On June 17, 2013, the U.S. Supreme Court issued its opinion in Federal Trade Commission v. Actavis, Inc. This is the Court’s first decision concerning the antitrust analysis of so-called “reverse payment” patent settlements — an issue that has been of significant interest to the pharmaceutical industry, and to patent holders generally, for over a decade.

The Supreme Court’s Actavis decision expressly holds that so-called reverse payment patent settlements, which include a payment from a branded pharmaceutical patent holder to a generic producer it has sued for infringement, may be beneficial but also “sometimes” may be anticompetitive. The Court thus holds that such settlements are subject to the antitrust laws and governed by the rule of reason. The decision rejects the “scope of the patent” standard urged by industry and that had been adopted by the Second, Eleventh and Federal Circuits. It also rejects the FTC’s position that so-called reverse payment patent settlements are “presumptively unlawful,” or subject to an abbreviated “quick look” antitrust analysis. As the Court noted, so-called reverse payment settlements are not such that “‘an observer with even a rudimentary understanding of economics could conclude that the arrangements in question have an anticompetitive effect on customers and markets.’” Mem. Opinion, at 20 (June 17, 2013).

The Court left the task of structuring the appropriate rule of reason analysis to the lower courts. As a result, there likely will continue to be significant litigation activity over the application of the antitrust laws to so-called reverse payment patent settlements. The lack of an articulated standard, and thus the potential for proliferating approaches in the district courts to managing what are inevitably complex, costly and uncertain fact-driven rule of reason cases will bedevil counsel and business people as they navigate this thicket. In-house counsel and business people should therefore exercise care in entering into patent settlements, and fully vet the implications and alternatives.

Overview of “Reverse Payment” Settlements

So-called reverse payment settlements are a mechanism for resolving patent litigation between a branded manufacturer and potential generic entrant. In a typical case, a generic firm files an Abbreviated New Drug Application (“ANDA”) with the FDA, certifying that its proposed generic form of a drug does not violate the branded manufacturer’s patents, or that those patents are invalid. This filing often prompts a suit for patent infringement by the branded manufacturer.

Given the cost and uncertainty of patent litigation, the parties frequently settle such suits rather than litigating them to conclusion. The generic firm typically agrees not to enter the market for a certain period of time after the settlement, but is allowed to enter before the expiration of the relevant patent(s). In addition, in the settlements at issue the branded manufacturer provides some further consideration to the ANDA applicant, beyond the right to enter the market before patent expiration.

In FTC v. Actavis, the Eleventh Circuit found the patent settlement to be lawful, and affirmed dismissal of the FTC’s antitrust challenge to the settlement. 677 F.3d 1298. The court held that unless the patent infringement lawsuit was a sham or the patent was procured by fraud, so-called reverse payment settlements were lawful so long as they restricted competition only within the facial exclusionary scope of the patent. Id. at 1312. The court found that such a rule was appropriate given the strong public policy in favor of settlements. In reaching this result, the Eleventh Circuit reaffirmed its own prior decisions, and agreed with similar decisions by the Second and Federal Circuits.1

The FTC, by contrast, has long taken the position that most settlements that contain monetary consideration to the generic are anticompetitive. The FTC views the consideration flowing to generic firms under such settlements as a payment by the branded manufacturer to postpone competition, which denies consumers the benefit of lower-cost generic drugs. The Third Circuit Court of Appeals had adopted a similar view, holding a payment from a patent holder to an alleged infringer to be prima facie evidence that the settlement was an unreasonable restraint of trade.2

The Supreme Court’s Decision in FTC v. Actavis, Inc.

In Actavis, the Supreme Court rejected the “scope of the patent” test adopted by the Eleventh Circuit and reversed dismissal of the FTC’s antitrust complaint. The Court found the Eleventh Circuit’s approach to be too deferential to patent law, finding that because some so-called reverse payment settlements can be anticompetitive, “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.” Opinion, at 8-9. Surveying past decisions regarding the antitrust analysis of patent issues, the Court explained that its past analyses have “answered the antitrust question by considering traditional antitrust factors such as likely anticompetitive effects, redeeming virtues, market power, and potentially offsetting legal considerations present in the circumstances, such as here those related to patents.” Opinion, at 9-10.

The Court acknowledged that settlements of litigation are strongly favored. But it noted five considerations that “lead us to conclude that the FTC should have been given the opportunity to prove its antitrust claim:” 1) the restraint has the potential for adverse effects on competition; 2) there might not be “traditional settlement considerations” for the payment “such as avoided litigation costs or fair value for services;” 3) the patent holder might have market power; 4) antitrust litigation regarding the settlement will not be administratively infeasible because “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;” and 5) “the fact that a large, unjustified reverse payment risks antitrust liability does not prevent litigating parties from settling their lawsuit.” Opinion, at 14-19.

The Court similarly rejected the FTC’s argument that patent settlements with monetary consideration flowing to the generic should be presumptively unlawful. Citing California Dental Assn. v. FTC, 526 U.S. 756, 775 n.12 (1999), the Court rejected a “quick look” approach under which the burden of proof would be shifted to defendants. Opinion, at 20.

The Court left to lower courts “the structuring of the present rule-of-reason antitrust litigation.” Opinion, at 21. In doing so, it noted that "the likelihood of a reverse payment bringing about anticompetitive effects 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 other convincing justification. The existence and degree of any anticompetitive consequence may also vary as among industries. These complexities lead us to conclude that the FTC must prove its case as in other rule of reason cases.” Opinion, at 20. The Court cautioned, however, that its opinion did not require lower courts to insist that “the Commission need litigate the patent's validity, empirically demonstrate the virtues or vices of the patent system, present every possible supporting fact or refute every possible pro-defense theory. As a leading antitrust scholar has pointed out, ‘there is always something of a sliding scale in appraising reasonableness,’ and as such ‘the quality of proof required should vary with the circumstances.’” Opinion, at 21.

Chief Justice Roberts predicts that “[t]he majority’s rule will discourage settlement of patent litigation,” notwithstanding the tendency of that litigation to be “particularly complex, and particularly costly.” Dissent, at 11.

Implications for the Industry

The decision leaves the structure of the appropriate rule-of-reason analysis to the district courts. As a result, it likely will lead to significant ongoing litigation over the proper application of the rule-of-reason analysis, with the potential for diverging opinions in the district courts. Indeed, the Supreme Court’s analysis does not address many issues, such as injury and damages, that may be implicated in a private antitrust action rather than in a case brought by the FTC. As a result of the ongoing uncertainty in this area of law, branded and generic pharmaceutical companies will want to exercise continued care in settling patent litigation, and carefully consider the implications of any potential settlement.