In Federal Trade Commission v. Actavis, Inc., the Supreme Court, in a 5-3 decision written by Justice Breyer, reversed the Eleventh Circuit's dismissal of an FTC complaint under Section 5 of the Federal Trade Commission Act[1] challenging a pharmaceutical reverse payment settlement even though the exclusionary effect of the settlement was within the scope of the patent grant. At the same time, the Court rejected the "rule of presumptive illegality" advocated by the FTC and held that the FTC "must prove its case as in other rule-of-reason cases."[2] The decision upended the prevailing Circuit Court view that the competitive effects of settlement pursuant to Hatch-Waxman litigation are assessed by reference to the scope of the challenged patent.[3] While the ruling resolves the circuit split created by last year's Third Circuit decision in In re K-Dur Antitrust Litigation,[4] it dramatically alters the certainty implicit in, and the incentives for settlement of, patent infringement litigation between brand-name and generic pharmaceutical companies.

Supreme Rules of the Road

The Actavis Court provided limited guidance regarding the factors that should be utilized in applying the rule of reason. The goal of the analysis is to determine whether the "objective [of the settlement] is to maintain supracompetitive prices to be shared among the patentee and the challenger rather than face what might have been a competitive market." The Court noted that "traditional" considerations "such as likely anticompetitive effects, redeeming virtues [i.e., procompetitive effects], market power, and potentially offsetting legal considerations present in the circumstances, such as here those related to patents"[5] were among the relevant factors to be used. While "circumstances… related to patents" should be part of the analysis, the Court denied that this would be an administrative burden[6] because antitrust review of a reverse payment settlement "normally" does not require an assessment of patent validity.  Rather, the lower courts may presume that a large reverse payment serves as a surrogate for a patent's weakness and, therefore, its objective is to maintain supracompetitive prices.[7]

To what extent this is a rebuttable presumption remains to be seen; as Commissioner Wright recently noted, "what constitutes a 'large and unjustified' payment" is the central question the lower courts must answer.[8] What is clear is that the patentee may introduce justifications for the payment because the rule of reason implies that "offsetting or redeeming virtues are sometimes present"[9] in reverse payment settlements. Such justifications include "traditional settlement considerations, such as avoided litigation costs or fair value for services."[10] The Court suggested that the lower courts should distinguish between "settlement on terms permitting the patent challenger to enter the market before the patent expires," which would be procompetitive and "to the consumer's benefit," and those containing a "payment in return for staying out of the market."[11] Given that these two propositions are the flip side of the same coin, it is not clear how one would ultimately balance quicker entry against a monetary payment.

In short, the Actavis Court directs the lower courts to formulate the structure of rule-of-reason reverse payment antitrust analysis on a case-by-case basis going forward and to determine the factors that bear on a finding of anticompetitive conduct.[12] In so doing, however, the lower courts should "structure antitrust litigation so as to avoid, on the one hand, the use of antitrust theories too abbreviated to permit proper analysis, and, on the other, consideration of every possible fact or theory irrespective of the minimal light it may shed on the basic question — that of the presence of significant unjustified anticompetitive consequences."[13]

Heartburn in Massachusetts

The District of Massachusetts' recent decision, In re Nexium (Esomeprazole) Antitrust Litigation,[14] denying defendant pharmaceutical manufacturers' motion to dismiss, is one of the first lower court opinions to attempt to define the specific contours of rule-of-reason reverse payment analysis.[15] In Nexium, a putative class of direct and indirect purchasers alleged that AstraZeneca entered into reverse payment agreements with various generic competitors who had filed Abbreviated New Drug Applications ("ANDA") under the Hatch-Waxman Act. Following Ranbaxy's paragraph IV certification as the first-filer and AstraZeneca's commencement of patent infringement litigation, AstraZeneca allegedly "paid" Ranbaxy $1 billion to settle in exchange for a purported six-year delay in generic market entry. The $1 billion compensation was not cash, however, but took the form of AstraZeneca's agreement to refrain from marketing an authorized generic version of Nexium during Ranbaxy's 180-day generic exclusivity period. Such agreements are known as a "No-AG agreement."[16] The authorized generic product would have otherwise stood in direct competition with Ranbaxy's generic Nexium, thereby lowering the price of the drug to consumers as a result of competition. The complaint also alleges that Teva and Dr. Reddy's, both subsequent generic ANDA filers, agreed to settle and delay generic competition in exchange for AstraZeneca's forgiveness of patent infringement damages related to "at-risk" generic launches for different AstraZeneca pharmaceutical products "entirely disconnected from" the Nexium infringement suits.[17]  

Defendants originally moved to dismiss because the competitive effects were within the scope of the AstraZeneca's Nexium-related patents. The district court "hastily" denied the motions to dismiss, but after Actavis was handed down, the court decided to "revisit some of its earlier conclusions," and "adjust its rationale in light of" Actavis.[18] In so doing, the court did not change its ruling, but dismissed the motions to dismiss after applying a structured rule of reason analysis.

Market Power in a Relevant Market

The court first asked whether the complaint sufficiently alleged market power in a relevant market. Defendants argued that the plaintiffs' proposed market of branded and generic Nexium was too narrow because Nexium was interchangeable with and competed with other products, such as Prilosec. However, the court declined to sustain the motion based on that argument because the complaint alleged that Nexium does not exhibit significant cross-elasticity of demand with other antacids.[19] While plaintiffs' allegation may have been sufficient on a motion to dismiss, it may have a more difficult road in a motion for summary judgment or before a jury. Given that Nexium is a single product market, the complaint's allegation that AstraZeneca was a monopolist able to charge supracompetitive prices for branded Nexium also was sufficient to withstand dismissal.[20]

Harm to Competition

Next the court considered whether the complaint sufficiently alleged that competition was harmed. But for the settlements, plaintiffs claim that the generic manufacturers would have entered earlier, and therefore competition was harmed by the delay in generic competition. AstraZeneca attacked these allegations as rank speculation and Dr. Reddy's argued that it was precluded from entering before the expiration of Ranbaxy's 180-day exclusivity period. The court rejected both arguments. While the court conceded that "waxing poetic on the probability of … generic market entry" may not suffice to raise a triable antitrust issue in some cases, here the fact that the generic companies had launched "at risk" in the past suggested that they would have done so in this case.[21] Moreover, as to the subsequent filers, the court suggested that the settlements facilitated an illegal bottleneck in generic entry among Ranbaxy and the subsequent filers.[22] Finally, relying on the Supreme Court's holding that a large reverse payment may be indicative of anticompetitive effect, the court noted that the AstraZeneca's $1 billion payment "seems like outsize accommodation from a company to whom Ranbaxy was purportedly liable for patent infringement."[23] These factors "sufficiently implicate[d] adverse anticompetitive consequences" to allow the claims to proceed.[24]

Monetary verses Nonmonetary Compensation

AstraZeneca characterized the No-AG agreement as a license granting Ranbaxy an exclusive license to market generic Nexium during the 180-day exclusivity period. As such, there was no "monetary payment," to stay out of the market. Therefore, argued AstraZeneca, the plaintiffs failed to state a claim under the rules laid down in Actavis. The court rejected this argument out of hand, explaining that "[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."[25] Rather, the district court found that interpreting reverse payments to include nonmonetary forms of compensation, such as the No-AG agreement at issue, served to "align the law with modern-day realities."[26] Quoting Actavis, the district court explained 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."[27] In other words, a reverse payment that exceeds litigation costs and the value of any services rendered, such as the No-AG agreement with Ranbaxy and the forgiveness of unrelated infringement claims against Teva and Dr. Reddy's, serves as a proxy to demonstrate anticompetitive effects regardless of whether it takes the form of direct monetary compensation.

Justifications

The rule of reason analysis requires the court to balance the anticompetitive effects against the economic benefits of a restraint. In Nexium, the only benefit proffered was the general policy favoring the settlement of patent disputes. As noted above, the Supreme Court rejected the argument that the desirability of settlement was sufficiently procompetitive to outweigh a large reverse payment. As the defendants had not "put forward a shred of affirmative evidence" demonstrating any countervailing benefits of the settlements, the court denied the motion to dismiss.[28]

Conclusion: Looking to the Future

While the Nexium Court is the first to rule on whether nonmonetary compensation constitutes a reverse payment, others are poised to do so in the near future.[29] However, the more challenging question posed by Actavis is the extent, if any, that an assessment of patent validity plays in the analysis. As recently as September 20, 2013, in FTC v. Cephalon, Inc., the FTC moved to preclude Cephalon from introducing evidence of patent validity to defend against allegations that it paid four generic challengers to delay competition with its blockbuster prescription drug Provigil.[30] Citing Actavis' admonition that "it is normally not necessary to litigate patent validity to answer the antitrust question,"[31] the FTC takes the position that "the Supreme Court has held that such evidence does not provide a defense to the charge that a reverse payment was used to prevent the risk of competition."[32] The FTC's position in Cephalon is debatable, particularly where a defendant tenders evidence demonstrating a low likelihood of patent invalidity combined with a substantial economic loss should the patent be declared invalid. Contrary to Actavis' assertion that a large reverse payment "likely seeks to prevent the risk of competition,"[33] even where the risk of invalidity is small, a branded company with a strong, highly valuable patent may find it economically rational to settle with a large reverse payment to foreclose even a miniscule chance of invalidity. Therefore, such cases may represent the instances where evidence bearing on patent validity is necessary because the size of the reverse payment does not properly serve as a proxy for likely anticompetitive effects.