Once again, we have antitrust news from the Supreme Court.  The decision in FTC v. Actavis, in which the Justices voted 5-3 to overturn the 11th Circuit on “pay for delay” patent settlements, was released this morning.

I’ve previously expressed my skepticism about the wisdom of a judicial resolution to the “pay for delay” question.  It seems to me to involve a policy judgment that weighs the potential for competitive harm against a general policy in favor of settlements to conserve party and judicial resources.  In general, policy decisions are best made in the legislative branch.  The Supreme Court doesn’t seem to have heeded my advice (I’m shocked, I tell you).

But let’s back up and set the table before getting into the Court’s reasoning.  The case involves a “pay for delay” or “reverse payment” patent settlement.  I’ll leave the details of the FDA process for generic pharmaceuticals to one side, but suffice it to say what happens is that the maker of the patented branded drug sues a potential generic entrant for patent infringement and the case ends up being resolved with a payment from the branded drug company to to the generic company with an agreement that the generic company will not seek to start offering its product some period of time.

Or, for a stylized example, let’s say I’m the only company that makes Adam’s Wondrous Magic Pills, because I currently have a series of patents that grant me a monopoly on making my pills. I’m making lots of money, because my pills are useful and effective for treating patients, and I don’t have any competition because of my patents. But Jessica’s Generic Drugs sees how much I’m making and really wants to start offering a generic version of my pills.  Even better, she looks at the patents that cover them and decides that she can either make a generic version without infringing them (perhaps the patents only cover a specific formulation, for example) or that my patents are invalid (i.e., they never should have been granted in the first place). So she goes forward with her plan to start offering her generic version, I learn about it and I sue her for infringing my patents.

The main possible outcomes of taking the case to trial are (1) my patents are found to be valid and Jessica’s generic infringes them, (2) my patents are found to be valid and Jessica’s generic does not infringe them, and (3) my patents are invalidated.  In scenario 1, Jessica would be blocked from selling her product and potentially owe me damages for whatever infringement has already taken place.  In scenarios 2 & 3, Jessica would be free to offer her generic product.  In none of the scenarios would I owe Jessica any money damages. (My apologies to any patent lawyers reading this for the simplification).

And yet not infrequently branded drug makers who hold patents are entering settlements to resolve patent infringement cases in which the branded company makes a payment to the potential generic entrant.  So in our example, I might take some of the fat wads of monopoly cash I’m making for my Wondrous Magic Pills and give it to Jessica in exchange for her agreeing to hold off for a while in competing with me.  It’s worth it for me because the payment I make to her is less than I would lose if she started to compete (prices fall rapidly upon generic entry), and it’s worth it to her because she gets cash for doing nothing.  Even better, the Hatch-Waxman Act also means that for 180 days, no one else can enter either, so I don’t have to pay off any other potential entrants to keep enjoying my monopoly.

And that’s where the antitrust concern comes in.  If it wasn’t for the patents involved, it would be pretty clear that you can’t just pay people not to compete with you. The problem is that there is a real dispute involved, and litigation, especially litigation that is as complex as a pharmaceutical patent case, comes with a lot of uncertainty.  I might have great faith in the validity of my patents and still prefer to pay to avoid the risks and costs involved in litigating.

The FTC, however, has a long standing antipathy toward settlements of this type.  Its Health Care shop has litigated quite a few cases seeking to have settlements of this type declared anticompetitive, with, until now, quite limited success.  The case at hand is a good example of the challenge the FTC has faced, where the 11th Circuit found that a patent settlement does not infringe the antitrust laws as long as it is “within the scope of the patent.”  That is as long as the restrictions on competition included in the settlement (primarily the length of time the generic company agrees to delay its entry) do less harm to competition than would the patent if its validity is assumed, there is no antitrust problem.  As much as the FTC seemed to be unhappy with that rule, there is some logic in presuming that a patent is valid unless and until it’s proved otherwise.  After all, that is what the patent application process is supposed to establish (as skeptical as we tend to be about it).

The Supreme Court, however, rejected that reasoning.  Rather than a bright line rule grounded in the patent, Justice Breyer and the majority of the Court adopted the FTC’s view that a broader inquiry “considering traditional antitrust factors such as likely anticompetitive effects, redeeming virtues, market power, and potentially offsetting legal considerations present in the circumstances, such as here those related to patents.”   I’m not even being excessively cynical in saying that the Court essentially created a second bite at the apple to invalidate the branded company’s patents via antitrust action by the FTC.  Especially in that the Court went even farther in stating that a large reverse payment might itself be evidence of the patent’s invalidity.  

Over all, this is a big win for the FTC.  It did not succeeding in getting the Court to declare reverse payment presumptively unlawful, but the court essentially blessed it to challenge reverse payment settlements with impunity.  And in that regard, the majority opinion, in my view, is quite disappointing.  It does little to nothing to provide guidance or put any rules in place to distinguish settlements that might be valid from those that are not.  The end result is going to be that it will be up to the FTC to decide which settlements to challenge, with the threat of hefty litigation costs in its pocket.

What does this change?  Well, on the one hand, it certainly makes entering into a reverse payment settlement much less attractive.   The FTC now has solid footing on which to ground more cases, which it will undoubtedly do.  There is certainly rejoicing within its halls today.

On the other hand, this doesn’t do much to address the underlying problem.  Right from the beginning of the majority opinion by Justice Breyer, the clear issue is that our patent system is spitting out patents that the courts don’t think should be issued.  Justice Breyer rejects the 11th Circuit’s formulation specifically because he rejects the existence of a patent as evidence of its validity or invalidity.  That’s actually a rather appalling state of affairs.