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Supreme Court Adopts “Rule of Reason” for Reverse Payment Settlements

Antitrust Patent
Federal Trade Commission v. Actavis, Inc. By Kathleen McGuinness – Edited by Jennifer Wong Federal Trade Commission v. Actavis, Inc., No. 12-416 (570 U.S. ___ June 17, 2013) Slip Opinion [caption id="attachment_3435" align="alignleft" width="150"] Photo By: epSos .de - CC BY 2.0[/caption] On June 17, the Supreme Court ruled that reverse payment settlements between brand name and generic drug manufacturers were not presumptively unlawful, but were subject to scrutiny under the “rule of reason.” This holding overruled the United States Court of Appeals for the Eleventh Circuit’s dismissal of the case, resolving a circuit split. JD Supra explains the Court’s holding. HealthAffairs describes the background of the industry and the history of the case. FDA Law Blog predicts its implications on future litigation. Actavis addresses the uncertain legality of “reverse payment settlements.” Such settlements are common when a generic drug manufacturer announces its intention to produce a patented drug and declares that it believes the patent to be invalid in an Abbreviated New Drug Application (“ANDA”) to the FDA, as required by the Hatch-Waxman Act. Actavis, slip op. at 2–4. This declaration constitutes infringement, and the patent owner can immediately sue to prevent the generic drug from entering the market. Id. at 3–4. In many such cases, the patent owner agrees to pay the potential infringer in exchange for a promise not to produce the patented drug until the expiration of the patent term. Reverse payment settlements allow the parties to avoid potentially costly litigation, at the cost (to everyone else) of allowing invalid drug patents to remain effectively enforced as government-granted monopolies. Actavis involved Solvay Pharmaceuticals, the manufacturer of a patented drug called AndroGel, and three generic manufacturers — Actavis, Inc. (“Actavis”), Paddock Laboratories (“Paddock”), and Par Pharmaceutical (“Par”). Id. at 5. When Actavis and Paddock filed ANDAs in 2003 seeking approval to market a generic version of AndroGel and claiming that Solvay’s patent was invalid, Solvay sued. Id. In 2006, the parties settled, agreeing that the generic manufacturers would promote AndroGel to urologists and would not market generic versions of AndroGel until 2015, 65 months before the patent’s expiration date. Id. In return, Solvay agreed to pay $12 million to Paddock, $60 million to Par, and up to $30 million annually for nine years to Actavis. Id. at 5–6. The FTC filed a lawsuit against all parties in 2009, arguing that the purpose of the payments was to compensate the generic manufacturers for their agreement not to compete with Solvay. Id. The District Court and the Eleventh Circuit dismissed the case, holding that “a reverse settlement is immune from antitrust attack so long as its anticompetitive effects fall within the [term] of the patent” because of the inherent anticompetitive goals of the patent system and the policy of encouraging settlement. Id. at 6–7 (quoting FTC v. Watson Pharmaceuticals, Inc., 677 F.3d 1298, 1312 (11th Cir. 2012)). The Court granted certiorari to resolve the split between courts applying this logic and other courts holding reverse payment settlements presumptively unlawful. Id. It heard oral arguments in March 2013 (previously covered by the Digest). The Court declined to adopt either position of the lower courts, endorsing instead a “rule of reason” test. Id. at 20. The Court first rejected the idea that settlements within the term of the patent were presumptively valid, noting that while valid patents would grant a holder legitimate monopoly rights, “[t]he patent here may or may not be valid, and may or may not be infringed.” Id. at 8. However, it also rejected the FTC’s proposed “quick look” rule, which would have found reverse payment settlements to be presumptively invalid; the “complexities” of the settlements’ consequences merited a case-by-case determination of anticompetitive effects. Id. at 20–21. The Court held that courts should balance patent and antitrust goals. Settlements “amount[ing] to . . . a rough approximation of the litigation expenses saved” or compensating “for other services that the generic has promised to perform” weighed against a finding of anticompetitive effects, id. at 17; however, “unexpectedly large” reverse payments could show a desire to maintain “supracompetitive prices,” id. at 19. The Court found that the FTC’s case should have been allowed to continue, given the special incentives of Hatch-Waxman, the suspicious characteristics of the settlement, and the potentially unjustified competitive consequences, and remanded the case for further proceedings. Id. at 16–21. Dissenting, Chief Justice Roberts endorsed the Eleventh Circuit’s test. Id. at 1–3. He argued that the validity and scope of a patent were not antitrust principles but questions for patent law. Id. at 5–6. Roberts further argued that the majority’s rule would disincentivize patent litigation settlements, and therefore invalidity suits, by decreasing their reward. Id. at 11. His dissent also noted that the majority’s decision could discourage patent challenges, and prohibiting litigation of validity disputes constitutes a public harm would undermine the entire idea of patent licensing. Id. at 11, 14, 17–18. Commentators, such as Patently-O and FDA Law Blog, suggest that the Court’s decision in Actavis will increase uncertainty for parties contemplating reverse-payment settlements, as the opinion offers little guidance to indicate how the “rule of reason” will actually apply to these settlements. Going forward, those looking to enter into such agreements will likely want to be extra cautious of the potential antitrust issues such settlements implicate.