On June 26, 2015, the Third Circuit extended Actavis to non-cash settlements and held that Actavis can cover a no-AG agreement – “a settlement in which the patentee drug manufacturer agrees to relinquish its right to produce an ‘authorized generic’ of the drug” during the statutorily guaranteed 180 days of market exclusivity for the first-filing generic drug manufacturer.

In Actavis, the Supreme Court held that “unexplained large reverse payment[s]” from a patent holder to an alleged infringer in order to settle patent litigation may violate the antitrust laws.  The Supreme Court reasoned that those large payments suggest that the patentee has serious concerns about its patent’s viability and thus suggests that the patentee is merely sharing the supracompetitive prices with the challenger rather than allowing for a competitive market.

In the Third Circuit decision, the three-judge panel considered the following settlement: GlaxoSmithKline (“GSK”), the patentee, had a patent for lamotrigine tablets and chewable tablets.  Teva filed an Abbreviated New Drug Application for generic lamotrigine under the Hatch-Waxman Act and litigation followed.  The district court judge held GSK’s main patent claim invalid and, before the judge could decide the remaining claims, GSK and Teva settled.  Under the terms of the settlement, Teva could enter the lamotrigine chewables market early – a market allegedly worth $50 million – and GSK agreed not to produce its own authorized generic of the lamotrigine tablet – a market allegedly worth $2 billion – until after Teva’s 180 days of exclusivity.  The Third Circuit held that such a no-AG agreement “may represent an unusual, unexplained reverse transfer of considerable value from the patentee to the alleged infringer and may therefore give rise to the inference that it is a payment to eliminate the risk of competition.”  Thus, the court held, the settlement falls under Actavis’s rule of reason analysis.

GSK and Teva, the defendants, argued that no-AG agreements are distinguishable from the reverse payments at issue in Actavis.  The Third Circuit was unpersuaded.  First, the panel reasoned that Actavis did not limit its reasoning to cash payments only.  Indeed, part of the concern of the dissent in Actavis was that the holding was not limited to cash payments.  Indeed, the Third Circuit found that the “thrust of the Court’s reasoning [in Actavis] is not that it is problematic that money is used to effect an end to the patent challenge, but rather that the patentee leverages some part of its patent power . . . to cause anticompetitive harm.”  Here, the Court found that the no-AG agreement amounted to a 180-day monopoly for Teva in the generic market, thus likely causing anticompetitive harm.

GSK and Teva argued next that extending Actavis’s holding to no-AG agreements will discourage settlements.  The Third Circuit rejected that argument, holding that antitrust law prohibits settlements that are anticompetitive without sufficient procompetitive justifications.  And, like the majority in Actavis, the panel reasoned that there are other ways to settle patent disputes without large unexplained reverse transfers of value from the patentee to the challenger.  Indeed, the panel hinted that a settlement to “reimburse litigation costs or compensate for services” would likely be upheld.

The district court may yet uphold the GSK-Teva settlement.  The Third Circuit decision left open several issues, which may present grounds for dismissal upon remand.  For instance, the court explicitly declined to address the issue of whether the plaintiffs have proven an “antitrust injury” as required by the Sherman Act.  The court also noted that the defendants could still prevail on a motion to dismiss “if, for example, there is no dispute that, under the rule of reason, the procompetitive benefits of a reverse payment outweigh the payment’s alleged anticompetitive harm.