On June 17, 2013, the Supreme Court decided Federal Trade
Commission v. Actavis, Inc., No. 12-416, by a 5-3 vote (Justice
Alito recused), resolving a circuit split over the appropriate
antitrust standard to apply when evaluating "reverse
payment" Hatch-Waxman patent litigation settlements between
branded and generic pharmaceutical companies. The Court did not
adopt either standard previously employed by the courts of appeal
and urged by the parties and amici, but instead held that the rule
of reason governed. The Court expressly left to the lower courts
the details of how to apply the rule of reason, and remanded for
further proceedings.
Background
Actavis resolves a split between the Second, Eleventh and Federal
Circuits, on the one hand, and the Third Circuit on the other,
regarding the antitrust test under which to assess Hatch-Waxman
settlements where payment flows from the branded company to the
generic. The Eleventh Circuit (the court of appeal in Actavis) as
well as the Second and Federal Circuits had held that such a
settlement was lawful so long as the settlement's restrictions
were within the "scope of the patent"—that is, so
long as the generic supplier did not agree to stay off the market
beyond patent expiration or to refrain from marketing products not
within the patent's claims. The Third Circuit, on the other
hand, had held (in a case decided shortly after the Eleventh
Circuit's ruling in Actavis, and which the Supreme Court placed
on hold in response to a petition for certiorari) that under the
"quick look" standard such a settlement was presumptively
unlawful unless the branded company could show that the payment was
"for something other than a delay in market entry" or was
otherwise pro-competitive. In re K-Dur Antitrust Litig., 686 F.3d
197, 218 (3rd Cir. 2012).
Actavis involved settlements between Solvay, the NDA holder for
AndroGel (a prescription testosterone cream) and Actavis and
Paddock, generic companies that filed ANDAs to market generic
versions of the drug. Under the settlements' terms, Actavis and
Paddock agreed not to market generic versions of AndroGel until a
date several years before patent expiration. Solvay also
contemporaneously agreed to make payments to each of the generic
companies (as well as to Par, another generic company that had
partnered with Paddock) purportedly for product promotion and
manufacturing services the generics agreed to perform. The FTC
alleged that those services had little independent value and that
the payments were intended to secure the generics' agreement to
stay out of the market and were therefore unlawful. The district
court dismissed the complaint. On appeal, the FTC urged the
Eleventh Circuit to hold that reverse payments were presumptively
unlawful—a quick look test under which the burden would shift
to the defendant to justify the agreement terms as pro-competitive.
The Eleventh Circuit, however, affirmed the district court's
decision under the scope of the patent test.
Decision
Writing for the majority, Justice Breyer rejected both the scope
of the patent and the quick look tests, and adopted the rule of
reason test even though no court previously had done so in this
context and no party urged the Court to do so. The Court first
reasoned that "what the holder of a valid patent could do does
not by itself answer the antitrust question," and observed
that it would be "incongruous" to measure the
anticompetitive effects of reverse payment settlements "solely
against patent law policy, rather than by measuring them against
procompetitive antitrust policies as well." Actavis at 8. The
Court then reviewed several of its precedents and concluded that
they "make clear that patent-related settlement agreements can
sometimes violate the antitrust laws" and that courts should
analyze such agreements "by considering traditional antitrust
factors such as likely anticompetitive effects, redeeming virtues,
market power, and potentially offsetting legal considerations
present in the circumstances...." Id. at 9-10.
The Court recognized that there was some support for the policy
favoring settlement reflected in the scope of the patent test, but
declined to make that policy determinative based on "five sets
of considerations." Id. at 14. First, the Court observed that
reverse payment settlements have potential for genuine
anticompetitive effects, namely higher prices to consumers. While
the Court acknowledged that in most contexts it would be difficult
if not impossible to buy off all competitors, the Court relied in
part on what it termed "special incentives for collusion"
created by Hatch-Waxman's first filer provisions (which give a
potentially very lucrative 180-day generic exclusivity period to
the first generic applicant to challenge a patent listed as
claiming the relevant branded drug). Id. at 17. Second, the Court
opined that these anticompetitive consequences at least sometimes
will prove unjustified, such as where reverse payments go beyond
traditional settlement considerations like avoided litigation costs
or fair value for services secured as part of the settlement.
Third, the Court reasoned that a large reverse payment is an
indicator that the patentee likely has market power because a firm
without the power to charge prices higher than a competitive level
is unlikely "to pay 'large sums' to induce 'others
to stay out of its market.'" Id. at 18. Fourth, the Court
rejected the argument that assessing the settlement's impact on
competition necessitated an impractical reexamination of validity
and infringement issues from the underlying case. The Court
suggested that, in many cases, it may not be necessary to
re-litigate the merits of a settled patent claim because, for
example, an "unexplained large reverse payment would normally
suggest that the patentee has serious doubts about the patent's
survival" and could "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."
Id. at 18-19. Fifth, the Court dismissed the argument that a rule
subjecting settlements to routine scrutiny would chill settlements,
opining that the parties could settle in ways not involving a
"large, unjustified reverse payment." Id. at 19.
The Court also held that the FTC's quick-look approach was
inappropriate because the question whether reverse payment
settlements cause anticompetitive consequences was too complex to
warrant a presumption of illegality.
The Court therefore concluded that the rule of reason applied, and
that 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."
Id. at 20. The Court declined to specify further how the rule of
reason should be applied in this context, and expressly left the
particulars of implementation to the lower courts. Id. at 21.
Chief Justice Roberts, joined by Justices Scalia and Thomas,
dissented, arguing that the Court should have affirmed under the
scope of the patent test.
The Court has not yet addressed K-Dur, although it likely will
grant certiorari, vacate and remand for proceedings consistent with
the Actavis opinion.
Implications
The Actavis decision significantly increases the likelihood that
Hatch-Waxman settlements involving "delayed" entry and
some form of payment from the branded company to the generic (even
if in connection with business transactions arranged in connection
with the settlement) will be challenged by the government and
private plaintiffs. It also increases the risk—except in the
Third Circuit, which had adopted the stricter "quick
look" approach—that such challenges will result in
unsuccessful outcomes for pharmaceutical companies given the
relatively amorphous rule of reason standard, the difficulties in
obtaining dismissal or summary judgment under that standard, the
discretion conferred on the lower courts to articulate its
application on a case-by-case basis, and the general uncertainties
associated with trial—especially jury trial. Risk can be
minimized by settling on terms that do not arguably suggest payment
from the branded company to the generic (such as an agreement as to
entry-date only), or by litigating the patent case to its
conclusion.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.