Federal Trade Commission v. Actavis, Inc.
On June 17, 2013, the United States Supreme Court issued a 5-3 decision in Federal Trade Commission v. Actavis, Inc. holding that pharmaceutical patent settlement agreements involving "reverse payments", otherwise known as "pay-for-delay" agreements, are not presumptively anti-competitive but should instead be analyzed under the rule-of-reason analysis to determine if they are likely to result in anti-competitive harm. In doing so, the Court overturned the Eleventh Circuit’s dismissal of the Federal Trade Commission ("FTC") lawsuit against Solvay Pharmaceutical, Par Pharmaceutical, Paddock Laboratories, and Watson Pharmaceuticals (subsequently acquired by Actavis), and rejected the "scope of the patent" test applied by the Eleventh, Second, and Federal Circuits, courts that have all held that a settlement agreement was lawful as long as it did not exceed the exclusionary rights granted by the underlying patent.
Under the Hatch-Waxman Act, generic drug companies, in filing a Abbreviated New Drug Application ("ANDA"), can make a "Paragraph IV certification" claim that their product does not infringe that of the brand-name drug manufacturers or the relevant patent is invalid. Hatch-Waxman also provides a period of exclusivity from the first commercial marketing of the drug for first-to-file generic manufacturers whereby no other generic can compete with the brand-name drug.
Actavis and Paddock Laboratories (joined by Par Pharmaceutical) separately filed ANDAs for the brand-name drug AndroGel patented by Solvay Pharmaceuticals. In light of the Paragraph IV certification, Solvay brought a patent infringement action against Actavis and Paddock. The parties ultimately settled, with the generic companies agreeing not to produce the generic product until several years before the expiration of the patent’s term in exchange for a monetary payment by Solvay, the brand-name patentee. The FTC subsequently brought a lawsuit under Section 5 of the Federal Trade Commission Act, 15 U.S.C. §45, alleging that the parties unlawfully agreed to "share in Solvay’s monopoly profits, abandon their patent challenges, and refrain from launching their low-cost generic products to compete" against AndroGel. In re Androgel Antitrust Litigation (No. II), 687 F. Supp. 2d 1371, 1379 (ND Ga. 2010).
The Eleventh Circuit affirmed the District Court’s dismissal of the FTC complaint, finding that "absent sham litigation or fraud in obtaining the patent, a reverse payment settlement is immune from antitrust attack so long as its anticompetitive effects fall within the scope of the exclusionary potential of the patent." FTC v. Watson Pharmaceuticals, Inc., 677 F.3d 1298, 1312 (2012).
Writing for the majority, Justice Breyer found there was reason for concern that "reverse payment" settlement agreements may have significant adverse effects on competition, and both patent law and antitrust policies must be weighed when considering the legality of the settlements. The Court viewed a reverse payment settlement as the plaintiff "pay[ing] money to defendant B purely so B will give up the patent fight" and delaying introduction of lower cost generic alternatives. The Court reviewed several precedents in the patent settlement context and the balance between patent and antitrust policies, concluding that they "make clear that patent-related settlement agreements can sometimes violate the antitrust laws" and courts should consider "traditional antitrust factors such as likely anticompetitive effects, redeeming virtues, market power, and potentially offsetting legal considerations present in the circumstances…"
Furthermore, despite acknowledging that there was some support in a general legal policy favoring settlement of these patent-related disputes, the Court held that the Eleventh Circuit’s focus on the desirability of settlements overlooked a number of factors that warranted providing the FTC with an opportunity to prove its antitrust claim. The Court offered some guidance as to what type of agreements are likely to pose antitrust concerns, discussing "five sets of considerations" that weigh in favor of antitrust scrutiny.
- First, the reverse payments at issue have the "potential for genuine adverse effects on competition," largely higher consumer prices. An agreement to stay out of the market splits the benefit between the branded patentee manufacturer and the generic challenger, at a loss to consumers, and removes the possibility of competition occurring more quickly.
- Second, the prospective anticompetitive consequences of the agreements "will at least sometimes prove unjustified," and the opportunity should be available for the complainant to examine the potential consequences and the defendant to show legitimate pro-competitive justifications under the rule of reason.
- Third, "where a reverse payment threatens to work unjustified anticompetitive harm, the patentee likely possesses the power to bring that harm about in practice," eg, the size of the payment to a generic challenger by the branded manufacturer suggests a market power to charge higher-than-competitive prices.
- Fourth, an antitrust action is administratively feasible as it may not be necessary to litigate the validity of the underlying patent.
- Fifth, allowing for the risk of antitrust liability from unjustified reverse payments would not interfere with the parties’ ability to settle patent disputes. The parties have other methods of settlement, and the relevant antitrust assessment should be what reasons are there to prefer settlements other than "large and unjustified" reverse payments.
The FTC had advocated for a "quick look" approach. However, the Court declined to hold that reverse payment settlement agreements are presumptively unlawful: "[t]he likelihood of a reverse payment bringing about anti-competitive effects depends upon its size, its scale in relation to the payer’s anticipated future litigation costs, its independence from other services for which it might represent payment, and the lack of any other convincing justification," factual complexities that require the application of a full "rule of reason" analysis.
Chief Justice Roberts, joined by Justices Scalia and Thomas, dissented, maintaining that the correct approach applied by the majority should have been "whether the settlement gives Solvay monopoly power beyond what the patent already gave it," not a statutorily-insupportable "novel approach" of considering the anticompetitive effects of the reverse payment settlements under a rule of reason analysis. Instead, the dissent agreed with the Eleventh Circuit’s application of the "scope of the patent" rule: settlements do not generate antitrust liability so long as the settlement’s competitive effects fall within the scope of the exclusionary potential of the patent absent sham litigation or fraud in obtaining the patent.
Implications of the holding
This ruling falls short of the test advocated by the FTC that these reverse-payment settlements should be considered presumptively unlawful, with the burden placed on defendants to show the settlement was procompetitive. However, it likely will have significant implications for the pharmaceutical industry and other intellectual property rights holders in reaching settlement in patent litigations. The ruling could effectively discourage settlements in Paragraph IV litigations, while at the same time the Court has provided very little guidance to lower courts as to the appropriate rule-of-reason analysis.