug.

The Hatch-Waxman Act recognizes that the innovator company’s patents provide it with a lawful means of excluding generic competitors for a set period of time. The ANDA therefore must include a certification for each of the patents used in the brand-name drug. One type, a “Paragraph IV” certification, states that the brand company’s patent is invalid, unenforceable, or will not be infringed by the generic product. The reverse payment settlements at issue in Actavis settled the Paragraph IV litigation.

The FTC asked the Court to adopt a new test that would render such settlements “presumptively unlawful” under the antitrust laws. The defendant pharmaceutical companies, on the other hand, asked the Court to hold that, when the exclusionary effects of the settlement are within the “scope of the patent,” the settlement does not violate the antitrust laws.

The Court rejected both positions. Instead, it adopted the rule of reason used for most antitrust cases, holding that in assessing reverse payment settlements, courts should balance the pro-competitive effects of the settlement against any anti-competitive effects. Specifically, the Court held that “trial courts can structure antitrust litigation so as to avoid, on the one hand, the use of antitrust theories too abbreviated to permit proper analysis, and, on the other, consideration of every possible fact or theory irrespective of the minimal light it may shed on the basic question—that of the presence of significant unjustified anticompetitive consequences.”

In particular, the Court emphasized that legality of the payment may depend in part on its size, both in absolute terms and in relation to potential litigation costs, as well as the absence of any justification for the payment other than to delay generic entry. Beyond those broad parameters, the Court provided little guidance to lower courts.

Please join us and two antitrust economists for a webinar on June 25, 2013, to discuss the implications of the Court’s decision.