On Monday, June 17, the Supreme Court handed down a decision in FTC v. Actavis, Inc., bringing some clarity to the antitrust treatment of so-called reverse payment patent settlements between brand-name drug manufacturers and would-be generic competitors, but leaving many open questions as well.1 In an opinion written by Justice Breyer, the Court reversed the Eleventh Circuit’s decision by a vote of 5-3 and rejected both the respondents’ proposed “scope of the patent” test that had immunized most settlements from antitrust challenge and the “presumptively unlawful” standard endorsed by the FTC.2 The Court instead opted for a rule of reason analysis, leaving it to the lower courts to sort out the specifics. The decision is unlikely to reduce the number of investigations or lawsuits related to such settlements, and ensures that both will be complex and protracted.

Background

Reverse payment settlements (disparaged by the FTC as “pay-for-delay”) most often arise in the unique statutory context created by The Drug Price Competition and Patent Term Restoration Act of 1984 (Hatch-Waxman Act), which offers an opportunity for a generic drug to enter the market prior to the expiration of the corresponding brand drug’s patents if the generic manufacturer can demonstrate non-infringement of those patents.3 The generic manufacturer typically satisfies this requirement by asserting during the FDA approval process that the brand’s patent is invalid or will not be infringed by the manufacture, use, or sale of the generic drug (i.e., “Paragraph IV certification”).4 The Act also rewards the first generic firm to challenge a patent associated with a particular drug by awarding 180 days of exclusivity following FDA approval and a successful patent challenge.5

The brand has the option to challenge and litigate the Paragraph IV certification, which automatically stays the generic’s entry for up to 30 months.6 As with other types of litigation, brand and generic companies often reach settlements under which the parties compromise on the timing of generic entry. When these settlement agreements also include a payment from the brand to the generic, or a side agreement that creates value for the generic, the settlement may be characterized as a reverse payment settlement.

In the Actavis case, Actavis and Paddock both filed applications with Paragraph IV certifications for generic equivalents to Solvay’s popular brand-name AndroGel product. Solvay brought suit against both, and the parties entered into settlements whereby the generics each agreed not to bring its generic to market for a specified number of years. The settlement agreements were entered into at the same time as agreements that the generic manufacturer would promote AndroGel to doctors in exchange for large payments. The FTC filed suit against respondents Solvay, Actavis, and Paddock under Section 5 of the Federal Trade Commission Act arguing that the terms of the settlements and side agreements constituted unlawful payments by Solvay to the potential generic entrants in exchange for delayed entry.

The FTC took the position, as it has in a number of similar cases, that reverse payment settlements are presumptively unlawful and that courts reviewing such agreements should proceed via a “quick look” approach. In other words, barring convincing evidence from defendants of pro-competitive effects of the settlement agreement, all reverse payment settlements should be found to violate antitrust law.7 That position had been endorsed by the Third Circuit.8

In contrast, respondents advocated the equally straightforward standard that rests on the statutory presumption that the underlying patent is valid and that the patentee has a legal right to exclude infringing competitors. Under the “scope of the patent test,” “absent sham litigation or fraud in obtaining the patent, a reverse payment settlement is immune from antitrust attack so long as its anticompetitive effects fall within the scope of the exclusionary potential of the patent.”9 The “scope of the patent” test had been endorsed by the Second, Eleventh, and Federal Circuits.10

The Court’s Decision

The Court rejected both the “quick look” approach and the “scope of the patent test.”11 Instead, citing United States v. Line Material Co., 333 U.S. 287, 308 (1948), the Court opted for a traditional rule of reason analysis “because the likelihood of a reverse payment bringing about anticompetitive effects 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 a payment, and the lack of any other convincing justification.”12

The Court provided some guidance on what the rule of reason analysis in a reverse payment case ought to entail, but ultimately left it to the lower courts to decide how the analysis should proceed. The Court made clear that under this analysis the FTC may be able to prove its case without litigating the validity of the patent itself13 given that “the size of the unexplained reverse payment can provide a workable surrogate for a patent’s weakness ….”14 But the Court did not suggest that the strength of the patent was irrelevant or that an antitrust defendant could not argue that the payment had not harmed competition because the patent holder would have won the underlying patent litigation, thus preventing generic entry until patent expiration. In the absence of a bright line rule, the lower courts are left to apply a traditional rule of reason multifactor balancing test that looks at “likely anticompetitive effects, redeeming virtues, market power, and potentially offsetting legal considerations in the circumstances.”15

The result in Actavis was not what the FTC or the pharmaceutical industry hoped for — a simple standard to evaluate reverse payment settlements. The rule-of-reason analysis the Court chose is substantially more complex, and likely to produce less predictable outcomes. We expect that the FTC (and private plaintiffs) will continue to look closely at patent settlements involving significant reverse payments or side deals that create value for the alleged infringer. Thus, parties ought to take account of the potential burden and expense of litigation under the rule of reason standard when contemplating and developing agreements to settle Hatch-Waxman litigation.