Introduction

On June 17, 2013, the United States Supreme Court ruled in Federal Trade Commission v. Actavis, Inc.1 that antitrust challenges to pay-for-delay agreements between drug makers should be analyzed under the “rule of reason.” The Court took a middle ground between the position advanced by the Federal Trade Commission (FTC), which argued that the burden should be on the settling parties to demonstrate that a pay-for-delay agreement is not anticompetitive, and the Eleventh Circuit Court of Appeal’s “scope of the patent” test, which would presume a pay-for-delay settlement legal as long as the agreement does not exceed the subject matter or term of a valid patent. In forging its own approach, the Supreme Court has set the stage for increased and more costly challenges of pay-for-delay settlements by the FTC and private parties moving forward.

Key Takeaways

  • Pay-for-delay agreements are neither per se legal nor per se illegal.
  • Courts will have to undergo a fact-intensive “rule of reason” analysis evaluating the net competitive effect to determine whether a pay-for-delay agreement violates the antitrust laws.
  • Parties seeking to resolve patent litigation through pay-for-delay settlement agreements will now face increased risk of potential antitrust liability.
  • Decision provides little guidance on how to evaluate competitive effects, although large payments are considered suggestive of weak patents and potential anticompetitive effects.
  • Expect the FTC to continue vigorously investigating and challenging pay-for-delay agreements.

Facts

Solvay Pharmaceuticals (Solvay) is the brand-name manufacturer of a drug called AndroGel. In 2000, Actavis, Inc. (Actavis) filed an application with the U.S. Food and Drug Administration (FDA) to make a generic version. Two other pharmaceutical companies, Paddock Laboratories and Par Pharmaceutical, also filed applications for generics shortly thereafter. Solvay filed suit against all three generic manufacturers alleging patent infringement. The parties settled, and Actavis agreed not to market its generic version until 2015 and to promote AndroGel to certain doctors. In exchange, Solvay agreed to pay Actavis an estimated USD19 to USD30 million annually for nine years. The other generic manufacturers reached similar agreements with Solvay. Such so-called “pay-for-delay agreements” (sometimes also referred to as reverse-payment settlements), are a way for drug makers to resolve a type of patent litigation that arises when a generic maker (seeking to launch its competing product and gain the benefits provided for under the Hatch-Waxman Act) preemptively files suit alleging that a brand-name maker’s patent is invalid.

The FTC, which long viewed these agreements as depriving consumers of access to inexpensive generic drugs, filed an antitrust lawsuit against the settling parties. The Eleventh Circuit Court of Appeals, in affirming the district court’s decision, held that the FTC’s claim should be dismissed on the grounds that the parties’ agreement was within the scope of a valid patent, and thus was immune from antitrust scrutiny. The Supreme Court has now reversed the Eleventh Circuit’s ruling and remanded the case back to the district court to analyze the anticompetitive effects of the agreement. The Court’s decision in FTC v. Actavis resolves a deep circuit split2 and allows the FTC’s claim against several pharmaceutical companies’ reverse payment settlement agreement to go forward.

Supreme Court Analysis

Under the Court’s decision, pay-for-delay agreements are not immune from scrutiny, even if they fall within the exclusionary potential of a patent. Rather, the legality of pay-for-delay agreements will be assessed under the “rule of reason,” which will require a court to weigh an agreement’s likely anticompetitive effects against its justifications. The “rule of reason” analysis is a fact-based evaluation commonly applied to assess the validity of antitrust claims in other industries.

In so ruling, the Court rejected the FTC’s preferred “quick look” approach, which would have made pay-for-delay agreements presumptively unlawful, subject to a defendant’s showing of procompetitive effects. Instead, the Court opted for a rule that takes into account various justifications for a particular pay-for-delay agreement, leaving the burden of proof with the plaintiff. The Court identified a number of factors that will affect the likelihood that a reverse payment creates anticompetitive effects: “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.” However, the Court offered little guidance on how to weigh these variables or what would constitute convincing justifications.

The Court’s decision also addressed the two concerns it identified as underpinning the Eleventh Circuit’s decision, namely that legal policy generally favors the use of settlements and that antitrust analysis of reverse payment agreements is likely to be time-consuming, complicated and expensive. The Court felt that these concerns should not be determinative based on the following five considerations: (i) reverse payments have the genuine potential to adversely affect competition, (ii) the resulting anticompetitive effects of such payments are not always justified, (iii) patentees likely have the ability to bring about anticompetitive harm, with the size of a reverse payment being a strong indicator of that ability, (iv) antitrust actions are likely to be administratively feasible, and (v) finding that unjustified reverse payments violate antitrust law does not prevent parties from settling their dispute in other ways.

Going Forward

The Court’s ruling is not the worst-case scenario that branded drug makers feared it may be. Nevertheless, that the Court has endorsed antitrust challenges to pay-for-delay agreements means that we are likely to see more lawsuits by the FTC and private plaintiffs filed against drug companies going forward. It also means that pay-for-delay antitrust challenges are likely to require more substantial and costly litigation, as the typical “rule of reason” analysis requires a factual analysis that courts are likely to find suitable for evaluation through summary judgment proceedings if not trial. In light of these risks, parties entering patent settlements characterized by reverse payments will need to give careful thought on how to establish that those payments are consideration for other goods or services and not the plaintiff’s delayed entry.

Perhaps most troubling, however, is that new and pending pay-for-delay challenges will now play out in a judicial environment likely to be prone to short-term confusion about the proper application of the “rule of reason” in this context. The Court has offered little guidance to lower courts in its opinion on the proper application of the rule in these cases, expressly leaving it to the lower courts to figure out on their own.

Only time will tell how courts will come to understand and apply the limited guidance provided by the Court in FTC v. Actavis. But what is clear is “[i]f the basic reason [behind pay-for-delay settlements] is a desire to maintain and to share patent-generated monopoly profits, then, in the absence of some other justification, the antitrust laws are likely to forbid the arrangement.”