This article was first published in the December 4, 2013 issue of Westlaw Journal Pharmaceutical, December 2013 (Volume 29, Issue 10). Reprinted here with permission of Andrews Publications, a Thomson Reuters business © 2013.
For decades, the antitrust and patent law regimes have hung in a delicate balance, fostering the coexisting goals of innovation and competition. The two regimes exist as flip sides of the same coin: Patent law aims to incentivize innovation as a means to promote competition, while antitrust law promotes competition as a means to incentivize innovation. Patents reward innovators by granting them legal monopoly rights. They operate as limited exceptions to antitrust law's general prohibition of monopolies.
Antitrust law has been largely unconcerned with patent monopolies, intervening only when a patent is procured by fraud or its enforcement is objectively baseless. Both regimes traditionally recognize the presumptive validity of patents, which the U.S. Patent and Trademark Office grants only after what is assumed to be a rigorous process of prosecution.
The Supreme Court's recent decision in Federal Trade Commission v. Actavis Inc., however, expressly disavows the principle that patents — or at least patents subject to patent infringement litigation — are presumed to be valid.1 In so doing, the high court's decision threatens the delicate balance the law has long fostered. Ironically, the ruling may also significantly hamper innovation and competition in the pharmaceutical industry.
In Actavis the Supreme Court addressed the question of whether a "reverse-payment settlement" — one in which the patentee pays the alleged infringer — "can sometimes unreasonably diminish competition in violation of the antitrust laws."2
The high court answered this question in the affirmative, holding that because "large and unjustified" reverse payment settlements pose the risk of creating "significant anti-competitive effects," they should be analyzed under the traditional "rule of reason" analysis.3 But the court offered little guidance in the wake of this game-changing pronouncement, leaving "to the lower courts the structuring of the present rule-of-reason antitrust litigation."4
Under traditional rule-of-reason analysis, the fact-finder must consider anti-competitive effect, procompetitive justification and the availability of less restrictive alternatives in determining whether the questioned practice imposes an "unreasonable restraint" on competition.5 Responding to the oft-cited concern that subjecting reverse-payment settlements to this analysis will require a time-consuming and unreliable evaluation of the very patent validity the parties are trying to settle, the Actavis majority ruling remarked that "it is normally not necessary to litigate patent validity to answer the antitrust question."6
The high court observed that "the size of the unexplained reverse payment can provide a workable surrogate for the patent's weakness, ... without forcing a court to conduct a detailed exploration of the patent itself" because "[a]n unexplained large reverse payment itself would normally suggest that the patentee has serious doubts about the patent's survival" and any "payment (if otherwise unexplained) likely seeks to prevent the risk of competition."7 But careful consideration shows that these observations may be inaccurate. Careful consideration also calls into question the high court's assurances that the parties will be able to avoid relitigating the patent case they were trying to settle.
Consider anti-competitive effect, or antitrust injury. All patent litigation settlements prevent the "risk" of competition because they extinguish litigation where there is some risk, no matter how small, that the patent holder will lose. Thus, a determination that preventing the risk of competition constitutes an anti-competitive effect or injury sufficient to violate the antitrust laws would call all patent litigation settlements into question.
Patent holder "A" might agree to drop patent litigation against alleged infringer "B" in exchange for 20 percent of its alleged damages and an acknowledgement that B's product infringes A's patent (which precludes further commercialization until patent expiration). In that scenario, A has in effect paid B 80 percent of the alleged damages to prevent the "risk" of competition.
Yet the Actavis majority made it clear that such compromises are not subject to antitrust scrutiny.8 Accordingly, injury must consist of something more than preventing the "risk" of competition.
It is this recognition that had led courts and advocates to embrace the presumption of patent validity, and to deem any reverse-payment settlement procompetitive so long as it prevented no more competition than the underlying patent itself. As Chief Justice John Roberts observed in his dissenting opinion in Actavis, settling a patent claim by any means does not cause anti-competitive harm if the settlement prevents no more competition than a valid patent. Thus, discarding the scope-of-the-patent test makes reexamining patent validity necessary.9
Chief Justice Roberts wrote: "[I]n any such antitrust suit, the defendant (patent holder) will want to use the validity of his patent as a defense — in other words, he'll want to say 'I can do this because I have a valid patent that lets me do this.' I therefore don't see how the majority can conclude that it won't normally be 'necessary to litigate patent validity to answer the antitrust question,' unless it means to suggest that the defendant (patent holder) cannot raise his patent as a defense in an antitrust suit. But depriving him of such a defense — if that's what the majority means to do — defeats the point of the patent."10
If a branded manufacturer/patent holder is unable to raise patent validity as a defense to a plaintiff's allegation of anti-competitive effect or injury, Actavis does far more than eschew presumptive patent validity; it establishes an unrebuttable presumption of patent invalidity. Surely the high court did not mean to go that far.
In Actavis, the high court did not say that any payment risks antitrust liability — rather, it said only "large, unjustified" ones do so.11 A reverse payment may be justified where it "amount[s] to no more than a rough approximation of the litigation expenses saved through the settlement" or "reflect[s] compensation for other services that the generic has promised to perform." In addition, "[t]here may be other justifications."12
That language opens the door for the traditional rule-of-reason consideration of the parties' procompetitive justifications. Any analysis that disregards the patent's relative strength begs this question: What, exactly, is a large, unjustified or unexplained payment?
The Actavis majority was concerned by patent holders that agree to split monopoly rents with patent challengers solely for the purpose of "pushing back" or "delaying" generic entry. Determining whether that indeed has occurred requires a comparative analysis of the parties' alternatives, and specifically, of when entry would have occurred but for the reverse payment.
In reverse payment cases, there are only two alternatives to the settlement under scrutiny: continued patent litigation or a different settlement. The likely outcome of the patent litigation — and the parties' subjective views as to that likely outcome — are central to consideration of both alternatives.
Any court considering whether a settlement delayed competition must determine the probabilistic entry date had the parties continued to litigate. To determine that entry date, it is necessary to calculate the parties' odds of winning the patent litigation, as well as how long the litigation would have lasted and whether the generic company would have launched "at risk" before receiving an appellate determination on the merits.
It is simply not true that any "large" reverse payment pushes the generic's entry date beyond the probabilistic entry date. One or both of the patent litigants, for example, may have subjective expectations about their likelihood of success that differ from their objective odds.
Similarly, whether a more pro-competitive settlement could have been reached (an exercise that would be novel under traditional rule-of-reason analysis) depends on the parties' subjective views of their relative chances of success, which often are not compatible. When litigants have different views of the patent merits, there often is no license period with a value that is both at or below the brand's perceived litigation risk and at or above the generic's perceived litigation value, particularly because the brand and generic value the license period very differently.
Settlement of Hatch-Waxman litigation is often further complicated by the patent litigants' asymmetric risk profiles resulting from the Hatch-Waxman regime,13 their risk tolerances, and the parties' imperfect information14 and differing expectations. Thus, parties often need additional consideration beyond an agreed-upon entry date to achieve settlement.
The Effect of Actavis
With this sea change that places the once-presumed patent validity squarely at the center of antitrust analysis, Actavis imperils the delicate balance between patent and antitrust law while posing a threat to innovation and competition. Lower courts have long recognized that the "turducken" task of litigating the merits of a patent case within an antitrust case is conceptually and administratively difficult for several reasons.15
These concerns led the 2nd U.S. Circuit Court of Appeals, the 11th U.S. Circuit Court of Appeals and the U.S. Court of Appeals for the Federal Circuit to adopt the "scope of the patent" test, which avoids relitigation of the patent merits by assuming the underlying patent to be valid.
First, litigating the patent merits in an antitrust case is unreliable. In FTC v. Watson Pharmaceuticals (the decision on appeal in Actavis), the 11th Circuit refused to make a "retrospective prediction" about the litigation outcome that would have been, because such guesswork would require an after-the-fact calculation of how "likely" a patent holder was to succeed in a settled lawsuit if it had not been settled. Predicting the future is precarious at best; retroactively predicting from a past perspective a future that never occurred is even more perilous.16
The 11th Circuit deemed this "too perilous an enterprise to serve as a basis for antitrust liability and treble damages."17 The Watson court recognized that litigating the patent merits in an antitrust case would be doubly perilous because Congress vested in the Federal Circuit exclusive appellate jurisdiction over patent cases, which means no other federal appeals courts have experience or expertise in that area.18
Further, allowing the non-specialized circuit courts to review complex patent issues undermines Congress's decision to have appeals involving patent merits decided only by the Federal Circuit.19
Second, relitigating the patent merits will impose "heavy burdens on the parties and the courts."20 In Watson, for example, the 11th Circuit observed that "assaying the infringement claim 'as of the time of settlement' would [require] mining through mountains of evidence [because] when the lawsuit settled, more than 40 depositions had been taken and one side alone had produced more than 350,000 pages of documents."21 In many cases, the prospect for summary adjudication will be nonexistent.
Third, and most importantly, forcing litigants to revisit the patent merits as part of an antitrust case makes the possibility of settlement more remote and much less certain. In Tamoxifen Citrate Antitrust Litigation for example, the 2nd Circuit remarked that:
We think, such a rule, making every settlement of patent litigation, at least in the Hatch-Waxman context, subject to the inevitable, lengthy and expensive hindsight of a jury as to whether the settlement constituted a 'reasonable' restraint ... would place a huge damper on such settlements.22
This is no small disadvantage: Courts have long recognized that "settlements provide a number of private and social benefits as opposed to the inveterate and costly effects of litigation."23 In Hatch-Waxman Act cases in particular, by making the prospect of settlement much more unlikely, Actavis very well could disincentivize both brand innovation and the procompetitive generic entry the act was designed to facilitate.
The Actavis decision has reduced the value of patents by limiting enforcement options and making those options more costly. Paragraph IV Abbreviated New Drug Application challenges24 also may become less valuable because pursuing them is more costly and the outcome is less certain. Thus, ironically, the Supreme Court's decision may disincentivize both investment in innovation and early generic entry.
As trial courts take the reins in the wake of Actavis, it appears inevitable that they will trend toward detailed examinations of patent validity. To what extent the lower courts' potential parade of horribles — in the form of unreliable results, swollen dockets, dwindling settlements, decreased innovation and generic entry — is realized remains to be seen.
1. See 133 S. Ct. 2223, 2231 (2013) ("The patent here may or may not be valid, and may or may not be infringed.").
2. Id. at 2227.
3. Id. at 2237.
4. Id. at 2238.
5. See, e.g., Deutscher Tennis Bund v. ATP Tour Inc., 610 F.3d 820, 829-30 (3d Cir. 2010).
6. 133 S. Ct. at 2236.
7. Id. at 2236-37.
8. See id. at 2233.
9. See id. at 2244 (Roberts, C.J., dissenting).
10. Id. (Roberts, C.J., dissenting) (internal citation omitted).
11. Id. at 2237.
12. Id. at 2236.
13. The Hatch-Waxman Act promotes generic competition by allowing a generic manufacturer to make an artificial act of patent infringement sufficient to create standing for patent infringement litigation. Because the generic company using this procedure has not actually marketed an infringing product, there is no risk that it will be liable for damages. Thus, the generic company in Hatch-Waxman litigation has a small downside (mostly litigation costs) and a large upside (the prospect of competition), while the patent holder has a huge downside (the loss of its patent).
14. For example, a generic company may fear that the branded company may decrease the value of any license by "switching the market" to a new drug or formulation before the generic company's agreed-upon entry date.
15. FTC v. Watson Pharms., 677 F.3d 1298, 1313-15 (11th Cir. 2012).
16. Id. at 1313.
18. 677 F.3d at 1314-15.
19. Id. at 1315.
20. Id. at 1314.
22. In re Tamoxifen Citrate Antitrust Litig., 466 F.3d 187, 212 n. 26 (2d Cir. 2006).
23. Schering-Plough Corp. v. FTC, 402 F.3d 1056, 1075 (11th Cir. 2005); see also Tamoxifen, 466 F.3d at 202.
24. See CFR 314.94(a)(12)(i)(A)(4).
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