Sidley to Host Seminar on Potential Impact of Ruling
The U.S. Supreme Court today held that the antitrust rule of reason is the applicable standard for assessing so-called “reverse payment” patent settlements, in which a generic pharmaceutical maker agrees not to bring its product to market for a specified number of years in return for a payment from the brand-name patent holder. According to the majority decision in FTC v. Actavis, No. 12-416 (decided June 17, 2013) the factors relevant to the rule-of-reason analysis would include (1) the size of the patent holder’s payment; (2) its scale in relation to the payor’s anticipated future litigation costs; (3) its independence from other services for which it represents payment; and (4) the lack of any other convincing justification.
In a 5-3 decision authored by Justice Breyer, the Court reversed an Eleventh Circuit decision that had immunized the settlement from antitrust challenge, so long as the anticompetitive effects of the settlement fell within the scope of the patent’s exclusionary potential. A dissent filed by Chief Justice Roberts would have upheld the scope-of-the-patent test of antitrust immunity, as an exception to the applicability of the antitrust laws and in the interest of encouraging the settlement of patent litigation.
The question of the legal standard by which to assess “reverse payment” settlements has been in dispute for more than a decade. These settlements are found predominantly in the pharmaceutical industry due to an incentive structure created by the Drug Price Competition and Patent Term Restoration Act of 1984, commonly known as the Hatch-Waxman Act, which was designed to promote the availability of generic drugs. A series of FTC challenges in the 1990s were resolved through consent settlement. As the issue proceeded into litigation, however, the Eleventh Circuit in Valley Drug Co. v. Geneva Pharmaceuticals, Inc., 344 F.3d 1294 (11th Cir. 2003), and Schering-Plough Corp. v. FTC, 401 F.3d 1056 (11th Cir. 2005), adopted the scope-of-the-patent test, a view that was also endorsed in In re Tamoxifen Citrate Antitrust Litigation, 466 F.3d 187 (2d Cir. 2006), and In re Ciprofloxacin Hydrochloride Antitrust Litigation, 544 F.3d 1323 (Fed. Cir. 2008).
Until recently, the primary authority in the opposite direction was a 2003 Sixth Circuit decision in a private case, In re Cardizem CD Antitrust Litigation, 332 F.3d 896 (6th Cir. 2003), which held that reverse payments were per se antitrust violations. The settlement at issue in Cardizem, however, extended beyond the patent’s scope and was therefore distinguishable. More recently, in In re K-Dur Antitrust Litigation, 686 F.3d 197 (3d Cir. 2012), the Third Circuit rejected the position of the Second, Eleventh, and Federal Circuits and held that a settlement within the “exclusionary potential” of the patent is not immune, but is instead subject to a quick-look rule of reason balancing test. According to the Third Circuit, any agreement between a brand manufacturer and a generic manufacturer involving a payment to the generic not to market its drug for a period of time is presumed to violate antitrust law unless the brand manufacturer can demonstrate that the payment offers a pro-competitive benefit that could not otherwise be obtained.
Today’s Supreme Court decision rejected all of the approaches suggested in the various Circuit Court decisions. In particular, it explicitly rejected the scope-of-the-patent standard, a test of per se illegality, and a quick-look approach. According to the Court, reverse payment settlements would sometimes lead to agreements that are anticompetitive and unjustified, and the desirability of encouraging settlement of patent litigation, while a “strong consideration,” is insufficient “to provide near-automatic antitrust immunity.” At the same time, the Court did not believe that anticompetitive effects could be observed based on “a rudimentary understanding of economics;” instead, the complexities of the settlements led the Court “to conclude that the FTC must prove its case as in other rule-of-reason cases.” The rule of reason is notoriously open-ended and, as Justice Roberts wrote in his dissent, “amorphous.” The majority, however, asserted that “an antitrust action is likely to prove more feasible administratively than the Eleventh Circuit believed.” For one thing, the Court emphasized that it is not requiring lower courts to insist that the Commission “litigate the patent’s validity, empirically demonstrate the virtues or vices of the patent system, present every possible supporting fact or refute every possible pro-defense theory.” The details of how the rule of reason trials would be structured, however, were left to the lower courts.