On June 17, 2013, the Supreme Court issued its ruling in Federal Trade Commission v. Actavis, Inc. The Court decided that, although “reverse payment settlements” in paragraph IV disputes are not immune from antitrust scrutiny, such settlements are not presumptively unlawful and instead must be evaluated under a rule-of-reason standard.

Background

The Drug Price Competition and Patent Term Restoration Act of 1984 (the ‘Hatch- Waxman Act’) allows a generic company to file an Abbreviated New Drug Application (‘ANDA’) for a generic version of a branded drug. 21 U.S.C. § 355(j)(2) (A)(iv). If the brand product is covered by a patent, the generic company must choose whether to wait until patent expiration before launching its generic version or raise a challenge under paragraph IV by certifying that the patent “is invalid or will not be infringed by the manufacture, use, or sale of the new drug…” Id. at § 355(j)(2)(A)(vii)(IV).  

When a paragraph IV challenge is made, the patent holder faces the possibility that it will lose patent protection and most of its market share to the generic company. See In re Tamoxifen Citrate Antitrust Litigation, 466 F.3d 187, 207-209 (2d Cir. 2006). Under these circumstances, settlement may include some payment from the patent holder to the generic in connection with a delayed generic entry date, often in advance of the patent expiration date. Id. Such settlement arrangements are known as “reverse payment settlements.” For over a decade, the FTC has worked to deter these arrangements.  

The U.S. Circuit Courts of Appeal have diverged on the proper standard to apply in evaluating whether a reverse-payment settlement amounts to an unreasonable restraint on trade. In the action before the Supreme Court, the Eleventh Circuit found that the reverse-payment settlements of a dispute involving the formulation for the brand-name testosterone product AndroGel® was lawful because (1) the agreements did not exceed the potential exclusionary scope of the patent, allowing generic entry some 65 months before the patent expired, and (2) there was no evidence of a sham litigation or fraud in obtaining the patent. Federal Trade Commission v. Watson Pharms., Inc., 677 F.3d 1298, 1312-13 (11th Cir. 2012). This “scope of the patent” test was previously adopted by the Second and Federal Circuits but was rejected by the Third Circuit in last year’s K-Dur decision. In re K-Dur Antitrust Litig., 686 F.3d 197 (3d Cir. 2012). In K-Dur, the Third Circuit adopted the quick-look standard advocated by the FTC, ruling that any payment from a patent holder to a generic manufacturer in exchange for delayed entry was a prima facie unreasonable restraint on trade. Id. at 218.  

The Court’s Opinion  

In Monday’s 5-3 decision delivered by Justice Breyer, the Supreme Court rejected both the more permissive “scope of the patent” test and the harsher presumption of illegality. In effect, the important considerations for both courts and settling parties will continue to be the size of the settlement payment and the justifications therefor.  

The Court dismissed concerns that the application of a rule-of-reason analysis will force the fact finder to decide issues of patent validity or infringement before determining the reasonableness of the settlement agreement.  

The Court listed five overarching considerations in rejecting the “scope of the patent” test and in adopting a more nuanced rule-of-reason analysis. First, the Court noted that such “unusual” reverse-payment settlements can foster genuine competitive harm and permit the patent holder and the patent challenger to share in an unwarranted patent protected monopoly to the detriment of consumers. Second, under the rule-of-reason framework, antitrust defendants can avoid liability with legitimate justifications, such as avoided litigation expenses, commensurate with the size of the payment. Third, large payments are an indication that the patent holder actually possesses the power to bring about actual anticompetitive harm. Fourth, a full patent validity analysis in ensuing antitrust litigation is normally unnecessary because “the size of the unexplained reverse payment can provide a workable surrogate for a patent’s weakness.” Finally, the Court noted that litigating parties are free to settle in other ways, such as by agreeing to a market entry date before patent expiration without any corresponding payment.  

The Court likewise found a presumption of illegality improper given the fact-specific questions raised by reverse payments. Instead, the Court left trial courts to determine the reasonableness of such payments under the particular circumstances presented.

In dissent, Chief Justice Roberts endorsed the “scope of the patent” test, arguing that patents represent an exception to antitrust law and that the analysis should start and end with whether the reverse-payment settlement gives the patent holder monopoly power beyond the patent grant.