On June 17, 2013, the US Supreme Court ruled in the case of FTC v. Actavis, 570 U.S. ___ (2013), that “reverse payment” settlement agreements—where they are large and unjustified—may violate the antitrust statutes. In doing so, the Court reversed a decision of the Eleventh Circuit Court of Appeals which held that such an agreement is generally “immune from antitrust attack so long as its anticompetitive effects fall within the scope of the exclusionary potential of the patent.”

The Supreme Court noted that “most if not all reverse payment settlement agreements arise in the context of pharmaceutical drug regulation,” which is the result of certain unique features of the Hatch-Waxman Act1, including (i) the ability of generic manufacturers to take advantage of abbreviated procedures for obtaining FDA approval once the brand-name drug has been approved, (ii) the provision allowing generic manufacturers to certify that any listed patent is either invalid or will not be infringed by the generic drug (the so-called “paragraph IV” route), and (iii) the 180-day period of exclusivity afforded the first generic manufacturer to file its Abbreviated New Drug Application.

This case arose from a settlement agreement among manufacturers of testosterone replacement drugs. Solvay Pharmaceuticals obtained FDA approval of its drug, AndroGel, in 2000. In 2003, Solvay received a patent for the drug. Later that year, Actavis (now known as Watson Pharmaceuticals) filed an ANDA for a generic drug modeled after AndroGel. Shortly thereafter, another generic manufacturer, Paddock Laboratories, filed an ANDA of its own. Both generic manufacturers certified under Paragraph IV of the Hatch- Waxman Act either that Solvay’s patent was invalid or that the generic drugs did not infringe the patent. Solvay sued the generic manufacturers for patent infringement, which the parties eventually settled. The settlement included a payment of millions of dollars from Solvay to the alleged infringers. The settlement agreement also obligated the generic manufacturers to provide certain services to Solvay, including promoting AndroGel to urologists.

The Federal Trade Commission alleged that the settlement violated the antitrust laws because its purpose was to restrict competition in the market and to divide Solvay’s monopoly profits among the parties. The Court of Appeals for the Eleventh Circuit rejected the FTC’s challenge and held that “absent sham litigation or fraud in obtaining the patent, 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 patent.” Because the settlement agreement would have allowed Actavis to enter the market before the expiration of Solvay’s patent, the Eleventh Circuit held it did not violate the antitrust statutes.

The Supreme Court began its analysis by observing that it has always sought to strike a balance between patent and antitrust policies—not, as it suggested the Eleventh Circuit had done, considering patent policy to the exclusion of relevant antitrust policies. The Court cited a number of cases to support its position, including one in which the Court found a settlement involving competing patents to violate the antitrust laws. The Court also cited the “procompetitive thrust” of the Hatch-Waxman Act as supporting its position that reverse payment settlements are not shielded from antitrust scrutiny merely because they do not exceed the scope of the patent.

While the Supreme Court acknowledged that settlement agreements are generally favored because they avoid the need to engage in time-consuming, complex, and expensive litigation, that consideration is not sufficient to outweigh the relevant antitrust concerns in this situation for several reasons. First, a large and unjustified payment to the alleged infringer has the potential for genuine adverse effects on competition. Second, these anticompetitive effects will sometimes prove unjustified, though not always. For example, where the payment roughly approximates litigation expenses saved by the settlement, or reflects compensation to the generic manufacturer for, e.g., distributing the brand-name drug or helping to develop the market, these settlements would not necessarily have anticompetitive consequences. Third, where the payment clearly has the potential to bring about anticompetitive harm, the patent holder usually has the wherewithal to bring that harm about in practice. Fourth, antitrust litigation in this situation is likely to be easier than the Eleventh Circuit envisioned. That is, courts will not necessarily need to decide the validity of the patent to decide the antitrust question. In this regard, the Court noted that a large and unexplained payment suggests the patent holder has serious doubts about the patent’s validity and that the purpose of the payment is to maintain supracompetitive prices. Fifth, the fact that “reverse payment” settlements may be found to violate the antitrust laws does not prevent the parties from settling their patent disputes by other means. For example, the parties may agree to allow the generic manufacturer to enter the market before the patent’s expiration without the patent holder paying the alleged infringer to stay out of the market before then. The fact that the parties might prefer to structure the settlement as a “reverse payment” is evidence that the basic reason for the settlement is a desire to maintain and share monopoly profits.

Finally, the Supreme Court declined to adopt the FTC’s position that “reverse payment” settlement agreements ought to be presumptively illegal under the “quick look” approach. This is because the likelihood that a “reverse payment” will have anticompetitive consequences depends on a number of factors, including “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.” Given these complexities, the Court concluded that a Rule of Reason analysis is the most appropriate in this situation.

This decision by the Supreme Court is likely to have a significant impact on the market for generic pharmaceuticals. Either, as the majority hopes, generics will become available sooner, thereby reducing the prices consumers must pay for drugs. Or, as the minority fears, the decision could actually stifle generic innovation and competition by discouraging settlement of costly patent litigation. What is clear is that generic drug manufacturers who wish to file an ANDA and challenge the validity of a patent under Paragraph IV of the Hatch-Waxman Act have a new set of risks and potential rewards to evaluate in making that decision. And should the parties to the ensuing patent litigation wish to settle their dispute, that settlement will need to be structured in a way that minimizes or avoids the likelihood that the parties will later be found to have violated the antitrust laws.