On April 25, the Eleventh Circuit issued its opinion in Federal Trade Commission v. Watson Pharmaceuticals,1 a much-anticipated decision involving an antitrust challenge to a “reverse payment” patent settlement. Watson confirms that the Eleventh Circuit uses the same standard as the Second and Federal Circuits for assessing such settlements under the antitrust laws.

Of equal significance, Watson roundly rejects the FTC’s long-standing skepticism about reverse payment settlements, and does so in quotable, plain-spoken language. Thus, the opinion provides useful ammunition for pharmaceutical companies that find themselves defending the lawfulness of their patent settlements.

Overview of Reverse Payment Settlements

“Reverse payment” settlements—characterized by critics as “pay-for-delay” agreements—are a mechanism for resolving patent litigation between a branded manufacturer and potential generic entrant. In a typical case, a generic firm files an Abbreviated New Drug Application (“ANDA”) with FDA, certifying that its proposed generic form of a drug does not violate the branded manufacturer’s patents, or that those patents are invalid. This filing often prompts a suit for patent infringement by the branded manufacturer.

Given the cost and uncertainty of patent litigation, the parties frequently settle such suits rather than litigating them to conclusion. In a “reverse payment” settlement, the generic firm typically agrees not to enter the market for a certain period of time after the settlement, but is allowed to enter before the expiration of the relevant patent(s). In addition, as part of the settlement, the branded manufacturer provides some further consideration to the ANDA applicant, beyond the right to enter the market before patent expiration.

Antitrust Challenges to Reverse Payment Settlements

The FTC has long taken the position that most reverse payment settlements are anticompetitive and should be illegal under the antitrust laws. The FTC views the consideration flowing to generic firms under such settlements as a payment by the branded manufacturer to postpone competition, which denies consumers the benefit of lower-cost generic drugs.

Among courts, however, the prevailing view is that reverse payment settlements are lawful if they restrict competition only within the facial exclusionary scope of the patent, unless the patent lawsuit itself was a sham or the patent was procured by fraud. Courts adopting this view have grounded their decisions on the policy importance of promoting settlement and the fact that—at least until its patent expires—a branded manufacturer has the legal right to exclude others from launching a competing product that falls within the scope of the patent. From this perspective, a settlement that allows generic entry before patent expiration arguably enhances, rather than lessens, competition.

FTC v. Watson Pharmaceuticals

In Watson, the FTC urged the Eleventh Circuit to interpret its prior decisions on reverse payment settlements as requiring courts to assess the strength of the patent claims involved in the underlying patent litigation, and then to compare the likely outcome of that suit to the competitive restrictions embodied in the settlement.2

In its complaint, the FTC alleged that Solvay had settled a patent infringement suit by agreeing to pay consideration to two generic firms in exchange for their commitment not to launch generic versions of Solvay’s AndroGel for several years. The FTC asserted that the settlement unlawfully reduced competition because AndroGel’s patent protection was weak, “Solvay was not likely to prevail” in the patent litigation, and therefore generic AndroGel likely would have reached the market sooner but for the restrictions in settlement agreement. The FTC argued that, under the Eleventh Circuit’s earlier decision in Schering-Plough Corp. v. FTC,3 courts considering the anticompetitive effect of a patent settlement must evaluate the patent’s strength, and not merely its facial scope.

The Eleventh Circuit flatly rejected the FTC’s argument, affirming dismissal of the complaint and declaring that the FTC had misread Schering-Plough.4 The court firmly embraced the “scope of the patent” test, holding 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 power of the patent.”5 In doing so, the Eleventh Circuit put to rest any argument that its test for reverse payment settlements is any different from the test adopted by the Second and Federal Circuits in Tamoxifen and Ciprofloxacin.6

In rejecting the FTC’s proposed standard, the Eleventh Circuit emphasized that it is often rational for companies to settle patent litigation, including on a reverse-payment basis, because such cases are “a high stakes, spin-the-chambers, all or nothing undertaking.”7 The court noted that adopting a test that turned on the perceived strength of a patent would impose antitrust liability based on a prediction of how “some other court in some other case at some other time was likely to have resolved some other claim if it had been pursued to judgment.”8 The court explained that this approach would “undo much of benefit of settling patent litigation” by requiring the parties to try “a patent case within an antitrust case.”9 Noting that most non-specialized courts are “ill-equipped” to asses the strength of patent claims, the Eleventh Circuit concluded that asking generalist judges or juries to retroactively predict the outcome of separate patent litigation “is too perilous an enterprise to serve as a basis for antitrust liability and treble damages.”10 Finally, the court expressed skepticism that reverse payment settlements have a real-world effect on competition, observing that there are usually several potential generic challengers to drug patents, and that branded firms could not practically expect “to escape the jaws of competition” by buying them all off through a patent settlement.11

In short, the Eleventh Circuit’s opinion offers a full-throated rebuttal to the FTC’s long-standing hostility toward reverse payment settlements. With this decision, the current weight of judicial authority clearly favors the “scope of the patent” rule, under which pharmaceutical companies will have much greater predictability when crafting settlement of high-stakes patent litigation.