Antitrust: Scrutiny of Reverse Payment Settlements
By Sarah Hasford1
I. FTC v. Actavis – A Recap
It has been less than a year since the Supreme Court handed down its decision in FTC v. Actavis, Inc., 133 S. Ct. 2223 (2013) (hereinafter “Actavis”) and differences in how district courts are interpreting that decision already suggest that the Court may once again need to address the issue of antitrust scrutiny of Hatch-Waxman-related patent settlements in the not too distant future.
As followers of Actavis will no doubt recall, the Supreme Court’s decision resolved a significant split between the circuits regarding the fundamental test to evaluate reverse-payment settlement agreements in Hatch-Waxman cases for antitrust violations. Prior to Actavis, the Eleventh Circuit, along with the Federal and Second Circuits, assessed the legality of reverse payment settlement agreements under a test that became known as the “scope-of-the-patent test.” See e.g., In re Tamoxifen Citrate Antitrust Litigation, 466 F.3d 187, 213 (2d Cir. 2005) (“Unless and until the patent is shown to have been procured by fraud, or a suit for its enforcement is shown to be objectively baseless, there is no injury to the market cognizable under existing antitrust law, as long as competition is restrained only within the scope of the patent.”). Under that test, reverse payment settlements were generally immune from antitrust attacks so long as their anticompetitive effects fell within the scope of the exclusionary potential of the patent. FTC v. Watson Pharms., Inc., 677 F.3d 1298, 1312 (11th Cir. 2012). The Third Circuit, on the other hand, had rejected the scope-of-the-patent test in favor of the “quick look” rule of reason analysis under which any payment from a patent holder to a generic patent challenger who agreed to delay entry into the market was treated as prima facie evidence of an unreasonable restraint of trade (i.e., such payments were presumptively unlawful). See e.g., In re K-Dur Antitrust Litigation, 686 F.3d 197, 214-218 (3d Cir. 2012).
Declining to embrace either the “scope-of-the-patent test” or the “quick look” rule of reason analysis, the Supreme Court held that antitrust cases must be proved using the traditional antitrust “rule-of-reason” analysis because the likelihood of a reverse payment bringing about anticompetitive effects depends on the size of the payment, 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. Actavis, 133 S. Ct. at 2237. Although the Court’s opinion clarified the general test to be used when analyzing patent settlements for antitrust violations, many questions on when and exactly how to apply that test remain. The Supreme Court explicitly left the issue of how to apply the rule-of-reason test to the district courts, instructing them only to “avoid, on the one hand, the use of antitrust theories too abbreviated to permit proper analysis, and, on the other hand, consideration of every possible fact or theory irrespective of the minimal light it may shed on the basic [antitrust] question.” Id. at 2238. Unfortunately, as discussed below, there already has been disagreement amongst district court judges with regard to the application of the general antitrust analysis now required by Actavis. These varying decisions undoubtedly will continue to impact pharmaceutical companies’ efforts to settle with one another in the Hatch-Waxman context, leaving pharmaceutical enterprises at a distinct disadvantage to other types of businesses when attempting to settle costly patent litigation.
1Sarah Hasford is an associate in the Intellectual Property Litigation Practice Group in the Washington, D.C. office of Haynes and Boone, LLP. Her practice focuses on patent litigation. She may be reached at email@example.com or 202.654.4506.
II. Differences of Opinion: When Are Settlements Subject to Antitrust Scrutiny Under
Given that only a short amount of time has passed since Actavis was decided, there have been only a
few decisions that address the types of settlement arrangements that might constitute a “reverse
payment” under Actavis. Of significant interest to those who litigate in the Hatch-Waxman area are the
recent decisions In re Lamictal Direct Purchaser Antitrust Litigation, In re Lipitor Antitrust Litigation and In
re Nexium (Esomeprazole) Antitrust Litigation.
A. In re Lamictal Direct Purchaser Antitrust Litigation
The Lamictal® case involved a settlement between GlaxoSmithKline (GSK) and Teva where, in exchange
for dropping its challenge to GSK’s patents, Teva was allowed to market generic lamotrigine (i.e., the
active ingredient in Lamictal products) before the relevant patent covering lamotrigine expired. In re
Lamictal Direct Purchaser Antitrust Litigation, No. 12-cv-995, 2014 WL 282755, at *2 (D.N.J. Jan. 24,
2014). The settlement agreement also ensured that once Teva marketed generic lamotrigine, its generic
tablets and chewables would not face competition from GSK’s own “authorized generic” for a certain
period of time. Id.
Plaintiffs Louisiana Wholesale Drug Company, Inc. and King Drug Company of Florence, Inc. challenged
the settlement between GSK and Teva, alleging that it violated federal antitrust laws. Id. In an earlier
decision rendered prior to the Supreme Court’s decision in Actavis, the district court dismissed the
plaintiffs’ complaint because the settlement at issue did not involve a transfer of money, i.e., it was not a
“reverse payment” settlement and was therefore not subject to antitrust scrutiny. Id. The plaintiffs
appealed the dismissal to the Third Circuit, which stayed the proceedings pending the outcome of
Actavis. Id. at *3. After the decision in Actavis, the Third Circuit remanded the case to the district court for
further proceedings. Id. The only issue on remand was whether Actavis, and its adoption of a “rule of
reason” standard for antitrust scrutiny of reverse payment settlements, rendered the plaintiffs’ complaint
sufficient under Fed. R. Civ. P. 12(b)(6). Id. at *6. As Judge Walls explained, prior to reaching the rule of
reason analysis, he needed to first decide: (1) whether Actavis requires a preliminary finding of a “reverse
payment,” or whether it requires scrutiny of every patent settlement for anticompetitive concerns; and (2)
whether Actavis defines “payment” in a way that includes non-monetary transfers of value. Id.
In reaching his decision on these questions, Judge Walls interpreted the Court’s holding in Actavis to
provide a three-part test – two steps of which indicate when the rule of reason analysis should be applied
to a particular settlement, and one step of which provides direction for how to apply that analysis to a
particular settlement agreement. See id. at *5. Judge Walls explained that under the first step of the test,
the district court should ask whether the settlement at-issue includes a reverse payment. Id. If the answer
to the first part is “yes,” then the court must address the separate question regarding whether the reverse
payment is large and unjustified because, according to Judge Walls, Actavis provides that only certain
reverse payments warrant antitrust scrutiny. Id. (citing Actavis, 133 S. Ct. at 2237 (explaining that the
“likelihood of a reverse payment bringing about anticompetitive effects” is not presumed but “depends on
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.”)). Lastly,
Judge Walls explained that the court need only undertake the rule of reason analysis (the third step) if the
reverse payment is large and unjustified. Id.
In support of his finding that Actavis requires scrutiny only of patent settlements containing reverse
payments, Judge Walls pointed out that the Supreme Court’s focus is on reverse payments from the very
first words of the opinion. Id. at *7. Indeed, the Supreme Court explains in its opinion that there is
“something quite different” about reverse payment settlements, as opposed to “traditional” and “commonplace forms” of settlement. Id. (citing Actavis, 133 S. Ct. at 2233). Based on the statements in which the Supreme Court distinguishes reverse payment settlements from other types of settlements, he concluded that only reverse payment settlements are subject to antitrust scrutiny under Actavis. Id.
Judge Walls’ finding that the term “reverse payment,” as used by the Supreme Court, means a payment of money and that term does not extend to non-monetary exchanges. Id. at *7-10. This further narrows the reach of Actavis. Plaintiffs in the litigation had argued that the settlement between GSK and Teva amounted to a reverse payment settlement because it “conferred substantial financial benefits to Teva” through the No-Authorized Generic Agreement (i.e., a “no-AG agreement”). Id. at *7. In rejecting their argument, Judge Walls explained that “nothing in Actavis says that a settlement contains a reverse payment when it confers substantial financial benefits or that a no-AG agreement is a ‘payment.’ Id. Judge Walls also cited several portions of the Supreme Court’s opinion that indicated that the majority and dissenting opinions all refer to reverse payments as involving a payment of money. Id. (citing Actavis, 133 S. Ct. at 2227, 2231, and 2233-35). He also noted that there are only a few scattered indications that the Supreme Court may have intended its holding to apply to non-monetary “payments,” and that the dissent critiques the majority precisely because it appeared to draw a line between monetary and non-monetary payments. Id. at *8 (citing Actavis, 133 S. Ct. at 2233). Based on his reading of the Actavis decision, and a consideration of the factual context in which it (and its predecessor cases) arose, Judge Walls declined to extend the antitrust analysis of Actavis to non-monetary settlements. Id. at *9. Thus, Judge Walls confirmed his earlier, pre-Actavis decision dismissing the antitrust complaint.
The Plaintiffs are presently appealing the dismissal.
B. In re Lipitor Antitrust Litigation
In interpreting the term “reverse payment” to apply only to settlements involving a monetary payment, Judge Walls found unpersuasive two earlier district court decisions which suggested that the term could apply to non-monetary reverse payments. Lamictal, 2014 WL 282755, at *9. One of those decisions came from the very same court, the District Court of New Jersey, where Judge Walls sits.
In September 2013, Judge Sheridan granted a Direct Purchaser Class’s leave to amend their complaint to clarify and augment a “reverse payment” allegation despite the defendants’ arguments that the proposed amendment would be futile because the amended allegations would still fail to allege an actionable reverse payment under Actavis. In re Lipitor Antitrust Litigation, No. 12-cv-2389, 2013 WL 4780496, at *26-27 (D.N.J. Sept. 5, 2013). The settlement agreement at issue in that case, which the plaintiffs referred to as the “Delay Agreement,” allegedly provided that Ranbaxy: (1) would not compete with Pfizer, (2) would keep its generic Lipitor product off the market until November 30, 2011, (3) would not waive or relinquish its first-to-file 180-day marketing exclusivity, and (4) would drop its challenges to a reissue proceeding for one of Pfizer’s patents covering Lipitor. Id. at *11. In exchange, Pfizer allegedly agreed to forgive unrelated outstanding monetary judgments it had obtained against Ranbaxy, give Ranbaxy the right to market generic Lipitor in at least eleven international markets, and dismiss its action in the District Court of New Jersey regarding Ranbaxy’s at-risk launch of a generic version of Pfizer’s product Accupril. Id. The so-called “Delay Agreement” also allegedly resolved another U.S. litigation between Pfizer and Ranbaxy pertaining to Ranbaxy’s generic Caduet. Id. Plaintiffs alleged that the settlement of the Accupril litigation was, in reality, a payment by Pfizer to Ranbaxy to delay Ranbaxy’s launch of its generic version of Lipitor, even though Ranbaxy made a $1 million payment to Pfizer as part of the deal. Id. at *26.
In deciding to permit the plaintiffs to amend their complaint, Judge Sheridan explained that “…nothing in Actavis strictly requires that the [reverse] payment be in the form of money, and so [the Court] declines to hold that the amendments [to the complaint] will be futile on that basis.” Id. The decision, however, left for another day the issue of Actavis’s application to the specific facts of the pending case to determine if the non-monetary payment was an antitrust violation.
C. In re Nexium (Esomeprazole) Antitrust Litigation
The other case that Judge Walls found unpersuasive was In re Nexium (Esomeprazole) Antitrust Litigation. In that case, Judge Young of the District Court of Massachusetts denied a motion to dismiss antitrust claims against AstraZeneca and a number of generic drug companies that had allegedly entered into “reverse payment” settlement agreements despite the Generic Defendants’ contention that they did not receive any kind of monetary payment from AstraZeneca in exchange for their alleged commitment to stay out of the market. No. 12-md-02409, 2013 WL 4832176, at *15 (D. Mass. Sept. 11, 2013). Several settlement agreements were at issue in the case. Id. at *6-9. Among them was a settlement between AstraZeneca and Ranbaxy in which the antitrust plaintiffs alleged AstraZeneca agreed to end its proceedings against Ranbaxy and effectively pay Ranbaxy over $1 billion (the value the plaintiffs attribute to an agreement not to launch an authorized generic) in exchange for Ranbaxy agreeing to: (1) admit that the patents-at-issue were enforceable and valid; (2) admit that Ranbaxy’s generic Nexium product would infringe the patents-at-issue; and (3) delay the launch of its generic Nexium until May 27, 2014. Id. at *6.
In finding that the plaintiffs’ claims could go forward, Judge Young explained:
[n]owhere in Actavis did the Supreme Court explicitly require some sort of monetary transaction to take place for an agreement between a brand and generic manufacturer to constitute a reverse payment. Admittedly, the Supreme Court spoke only to the merits of cash payouts as a quid pro quo for promises of delayed generic market entry…Yet Actavis only involved a brand manufacturer’s bargain with three generic manufacturers ‘to pay millions of dollars to each generic,’ see id. at 2229, so the Supreme Court’s confined analysis hardly seems surprising. This Court does not see fit to read into the opinion a strict limitation of its principles to monetary-based arrangements alone. Adopting a broader interpretation of the word ‘payment,’ on the other hand, serves the purpose of aligning the law with modern-day realities.
Id. at *15 (citations omitted).
In interpreting the term “payment” to include non-monetary arrangements, Judge Young explicitly recognized that some courts had opted for a narrower construction of the term, but he decided not to follow suit. Id. (citing the pre-Actavis decision in In re Lamictal Direct Purchaser Antitrust Litig., 2012 WL 6725580, at *6 (D.N.J. Dec. 6, 2012); and Asahi Glass Co. v. Pentech Pharms., Inc., 289 F. Supp. 2d 986, 994 (N.D. Ill. 2003)). In his analysis, Judge Young also cited the Federal Trade Commission’s studies that contend that nonmonetary pay-for-delay agreements in which, for example, a brand drug manufacturer declines to sell an authorized generic during a first-filer’s 180-day exclusivity period, constitute reverse payments. Id. at n.22 (citing FTC Report on Authorized Generics). Thus, the Nexium court chose not to dismiss the “reverse payment” allegations despite the alleged lack of an actual monetary exchange between the brand company and the generics.
The Actavis decision was a highly anticipated one that most hoped would provide clear guidance to pharmaceutical companies trying to fashion settlement agreements that would avoid antitrust scrutiny. While that decision did provide instruction with regard to what test should be used when scrutinizing patent settlements for antitrust violations, the Supreme Court left it up to the district courts to determine when and how antitrust scrutiny should be applied. The three cases discussed above, however, make it clear that some district courts (two decisions of which are from the same district) seemingly are at odds as to what even constitutes a “reverse payment” that requires evaluation, i.e., when is a Hatch-Waxman settlement agreement even subject to antitrust scrutiny. The existence of such fundamental differences suggests that the guidance needed in the area of Hatch-Waxman settlements may be a long time coming.