Federal Trade Commission v. Actavis, Inc., Supreme Court, No. 12-416 (June 17, 2013)

http://www.supremecourt.gov/opinions/12pdf/12-416_m5n0.pdf

Although the facts in this case are straightforward, the analyses of the majority and dissenting justices reflect sharply differing views on how antitrust laws should be balanced against the monopoly rights of a patent owner.

The complained of action occurred under the drug-regulatory rules established by the Hatch-Waxman Act. Solvay Pharmaceuticals, one of the respondents in this case, obtained FDA approval in 2000 on a brand-name drug called AndroGel, and three years later obtained a patent covering the drug. Later in 2003, Actavis, Inc. filed an Abbreviated New Drug Application (ANDA) for a generic drug modeled after AndroGel, and subsequently Paddock Labs, filed another ANDA for its own AndroGel-like generic drug. Once a generic drug manufacturer files its ANDA, the Hatch-Waxman provisions require it to assure the FDA that its generic drug will not infringe the brand-name’s patents. One way it can meet this requirement is to certify that any listed, relevant patent is invalid or will not be infringed by the manufacture, use or sale of the drug described in the ANDA (the so-called “paragraph IV route”). If the brand-name patentee brings an infringement suit within 45 days, the FDA must then withhold approving the generic, usually for a 30 month period, while the parties litigate validity and/or infringement in court.

Solvay initiated paragraph IV litigation against Actavis and Paddock in 2003; thirty months later, the FDA approved Actavis’ first-to-file generic product. In 2006, the parties settled their patent litigation by Actavis agreeing that it would not bring their generic drug to market until March 31, 2015, 65 months before Solvay’s patent expired, and Actavis also agreed to promote AndroGel to urologists, in exchange for agreed-upon payments from Solvay. Paddock and Par Pharmaceuticals, which had joined forces with Paddock in the patent litigation, agreed to similar terms. The money Solvay agreed to pay under the agreement was $12 million in total to Paddock, $60 million in total to Par, and an estimated $19-30 million annually, for nine years, to Actavis. Agreements such as these are known as “reverse payment” or “pay-to-delay” settlements.

On January 29, 2009, the FTC filed a lawsuit against all settling parties, alleging that the parties had violated Section 5 of the Federal Trade Commission Act, by unlawfully agreeing to “share in Solvay’s monopoly profits, abandon their patent challenges, and refrain for nine years from launching their low-cost generic products to compete with AndroGel. The District Court held that these allegations did not set forth an antitrust law violation, and the Eleventh Circuit Court of Appeals affirmed, noting that “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 patents.” The FTC sought certiorari, and because “different courts have reached different conclusions about the application of the antitrust laws to Hatch-Waxman-related patent settlements,” the Supreme Court granted the FTC’s petition.

Justice Breyer, writing for the majority, and Chief Justice Roberts, for the dissent, (in a five-to-three decision in which Justice Alito took no part) start from very different legal positions. Justice Breyer’s position is that what the holder of a valid patent can do does not itself answer the antitrust question, because, as here, the patent may or may not be valid, and may or may not be infringed. In other words, can a patent owner immunize itself against antitrust violations through a settlement in which the patent challengers were induced not to pursue their patent challenge in exchange for payments whose purpose was clearly anti-competitive-- to protect Solvay’s monopolistic profits? Justice Roberts, by contrast, saw no reason to question the validity of the patent or the rights of the patent owner under it. A patent owner, acting within the scope of its patent, has an obvious defense to any antitrust suit: “that its patent allows it to engage in conduct that would otherwise violate antitrust law.”

The Court laid out five sets of considerations that justified giving the FTC an opportunity to prove its antitrust claim. First, is the rationale behind a payment of this size by Solvay consistent with traditional settlement considerations or does it instead “provide strong evidence that the patentee seeks to induce the generic challenger to abandon its claim with a share of its monopolistic profit that would otherwise be lost in the competitive market?” Second, and related to the first, were there offsetting or redeeming virtues behind the reverse payment settlement? For example, were the payments justified by Solvay’s wish to avoid continued litigation costs or reflect payment for services that the generics has promised to perform?

Third, the size of the reverse payment to a prospective generic is a strong indicator of market power flowing from the patent. Here the Court noted studies showing that reverse payment agreements coincide with the presence of higher-than-competitive profits. Fourth, the antitrust action is likely to be more administratively feasible than the Eleventh Circuit believed, in that it may not be necessary to resolve the issues of patent validity and infringement. An unexplained large reverse payment might suggest that the patentee has serious doubts about the patent’s survival. “In a word, the size of the unexplained reverse payment can provide a workable surrogate for a patent’s weakness, all without forcing a court to conduct a detailed exploration of the validity of the patent itself.” Finally, the court needs to consider the reasons for the large reverse-payment settlement. If the basic reason is the desire to maintain and share patent-related monopoly profits, then the antitrust laws are likely to forbid the agreement.

However, the Court did not go so far as to find reverse-payment agreements presumptively unlawful, as the FTC had urged, a so-called “quick look analysis.” Rather the Court adopted a “rule of reason” in which the likelihood of a reverse payment bringing about anticompetitive effects must be judged by the size of the payment, its scale in relation to future litigation costs, and whether the receiving party is performing other services.