On June 17, 2013, the Supreme Court in Federal Trade Commission v. Actavis, Inc., No. 12-416, held that the use of "reverse payment" settlement agreements to resolve patent infringement litigation may in certain circumstances violate antitrust laws. The Court further held that the potential anticompetitive effects of these settlement agreements should be evaluated under a "rule of reason" analysis. Resolving a circuit split, the 5–3 decision overturned the Eleventh Circuit’s holding that a reverse settlement agreement is immune from antitrust attack as long as the anticompetitive effects of the settlement agreement fall within the scope of the patent’s exclusionary potential. The Court, however, declined to hold that reverse payment settlement agreements are presumptively unlawful, and rejected evaluating them under a "quick look" approach.

This holding can have significance beyond reverse payments in the patent arena, depending on how courts choose to apply the decision. At its broadest, the holding could be viewed as an affirmation that patents are like any other types of property that can be used both legally and illegally. The mere fact that a patent holder may be able to exclude an alleged infringer from a relevant market does not mean that all methods and attempts to do so are necessarily legal.

Background

"Reverse payment" patent settlements frequently arise in litigations brought under the Hatch- Waxman Act. The Hatch-Waxman Act creates special procedures for identifying and resolving patent disputes between brand name and generic drug manufacturers by requiring a prospective generic manufacturer to assure the FDA that it will not infringe on the brand name’s patents. A generic drug manufacturer can provide this assurance by certifying under paragraph IV of the Hatch-Waxman Act that the brand-name drug manufacturer’s relevant patent is invalid or will not be infringed by the manufacture, use, or sale of the drug described in the generic drug manufacturer’s new drug application. However, because this certification method is considered patent infringement per statute, the validity of the brand-name patent is often litigated with the plaintiff brand-name drug manufacturer/patent holder initiating a patent claim pursuant to paragraph IV of the Hatch-Waxman Act against the alleged patent infringing generic drug manufacturers.

Parties to a patent litigation brought under paragraph IV may often resolve the dispute by agreeing to a reverse payment settlement agreement. Under the typical terms of a reverse payment settlement agreement, the patent holder agrees to pay the alleged patent infringer a certain sum of money and the alleged patent infringer agrees not to produce the patented product until the patent’s term expires. A reverse payment settlement agreement is a unique settlement mechanism in that the allegedly wrongdoing party that has not sought damages in the litigation is the one that receives payment.

The Actavis case involved an FTC challenge to a reverse payment settlement agreement that ended years of patent litigation between several pharmaceutical companies. In 2003, Solvay Pharmaceuticals obtained a patent for a drug called AndroGel, and disclosed the patent to the FDA as required under the Hatch-Waxman Act. Soon after, Actavis, Inc. and Paddock Laboratories filed applications for generic drugs modeled after AndroGel, and certified under paragraph IV of the Hatch-Waxman Act that Solvay’s patent was invalid and that their own drugs did not infringe on Solvay’s patent. Solvay then initiated a patent litigation brought under paragraph IV. Par Pharmaceutical, a fourth company, aligned with Paddock and agreed to share the costs in the patent litigation in return for a share of profits if Paddock obtained approval for its generic drug.

In 2006, Actavis, Paddock, and Par entered into a "reverse payment" settlement agreement with Solvay. Under the terms of the settlement agreement, the parties agreed not to bring their generics to market until August 31, 2015, 65 months before Solvay’s patent expired, and agreed to promote AndroGel to doctors. In return, Solvay agreed to pay $12 million to Paddock, $60 million to Par, and an estimated $19–$30 million annually for nine years to Actavis.

The FTC sued the generic manufacturers under Section 5 of the FTC Act, which prohibits "[u]nfair methods of competition in or affecting commerce, and unfair or deceptive acts or practices in or affecting commerce." The FTC charged that the generic manufacturers had unlawfully agreed to abandon their patent challenges, refrain from launching their low-cost generic drugs for nine years, and share in Solvay’s monopoly profits. The District Court dismissed the FTC’s complaint for failure to state an antitrust claim and the Eleventh Circuit affirmed, concluding that as long as the anticompetitive effects of a settlement fall within the scope of the patent’s exclusionary potential, the settlement is immune from antitrust attack.

The Supreme Court's Ruling

The Court was faced with the basic questions of whether a reverse payment settlement agreement can sometimes unreasonably diminish competition in violation of the antitrust laws. The Court noted that since different courts had reached different conclusions about the application of antitrust laws to Hatch-Waxman-related patent settlements, the Court granted the FTC’s petition for certiorari.

The Court began by noting that the antitrust question is not answered by simply referring to what the holder of a valid patent could do. The fact that the agreement’s anticompetitive effects fall within the "scope of the exclusionary potential of the patent," does not immunize the agreement from an antitrust attack. The Court indicated that patent and antitrust policies are both relevant in determining the "scope of the patent monopoly," and consequently of the antitrust law immunity, that is conferred by a patent.

Although the Court recognized the value of settlements, it said that settlements should not come at the price of adverse effects on competition. The Court pointed out the dangers of settlement agreements that may result in a patent holder gaining more from the settlement than it could if the case went to trial.

The Court also pointed out that it is not necessary to litigate patent validity to answer the antitrust question. The fact of a large, unexplained reverse payment can provide a workable surrogate for evidence of a patent’s weakness, all without forcing a court to conduct a detailed exploration of the patent’s validity. Such payment may provide strong evidence that the patent holder wants the generic challenger to abandon its claim in return for a share of the patent holders’ monopoly profits, so that the patent holder may continue to retain a monopoly despite holding a weak patent.

Although the Court recognized that it is not necessary to litigate the question of patent validity when considering antitrust issues, it was not willing to take the further step that was advocated by the FTC of treating reverse payment settlement agreements as presumptively unlawful such that courts reviewing such agreements should proceed via a "quick look" approach rather than applying a full-scale "rule of reason" analysis. A "quick look" approach, said the Court, is only appropriate where "an observer with even a rudimentary understanding of economics could conclude that the arrangements in question would have an anticompetitive effect on customers and markets." The likelihood of a reverse payment bringing about anticompetitive effects, however, 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 convincing justification. These complexities, the Court concluded, rendered "quick look" analysis inappropriate and required the FTC to prove its case as in other "rule of reason" cases. The Court left it up to the lower courts to figure out how to structure the "rule of reason" analysis in pharmaceutical patent settlements.

Implications

Actavis is significant for a number of reasons. First, the Court’s decision may discourage settlement and encourage litigation among parties considering reverse payment settlements, as the additional threat of antitrust litigation with the FTC looms. At the very least, the costs of this new litigation threat will likely be included in the settlement terms negotiated by the parties.

Second, from a planning standpoint, if a patent holder anticipated that a reverse payment may be worthwhile, it would want to develop as comprehensive as possible a litigation plan that would document the various stages of the litigation and the costs associated with each. Such a plan would typically be privileged, so the patent holder would also have to think strategically about how to waive privilege in the context of the FTC’s investigation. If the amount of the anticipated reverse payment were going to be much more than a reasonable estimate of litigation costs, one would need to anticipate litigation with the FTC as well.

While the Actavis decision may not fully clarify the case law on reverse payment settlement agreements, it does provide some meaningful guidance on where the touch points may be in reverse payment litigation, and where parties can anticipate problems and possibly avert them.