On Monday, 17 June the Supreme Court finally weighed in on the issue of pharmaceutical patent settlement agreements involving so-called “reverse payments” — reversing the Eleventh Circuit, but declining to find that such agreements are presumptively unlawful. Instead, in a 5-3 ruling the Court held that these agreements, sometimes referred to as “pay-for-delay” agreements, should be analyzed under the rule of reason.

Writing for the majority, Justice Breyer specifically rejected the so-called “scope-of-the-patent” test adopted by the Eleventh Circuit (as well as the Second and Federal Circuits) under which a settlement agreement could only violate the antitrust laws if it exceeded the exclusionary rights granted by the underlying patent. According to Justice Breyer, in addition to considering the length or scope of a restriction against the underlying patent, courts also should consider “traditional antitrust factors such as likely anticompetitive effects, redeeming virtues, market power, and potentially offsetting legal considerations…” According to the majority, a reverse payment “where large and unjustified, can bring with it the risk of significant anticompetitive effects... [ and ] a court, by examining the size of the payment, may well be able to assess its likely anticompetitive effects along with its potential justifications without litigating the validity of the patent…”

While acknowledging a “general legal policy favoring the settlement of disputes” and the concern that analyzing these settlement agreements under antitrust principles would require in-depth analysis of the underlying patent dispute, the majority held that nevertheless “five sets of considerations” weigh in favor of antitrust scrutiny here:

  • reverse payments have the “potential for genuine adverse effects on competition;”
  • the potential anticompetitive consequences of these agreements “will at least sometimes prove unjustified;”
  • “ [ w ] here a reverse payment threatens to work unjustified anticompetitive harm, the patentee likely possesses the power to bring that harm about in practice;”
  • an antitrust action is administratively feasible because it will not generally be necessary to litigate the validity of the underlying patent; and
  • allowing for this degree of antitrust scrutiny will not interfere with the parties’ ability to settle patent litigation.

Although the Court refused to apply “quick look” analysis, as had been advocated by the FTC, the opinion suggests that only “traditional settlement considerations” can justify a reverse payment. Specifically, the Court identifies avoided litigation costs and fair value for services as legitimate bases upon which a reverse payment may be justified.