FTC v. Actavis, Inc.

Reverse-payment settlement agreements may sometimes violate antitrust laws and a rule-of-reason approach guided by antitrust principles should apply.

July 15, 2013

Robins Kaplan GENERICally Speaking: A Hatch-Waxman Litigation Bulletin

Case Name: FTC v. Actavis, Inc., No. 12-416, 2013 U.S. LEXIS 4545 (Supreme Court June 17, 2013) (Opinion by Justice Breyer, in which Kennedy, Ginsburg, Sotomayor, and Kagan join; Dissent by Chief Justice Roberts, in which Scalia and Thomas join; Justice Alito took no part in the case) (Appeal from 11th Cir.)

Drug Product and Patent(s)-in-Suit: Androgel® (testosterone); U.S. Pat. No. 6,503,894 (“the ’894 patent”)

Nature of the Case and Issue(s) Presented:  The Federal Trade Commission (“FTC”) filed an antitrust suit challenging the patent settlement agreements between Solvay Pharmaceuticals, Inc. and Watson Pharmaceuticals, Inc., Par Pharmaceutical Companies, Inc. and Paddock Laboratories, Inc.  The FTC challenged the settlement agreements on the basis that they included “pay-for-delay” or “reverse payment” terms (i.e., “a patent holder pays the alleged infringing generic drug company to delay entering the market until a specified date, thereby protecting the patent monopoly against a judgment that the patent is invalid or would not be infringed by the generic competitor.”). The district court dismissed the complaint and the Eleventh Circuit affirmed. The Eleventh Circuit stated “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.” The FTC appealed the dismissal of its complaint to the Supreme Court. The Supreme Court granted certiorari because different courts have reached different conclusions about the application of antitrust laws to Hatch-Waxman-related patent settlements.

Why FTC Prevailed:  The Supreme Court did not agree that the “scope of the patent” test was sufficient to immunize the agreement from antitrust attack. It also rejected FTC’s proposal that reverse payment agreements are presumptively or per se unlawful. But the Supreme Court reversed the Eleventh Circuit and remanded the case. The Supreme Court found that simply identifying what a patent holder could or could not do during the term of a patent is insufficient by itself to answer the antitrust questions. A patent may permit the patentee to charge a higher-than-competitive price for a patent product, but an invalid patent does not. The litigation put the validity at issue. Precedent makes clear that antitrust questions should be measured not by the exclusionary scope of the patent but by traditional antitrust factors (e.g., anticompetitive effects, redeeming virtues, market power and potentially offsetting legal considerations). The Supreme Court identified five reasons for employing a rule of reason test. First, the Supreme Court noted that the specific restraint at issue has “potential for genuine adverse effects on competition.” The court acknowledged that while these agreements permit challengers to enter the market before the patent expires, the payment in return for staying out of the market keeps prices at patentee-set levels. The Supreme Court stated that the patentee and the patent challenger gain by dividing the profits from this patent-monopoly, while the consumer loses. Thus, the court determined that the size of the payment may 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 market. Second, the Supreme Court found that a reverse payment alone is not sufficient to demonstrate anticompetitive consequences. A reverse payment, for example, may reflect litigation expenses saved through settlement or compensation for other services, such as distributing the patented item. Those considerations may assist an antitrust defendant in showing the lawfulness of the term under a rule of reason. Third, a reverse payment may threaten to work unjustified anticompetitive harm at the hands of the patentee, since the size of the payment from the branded company to a prospective generic competitor is a strong indicator of the power to charge prices higher than the competitive level. Fourth, it is not normally necessary to litigate the patent’s validity to answer the antitrust question because an unexplained large reverse payment would itself suggest that the patentee has doubts about its patent’s survival. Finally, the Supreme Court found that while parties may prefer reverse payments, reverse payments are not the only way for companies to settle these litigations. The Supreme Court explicitly left it to the lower courts to determine the structure of the rule-of-reason antitrust litigation.

Chief Justice Roberts wrote the dissent. The dissent criticized the majority’s opinion as creating a new rule. The Supreme Court has never held that a competitor who is refrained from challenging a patent violates antitrust law. Moreover, the Supreme Court has long recognized that patent litigation settlements do not by themselves violate antitrust law. According to the Chief Justice, the proper test is whether the actions are within the scope of the patent. The question of whether a patent is valid is a question of patent law and not a question of antitrust law. The Chief Justice claims the majority’s new rule will discourage settlement since after settling the parties would have to litigate the same issue; namely, the patent’s validity. In addition, this new rule will discourage generic manufacturers from challenging patents in the first place, since taking settlement off the table will damper the generic’s expected value going into litigation.

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