High Court: Reverse-Payment Settlements Are Not Immune from Antitrust Scrutiny

 WASHINGTON, D.C. - (Mealey's) The U.S. Supreme Court on June 17 ruled 5-3 that reverse-payment settlements of patent litigation between the holder of a drug patent and potential generic manufacturers of the drug are not necessarily immunized from an antitrust challenge, even if the anti-competitive effects of the agreement fall within the scope of the exclusionary potential of the patent, and that reverse-payment settlements should be analyzed under the rule of reason (Federal Trade Commission v. Actavis, Inc., et al., No. 12-416, U.S. Sup.; See March 2013) (lexis.com subscribers may access Supreme Court briefs and the opinion for this case).

Justice Stephen G. Breyer, writing for the majority, said that the 11th Circuit U.S. Court of Appeals erred in dismissing the Federal Trade Commission's complaint against Solvay Pharmaceuticals Inc. and generic drugmakers Actavis Inc. (formerly known as Watson Pharmaceuticals Inc.), Paddock Holdings Inc. and Par Pharmaceutical Cos. Inc. The agreements at issue involve payments made by Solvay to the generic drugmakers to settle Solvay's patent infringement lawsuit in exchange for the generic manufacturers' agreement not to market generic versions of AndroGel, a topical gel that treats the symptoms of low testosterone, in the United States prior to 2015.

The majority declined to hold that reverse-payment settlement agreements are presumptively unlawful.  Instead, the majority said that courts reviewing the agreements should apply the rule of reason, rather than a quick-look approach.

Justices Anthony M. Kennedy, Ruth Bader Ginsburg, Sonia Sotomayor and Elena Kagan joined in the majority opinion.

Chief Justice John G. Roberts Jr. filed a dissenting opinion, saying that patent law "provides an exception to antitrust law, and the scope of the patent - i.e., the rights conferred by the patent - forms the zone within which the patent holder may operate without facing antitrust liability."  Justices Antonin Scalia and Clarence Thomas joined in the dissenting opinion.

Justice Samuel A. Alito Jr. took no part in the consideration or decision of the case.

FTC Complaint

The FTC alleged that Solvay was not likely to prevail in the infringement actions that it brought against the generic manufacturers and then settled and, therefore, that the reverse-payment settlements unlawfully protected or preserved a monopoly that likely was invalid in restraint of trade in violation of Federal Trade Commission Act Section 5(a).

The U.S. District Court for the Northern District of Georgia dismissed the FTC's complaint under Federal Rule of Civil Procedure 12(b)(6), finding that the FTC did "not allege that the settlements exceed the scope of the . . . patent."

On April 25, 2012, the 11th Circuit ruled that "'absent sham (patent) 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,' i.e., so long as the patentee does not obtain more protection from competition than would result from a successful infringement suit."

Because the generic manufacturers' promise not to enter the market expired before the patent's term ended, the 11th Circuit found the agreement legal and dismissed the FTC complaint.

Patent Law Policy

In reversing and ruling that the 11th Circuit should have allowed the FTC's lawsuit to proceed, the majority said 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."  The majority noted that the patent might not be valid and might not be infringed.

Moreover, "this Court's precedents make clear that patent-related settlement agreements can sometimes violate the antitrust laws" and "the Court has struck down overly restrictive patent licensing agreements - irrespective of whether those agreements produced supra-patent-permitted revenues," the majority said.

The majority distinguished the reverse-payment settlement agreements at issue from traditional settlements, saying that "[i]n the traditional examples . . . , a party with a claim (or counterclaim) for damages receives a sum equal to or less than the value of its claim.  In reverse patent settlements, in contrast, a party with no claim for damages . . . walks away with money simply so it will stay away from the patentee's market."

Antitrust Considerations

In concluding that the desirability of settlements should not immunize reverse-payment settlements from antitrust challenges, Justice Breyer said that such settlements have the "potential for genuine adverse effects on competition" because "payment in return for staying out of the market - simply keeps prices at patentee-set levels, potentially producing the full patent-related $500 million monopoly return while dividing that return between the challenged patentee and the patent challenger.  The patentee and the challenger gain; the consumer loses."

"These anticompetitive consequences will at least sometimes prove unjustified," Justice Breyer said, adding that "where a reverse payment threatens to work unjustified anticompetitive harm, the patentee likely possesses the power to bring that harm about in practice."

The majority also concluded that "it is normally not necessary to litigate patent validity to answer the antitrust question. . . . [T]he 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."

"[T]he fact that a large, unjustified reverse payment risks antitrust liability does not prevent litigating parties from settling their lawsuit.  They may, 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," the majority said.

Not Presumptively Unlawful

However, the majority rejected the FTC's argument that reverse-payment settlement agreements are presumptively unlawful and subject to a quick-look approach.

"[T]he likelihood of a reverse payment bringing about anticompetitive effects depends upon its size, its scale in relation to the payor's anticipated future litigation costs, its independence from other services for which it might represent payment, and the lack of any other convincing justification.  The existence and degree of any anticompetitive consequence may also vary as among industries," the majority said.

Therefore, such agreements are subject to a rule-of-reason analysis, the majority ruled.

Dissent

Dissenting, Chief Justice Roberts said that "under our precedent, this is a fairly straight­forward case.  Solvay paid a competitor to respect its patent - conduct which did not exceed the scope of its patent.  No one alleges that there was sham litigation, or that Solvay's patent was obtained through fraud on the PTO [Patent and Trademark Office].  As in any settlement, Solvay gave its competitors something of value (money) and, in exchange, its competi­tors gave it something of value (dropping their legal claims).  In doing so, they put an end to litigation that had been dragging on for three years.  Ordinarily, we would think this a good thing."

"The majority's rule will discourage settlement of patent litigation," which is "particu­larly complex" and "particularly costly," the dissent said.

"[A]lthough the question posed by this case is fun­damentally a question of patent law - i.e., whether Sol­vay's patent was valid and therefore permitted Solvay to pay competitors to honor the scope of its patent - the majority declares that such questions should henceforth be scrutinized by antitrust law's unruly rule of reason," the dissent said, also noting that antitrust law provides for treble damages.

"I fear the Court's attempt to limit its holding to the context of patent settlements under Hatch-Waxman will not long hold," the chief justice said.

Amici

Amicus curiae briefs in support of the FTC were filed by Knowledge Ecology International; Public Patent Foundation; Louisiana Wholesale Drug Co. Inc., CVS Pharmacy Inc., Rite Aid Corp., Walgreen Co., Eckerd Corp., The Kroger Co., Safeway Inc., Albertson's Inc., Hy-Vee Inc. and Maxi Drug Inc.; America's Health Insurance Plans; States of New York, Arizona, Arkansas, California, Colorado, Connecticut, Delaware, Hawaii, Idaho, Illinois, Iowa, Kentucky, Louisiana, Maine, Maryland, Massachusetts, Michigan, Minnesota, Mississippi, Missouri, Nevada, New Hampshire, New Mexico, North Carolina, North Dakota, Ohio, Oregon, Pennsylvania, Rhode Island, South Carolina, South Dakota, Tennessee, Utah, Vermont, Washington and Wyoming, the District of Columbia and the Commonwealth of Puerto Rico; 118 law, economic and business professors and the American Antitrust Institute; Apotex Inc.;  AARP, American Medical Association, National Legislative Association for Prescription Drug Prices and U.S. Public Interest Research Groups; Rep. Henry A. Waxman; and National Association of Chain Drug Stores (NACDS).

Amicus briefs in support of the drug companies were filed by National Association of Manufacturers; generic manufacturers Upsher-Smith Laboratories Inc., Teva Pharmaceuticals USA Inc., Ranbaxy Pharmaceuticals Inc., Mylan Pharmaceuticals Inc. and Impax Laboratories Inc.; Enavail; Generic Pharmaceutical Association; Bayer AG and Bayer Corp.; Shire PLC; New York Intellectual Property Law Association; Merck & Co. Inc.; Pharmaceutical Research and Manufacturers of America; antitrust economists; law professors Gregory Dolin, Kent Bernard, Christopher Holman, Adam Mossoff, Emily Michiko Morris, Mark F. Schultz, Geoffrey A. Manne and Max Oppenheimer; American Intellectual Property Law Association Mediation and Negotiation Professionals; David W. Opderbeck and Erik Lillquist; health and economics professors; Washington Legal Foundation; and Intellectual Property Owners Association.

Counsel

The FTC is represented by Solicitor General Donald B. Verrilli Jr., Acting Assistant Attorney General Renata B. Hesse, Deputy Solicitor General Malcolm L. Stewart and Assistant to the Solicitor General Benjamin J. Horwich of the U.S. Department of Justice and Acting General Counsel David C. Shonka, Deputy General Counsel for Litigation John F. Daly, Deputy Chief Trial Counsel Michael B. Kades and Attorneys Mark S. Hegedus and Mark J. Woodward of the FTC.  All are in Washington.

Actavis is represented by Clifford M. Sloan, Steven C. Sunshine and Julia K. York of Skadden, Arps, Slate, Meagher & Flom in Washington and David A. Buchen of Actavis in Parsippany, N.J.  Solvay is represented by Jeffrey I. Weinberger, Stuart N. Senator and Adam R. Lawton of Munger, Tolles & Olson in Los Angeles and Rohit K. Skngla, Michelle T. Friedland and Michael J. Mongan of Munger Tolles in San Francisco.  Par and Paddock are represented by Eric Grannon, J. Mark Gidley, Ryan M. Christian and David R. Courchaine of White & Case in Washington.

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