A “reverse-payment settlement” recently has been described by the Supreme Court as when “Company A sues Company B for patent infringement. The two companies settle under terms that require 1) Company B, the claimed infringer, not to produce the patented product until the patent’s term expires, and 2) Company A, the patentee, to pay B many millions of dollars.”1 Such settlements often are used to resolve Hatch-Waxman litigations, which may involve a name brand drug company (Company A) suing a generic drug company (Company B) for alleged infringement based upon the generic company’s application for FDA approval of a generic version of the name brand drug—also known as an Abbreviated New Drug Application (ANDA).

In FTC v. Actavis, Inc., the Supreme Court determined that reverse-payment settlements can violate antitrust laws, but that each case must be considered individually under the rule-of-reason standard commonly used in antitrust cases.2 The Court left the structuring of the rule-of-reason test to the lower courts.3

Two years after Actavis, several courts have considered claims alleging antitrust violations related to reverse-payment agreements. However, there is still uncertainty regarding the proper application of the rule-of-reason test, particularly as it applies to settlements that do not include monetary compensation. Some courts have ruled that alleged reverse-payment settlements must include cash consideration to be considered a reverse payment; other courts have found that cash consideration is not required for a reverse payment; while still others have found that cash consideration is not required, but that the non-cash consideration must be converted to a monetary value.

King Drug Co. of Florence, Inc. v. Smithkline Beecham Corp.4 was the first circuit court decision since Actavis to address the consideration issue. The Third Circuit found that consideration in the form of an agreement by the brand name company not to launch an “authorized generic”5 during the generic company’s 180-day exclusivity period6 can be a reverse payment under Actavis.

Facts and procedural posture

King Drug involved a settlement from a patent litigation involving medication to treat seizures and mood disorder. The settlement provided for non-monetary compensation in the form of a promise by GlaxoSmithKline not to launch an authorized generic during Teva’s first-filer exclusivity period (the “no-AG agreement”). The district court granted a pre-Actavis motion to dismiss, but then accepted a post-Actavis motion for reconsideration in view of Actavis.

Particularly, the district court interpreted Actavis to require a three part test: 1) determine if there is a reverse payment; 2) determine if the reverse payment is “large and unjustified”; and 3) apply the rule of reason.”7 The court further interpreted the rule-of-reason test as having “five considerations”: 1) “potential for genuine adverse effect on competition”; 2) whether the payment is justified; 3) whether the brand name manufacturer has market power; 4) the size of the settlement; and 5) whether the parties could have settled without a reverse payment.8

The court found that Actavis requires the reverse-payment settlements to include money, in part because the majority and dissenting opinions “reek with discussion of payment of money.”9 Because the settlement at issue did not include money, it was not considered a reverse payment. Accordingly, the first part of the test was not satisfied, Actavis scrutiny was not necessary, and the motion to dismiss for failure to state a claim was granted. Alternatively, the court noted that the agreement would still have survived even if reviewed under the “five considerations” of the rule-of-reason test.10

Circuit court decision

The Third Circuit reversed, finding that a no-AG agreement can be subject to antitrust scrutiny under the rule of reason.11 The court reasoned that, according to Actavis, “reverse payments are problematic because of their potential to negatively impact consumer welfare by preventing the risk of competition, which arises from expected litigation outcomes.”12 As such, the potential anticompetitive harm of a reverse payment comes from companies “eliminating ‘the risk of patent invalidation or a finding of noninfringement’ by ‘paying the challenger to stay out’ of the market.”13

The court found that the no-AG agreement could cause such harm in the same way a cash payment could, at least because the no-AG agreement is very valuable to the generic company, and without the agreement, it would be economically rational for the brand company to produce an authorized generic.14Furthermore, the court did not believe the Supreme Court “intended to draw such a formal line” between cash payments and non-cash payments.15 As such, the court found the no-AG agreement should be subject to antitrust scrutiny “because it may represent an unusual, unexplained transfer of value from the patent holder to the alleged infringer that cannot be adequately justified.”16

Additionally, the Third Circuit took issue with the rule-of-reason test outlined by the district court. First, if questions of fact remain after discovery, the rule-of-reason analysis is a question of fact, not a matter of law.17 Second, the five considerations laid out by the district court represented a misreading ofActavis.18 The Third Circuit noted that rather than redefine the rule-of-reason test, the Supreme Court provided a guideline for applying the well-established test to reverse-payment settlements.19

Under the traditional rule-of-reason test, the plaintiff bears the initial burden of showing anti-competitive effects.20 The burden then shifts to the defendant to present pro-competitive benefits or objectives of the challenged conduct.21Finally, the plaintiff will have a chance to rebut.22

The same test is therefore applied by the Third Circuit. That is, according to the Third Circuit, to apply the rule of reason to alleged reverse payments, first, the “plaintiff must prove payment for delay, or in other words, payment to prevent the risk of competition,” to show anticompetitive effects.23 Support may come from the size, scale compared to anticipated litigation costs, and independence from other services, of the reverse payment, as well as the lack of other convincing justification.24 Second, the burden shifts, and the defendant must show “that legitimate justifications are present, thereby explaining the presence of the challenged term and showing the lawfulness of the term under the rule of reason.”25 Examples of legitimate justifications include savings from avoiding litigation, payment for other services that the generic has agreed to perform, or other justifications, which the court did not provide.26 Third, the plaintiff will have a chance to rebut the defendant’s justifications.27

Conclusion

Since the Supreme Court’s decision in Actavis, there has been uncertainty with regard to reverse-payment agreements, and particularly whether the settlements must include money to qualify as a reverse payment. King Drug cast new light on the matter, providing the first circuit court decision on the issue and ruling that no-AG agreements can be reverse payments under Actavis.