High Court Will Consider Whether Reverse-Payment Settlements Are Anti-Competitive

High Court Will Consider Whether Reverse-Payment Settlements Are Anti-Competitive

WASHINGTON, D.C. — (Mealey's) The Supreme Court on Dec. 7 granted the Federal Trade Commission’s petition for a writ of certiorari seeking consideration of whether reverse-payment settlements of patent litigation between the holder of a drug patent and generic manufacturers of the drug violate federal antitrust law (Federal Trade Commission v. Watson Pharmaceuticals, Inc., et al., No. 12-416, U.S. Sup.).

On Oct. 4, the FTC sought review of an 11th Circuit U.S. Court of Appeals April 25 ruling that reverse-payment settlements do not constitute an unfair restraint on trade in violation of Section 5(a) of the Federal Trade Commission Act, saying that the 11th Circuit decision, along with rulings of the Second Circuit and the Federal Circuit, apply the scope-of-the-patent rule and conflict with the Third Circuit ruling in In re K-Dur Antitrust Litigation (686 F.3d 197 [2012], petitions for certiorari pending [No. 12-245 filed Aug. 24, 2012 and No. 12-265 filed Aug. 29, 2012) [enhanced version available to lexis.com subscribers] that reverse-payment agreements are presumptively anti-competitive.

Watson Pharmaceuticals Inc. agreed that “[g]iven the size and importance of the pharmaceutical industry, and the fact that patent litigation regularly arises in the approval process for generic drugs, clear guidance from this Court is warranted now on the appropriate antitrust analysis of settlements of Hatch-Waxman patent litigation.”

However, contrary to the FTC position, Watson argued that the 11th Circuit’s scope-of-the-patent rule “reflects the appropriate evaluation of the exclusionary rights of patent holders and the antitrust laws. The analysis of the court below correctly took the existence of the patent — granted by the USPTO [IU.S. Patent and Trademark Office] and entitled to a presumption of validity, 35 [United States Code] § 282 — as its point of departure. Under this Court’s longstanding precedents, the scope of the patent forms the zone within which the patent holder may operate without facing the specter of antitrust liability.” “Moreover, the scope of the patent rule is consistent with the general judicial policy and rule of law favoring settlement,” Watson asserted.

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

Patent Infringement Lawsuits

The agreements at issue involve payments made by Solvay Pharmaceuticals Inc. to generic drugmakers Watson, Paddock Laboratories Inc. and Par Pharmaceuticals Cos. Inc. 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 FTC sued Solvay, Watson, Par and Paddock, alleging 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 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.”

Scope Of Patent

The 11th Circuit affirmed on April 25, holding that reverse-payment agreements are per se lawful unless the underlying patent litigation was a sham or the patent was obtained by fraud. “The issue in this case is whether, under that test, the FTC’s complaint states an antitrust claim by alleging that Solvay was ‘not likely to prevail’ in the underlying infringement action against Watson, Par, and Paddock,” the court said.

In refusing to adopt the “likely-to-prevail” rule proposed by the FTC, the 11th Circuit said that “the FTC’s position equates a likely result (failure of an infringement claim) with an actual result, but it is simply not true that an infringement claim that is ‘likely’ to fail actually will fail.”

The appeals court also found that the FTC’s approach would require the courts to engage in “an after-the-fact calculation of how ‘likely’ a patent holder was to succeed in a settled lawsuit if it had not been settled.” The court found that approach to be “too perilous an enterprise to serve as a basis for antitrust liability and treble damages” and said that it would “impose heavy burdens on the parties and courts.” On July 18, the 11th Circuit denied the FTC’s petition for rehearing en banc.

Anti-Competitive Presumption

In seeking Supreme Court review, the FTC argued that “under the decision below, drug companies will have a substantial financial incentive to shift away from conduct that benefits consumers (generic entry following the generic manufacturer’s successful defense against a patent-infringement suit) toward conduct that harms consumers (preserving monopoly pricing through reverse-payment agreements).”

In addition, “[t]he anticompetitive potential of reverse-payment agreements—which are estimated to cost consumers billions of dollars annually—is sufficiently clear that they should be treated as presumptively unlawful under the federal competition laws,” the FTC said.

On Nov. 5, the attorney general of New York and 30 other state attorneys general, filed an amicus curiae brief in support of review and reversal of the 11th Circuit ruling.

The states contended that “[t]he approach taken by the court below . . . would permit drug companies, systematically and in case after case, to pay competitors to preserve their monopolies beyond what their patents themselves would allow them to achieve,” even though the “public policy favoring the testing of patents is particularly strong in the area of pharmaceuticals.”

In addition, “[p]ay-for-delay settlements harm drug purchasers, both government health-care programs and consumers alike: such settlements delay the availability of generic drugs and keep drug prices artificially high,” the states said.

In addition to New York, the amici states are Arizona, Arkansas, California, Colorado, Connecticut, Delaware, Hawaii, Idaho, Illinois, Iowa, Kentucky, Louisiana, Maine, Maryland, Massachusetts, Minnesota, Mississippi, Nevada, New Hampshire, New Mexico, Ohio, Oregon, Pennsylvania, Rhode Island, Tennessee, Utah, Vermont, Washington, West Virginia and Wyoming.


The FTC is represented by Solicitor General Donald B. Verrilli Jr., Acting Assistant Attorney General Joseph F. Wayland, Deputy Solicitor General Malcolm L. Stewart and Assistant to the Solicitor General Benjamin J. Horwich of the U.S. Department of Justice and General Counsel Williard K. Tom, Deputy General Counsel for Litigation John F. Daly and Attorney Mark S. Hegedus of the FTC in Washington. All are in Washington.

Watson is represented by Clifford M. Sloan, Steven C. Sunshine, Julia K. York and Maria A. Raptis of Skadden, Arps, Slate, Meagher & Flom in Washington and David A. Buchen of Watson in Parsippany, N.J.

Amici states are represented by Attorney General of the State of New York Eric T. Schneiderman, Solicitor General Barbara D. Underwood, Deputy Solicitor General Richard Dearing, Assistant Solicitor General Andrew B. Ayers in New York, Chief of Antitrust Bureau C. Scott Hemphill and Assistant Attorney General Elinor R. Hoffmann of the New York Office of the Attorney General in New York.

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