Australia: Pay for delay: The US Supreme Court rules on reverse patent settlements

Both sides are claiming victory following a decision of the United States Supreme Court, in the long running "pay for delay" saga.¹

The Court has ruled that reverse patent settlements, commonly known as "pay for delay" agreements, may be illegal under anti-trust laws, and must be considered from the perspective of both patent law and anti-trust law. Importantly, the Court has indicated that while there may be circumstances in which such arrangements are legal, moving forward, drug companies will need to carefully consider the use of such arrangements.

What is a reverse patent settlement?

Reverse patent settlements typically arise where an originator drug company settles a patent challenge from a generic drug company by paying the generic drug company to abandon its attack, thereby delaying the launch of the competitor drug.

The legal context

Under US law, the first generic drug company to file for FDA approval for their product gets a 180 day exclusivity period before other generic drug companies can introduce their equivalent product. This period of exclusivity can be extremely valuable to the generic drug company.

To obtain FDA approval, the generic drug company may certify that one or more of the originator drug company's patents are invalid or will not be infringed by the manufacture, use or sale of the generic drug. This will typically trigger litigation by the originator drug company as if it brings an infringement suit within 45 days, the FDA must withhold approval of the generic drug, usually for a 30 month period, whilst the parties litigate.

Reverse patent settlements often result from these challenges and the associated litigation.

Two sides to the story

The US regulatory authority, the Federal Trade Commission (the FTC), has typically opposed "pay for delay" arrangements, arguing that:

• they delay the launch of cheaper drugs
• increase the cost to both consumers and the government, and
• only benefit the drug companies that are party to the arrangements.

Meanwhile, drug companies have typically argued that:

• reverse patent settlements are not anti-competitive; rather they are a sensible commercial settlement of patent disputes, and protect both the originator drug company's patent rights and its investment in research and development, and
• reverse patent settlements are pro-competitive because often they result in the generic drug becoming available before the expiry of the originator drug company's patent.

The US Courts view

Where it has been demonstrated that the settlement did not exceed the scope and term of the patent, where the patent had not been fraudulently obtained, and the litigation was not a sham, the US Courts (including the Sixth and Eleventh Circuit Courts) have generally upheld these arrangements in favour of the drug companies on this issue, and determined that the settlement was immune from anti-trust attack.

However, in 2012, the Third Circuit Court broke ranks and ruled in favour of the FTC and held that these types of reverse patent settlements are illegal unless proven otherwise.² This prompted the US Supreme Court to agree to review a decision of the Eleventh Circuit that had ruled in favour of reverse patent settlements between Solvay Pharmaceuticals and a number of generic drug companies.

The Supreme Court decision in Federal Trade Commission v Actavis, Inc.

In a 5-3 decision, the Supreme Court has reversed the decision of the Eleventh Circuit, and determined that the lower courts should reconsider the reverse patent settlements reached by Solvay.

The Supreme Court decided that:

1. Patent-related settlements can violate anti-trust laws. These settlements must be considered in light of both patent law and anti-trust laws.
2. Even though the anti-trust scrutiny of a reverse patent settlement can be complex it should still be given due consideration because:
3. • there is the potential for genuine adverse effects on competition
   • an examination of anti-competitive consequences may prove concerns to be unjustified, and there may be offsetting or redeeming virtues of the conduct
   • where a reverse patent settlement has the potential for anti-competitive harm, the patentee has the power to bring about that harm in practice
   • it is not normally necessary to litigate patent validity to determine the anti-trust question
   • the parties may settle in other ways, without resorting to large reverse payments that may give rise to anti-trust concerns.

3. Reverse patent settlements are not presumptively unlawful. Each settlement needs to be reviewed on a case-by-case basis.

The effect

As a result of this decision, reverse patent settlements must now be scrutinised from an anti-trust perspective. Further, where reverse payments do form part of any settlement, the parties will need to justify the reason for those payments. The larger those payments are, the harder they may be to justify and the greater the anti-competitive effect they are likely to have.

The Court did, however, make it clear that just because a large reverse payment risks breaching anti-trust laws does not mean that litigating parties cannot reach settlement. It used the example of the generic drug company being allowed to enter the market prior to the expiry of the originator drug patent without the passing of payment.

Drug companies will need to carefully consider how they approach and justify patent litigation settlements which include reverse payments, and whether they can legitimately attribute those payments to something other than a share of profits.

Impact on Australia

Reverse patent settlements have not yet been considered in this context by the Australian courts. However, it is important to note that:

1. While the US Supreme Court decision is not binding on the Australian courts, it is anticipated that the Supreme Court's position will have some influence if (or more likely when) Australian courts are required to consider the issue, and it will be at the forefront of the parties' minds in patent litigation settlement negotiations.
2. The Supreme Court decision may also impact a drug company's Australian operations where the US patent litigation settlement forms part of a global settlement deal.
3. Reverse patent settlements in respect of Australian patents or Australian operations could give rise to competition issues under the Competition and Consumer Act 2010 (Cth), including accusations of cartel conduct, misuse of market power and exclusive dealing.

At face value, a reverse patent settlement looks like cartel conduct in that two competitors enter into an agreement that restricts the supply of goods by one of the parties. Companies should consider whether the arrangement could take advantage of the anti-overlap provisions, or be able to demonstrate sufficient public benefit to support an application for authorisation.

The Act does exempt patent licences from the effect of the Act in certain circumstances. Depending upon the circumstances, a patent settlement may be able to take the form of a licence agreement, to take advantage of those exemptions. However, those exemptions do not extend to the misuse of market power.

In Australia, it is a breach of the Act for a corporation with a substantial degree of market power to take advantage of that power for the purpose of:

• preventing the entry of another business into that market, or any other market; or
• deterring or preventing another business from engaging in competitive conduct in that or any other market.

A key element in establishing a misuse of market power is the existence of a substantial degree of market power. The US Supreme Court took the view that the ability to settle litigation by way of a reverse payment was a likely indication of market power.

If this reasoning was applied in Australia, it may support accusations of a misuse of market power, and this issue could pose a real risk to the parties to such settlement arrangements.

Take away

• In the US, reverse patent settlements must be considered on a case-by-case basis from both a patent and anti-trust perspective.
• Drug companies may need to consider alternatives to reverse payments where those payments cannot be justified.
• In Australia, any proposal for a reverse patent settlement must have very careful regard to the boundaries of Australian competition law.

Footnotes

¹Federal Trade Commission v Actavis, Inc., et al No. 12-416.

²In re K-Dur Antitrust Litigation, 686 F. 3d 197, 214-218 (CA3 2012).

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