Under the prior 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) skeptical courts that refused to accept the FTC’s theory for imposing antitrust liability; and (ii) “friendly-fire” from a DOJ that also was concerned about the legality and economic effects of such patent settlements, but viewed the FTC’s proposed legal standard as too strict. In the Obama administration, recent public filings and statements from the enforcement agencies indicate that the DOJ 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 (DOJ) was barely settled in when the Second Circuit asked it to submit an amicus brief in the In re Ciprofloxacin Hydrochloride Antitrust Litig. (a related case to the Cipro case 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 theTamoxifen case. The Division, under newly-confirmed chief Christine Varney, acted swiftly and decisively, filing a brief that re-affirmed the DOJ’s opposition to the standard set forth in Tamoxifen, and seems to endorse the strict legal standards that have long been advocated by the FTC.  

There are at least three potential antitrust standards that have been proposed to govern the legality of reverse payment patent settlements. To oversimplify, under the theory that has been 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, in the FTC’s view, 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 viewed to have harmed competition by means of a patent settlement unless the settlement affected competition outside the scope of a valid patent. These 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 – i.e., a sham.  

Under the prior administration, the DOJ arguably took a third, middle-of-the-road, view. DOJ amicus briefs submitted in the Schering-Plough and Tamoxifencases suggested that, absent proof that the branded manufacturer was likely to lose its patent case, reverse payment patent settlements could not violate the antitrust laws. However, the DOJ 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 DOJ amicus submitted in Tamoxifen also suggested that this view was consistent with the Eleventh Circuit’s decision in Schering-Plough, which, according to the DOJ “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.”  

The DOJ’s new filing in Cipro, however, 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 DOJ concludes: “[a] payment in exchange for such additional exclusion is presumptively violative of Section 1." (emphasis added). Apparently abandoning the prior DOJ’s 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."  

The new DOJ position, however, 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 DOJ suggested that an example of where that 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 issued on June 23, 2009, new FTC Chairman Jonathan Leibowitz reaffirmed the Commission’s intention to aggressively pursue such challenges, 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, he believed that the Commission would “save consumers $35 billion over ten years—or about $3.5 billion per year." Chairman Leibowitz clearly indicated that the Commission will continue to aggressively challenge reverse payment patent settlements in the courts and by supporting legislation that is currently pending in Congress that would make all such transactions a violations of the FTC Act.