In Federal Trade Commission v. Actavis, Inc., No. 12-416, 2013 U.S. LEXIS 4545 (U.S. June 17, 2013), the U.S. Supreme Court reversed the Eleventh Circuit decision in FTC v. Watson Pharmaceuticals, Inc., 677 F.3d 1298 (2012), and announced that the antitrust "rule of reason" applies to the evaluation of "reverse payments" made in the context of patent settlements between pharmaceutical patent holders and generic drug manufacturers seeking approval of Abbreviated New Drug Applications (ANDAs) from the FDA.

In this 5 –3 decision, authored by Justice Breyer and joined by Justices Kennedy, Ginsburg, Kagan, and Sotomayor, the Supreme Court rejected both the "scope of the patent" standard applied by the Eleventh Circuit and the "presumptively unlawful" standard advocated by the FTC. 

The scope of the patent standard, recognized not only by the Eleventh Circuit, but also the Federal Circuit and the Second Circuit, generally protected such patent settlements as consistent with the patent owner's lawful right to exclude others from the patented art. See Schering-Plough Corp. v. FTC, 402 F.3d 1056 (11th Cir. 2005); In re Ciprofloxacin Hydrochloride Antitrust Litig., 544 F.3d 1323 (Fed. Cir. 2008); In re Tamoxifen Citrate Antitrust Litig., 466 F.3d 187 (2d Cir. 2006) The "presumptively unlawful" standard had been embraced by the Third Circuit. See In re K-Dur Antitrust Litig., 686 F.3d 197 (3d Cir. 2012).

With the Supreme Court rejecting these two "bright line" tests in favor of a rule of reason analysis, the FTC now has greater leeway to challenge reverse payments, and perhaps any form of consideration flowing from the patent owner to the generic challenger, other than a compromise on generic entry date.

In his dissent, Chief Justice Roberts, joined by Justices Scalia and Thomas, argued that the

Majority today departs from the settled approach separating patent and antitrust law, weakens the protections afforded to innovators by patents, frustrates the public policy in favor of settling, and likely undermines the very policy it seeks to promote by forcing generics who step into the litigation ring to do so without the prospect of cash settlements. Actavis, 2013 U.S. LEXIS 4545, at * 68.

Litigation Uncertainties

However, there is the practical question of how district courts will undertake to apply the rule of reason in this context. A rule of reason analysis is an intensely factual inquiry. Will it be possible to evaluate the reasonableness of a reverse payment (or any other form of consideration) without considering (and perhaps resolving) the challenges to patent validity and/or enforceability asserted by the generic manufacturer in its ANDA Paragraph IV certification? Granted patents are afforded a presumption of validity, thus there is a great deal of uncertainty regarding the outcome of the case when a generic manufacturer undertakes such a patent challenge.

The Eleventh Circuit had based its adherence to its scope of the patent approach at least in part on the practical difficulties of pursuing an alternative approach:

In closing, it is worth emphasizing that what the FTC proposes is that we attempt to decide how some other court in some other case at some other time was likely to have resolved some other claim if it had been pursued to judgment. If we did that we would be deciding a patent case within an antitrust case about the settlement of the patent case, a turducken task. See Watson, 677 F.3d at 1315.

The majority did not provide much guidance to district courts regarding this reasonableness determination, such as the relative weight the district court should assign to the strength of the patent or possible pro-competitive justifications proffered by the patent holder and generic manufacturer. Justice Breyer asserted that “a court, by examining the size of the payment, may well be able to assess its likely anticompetitive effects along with its potential justifications without litigating the validity of the patent.” Actavis, 2013 U.S. LEXIS 4545, at * 37.

Chief Justice Roberts, however, kindly offered his sympathies to the district court facing this review: "Good luck to the district courts that must, when faced with a patent settlement, weigh the 'likely anticompetitive effects, redeeming virtues, market power, and potentially offsetting legal considerations present in the circumstances,’” id. at * 63, factors cited in the majority decision.

District courts will likely struggle with a "turducken task" for many years to come in applying a rule of reason test to the evaluation of reverse payments, or other consideration, provided in the context of patent settlements between pharmaceutical patent holders and generic manufacturers seeking ANDA approval from the FDA. This decision could have a chilling effect on patent challenges and the resolution of such challenges in the face of higher uncertainty as to outcome and cost of patent litigation.