On June 17, 2013, the Supreme Court issued an opinion authored by Justice Breyer in FTC v. Actavis, holding that “reverse payment” settlements are not immune to scrutiny under the antitrust laws, and that they should be evaluated under the Rule of Reason. This decision settles a circuit split as to whether or not patent settlements are subject to potential antitrust liability and validates the FTC’s 15-year enforcement efforts challenging certain patent settlements, but fails to give the FTC a decisive victory. Justices Roberts, Scalia and Thomas dissented.

A “reverse payment” settlement is one in which Manufacturer A sues Manufacturer B for infringement and they settle, but instead of the infringing party paying Manufacturer A, Manufacturer A pays the infringer not to produce its product for a period of years. Such types of settlements have become popular in the pharmaceutical industry, where manufacturers of patented drugs sometimes pay manufacturers of generics not to produce their products, resulting in consumers paying the higher prices of the branded drugs rather than the lower prices when generics come into the market.

In Actavis, the FTC challenged a “reverse payment” settlement reached between Solvay Pharmaceuticals, which manufactures brand-name drugs, and Actavis, Paddock, and Par, three manufacturers of generics. In 1999, under provisions of the Hatch-Waxman Act, Solvay filed a New Drug Application (“NDA”) for a brand-name drug called AndroGel, which the FDA approved in 2000. In 2003, Solvay obtained a patent on AndroGel. That same year, Actavis, Inc. and Paddock Laboratories each filed abbreviated new drug applications (“ANDA”) for generic versions of AndroGel. In their respective ANDAs, both Actavis and Paddock claimed that Solvay’s patent was invalid. Solvay sued Actavis and Paddock, and another potential generic manufacturer, Par, for patent infringement, and the parties settled in 2006. Under the terms of the settlement, Solvay agreed to pay Actavis, Paddock, and Par not to bring their generics to market until August 31, 2015, a delay of nine years, unless someone else marketed a generic sooner. Solvay agreed to pay Actavis $19-30 million, Paddock $12 million, and Par $60 million annually for nine years.

In 2009, the FTC brought suit against Solvay, Actavis, Paddock, and Par, alleging that they had violated Section 5 of the FTC Act by unlawfully agreeing “to share in Solvay’s monopoly profits, abandon their patent challenges, and refrain from launching their low-cost generic products to compete with AndroGel for nine years.” The District Court dismissed the complaint, and the Eleventh Circuit affirmed the dismissal. In its opinion, the Eleventh Circuit noted that the “antitrust laws typically prohibit agreements where one company pays a potential competitor not to enter the market.” Id. at 1307. The court, however, believed that the instant case could be distinguished because Solvay had a patent, and patent owners have the right to exclude others from the market. Furthermore, the court noted that public policy favored settlements as opposed to forcing parties to settle disputes through litigation. Id. at 1313-1314. Consequently, the court 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.” Id. at 1312.

In reversing, the Supreme Court first noted that holders of valid patents are entitled to exclude others from the market, but that Solvay’s patent had not been proven to be valid. Rather than litigate that issue to conclusion, the parties had decided to settle. So the Court agreed with the FTC that the agreement reached was not payment for a conclusively valid patent, but a payment to stay out of Solvay’s market, when Solvay did not have a claim that the generic manufacturers owed it anything. Op. at 8. Accordingly, the Court said it was appropriate to consider not just patent policy, as the Eleventh Circuit did, but also antitrust policy.

Applying an antitrust lens, the Court noted its many prior decisions holding that, in certain circumstances, patent-related settlements, as well as patent licenses, could violate the antitrust laws. The Court noted that the settlement agreement at issue here was suspicious from an antitrust standpoint, because it did not account for the value of Solvay’s alleged patent rights. It was just a payment from Solvay to the generic manufacturers, in exchange for their agreement to hold their drugs back from the market, and a few nominal additional services. Id. at 13. Finally, the Court noted that it was clear from the legislative history that the Hatch-Waxman Act was not intended to facilitate “reverse payment” settlements.

The Court acknowledged that there is a general public policy interest in promoting settlements, but outlined five considerations it says should outweigh the public policy concern here.

  • First, “the specific restraint at issue has the ‘potential for genuine adverse effects on competition.’” The Court noted that unlike litigation, which might result in invalidation of the patent, allowing entry, or a settlement that allowed the competitor to enter before the patent expired, a settlement like this one that kept the competitor out of the market entirely, was likely to benefit all the parties to the settlement and lead to higher prices for consumers.
  • Second, the Court held that “these anticompetitive consequences will at least sometimes prove unjustified.” As the Court notes, and the FTC admits, there might be procompetitive benefits to this type of settlement. For example, “[w]here a reverse payment reflects traditional settlement considerations, such as avoided litigation costs or fair value for services, there is not the same concern that a patentee is using its monopoly profits to avoid the risk of patent invalidation or a finding of noninfringement.” Op. at 17. But the Court notes that these reasons, if they exist, can be shown by the defendants when the settlement is challenged under the antitrust laws.
  • Third, the Court held that “where a reverse payment threatens to work unjustified anticompetitive harm, the patentee likely possesses the power to bring that harm about in practice.” Op. at 18. In other words, the ability of Solvay to pay such huge amounts to the generics shows that absent the generics, Solvay would be able to charge supracompetitive prices, which would harm consumers.
  • Fourth, the Eleventh Circuit held that absent a sham, a patent settlement cannot be subject to an antitrust suit, meaning that a court would need to determine whether the patent was valid to decide the antitrust suit. The Court disagrees, noting that a court normally does not need to determine patent validity to determine the antitrust claim. Here, the Court suggests that the high amount of the payments is evidence that the patent was likely invalid, thus enabling the Court to assume the patent is likely not valid for purposes of resolving the antitrust claim.
  • Finally, the Court notes that parties in this situation can still settle their lawsuits without “large, unjustified reverse payments.” Op. at 19. For example, they might reach a settlement that allows the generic to enter the market before the patent expires.

In its petition, the FTC also asked the Court to find reverse payment settlements presumptively unlawful. The Court declined to do so, saying that there were circumstances in which such settlements might be justified under the antitrust laws. The FTC also urged that a “quick look” would be sufficient, which the Court also rejected. Accordingly, the Court held that such settlements should be evaluated under the Rule of Reason, which would allow the parties a chance to demonstrate whether there were procompetitive benefits to their settlement that might outweigh the anticompetitive harm. Just how that analysis is likely to be conducted was left to the lower courts, which are to consider traditional antitrust factors such as likely competitive effects, procompetitive benefits, and market power.

In the dissent, Chief Justice Roberts challenged whether the size of the settlement reliably indicates a patent holder’s doubts about patent validity, and stressed the difficulty of determining incentives to enter into a patent settlement.

As noted above, this decision settled a circuit split on the antitrust implications of Hatch-Waxman patent settlements. Compare In re Ciprofloxacin Hydrochloride Antitrust Litigation, 544 F. 3d 1323, 1332–1337 (Fed. Cir. 2008) (settlements generally “immune from antitrust attack”); In re Tamoxifen Citrate Antitrust Litigation, 466 F. 3d 187, 212–213 (2d Cir. 2006) (same), with In re K-Dur Antitrust Litigation, 686 F. 3d 197, 214–218 (3rd Cir. 2012) (settlements presumptively unlawful). But the key aspect of the holding is the Court’s application of the Rule of Reason, and its finding that there might be procompetitive reasons behind certain “reverse payment” settlements. This makes it essential that pharmaceutical manufacturers stay informed about current litigation, and specifically, what types of provisions in “reverse payment” settlements survive Rule of Reason scrutiny as the case law develops. The Court’s emphasis on the size of settlements and the inferences to be drawn from that size are also worthy of note.