By rejecting the “scope of the patent” test and holding that reverse payment patent settlements “can sometimes violate the antitrust laws,” the Supreme Court of the United States subjects such settlements to greater antitrust scrutiny. But, by establishing the rule of reason as the operative standard for adjudicating the cases, with the burden of proof on the plaintiff, the Supreme Court rejected the Federal Trade Commission’s position that reverse payment settlements are “presumptively anticompetitive” and that the burden should be on defendants to overcome the presumption at trial. Companies considering reverse payment settlements should evaluate a number of practical factors that may determine their level of antitrust risk.
Resolving a split in the U.S. Courts of Appeals, the Supreme Court of the United States ruled on June 17, 2013, that patent infringement litigation settlement agreements between branded and generic drug manufacturers containing “reverse payment” (“pay-for-delay”) provisions “can sometimes violate the antitrust laws,” and that the rule of reason is the legal standard that courts must apply when determining whether such an agreement violates an antitrust law. A reverse payment settlement restricts the generic from entering the market until a future date (even if that date is before the patent at issue expires) and includes a transfer of value from the brand to the generic firm, typically in the form of payments arising from an ancillary agreement for services or products provided by the generic.
In Federal Trade Commission v. Actavis, Inc., the Supreme Court reversed the U.S. Court of Appeals for the 11th Circuit’s decision affirming dismissal of a Federal Trade Commission (FTC) challenge to a reverse payment settlement. The 11th Circuit held that because the settlement allowed for generic competition before the brand’s patent expired, the agreement stayed inside the lawful “scope of the patent” and therefore outside the reach of antitrust law. The Supreme Court rejected the 11th Circuit’s “scope of the patent test” and remanded the case for adjudication under the rule of reason, which requires the FTC to prove that the agreement’s anticompetitive effects outweigh its procompetitive effects. Importantly, by establishing the rule of reason as the operative standard, the Supreme Court also rejected the FTC’s position (adopted by the U.S. Court of Appeals for the Third Circuit in a different case) that reverse payment agreements are “presumptively anticompetitive” and that defendants should have the burden at trial to overcome the presumption.
Justice Breyer’s majority opinion, to which Chief Justice Roberts and Justices Scalia and Thomas dissented (Justice Alito did not participate), addresses the issues with reference to prior Supreme Court antitrust and patent law cases (and responds to the dissent’s charge that the majority strays from patent law precedent). According to the Supreme Court, although a patent that is valid and infringed gives its owner a right to exclude, neither an invalidated patent nor a valid patent as to non-infringing products conveys that right. Here, the litigation “put the patent’s validity at issue, as well as its actual preclusive scope,” until settlement. Given that there is “reason for concern that settlements taking this form tend to have significant adverse effects on competition,” the Supreme Court stated, “it would be incongruous to determine antitrust legality by measuring the settlement’s anticompetitive effects solely against patent law policy, rather than by measuring them against procompetitive antitrust policies as well.” (The Supreme Court characterized as “novel . . . the dissent’s suggestions that a patent holder may simply ‘pa[y] a competitor to respect its patent’ and quit its patent invalidity or noninfringement claim without any antitrust scrutiny whatever.”)
Turning to other issues, the Supreme Court attributed its decision to five sets of considerations:
- There is a “potential for genuine adverse effects on competition” from a payment that induces the generic to abandon its challenge for a share of the monopoly profits that would be lost in the competitive market.
- “[A]nticompetitive consequences will at least sometimes prove unjustified,” but not always, such as when the payment is for avoided litigation costs or “fair value for services.”
- Firms with market power, perhaps because of their patents, are best situated to pay large sums to protect their market.
- An antitrust trial is feasible without litigating the patent case: “[a]n unexplained large reverse payment itself would normally suggest that the patentee has serious doubts about the patent’s survival” and that the payment is intended to maintain higher prices.
- Parties are able to settle without reverse payments.
In rejecting the FTC position that reverse payment settlements are “presumptively unlawful,” the Supreme Court held that the likelihood of anticompetitive effects from such a settlement “depends upon its size, its scale in relation to the payor’s anticipated future litigation costs, its independence from other services for which it might represent payment, and the lack of any other convincing justification” (emphasis added). Further, “[t]he existence and degree of any anticompetitive consequences may also vary as among industries.” Concluding, the Supreme Court stated: “We therefore leave to the lower courts the structuring of the present rule-of-reason antitrust litigation.”
For the foreseeable future, reflecting its advocacy for a presumptive illegality standard and decade-plus bipartisan opposition to reverse payment settlements, the FTC probably will continue to scrutinize them closely and evaluate each as a candidate for investigation and legal challenge. However, unless brand-generic settlements—which by law must be filed with the FTC and U.S. Department of Justice—with reverse payments fall in number substantially from past levels, the FTC likely will lack the resources to challenge each one and will use discretion in selecting cases for litigation that would have the highest impact for its public interest mandate. Private actions also likely will continue, to the extent enough details about settlement terms are publicly available. Companies evaluating whether to enter a reverse payment settlement and assessing their risk of antitrust challenge can look to a number of factors to gauge whether their agreement is likely to “stand out from the pack” as a litigation target:
- How large is the payment? The FTC may assert, pointing to the Actavis decision, that a big number shows the brand was worried it would lose the patent case, or that it has market power. Settling parties should be prepared to defend the payment size as appropriate given expected litigation costs and litigation uncertainties, and as justified to the extent it is consideration for an ancillary agreement.
- Is the brand paying fair market value for the ancillary service/product it is receiving from the generic, and is the ancillary agreement justified? An “overpayment” would be a red flag. Parties should be able to explain why they entered the ancillary agreement, and they would benefit from contemporaneous documents that support their rationale and valuation. The FTC would look for evidence tying the ancillary agreement and payment to the generic entry date.
- How much time transpires between the settlement date and generic entry date? The shorter this period, the stronger is a defense to charges that the settlement led to significant delay.
- How much time transpires between generic entry and patent expiration? The shorter this period, the more limited is a defense that the settlement was procompetitive; but it may also reflect party recognition that the patent is strong.
- How big a seller is the brand? A blockbuster is a more attractive prosecution candidate then a low-volume product.
- What do the documents say? Non-privileged documents about patent strength, predictions for generic entry absent settlement, projected earning streams absent settlement, and the settlement’s role in life-cycle management strategy can be evidence about likely competition absent, and motivations for, the settlement.
Most of the foregoing factors, at least to some extent, are within the parties’ control when forming settlement agreements. Other factors are of course also relevant to the risk of antitrust challenge, including the strength of the challenged patent and the competitive market conditions facing the brand’s product.
Companies considering reverse payment settlements should closely monitor other pending cases, because the law post-Actavis, where courts must apply a rule of reason standard, will develop on a case-by-case basis and establish precedent to be applied in the future.