Under the previous administration, the Federal Trade Commission's (FTC) pursuit of antitrust challenges to patent settlements with so-called 'reverse payments' ran into at least two hurdles: (i) sceptical courts that refused to accept the FTC's theory for imposing antitrust liability; and (ii) 'friendly fire' from the Department of Justice, which was also concerned about the legality and economic effects of such patent settlements, but which viewed the FTC's proposed legal standard as too strict. Under the Obama administration, recent public filings and statements from the enforcement agencies indicate that the Department of Justice has cleared the second hurdle from the FTC's path, and the FTC is continuing to mount an aggressive push to clear the first.

The new leadership at the Department of Justice had barely settled in when the Second Circuit asked it to submit an amicus brief in In re Ciprofloxacin Hydrochloride Antitrust Litig (related to the Cipro Case(1) recently decided by the Federal Circuit) concerning the legal standards that should govern patent settlements that included 'side deals' involving the transfer of consideration to the generic manufacturer (sometimes referred to as a 'reverse payment'). This is an unusual development, which may indicate some hesitancy on the part of the Second Circuit to re-affirm the lenient treatment it accorded to such patent settlements in the Tamoxifen Case.(2) The enforcement division, under newly confirmed chief Christine Varney, acted swiftly and decisively, filing a brief that re-affirmed the Department of Justice's opposition to the standard set forth in Tamoxifen, and appearing to endorse the strict legal standards that have long been advocated by the FTC.

At least three potential antitrust standards have been proposed to govern the legality of reverse payment patent settlements. To oversimplify, under the theory advocated by the FTC, if branded and generic manufacturers settle their patent litigation, they should choose a compromise entry date reflecting their respective views of the likelihood of success of the patent infringement suit. In other words, if the branded manufacturer has a two-thirds chance of winning, then the parties might agree to a compromise entry date allowing generic entry during the last third of the remaining life of the patent. In the FTC's view, any patent settlement with a reverse payment is inherently suspect because it likely represents compensation to the generic manufacturer in return for agreeing to a later compromise entry date.

Under the second potential antitrust standard – which has been endorsed by the Federal Circuit in Cipro and the Second Circuit in Tamoxifen – a branded manufacturer cannot be seen as having harmed competition by means of a patent settlement unless the settlement affected competition outside the scope of a valid patent. The courts have insulated patent settlements from antitrust scrutiny, even where there is a reverse payment, as long as the underlying patent infringement lawsuit was not objectively and subjectively baseless (ie, a sham).

Under the prior administration, the Department of Justice arguably took a third, middle-of-the-road, view. The amicus briefs submitted in the Schering-Plough(3) and Tamoxifen(4) Cases suggested that, without proof that the branded manufacturer was likely to lose its patent case, reverse payment patent settlements could not violate the antitrust laws. However, the Department of Justice also suggested that the 'sham' standard was too strict, and that the FTC and other antitrust plaintiffs should be able to challenge such settlements by presenting evidence that the patent holder was likely to lose the patent case, as part of a (as stated in the Tamoxifen brief) "limited examination of the merits of the claim (aided by the analysis of any other relevant factors surrounding the parties' negotiations)". The Department of Justice amicus submitted in Tamoxifen also suggested that this view was consistent with the Eleventh Circuit's decision in Schering-Plough, which, according to the Department of Justice, "did not foreclose the possibility that a party challenging a patent settlement could rely on an ex ante view of the strength of the infringement claim in contending that the settlement was invalid".

However, the Department of Justice's new filing in Cipro aligns it with the FTC position, stating that a reverse payment:

"is naturally viewed as consideration for the generic's agreement to delay entry beyond the point that would otherwise reflect the parties' shared view of the likelihood that the patentee would ultimately prevail in the litigation."

Thus, the Department of Justice concludes: "[a] payment in exchange for such additional exclusion is presumptively violative of Section 1." Apparently abandoning the prior position, the new filing states that:

"[i]t is neither necessary nor appropriate to determine whether the patent holder would likely have prevailed in the patent infringement litigation in determining liability for a Hatch-Waxman reverse payment settlement under the rule of reason."

However, the new Department of Justice position still provides defendants with a way to escape liability if they can show that:

"despite the reverse payment, the agreed upon entry date and other terms of entry reasonably reflected their contemporaneous evaluations of the likelihood that a judgment in the patent litigation would have resulted in generic competition before patent expiration."

The Department of Justice suggested that an example of where this might be the case is where the payment only reflected litigation costs saved by the patent holder by avoiding the need to bring its infringement case to trial.

The FTC has also indicated that its efforts against reverse payment patent settlements will only accelerate in the new administration. In a speech of June 23 2009,(5) new FTC Chairman Jonathan Leibowitz reaffirmed the FTC's intention to pursue such challenges aggressively , stating that "eliminating these deals is one of the Federal Trade Commission's highest priorities". He stated that the economic implications of reverse payment patent settlements were staggering, and that under "conservative assumptions", by eliminating them the FTC would "save consumers $35 billion over ten years — or about $3.5 billion per year". Leibowitz clearly indicated that the FTC will continue to challenge reverse payment patent settlements aggressively in the courts and to support legislation that is currently pending in Congress that would make all such transactions violations of the Federal Trade Commission Act.

For further information on this topic please contact Eric J Stock at Hogan & Hartson LLP by telephone (+1 212 918 3000), fax (+1 212 918 3100) or email (ejstock@hhlaw.com).


(1) www.cafc.uscourts.gov/opinions/08-1097.pdf.

(2) http://cyber.law.harvard.edu/people/tfisher/2006%20Tamoxifen%20Abridged.pdf.

(3) www.usdoj.gov/atr/cases/f216300/216358.pdf.

(4) www.usdoj.gov/atr/cases/f223500/223525.pdf.

(5) www.ftc.gov/speeches/leibowitz/090623payfordelayspeech.pdf.

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