The Court has held that so-called "reverse payment" or “pay for delay” settlement agreements used between brand name drug makers and their generic counterparts should be analyzed under a rule of reason analysis under which the court assesses any anticompetitive effects of such agreements. Fed. Trade Comm’n v. Actavis, Inc., 570 U.S. __ (2013).

Background

Utilizing the Hatch-Waxman Act to speed the entry of generic drugs to market, Actavis, Inc. (formerly Watson Pharmaceuticals) and Paddock Laboratories filed Abbreviated New Drug Applications referencing Solvay Pharmaceuticals’ AndroGel branded drug product, and certifying, under Paragraph IV, that Solvay’s patent purportedly covering AndroGel, was invalid and not infringed. Solvay sued both for patent infringement under 35 U.S.C. § 271(e)(2)(A). Despite having received approval from the FDA to market its generic product, Actavis entered into a reverse payment settlement agreement with Solvay in which Actavis agreed not to bring its generic drug to market for a specified number of years and to promote Solvay’s AndroGel to doctors in exchange for millions of dollars in payments from Solvay. Paddock made a similar agreement with Solvay.

The FTC filed suit against all the settling parties, alleging violation of § 5 of the Federal Trade Commission Act (15 U.S.C. § 45) by unlawfully agreeing to abandon their patent challenges, to refrain from launching their low-cost generic drugs, and to share in Solvay’s monopoly profits. The U.S. District Court for the Northern District of Georgia dismissed the FTC’s Complaint. The Eleventh Circuit Court of Appeals affirmed, holding that as long as the anticompetitive effects of a settlement fall within the scope of the patent’s exclusionary potential, the settlement is immune from antitrust attack. In contrast, the Third Circuit Court of Appeals has held, in an unrelated case, that reverse payment settlements are presumptively anticompetitive and unlawful. See In re K-Dur Antitrust Litigation, 686 F.3d 197, 214-218 (3d Cir. 2012).

The Decision

On appeal from the Eleventh Circuit, the Court held that reverse payment settlements can violate federal antitrust laws and therefore the Eleventh Circuit erred in affirming the dismissal of the FTC’s Complaint. More specifically, the Court held that the antitrust law’s rule of reason analysis applies in determining whether a reverse payment settlement violates federal antitrust laws. Reverse payment settlements are thus not near-automatically immune from federal antitrust laws. The Court also rejected the FTC’s position that reverse payment settlements are presumptively illegal.

Citing precedent demonstrating that patent-related settlement agreements can violate the antitrust laws, the Court held that the legal right to exclude competition only applies to valid patents and to products or processes that actually infringe. Thus, precedents in the areas of patent and antitrust law have sought to “accommodate patent and antitrust policies, finding challenged terms and conditions unlawful unless patent law policy offsets the antitrust law policy strongly favoring competition.” Slip Op. at 12.

Turning directly to reverse payment settlements the Court held that they are “something quite different” than typical settlement agreements in that “a party with no claim for damages…walks away with money simply so it will stay away from the patentee’s market.” Slip Op. at 13. The Eleventh Circuit’s decision that such settlements are generally immune from antitrust laws, in view of a general policy favoring the settlement of disputes, was thus rejected.

The Court looked to five factors in determining that the reverse payment settlement here could violate antitrust laws, notwithstanding Solvay’s legal patent monopoly. First, the settlement may have a strong potential adverse impact on competition. If the litigation had resulted in a judgment of patent invalidity, lower drug prices would result from the generic companies’ entrance into the market. Thus, paying them to stay out of the market has the potential of inflating drug prices above what they would have been. The Court gave great weight to the fact that an invalid patent affords no monopoly protection, and settlements terminate litigation before an infringement or validity determination. Accordingly, reverse payment settlements could have the effect of unreasonably restraining trade by ensuring the enforcement of what might be an invalid patent. Second, the potential anticompetitive effects of the reverse payment might be unjustified. While a plaintiff may justify settling and paying the defendant to avoid future litigation costs or for services rendered, a court must look to determine whether the effect of the payment is solely to restrict entrance into the market. Third, the ability of a patentee to pay large sums of money to keep competitors out of the market is an indicator of the patentee’s strong market power. Fourth, a patent antitrust action is not as administratively difficult as it would appear. That a patentee is willing to pay a large settlement fee to a potential competitor is strong evidence that it fears its patent is invalid. Fifth, parties are not prevented from settling patent litigation because their settlement might violate antitrust laws. They may settle in ways other than large monetary fees, such as agreeing to let a competitor enter the market before patent expiration.

Ultimately, the Court held, “these considerations, taken together, outweigh the single strong consideration - the desirability of settlements – that led the Eleventh Circuit to provide near-automatic antitrust immunity to reverse payment settlements.” Slip Op. at 20. Thus, the Court held that, in an antitrust action, the trier of fact must analyze a reverse payment settlement under the rule of reason standard.

Impact of the Decision

Prior to the Court’s decision, reverse payment settlements of Hatch-Waxman patent litigation could have been either presumptively anticompetitive or near-automatically immune from antitrust laws depending upon the venue. Now, any anticompetitive effects of such settlements are subject to a rule of reason analysis. While reverse payment settlements of Hatch-Waxman patent litigation between generic and branded pharmaceutical companies was the context for this decision, it may have implications beyond pharmaceutical litigation.