In a much-anticipated decision,
the Supreme Court in FTC v. Actavis held 5-3 that reverse-payment
settlements of Hatch-Waxman Act litigation are neither immune from antitrust
liability nor presumptively unlawful, but rather must be analyzed under the
rule-of-reason standard on a case-by-case basis.
In choosing the traditional
antitrust standard, the decision rejected all lower court approaches to these
settlements and resolved a split between the Third Circuit - which had held
such agreements presumptively unlawful - and the Eleventh, Second, and Federal
Circuits - which essentially had immunized the agreements as long as they fell
within the exclusionary scope of the underlying patent. These lower court
approaches are discussed in detail here.
Acknowledging that application
of the rule of reason might require antitrust trial courts in some cases to
determine the validity of the underlying patent, the Court stated that such an
occurrence should be rare because the size of the reverse payment can function
as a "workable surrogate for the patent's weakness." (Slip Op. 19). Thus, the Court directed trial judges to weigh the anticompetitive effects of a
particular reverse payment by reference to "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." (Slip Op. 20).
FTC v. Actavis considerably increases the antitrust risk associated
with reverse-payment settlements, leaving the detailed definition of the
boundaries of legality to be developed by trial courts. Careful antitrust
analysis should thus continue to be a central part of any contemplated
settlement of Hatch-Waxman Act litigation going forward.
In May 2003, generic drug
manufacturers, including Actavis, submitted ANDAs and paragraph IV
certifications for a generic formulation of AndroGel, the patent for which was
held by Solvay. Solvay filed timely infringement actions against the generic
drug manufacturers. The generics argued that Solvay's patent was invalid and
they should be allowed to market generic versions of the drug. In 2006,
the companies reached a settlement by which the generics would not go on the
market until 2015 - more than five years prior to the patent expiring - and
would assist Solvay in the marketing of AndroGel in exchange for payments
exceeding US$100 million. The Federal Trade Commission challenged the
settlement and the Eleventh Circuit, utilizing the "scope of the patent" test,
upheld the settlement agreement. On June 17, 2013, the Supreme Court
reversed the Eleventh Circuit and sent the matter back down to the lower court.
After describing the unique
setting of the Hatch-Waxman Act and the underlying patent infringement lawsuit,
the Court emphasized that the underlying patent "may or may not be valid, and
may or may not be infringed," and expressed concern about settlements in
which "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." (Slip Op. 8).
On those grounds, the Court
rejected the so-called scope-of-the-patent test adopted by the Eleventh, Second
and Federal Circuits and declined to immunize a reverse-payment settlement
from antitrust scrutiny even when "the agreement's anticompetitive effects
fall within the scope of the exclusionary potential of the patent." In
a crucial departure from the Eleventh Circuit's decision and Chief Justice John
Roberts' strongly worded dissent, both of which urged that patent validity
and infringement issues should be the exclusive domain of patent law, the Court
pointed to a long line of precedent and the procompetitive policies underlying
the Hatch-Waxman Act to assert that "patent and antitrust policies are both
relevant in determining the 'scope of the patent monopoly.'" (Slip Op. 9,
emphasis added). The Court also criticized the Eleventh Circuit for
measuring the scope of the agreement's restriction solely against the length of
the patent's term or its earning potential, instead of "considering traditional
antitrust factors such as likely anticompetitive effects, redeeming virtues,
market power, and potentially offsetting legal considerations present in the
circumstances, such as  those related to patents." (Slip Op. 9-10).
The Court acknowledged that its
rule-of-reason approach might run counter to judicial policies favoring
settlement and might lead parties to the antitrust dispute to litigate patent
validity. Nevertheless, the Court set forth five considerations
supporting its conclusion that the FTC should have an opportunity to prove its
antitrust claim under the rule of reason.
First, "the specific restraint at issue has the 'potential for genuine
adverse effects on competition." (Slip Op. 14). That is, according to the
Court, the "payment in effect amounts to a purchase by the patentee of the
exclusive right to sell its product," leading the patentee and the alleged
infringer to split monopoly profits between themselves at the expense of
consumers (Slip Op. 15). The Court found this particularly likely in the
Hatch-Waxman Act context, where the 180-day exclusivity and 30-month-stay
provisions enable branded manufacturers to exclude most competition by offering
a sizable reverse-payment settlement to the first-to-file generic.
Second, "these anticompetitive consequences will at least sometimes prove
unjustified." (Slip Op. 17). The Court identified some potentially
valid justifications for a reverse payment, such as avoided litigation costs or
services provided by the settling generic to the patentee. Recognizing
that antitrust defendants may be able to establish such justifications in some
cases, the Court noted that a rule of reason analysis would enable them to do
Third, "where a reverse payment threatens to work unjustified
anticompetitive harm, the patentee likely possesses the power to bring that harm
about in practice." (Slip Op. 18). The Court explained that the size
of the reverse payment might be a good indicator of the branded-drug
manufacturer's ability to charge supra-competitive prices and, therefore,
of market power.
Fourth, "an antitrust action is likely to prove more feasible
administratively than the Eleventh Circuit believed." (Slip Op. 18).
Although litigating the patent's validity is a possibility, according to the
Court it is "normally not necessary" to "answer the antitrust question,"
unless, perhaps, to "determine whether the patent litigation is a sham." Id.
Instead, the Court viewed "the size of the unexplained reverse payment" as a
"workable surrogate for a patent's weakness." (Slip Op. 19). "An unexplained
large reverse payment itself would normally suggest that the patentee has
serious doubts about the patent's survival." (Slip Op. 18).
Finally, "the fact that a large, unjustified reverse payment risks antitrust
liability does not prevent litigating parties from settling their lawsuit."
(Slip Op. 19). The parties, according to the Court, can 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." Id.
After rejecting the
scope-of-the-patent test, the Court also declined the FTC's invitation to
find reverse-payment settlements presumptively unlawful. The Court
explained that such a rule, sometimes described as a "quick-look" analysis that
shifts the initial burden onto the antitrust defendant to justify its conduct,
"is appropriate only where an observer with even a rudimentary understanding of
economics could conclude that the arrangements in question would have an
anticompetitive effect." Reverse-payment settlements do not meet that
test, the Court ruled, "because the 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." (Slip Op. 20).
Thus, the Court concluded that
these cases should be decided under the same framework as other rule-of-reason
cases, but emphasized that this does not mean that antitrust litigants will be
required to dispute patent validity or the overall merits of the patent
system. Rather, "as in other areas of law, 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 sum, detailed antitrust
analysis should remain an essential element of any prudent settlement in the
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