In a decision that will likely have a significant impact on the pharmaceutical industry (and possibly broader implications for patent, antitrust, and high technology), the Supreme Court yesterday refused to exempt so-called reverse payment (or "pay for delay") patent settlements from antitrust scrutiny. Prior to yesterday’s ruling in FTC v. Actavis, Inc., 570 U.S. ___ (2013), most of the circuit courts to have considered the issue (i.e., the Second, Eleventh, and Federal Circuits) had held that a reverse payment settlement was essentially immune from antitrust challenge so long as its anticompetitive effects did not exceed the scope of the patent. Last year, however, a contrary decision (by the Third Circuit in the K-Dur Antitrust Litigation case) created a split in the circuits. As a result, the Supreme Court granted certiorari to hear the FTC’s appeal from the Eleventh Circuit’s decision in Actavis affirming the dismissal of the FTC’s complaint.

Generally, in reverse payment settlements – which have become particularly common between brand-name and generic drug manufacturers since the enactment of the Hatch-Waxman Act – a patentee provides net compensation (either cash or other consideration) to a purported infringer rather than the other way around. In return for this compensation, the patentee obtains peace with a party challenging the patent, along with a promise that the purported infringer will not produce the patented product until a date certain, typically one that falls within the life of the patent. The FTC and other critics of such settlements characterize them as "pay for delay" agreements, and the FTC has been attempting to challenge them for roughly a decade.

In Actavis, the Supreme Court (by a 5-3 vote, with Roberts, Scalia, and Thomas dissenting) reversed the 11th Circuit’s decision and held that reverse payment settlements should be subject to antitrust scrutiny under the rule of reason. In reaching this conclusion, the Court reasoned that it would be "incongruous to determine antitrust legality by measuring the settlement’s anticompetitive effects solely against patent law policy, rather than by measuring them against procompetitive antitrust policies as well."

Notably, however, the Supreme Court refused to declare such settlements presumptively unlawful, as the FTC had urged, and hence also rejected the FTC’s argument that such settlements should be evaluated using a truncated "quick look" approach rather than being subjected to a full-blown rule of reason analysis. Essentially, then, the Court’s core ruling was that reverse payment settlements may sometimes violate the antitrust laws, depending on the facts of the specific case.

In mandating a rule of reason analysis, the Supreme Court concluded that the FTC’s case should have gone forward to permit a thorough examination of the underlying considerations, including five issues that the Court specifically identified:

  • The restraint at issue had the "potential for genuine adverse effects on competition." In particular, it was likely that consumers would lose while the patentee and challenger both gained.
  • These anticompetitive consequences could prove unjustified in some circumstances. For instance, offsetting or redeeming virtues might well exist if the reverse payment amounted to no
  • more than a rough approximation of the litigation expenses saved through the settlement or if the payment reflected compensation for services to be provided by the generic. Other legitimate justifications might also exist.
  • Where a reverse payment threatens to cause unjustified anticompetitive harm, the patentee likely possesses the power to bring that harm about in practice. In other words, the size of the payment is a strong indicator of the existence of market power.
  • It is likely possible to resolve the antitrust question without determining the underlying patent’s validity. Again, a particularly large reverse payment will be an indicator that "the patentee has serious doubts about the patent’s survival" and that the settlement is therefore anticompetitive.
  • The policy favoring settlement will not be harmed, because parties can settle in ways other than through large reverse payments – "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 prior to that point." In other words, a settlement can be premised upon a split of the remaining term of the patent between the patentee and the generic challenger.

The case was then remanded to permit the lower courts to engage in a thorough rule of reason analysis of the sort articulated by the Supreme Court.

This case changes the landscape in the interaction between brand-name and generic drug manufacturers. It exposes to antitrust challenge a relatively common form of settlement that had previously been viewed as almost always legal. Significantly, the decision increases the importance of ensuring that any reverse payment in future settlements is not solely for delay, and is based upon legitimate justification. Moreover, by reaffirming the principle that antitrust policy need not turn on patent law principles, the Supreme Court may have opened a wider door to antitrust challenges to other forms of patent licensing or patent restrictions, with potential implications for patent holders or licensees – particularly in the high-tech arena.