Yesterday, the Supreme Court ruled that “large unexplained” reverse payments in Hatch-Waxman litigation settlements, even if within the “scope of the patent,” are subject to antitrust attack.  In a long-awaited decision, the Court ruled 5-3 in Federal Trade Commission v. Actavis, Inc., et al., that so-called “pay-for-delay” settlement deals between pioneer drug manufacturers and their generic rivals are subject to antitrust ”rule of reason” analysis, but stopped short of applying a “quick look” approach that assumes patent invalidity.  In so ruling, the Court threw open the litigation floodgates for plaintiffs’ lawyers of all stripes, made patent litigation settlements going forward less likely and more costly and may even discourage generic companies from challenging pioneer drug patents – defeating the very rationale for the ruling.

Background on “Pay-for-Delay” Settlements

As PharmaRisc blog readers will recall from our March 26 post titled, “Pay for Delay and Drug Design Defect Cases Take Center Stage at Supreme Court,” we noted that:

… the [Federal Trade Commission] has been arguing for more than a decade that Hatch-Waxman patent litigation settlements in which the branded-innovator manufacturer (and patent holder) makes payment to a generic manufacturer (and alleged infringer) in exchange for delayed generic market entry are inherently anticompetitive and illegal.  According to the FTC, these reverse payments keep low cost generic versions of branded drugs off the market longer than should be the case, drive up consumer costs and, therefore, should be presumptively illegal.

In the case before the Supreme Court, Solvay Pharmaceuticals had agreed in a settlement in 2006 to pay millions to generic competitors Watson Pharmaceuticals (now Actavis, Inc.), Paddock Laboratories and Par Pharmaceutical, in order to keep these generic manufacturers from marketing generic versions of AndroGel® until August 31, 2015, 65 months before the expiration of AndroGel®’s patent.  In January, 2009, the FTC filed a lawsuit against all the settling parties, arguing that the settlement violated the antitrust laws.  The district court dismissed the suit and the FTC appealed.  The Eleventh Circuit affirmed the district court’s ruling and held that “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.”  FTC v. Watson Pharmaceuticals, Inc., 677 F.3d 1298, 1312 (11th Cir. 2012).   Although the Eleventh Circuit’s ruling was consistent with its own precedent and that of other Federal Circuits, a short time later, the Third Circuit agreed with the FTC in In re K-Dur Antitrust Litigation, 686 F.3d 197, 214-218 (3rd Cir. 2012) in rejecting the so-called “scope of the patent” test and adopting the “quick look” test, essentially finding that reverse payments render the patent in suit presumptively invalid and requiring manufacturers to prove the procompetitive effects of the reverse payment.  Based on the “Circuit split,” the Supreme Court accepted the FTC’s petition for certiorari.

Opposing Views

In the five-justice majority opinion, Justice Breyer was particularly troubled by both the size of the reverse payments from Solvay to its generic rivals — $12 million to Paddock, $60 million to Par and annual payments of between $19-$30 million to Actavis — and the direction of the payment: from patent holder and plaintiff to alleged patent infringer and defendant.   As he notes in the majority opinion, the payments exceeded both the likely cost of the litigation to the generic manufacturers and what the generics would likely have earned had they succeeded in their suit against Solvay.

Although Justice Breyer spent the early part of the majority opinion marshalling and distinguishing prior Supreme Court precedent that at times seemed to endorse the scope of the patent test – ”seek[ing] to accomodate patent and antitrust policies, finding challenged terms and conditions unlawful unless patent policy offsets the antitrust policy strongly favoring competition” – he also noted the “procompetitive thrust of the [Hatch-Waxman] statute,” which encourages and rewards generic ”first filers” that challenge the pioneer drug patent, and discounted the value of settlements in costly patent litigation in favor of five “sets of considerations.”  One such consideration was intended to answer the criticism that anything but the scope of the patent test will result in litigation over the validity of the underlying patent, thereby defeating the purpose of the settlement: “[i]n a word, the size of the unexplained reverse payment can provide a workable surrogate for a patent’s weakness, all without forcing a court to conduct a detailed exploration of the validity of the patent itself.”  Another consideration was that antitrust liability risks posed by a reverse payment ”does not prevent litigating parties from settling their lawsuit . . . for example,  by allowing the generic manufacturer to enter the patentee’s market prior to the patent’s expiration, without the patentee paying the challenger to stay out [of the market] prior to that point.”  Indeed, in rejecting the FTC’s bid for a “quick look” test  and in adopting a case-by-case “rule of reason” approach, the majority concluded by noting that “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 payment, and the lack of any other convincing justification.”

Chief Justice Roberts’ dissent sharply criticized the logic of all aspects of the majority opinion.  First, it noted that every Supreme Court opinion cited by the majority stood for the opposite proposition for which it was cited, namely, that in the context of patent settlements and agreements, antitrust principles applied only when the patentee(s) sought to exceed the limits or scope of the authorized patent(s).  Second, in countering the majority’s argument that the scope of the patent test assumes patent validity despite the obvious uncertainty in a Hatch-Waxman litigation context, the dissent stated the following:  “The majority points to no case where a patent settlement was subject to antitrust scrutiny merely because the validity of the patent was uncertain.  Not one.  It is remarkable, and surely worth something, that in the 123 years since the Sherman Act was passed, we have never let antitrust law cross that Rubicon” (emphasis in original).  Third, the dissent undercut the majority’s claim that the rule of reason approach furthers the “procompetitive” goals of the Hatch-Waxman statute, noting that despite 11 bills introduced into the House of Representatives or Senate since 2006 to prohibit reverse payments, Congress “has repeatedly declined to enact legislation addressing the issue the Court takes on today.”  Fourth, as a practical matter, the dissent pointed out that the only sure defense the settling parties will have to defend a reverse payment is the validity of the patent itself, which puts the alleged generic infringer “in the especially awkward position of being for the patent after being against it.”  Chief Justice Roberts concluded his dissent by predicting that, rather than encouraging greater generic competition, the majority’s decision will make patent litigation settlement less likely, increase costs to both sides and, as a consequence, disincentivize generic manufacturers from seeking FDA approval for generic drugs, thereby defeating the majority’s stated purpose of the Hatch-Waxman statute.

Observations

It has been said that hard cases make bad law and that bad facts make bad law.  Settlements of complex Hatch-Waxman patent litigation lawsuits (hard cases) involving millions of dollars in reverse payments from pioneer drug companies to their generic rivals that exceed the cost of the litigation (bad facts) and that may also exceed what the first-filing generic companies would have earned in the first 180 days of generic exclusiviity, if they had succeeded in the underlying patent litigation (really bad facts), fit the old adages perfectly.  While it is certainly clear that the Solvay-Actavis/Paddock/Par settlement didn’t pass the smell test for most of the Supreme Court Justices who heard the case, the majority’s implicit assumption that settlements can be easily reached by means other than reverse payments — e.g., through delayed market entry that allows a generic to enter the market a little sooner – may be somewhat naive as the dissent implies.  In fact, the FTC in a 2012 study characterized various forms of consideration in patent litigation settlements as “pay-for-delay” including, for example, an agreement by the pioneer drug company not to authorize its own generic drug to compete with its adversaries’ generic drugs during the term of the settlement — a seemingly reasonable demand from generic companies that are being asked to give up their lawsuits as part of a settlement.   Although it can be argued that the majority’s rule of reason approach is limited only to “large unexplained” reverse payments, what if a settlement awarded the generic company the right to enter the market 210 days (seven months) before the expiration of the patent in suit, which is 30 days more of exclusivity than it would have achieved had it succeeded in the underlying patent litigation?  How long before the FTC and plaintiffs’ bar argue that this arrangement too is just another anticompetitive “pay-for-delay” deal that violates the antitrust laws?  If any part of a patent litigation settlement agreement can be characterized as anticompetitive and subject to antitrust liability, by what logic can anyone expect that the majority’s ruling will make settlements more or just as likely as when reverse payments within the scope of the patent were considered immune.

In addition to encouraging more patent litigation between pioneer and generic manufacturers, the Actavis majority has all but waved the green flag to the various plaintiffs’ bars to sue all branded and generic manufacturers that reached settlements involving reverse payments, regardless of the patent’s underlying validity, as we noted in our May 20 blog post, titled ”Niaspan Antitrust Suit Underscores High Stakes in Supreme Court Pay-for-Delay Decision.”  Not only can we expect to see more antitrust class action suits from consumer and insurance payors, but what’s to stop lawyers and their clients from claiming branded and generic settlers engaged in some form of deceptive trade practice that tricked Medicaid or other state government health care programs into overpaying for branded drugs?  Nothing.   Moreover, although the FTC has yet to litigate a reverse payment case, does anybody really think that the agency is going to have a hard time proving the anticompetitive effects of reverse payments under a rule of reason approach, especially where the reverse payments exceed either the costs that the generics would have incurred in the litigation or what they would have earned had they prevailed in the litigation?  And if the risks of settling a patent litigation lawsuit are as bad or worse than the risks of losing a patent litigation lawsuit, what incentive is there for generic drug companies to challenge a pioneer company’s drug patent and bring about the “procompetitive” vision of Hatch-Waxman that the majority states exists?

My advice to clients and other manufacturers (both branded and generic) that find themselves on the wrong side of a reverse payment antitrust lawsuit (whether brought by the FTC or plaintiff’s lawyers) is to bring back the patent litigators, make the case for the patent’s validity (assuming a case can be made and despite how awkward it might seem for the generics), and litigate or settle from a position of strength.  Any other approach could end up being far more costly.