United States: Supreme Court Applies Antitrust Scrutiny To ANDA Reverse Payment Settlement Agreements

In Federal Trade Commission v. Actavis, Inc., the Supreme Court held that reverse payment ("pay-for-delay") settlement agreements made in the context of settling Hatch-Waxman ANDA litigation should be evaluated for antitrust violations under a "rule of reason" analysis. In so doing, the Court rejected both the "scope of the patent" test urged by the patent holders and the "quick look" test urged by the FTC. Coming on the heels of the Court's decision in Myriad, Justice Breyer's opinion reads like the second blow of a one-two punch against biotech and pharmaceutical patents.

Reverse Payment Agreements

When a patented pharmaceutical product receives FDA approval, patents covering the product and approved therapeutic methods are listed in the FDA "Orange Book." When a would-be generic company files an Abbreviated New Drug Application (ANDA) for approval of the same drug, it must make a certification against each patent listed in the Orange Book. Generic companies who want to enter the market before the patents expire usually must make a "Paragraph IV certification," asserting that the patents are invalid or will not be infringed by the generic product. The Hatch-Waxman Act incentivizes the filing of an ANDA with a Paragraph IV certification, by providing the first such ANDA filer with a 180 day period of market exclusivity, measured from its first commercial marketing of its generic drug.

The Hatch-Waxman Act makes a Paragraph IV certification an act of infringement under 35 USC § 271(e)(2). If the patent holder brings suit within a specified time period, it is entitled to a 30-month stay that prevents the FDA from approving the generic product for a 30 month period, or until the ANDA litigation is resolved against the patents.

ANDA litigation often is settled by a "reverse payment" agreement, wherein the patent owner pays the would-be generic company (the ANDA filer) to stay off the market for a period of time, usually less than the full term of one or more of the patents. (Thus the "pay for delay" moniker. It also is called a "reverse" payment because usually it is the infringer who pays the patent owner, not vice versa.)

The "Scope of the Patent" Test

The "scope of the patent" test recognizes the special circumstance of a patent holder vis-a-vis the antitrust laws in view of the fundamental right to exclude others that is embodied in a patent. Under this test, reverse payment agreements are reviewed to confirm that they do not exceed the scope of the patent. As long as the agreement does not extend beyond the patent's boundaries, it will be upheld unless the underlying patent litigation was a sham or the patent was obtained by fraud. Indeed, no court applying this test has invalidated a reverse payment agreement.

The Eleventh Circuit applied the "scope of the patent" test to the reverse payment agreement between Solvay and Watson (now Actavis), and found no antitrust violation.

The "Quick Look Rule of Reason" Test

The "quick look rule of reason" test starts from an opposite perspective, and holds that a reverse payment agreement is "prima facie evidence of an unreasonable restraint of trade." According to the Third Circuit (writing in the K-Dur case), this presumption could be overcome under one of two circumstances:

  1. There was no reverse payment because any payment was "for something other than delay of market entry."
  2. The reverse payment offered a competitive benefit, i.e., it somehow increased competition.

As the Third Circuit noted, it will be the "rare" agreement that survives scrutiny under this test.

The AndroGel® Settlement Agreements

The case before the Supreme Court related to Solvay's AndroGel® testosterone product, and ANDA litigation between Solvay and Actavis, Paddock Laboratories, and Par Pharmaceutical. As summarized by the Court:

  • Actavis agreed that it would not bring its generic to market until August 31, 2015, 65 months before Solvay's patent expired (unless someone else marketed a generic sooner), and agreed to promote AndroGel to urologists. The other generic manufacturers made roughly similar promises.
  • Solvay agreed to pay $12 million in total to Paddock, $60 million in total to Par, and an estimated $19–$30 million annually, for nine years, to Actavis.
  • The companies described the payments as compensation for other services the generics promised to perform.
  • The FTC contends that the true point of the payments was to compensate the generics for agreeing not to compete against AndroGel until 2015.

The Supreme Court Decision

Justice Breyer delivered the opinion of the Court, which was joined by Justices Kennedy, Ginsburg, Sotomayor, and Kagan. Justice Roberts filed a dissenting opinion which was joined by Justices Scalia and Thomas. Justice Alito took no part in the case.

As framed by Justice Breyer, the "basic question" before the Court was whether reverse payment settlement agreements "can sometimes unreasonably diminish competition in violation of the antitrust laws, e.g., the Sherman Act's prohibition of "restraint[s] of trade or commerce." The majority decision holds that they can.

The Court rejected the premise of the "scope of the patent" test because "[t]he patent here may or may not be valid, and may or may not be infringed." Indeed, the settlement agreements terminated the very litigation that could have resolved those issues. Thus, Justice Breyer found that "it would be incongruous to determine antitrust legality by measuring the settlement's anticompetitive effects solely against patent law policy, rather than by measuring them against precompetitive antitrust policies as well."

The majority opinion discusses "five sets of considerations" that led it to reject the "scope of the patent test":

First, the specific restraint at issue has the potential for genuine adverse effects on competition. ... The [reverse] payment in effect amounts to a purchase by the patentee of the exclusive right to sell its product, a right it already claims but would lose if the patent litigation were to continue and the patent were held invalid or not infringed by the generic product.

So much for a patent's presumption of validity!

Second, these anticompetitive consequences will at least sometimes prove unjustified. ... As the FTC admits, offsetting or redeeming virtues are sometimes present. ... The reverse payment, for example, may amount to no more than a rough approximation of the litigation expenses saved through the settlement. That payment may reflect compensation for other services that the generic has promised to perform—such as distributing the patented item or helping to develop a market for that item. There may be other justifications. ... An antitrust defendant may show in the antitrust proceeding that legitimate justifications are present, thereby explaining the presence of the challenged term and showing the lawfulness of that term under the rule of reason.

Would patent holders rather litigate the validity of their patents or the justifications for their settlement agreements?

Third, where a reverse payment threatens to work unjustified anticompetitive harm, the patentee likely possesses the power to bring that harm about in practice ... At least, the "size of the payment from a branded drug manufacturer to a prospective generic is itself a strong indicator of power"—namely, the power to charge prices higher than the competitive level. ... An important patent itself helps to assure such power. ... In any event, the Commission has referred to studies showing that reverse payment agreements are associated with the presence of higher-than competitive profits—a strong indication of market power.

Isn't the point of the patent system was to permit the patentee to earn "supracompetitive profits" for a limited period of time in exchange for disclosing the invention to the public?

Fourth, an antitrust action is likely to prove more feasible administratively than the Eleventh Circuit believed. .... [I]it is normally not necessary to litigate patent validity to answer the antitrust question (unless, perhaps, to determine whether the patent litigation is a sham ....). .... In a word, the size of the unexplained reverse payment can 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.

So, instead of the presumption of validity arising from a granted patent, we now have a presumption of invalidity arising from a "large, unjustified" reverse settlement payment. Can a patent holder rebut this "presumption" with evidence of the patent's validity?

Fifth, the fact that a large, unjustified reverse payment risks antitrust liability does not prevent litigating parties from settling their lawsuit. .... Although the parties may have reasons to prefer settlements that include reverse payments, the relevant antitrust question is: What are those reasons? If the basic reason is a desire to maintain and to share patent-generated monopoly profits, then, in the absence of some other justification, the antitrust laws are likely to forbid the arrangement.

In sum, a reverse payment, where large and unjustified, can bring with it the risk of significant anticompetitive effects; one who makes such a payment may be unable to explain and to justify it; such a firm or individual may well possess market power derived from the patent; a court, by examining the size of the payment, may well be able to assess its likely anticompetitive effects along with its potential justifications without litigating the validity of the patent; and parties may well find ways to settle patent disputes without the use of reverse payments.

Ah, maybe it's the Supreme Court that prefers antitrust cases to patent cases.

The majority decision also explains why it rejected the "quick look rule of reason" test:

[T]he 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. The existence and degree of any anticompetitive consequence may also vary as among industries. These complexities lead us to conclude that the FTC must prove its case as in other rule-of-reason cases.

Yet, the majority insists that this can be done without litigating the patent's validity.

Justice Robert's Dissenting Opinion

As noted above, Justice Roberts filed a dissenting opinion which was joined by Justices Scalia and Thomas.

Justice Roberts criticizes the majority opinion for ignoring the fact that the patent system carves out exceptions to general antitrust laws:

The point of antitrust law is to encourage competitive markets to promote consumer welfare. The point of patent law is to grant limited monopolies as a way of encouraging innovation. Thus, a patent grants "the right to exclude others from profiting by the patented invention." Dawson Chemical Co. v. Rohm & Haas Co., 448 U. S. 176, 215 (1980). In doing so it provides an exception to antitrust law, and the scope of the patent—i.e., the rights conferred by the patent—forms the zone within which the patent holder may operate without facing antitrust liability.

This should go without saying, in part because we've said it so many times.

The One-Two Punch

Innovators in the pharmaceutical field who believe that the Supreme Court's Myriad decision is safely off-target from their interests will have to take more than a quick look at the Actavis decision, and biotechnology companies who are developing therapeutic products must now consider the combined effect of the Myriad-Actavis one-two punch. While the Court purports to adopt a "rule of reason" analysis, it strikes me as unreasonable to balance a patent holder's right to exclude against the procompetitive aims of the antitrust laws without taking into account the validity of the patent (presumed or proven).

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