On June 17th the U.S. Supreme Court issued its much anticipated opinion in FTC v. Actavis, Inc., examining the question of whether reverse payment settlement agreements, sometimes also referred to as “pay for delay” settlement agreements, violate antitrust laws. But for those seeking solid guidance as to the legality and future of such agreements, the decision left some big question marks.
In a 5-3 decision, the majority gave the green light for antitrust challenges to such “pay for delay” settlement agreements, reversing the 11th Circuit’s decision to affirm dismissal of an FTC complaint and concluding that the FTC should have been allowed an opportunity to prove its antitrust claim.
But the Court’s ruling was short on road signs for those potentially affected by its decision – including the parties at hand in this case – the Court stopped short of finding that reverse payment settlement agreements are presumptively unlawful, stating in the majority opinion, “In our view, however, reverse payment settlements such as the agreement alleged in the complaint before us can sometimes violate antitrust laws (emphasis added).”
The High Court found that such challenges must be subjected to an antitrust “rule-of-reason” approach, utilizing what some claim are somewhat ambiguous, subjective standards. In addition, the lower courts are now tasked with the difficult job of fleshing out whether such reverse payment settlement agreements have significant unjustified anticompetitive effects.
The ruling prompted us to ponder: Did the High Court’s decision clarify anything solid about reverse payment settlement agreements, other than allowing antitrust challenges which potentially undermine settlements and the exclusionary right of patent holders? Did the Court’s decision add an unnecessary layer of antitrust analysis which threatens to muddy the waters and result in increased litigation at the trial court level?
Reverse Payment Settlement Agreements
Reverse payment settlement agreements often arise in the context of pharmaceutical drug regulation and patent infringement litigation, when a generic drug manufacturer seeks to bring a drug to market prior to the expiration of a patent in connection with a branded drug under what is referred to as Paragraph IV certification.
In short, as part of its request for obtaining marketing approval from the FDA, a generic drug manufacturer can file an Abbreviated New Drug Application under the Hatch-Waxman Act, which essentially allows it (as referred to by the Supreme Court’s majority opinion) to “piggy-back” on the brand-name manufacturer’s prior FDA approval, thereby speeding up introduction of the generic drug.
If the generic maker takes what is referred to as the “paragraph IV route” – one alleging non-infringement and invalidity – the brand name maker then has 45 days to bring an infringement suit, and if brought, the FDA must withhold approving the generic for a certain amount of time while the parties litigate the patent issues.
If the generic is successful in defending against the patent infringement claims and can successfully bring the generic to market, the Hatch-Waxman Act provides the first generic to file under a paragraph IV route a period of exclusivity during which time no other generic can compete with the brand name drug. This period of exclusivity is often very valuable and can be worth hundreds of millions of dollars, as noted by the Court.
In this case, prospective generic drug manufacturers sought to bring a generic drug developed to treat low testosterone to market under Paragraph IV certification. Patent litigation was initiated by the brand name maker. Three years later the parties settled under terms in which two of the generic manufacturers agreed to wait a specified time period before bringing the generic drug to market and agreed to help promote the brand name drug, allegedly in exchange for certain payoffs totaling tens of millions of dollars.
Claiming that the real purpose of the payment was for the purpose of compensating the generic makers for agreeing not to compete against the brand name drug, the FTC filed a complaint alleging the settlement agreement violated the Sherman Act and other antitrust laws. The district court disagreed, however, and dismissed the FTC’s complaint.
On appeal, the 11th Circuit affirmed the ruling of the lower court, stating, “[A]bsent 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 U.S. Supreme Court granted the FTC’s petition for certiorari, and reversed the 11th Circuit’s decision affirming the lower court, finding that the FTC should have the opportunity to prove its antitrust claim.
No Automatic Antitrust Insulation in “Pay For Delay”
At the outset, the Court rejected the notion that because an agreement’s “anticompetitive effects fall within the scope of the exclusionary potential of the patent,” the agreement should be insulated from antitrust attack.
Because the parties settled the paragraph IV litigation before a determination of the patent’s validity and scope of its exclusivity was made – noted the majority – the brand maker’s payment to the generic makers to stay out of the market raised concerns that these types of settlement agreements could have adverse effects on competition.
As the majority stated, “The FTC alleges that in substance, the plaintiff agreed to pay the defendants many millions of dollars to stay out of its market, even though the defendants did not have any claim that the plaintiff was liable to them for damages. That form of settlement is unusual.”
Therefore, the Court continued, “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 procompetitive policies as well.”
However, the Court stopped short of holding – as the FTC had urged – that reverse settlement payment agreements are presumptively unlawful. Instead, the Court held that the FTC must be given the opportunity to prove its case under antitrust “rule-of-reason” factors, relying on antitrust litigation principles over patent validity considerations.
Interestingly the Court noted that, among other factors, the size of the agreed upon payment may be used to determine potential anticompetitive effects, (for example, a large, unjustifiable payment might be indicative of market power and suggestive of a patent’s weakness), without the need to litigate the validity of the patent itself.
In sum, the Court stated, “Although the parties may have reasons to prefer settlements that include reverse payments, the relevant antitrust question is: What are those reasons? 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.”
Passing the Buck? – District Courts Now in the Hot Seat
In the end, the Court shifted the burden of making such anti-competitive, antitrust determinations to the lower courts, concluding, “We therefore leave to the lower courts the structuring of the present rule-of-reason antitrust litigation” and remanded the case.
Which means, at least for now, the ball is back in the lower courts, so to speak, to determine whether the FTC can successfully prove its claim of antitrust violation – and if so, how. You can bet all eyes will be on the court’s decision following remand.
Tell Us Your Thoughts
Does the majority’s decision undermine a patent holder’s ability to exercise legitimate exclusionary rights, setting the stage for increased infringement litigation in the pharmaceutical patent sector and potentially inconsistent antitrust rulings?
The dissent, penned by Chief Justice Roberts opines, “A patent carves out an exception to the applicability of antitrust laws. The correct approach should therefore be to ask whether the settlement gives [the brand maker] monopoly power beyond what the patent already gave it.”
Will the majority’s decision ultimately cause pharmaceutical drug makers to shy away from such agreements altogether? Or will they be able to find a way to craft such agreements without raising antitrust concerns?