On June 17, 2013, the United States Supreme Court (in a split decision) held that settlements of pharmaceutical patent disputes where a patent holder pays a generic company not to produce a product based on its patent may be a violation of antitrust laws. The Court’s decision reversed the decision of the Eleventh Circuit Court of Appeals, which held that such settlements were lawful so long as the agreement not to produce and market the generic product fell within the exclusionary potential of the patent. The Supreme Court found that settlements in the Hatch-Waxman context are subject to the same antitrust review as any other settlement agreement. This is the second time this term that the U.S. Supreme Court has sided with the Federal Trade Commission (FTC) in an antitrust case. The decision is not, however, a complete win for the FTC. The Court rejected the agency’s suggestion that reverse payment agreements should be presumed unlawful. After remand, the FTC will be required to prove that the settlement agreements at issue unreasonably restrain competition.

Case Background:

Under the Hatch-Waxman Act, a generic drug maker may file an Abbreviated New Drug Application (ANDA) with the FDA. An ANDA streamlines the approval process for generic drugs that are chemically identical to a brand name drug that has already been approved. The generic manufacturer can make one of four certifications about its right to produce the drug. If the generic manufacturer certifies that the brand name’s patent is invalid or will not be infringed, known as a Paragraph IV certification, the generic manufacturer must give notice to the patent holder. The patent holder then has 45 days to file a patent infringement suit, based on the statutory (theoretical) infringement of a Paragraph IV certification. If the patent holder fails to do so, the FDA proceeds with the ANDA approval process. If a suit is filed, the FDA stays the approval process for 30 months to allow the parties to resolve the patent dispute. If the court decides that the patent is invalid or will not be infringed, the FDA may approve the ANDA and the first ANDA applicant receives a 180-day exclusivity period (where no other generic may enter the market).

In 2003, Watson and Paddock filed ANDAs for a generic version of AndroGel. Both manufacturers certified that their generic versions of AndroGel did not infringe Solvay’s patent or, alternatively, that Solvay’s patent was invalid. Solvay filed a patent infringement suit within the 45-day window, triggering the 30-month stay of the FDA’s approval of generic versions of AndroGel. After discovery (and while motions for summary judgment were pending), the patent litigation settled. Pursuant to the terms of the settlement, Solvay agreed to terminate the infringement litigation and make payments to the generic drug manufacturers, and in exchange, Watson and Paddock agreed (1) to promote and market AndroGel to certain doctors and (2) that they would not market generic versions of AndroGel until August 31, 2015 (unless another generic version entered the market first). Par1 agreed to serve as a back-up manufacturer for AndroGel.

The FTC sued Solvay and the generic manufacturers, claiming that the settlement payments were made to delay competition. The FTC argued that the fact that Solvay made a payment to the generics was evidence that the settlement harmed competition and consumers.

The district court dismissed the FTC’s complaint and the Eleventh Circuit affirmed. The Eleventh Circuit, following its earlier decisions, held that so long as the Hatch-Waxman settlement’s restriction was within the exclusionary scope of the patent (e.g., that the duration of the agreement not to compete was within the patent’s temporal scope) there was no antitrust violation. The Eleventh Circuit reasoned that a party who is likely to win may still be justified in settling the case to mitigate risk and avoid litigation costs and that the FTC’s approach would require an after-the-fact calculation of the likely success of a patent holder in a settled lawsuit. The FTC appealed the Eleventh Circuit’s decision.

Supreme Court’s Ruling:

In a 5-3 decision written by Justice Breyer, the Supreme Court reversed the Eleventh Circuit and rejected the scope of the patent test in favor of the rule of reason. Although the Court recognized that the owner of a valid patent can exclude competitors, “an invalidated patent carries with it no such right.”2 The Court held that whether a particular restraint is beyond the limits of a patent monopoly is the conclusion that flows from an antitrust analysis, not the starting point, and ruled that a court must examine a Hatch-Waxman settlement agreement by reviewing its likely anti-competitive effect, redeeming virtues and the parties’ market power.

The Court summarily dismissed the Eleventh Circuit’s concerns that review of a settlement agreement would require re-litigation of the underlying patent dispute, stating that “it is normally not necessary to litigate patent validity to answer the antitrust question . . . . [because an] unexplained large reverse payment itself would normally suggest that the patentee has serious doubts about the patent’s survival….”3 The Court also disagreed with the Eleventh Circuit’s suggestion that a rule of reason review would discourage settlement and found that companies desiring settlement could “settle in other ways, for example, by allowing the generic manufacturer to enter the patentee’s market prior to the patent’s expiration, without the patentee paying the challenger to stay out prior to that point.”4 Relevant factors in determining whether a settlement is anti-competitive include the payment size, its scale in relation to the payor’s anticipated costs of future litigation and its independence from other services for which it might represent payment.

After remand, the FTC will be required to prove the settlement agreements at issue unreasonably restrained competition.

Conclusions and Implications:

  • Large reverse settlement payments that are not tied to litigation costs or services rendered will likely receive greater antitrust scrutiny. In contrast, settlements that contain no payment and only adjust the generic entry date (to a period prior to the expiration of the patent) are unlikely to receive scrutiny.
  •  Parties that plan to settle a dispute with a “reverse payment” should take care to establish that the payment is reasonable considering (1) the litigation cost and (2) the value of any services rendered by the generic. Third-party valuations may be used to demonstrate that a payment will not be anti-competitive.
  • While the decision left the lower courts to craft the rule of reason inquiry for reverse payments, the Court noted that it would “normally not [be] necessary to litigate patent validity to answer the antitrust question,” and even directed lower courts to look at other factors like “the size of the unexplained reverse payment” as a proxy for the patent’s strength.5