United States: Supreme Court To Determine Antitrust Standards For Reverse Payment Settlements

In a late breaking but widely expected development, the Supreme Court of the United States granted the request of the Federal Trade Commission (FTC) to review a decision of the Eleventh Circuit in Federal Trade Commission v. Watson Pharmaceuticals, Inc. ¹ The defendants acquiesced in the FTC's request for Supreme Court review.

The case involves the Eleventh Circuit's decision to affirm a district court order dismissing the FTC's complaint alleging that a "reverse payment settlement" violated the antitrust laws. A reverse payment settlement involves the settlement of patent litigation brought under the Drug Price Competition and Patent Term Restoration Act, Pub. L. No. 98-417, 98 Stat. 1585 (commonly known as the Hatch-Waxman Act) in which the patent holder and brand-name drug manufacturer agrees to resolve its patent lawsuit against the manufacturer of a generic drug by paying the generic drug manufacturer a specified sum and the generic drug manufacturer agreeing not to enter the market earlier than a specified date, where such date would be before the allegedly infringing patent would expire. In deciding the matter, the Eleventh Circuit applied the so-called "scope of the patent" test, which provides that absent 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.² The Eleventh Circuit, as well as the Second Circuit and Federal Circuit, has applied this rule on several occasions.³ The scope of the patent test, however, conflicts with a rule long advocated by the FTC and recently adopted by Third Circuit in In re K-Dur Antitrust Litigation.⁴ Rather than presuming the reverse payment settlement to be lawful, the Third Circuit rule presumes such settlements to be unlawful unless the parties to the settlement can demonstrate that the payment is for some other purpose than delayed entry or advances some other pro-competitive purpose. The Supreme Court will now decide the issue, which is exceptionally important for the pharmaceutical industry, in which patent rights are worth billions of dollars. The FTC claims such settlements reduce competition and cost consumers billions of dollars.

This case and several others involve litigation arising under the Hatch-Waxman Act. The Hatch-Waxman Act was passed to promote generic entry while promoting drug innovation, including allowing branded drug manufacturers to protect their patent rights. Under the Hatch-Waxman Act, a branded drug manufacturer must demonstrate the safety and efficacy of the product and disclose its patents. The Hatch-Waxman Act seeks to facilitate generic entry by authorizing the Food and Drug Administration (FDA) to approve a generic drug if the product is bioequivalent to the approved branded drug. This saves significant costs for the generic entrant. To obtain FDA approval the generic entrant may also need to disclose that its product does not infringe the branded manufacturer's product or the patent is invalid. If the branded manufacturer files a patent infringement suit against the generic entrant within 45 days of the generic application to the FDA, the FDA may not grant final approval for the generic drug to enter the market until 30 months after the lawsuit is filed or until the generic entrant prevails in litigation, whichever occurs later. The litigation generally involves substantial financial risks for both parties.

The FTC has challenged settlements of Hatch-Waxman litigation when the essential terms of the settlement involve a payment from the branded manufacturer to the generic entrant and a date upon which the generic can enter. The dates of entry are prior to the expiration of the patent. Thus, the scope of the patent test indicates that because the branded manufacturer's patent could potentially exclude generic entry and, under patent law, the patent is presumptively valid, the settlement cannot eliminate competition unless the patent litigation is a sham or the patent was obtained by fraud. That is, because both the patent and antitrust laws permit a patent owner to exclude competition for lawfully obtained and valid patents, the settlement cannot reduce competition unless it extends the life of the patent. Further, the scope of the patent test is generally consistent with the judicial preference for the settlement of litigation. Proponents of the scope of the patent test argue that generic entry could be deterred if patent litigation cannot be settled.

In contrast, the Third Circuit test is premised on uncertainty of the validity and infringement of the patent and the potential anticompetitive effect of the settlement. Proponents of the Third Circuit rule argue that the scope of the patent test effectively assumes the patent is valid and infringed. While supporters recognize the presumption of patent validity, they argue the presumption is rebuttable and there is no presumption of infringement. The Third Circuit maintains that its rule does not discourage settlement, reasoning that while settlement of patent litigation is a laudable goal, its rule does not preclude settlements, only reverse payment settlements. Further, the Third Circuit explained that patent litigation effectuates the purposes of the Hatch-Waxman Act, essentially allowing the branded manufacturer to protect its rights but also preventing monopolies.

Absent extension, amicus briefs supporting the FTC would be due January 28, 2013, and briefs supporting Watson Pharmaceuticals are due February 27, 2013.

Footnotes

1. FTC v. Watson Pharm., Inc., 677 F.3d 1298, cert. granted, __U.S.L.W.__ (U.S. Dec. 7, 2012) ( No. 12-416).

2. The scope of the patent test would not apply to settlements involving an agreement whereby the generic drug company would not enter the market after the date upon which the allegedly patent expires. Andrx Pharm. Inc. v. Elan Corp., 421 F.3d 1227 (11th Cir. 2005). The Eleventh Circuit applies a traditional rule of reason to such settlements because such settlements can extend the exclusion beyond the date upon which the patent would expire.

3.Valley Drug Co. v. Geneva Pharm. Inc., 344 F.3d 1294 (11th Cir. 2003) (applying the scope of the patent test); Schering-Plough Corp. v. FTC, 402 F.3d 1056 (11th Cir. 2005) (same); Andrx, 421 F.3d 1227; see also In re Tamoxifen Citrate Antitrust Litig., 429 F.3d 370 (2d Cir. 2005), amended, 466 F.3d 187 (2d Cir. 2006) (same); In re Ciprofloxacin Hydrochloride Antitrust Litig., 544 F.3d 1323 (Fed. Cir. 2008) (same).

4. 686 F.3d 197 (3d Cir. 2012).

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