So-called “pay for delay” patent settlements continue to roil the pharmaceutical industry. I recently spoke on this topic at the 3rd Circuit judicial conference with panelists from the FTC, industry and outside law firms. These settlements typically arise in the context of Hatch-Waxman patent litigation. A branded drug company, defending its patent position against one or more potential generic entrants, may agree to pay a portion of the brand’s profits to a generic entrant as part of an overall settlement in which the generic entrant agrees to delay marketing its drug for some period of time of the remaining patent term. Because the payment goes from the patentee to the putative infringer, instead of the other way around as is the case in other patent litigations, these settlements are frequently known as “reverse payment” settlements. In arguing that these settlements violate the antitrust laws, the FTC has successfully employed the moniker “pay for delay” – i.e., the branded company is paying for the delayed entry of the generic.
In 2013, the Supreme Court decided the case of FTC v. Actavis, 133 S.Ct.2223 (2013). That case resolved a circuit split about “reverse payment” settlements and the antitrust laws. The two opposing views were that: a) so long as the settlement was “within the scope of the patent,” the settlements were typically fine; vs. b) because of the reverse payment, the settlements were per se violations of the antitrust laws. The former imagined a world where, so long as the branded company was paying a generic to not market a product that was within the scope of its patent, the branded company could have excluded the product entirely, had it won the case. And therefore, it could not violate the antitrust laws. Whereas the latter view focused on the atypical nature of the payment, from patentee to infringer, and thus concluded that it was a horizontal restraint on trade by two competitors who had agreed split the profits one of them (the branded company) was making.
In Actavis, the FTC argued for the latter view, while both the branded and generic drug industries argued for the former. The Supreme Court, which in general is not in favor of bright line rules, came down somewhere in the middle. In the decision, the Court held that, where there is compensation flowing from the branded to the generic, that compensation can be so out of bounds as to violate the antitrust laws, regardless of whether or not the settlement is “within the scope of the patent.” According to the Court, the size of the payment can indicate that the real purpose behind the payment is an anti-competitive one. While to be sure some payments the Court stated might be fine – for example, a payment to refund attorney’s fees for example – others are not. All of this should be evaluated under the “rule of reason” approach, and, according to the Supreme Court, it usually shouldn’t be necessary to litigate the merits of the patent to determine whether the compensation is anti-competitive or not.
This latter assertion by Justice Breyer is worthy of skepticism. The strength of the patents at issue is the most critical fact in any Hatch-Waxman case. Where a patent is weak, one would think a payment would be more suspect, regardless of its size. Conversely , where a patent is strong, a payment might have nothing to do with anti-competitive intent, despite it being relatively large. But, according to Actavis, the former would likely not be of concern, while the latter would be. This has led to great confusion in the industry as to how to go about assessing settlements where compensation of some kind flows from the brand to the generic, whether it be pure cash or some other form of compensation, such as the agreement by a brand company not to offer its own authorized generic product to compete with the true generic. On the panel I sat on, the consensus was that only time would tell – that litigation was necessary to determine the bounds of what is acceptable and what is not. Moreover, in the interim, the consensus was that settlements of almost any kind except the most “vanilla” – where a brand and a generic simply compromise on an entry date and nothing more — would be less likely. While fewer settlements may not have been the driving force behind FTC v. Actavis, from my chair it does appear to be the result, giving further proof to perhaps the most famous law of them all, the law of unintended consquences.