The name of the game in the pharmaceutical industry is exclusivity. According to Drugs.com, sales in the US for a blockbuster drug like Lipitor® can go from nearly $2 billion a quarter to less than $200M a quarter less than a year after the introduction of a generic version of the drug. (See www.drugs.com.) On March 25, 2013, the U.S. Supreme Court heard argument in Fair Trade Commission v. Actavis (12-416) regarding one of the strategies used by drug companies to extend their exclusivity, the so-called “reverse payment settlement.”

The party wishing to practice a patent in the typical patent licensing scenario provides a payment or other consideration to the patentee in exchange for a promise by the patentee not to sue for infringement. In the pharmaceutical industry, the branded pharmaceutical company that owns a patent covering a drug sometimes will pay a generic drug company that has filed an Abbreviated New Drug Application under the Hatch-Waxman Amendments to delay the entry of a competing product and withdraw challenges to the validity of the patent. These reverse payment or “pay-for-delay” settlements have become more common in recent years and have been challenged by the Fair Trade Commission (FTC), pharmaceutical wholesalers, and pharmacies as anticompetitive. The FTC estimated in 2010 that reverse payment settlements in the pharmaceutical industry cost U.S. consumers $3.5 billion annually. The FTC published another reportat the beginning of this year indicating an increase in reverse payment settlements.

Actavis and the “scope of the patent” test

As discussed in the opinion of the Eleventh Circuit Court of Appeals, the reverse payment settlement in Actavis relates to a patent set to expire in 2020 covering a formulation of AndroGel®, a topical gel that treats the symptoms of low testosterone in men. Sales of AndroGel® generated revenue in excess of $1.8 billion between 2000 and 2007. Two drug companies filed ANDAs to market generic versions of AndroGel®, leading to patent litigation between the marketer of AndroGel® and the generic competitors. The generic drug companies estimated that the generic version would sell at 25% of the price of AndroGel® and decrease sales of AndroGel® by 90%.

In 2006, after the lifting of the 30-month stay when the litigation was still ongoing, the parties reached a settlement under which the defendants agreed not market a generic version of AndroGel® until August 31, 2015. During the nine years of AndroGel® exclusivity, the generic drug companies would receive a total of $29-40 million per year. As required by statute, the parties reported their settlement to the FTC.

The FTC then filed suit against the settling parties alleging that the reverse payment settlements were unlawful agreements not to compete. The FTC asserted that the patentee was not likely to prevail in the infringement actions because of the persuasive arguments regarding the invalidity and noninfringement of the asserted patent. The FTC argued that because the AndroGel® patent “was unlikely to prevent generic entry,” the reverse payments extended an unauthorized monopoly.

The district court dismissed the FTC’s complaint based on Eleventh Circuit precedent because the FTC did not allege that the settlement imposed a greater exclusion than that provided by the patent itself. The FTC appealed, challenging the “scope of the patent” test for anticompetitive behavior. The Eleventh Circuit affirmed, and the FTC petitionedthe Supreme Court for review. The briefs, including a number of amicus curiae briefs, can be found here, including a brieffrom one of the co-sponsors of the Hatch-Waxman amendments, Rep. Henry Waxman.

K-Dur and the “quick look” test

Shortly after the Eleventh Circuit’s decision in Actavis, the Third Circuit considered a similar appeal and reached a different result based on a different legal test. The In re K-Dur Antitrust Litigation appeal related to the settlement of patent litigations involving patents covering a controlled-release microencapsulated potassium chloride formulation. One settlement required the generic drug company to delay entry of its product of four years for a payment of $60 million. But the settlement also included a cross-license to certain patents owned by the generic drug company.

Despite the branded and generic drug companies’ argument that the payment related to the licensing of patents not involved in the litigation, the Third Circuit found that there was a reverse payment. After reviewing the precedent from other circuits, the K-Dur panel rejected the scope of the patent test because reverse payments “permit the sharing of monopoly rents between would-be competitors without any assurance that the underlying patent is valid.” Instead, the Third Circuit held that courts should apply a “quick look rule of reason” analysis, which shifts the burden to defendants to provide evidence that per se illegal behavior had an economic justification. Under those circumstances, defendants in quick look situations have only rarely been able to provide the justification necessary to avoid antitrust liability. The K-Dur defendants also petitioned for review by the Supreme Court, which has yet to rule on their petition.

The Oral Argument in actavis

Deputy Solicitor General, Malcolm Stewart, argued on behalf of the Government, while Jeffrey Weinberger argued on behalf of the respondent pharmaceutical companies. Justice Samuel Alito recused himself from the proceedings. Thus, a 4-4 decision, which would uphold the Eleventh Circuit’s ruling that the settlements are lawful, is possible.

Shortly after Mr. Stewart began his argument in support of the quick look test, Justice Scalia challenged him to identify “a case in which the patentee acting within the scope of the patent has nonetheless been held liable under the antitrust laws.” Justice Kennedy indicated his concern that the quick look test makes no attempt to distinguish between weak patents and strong patents because settlements involving either would be presumptively unlawful. Justice Breyer, on the other hand, asked why the Government would not be satisfied with an acknowledgement that reverse payment settlements sometimes have anticompetitive effects and should be subject to the standard rule of reason analysis without a presumption for or against legality. Mr. Stewart responded that such an approach would bring in the “kitchen sink”—i.e., unnecessarily complicate the analysis.

For respondents, Mr. Weinberger responded to the question posed by Justice Scalia by stating that there had in fact been no decision where the court “has ever found a restraint outside the scope of the patent to be unlawful.” However, Justice Sotomayor challenged Mr. Weinberger to suggest another licensing situation where a patentee and a licensee appear to be sharing the monopoly profits. Failing to provide a clear example in response to Justice Sotomayor, Mr. Weinberger argued instead that judges would have a hard time determining whether a given agreement was anticompetitive under the rule of reason.

The questions posed at the argument suggest that Justice Scalia favors affirmance, while four justices (Kennedy, Breyer, Sotomayor, and Kagan) favor applying the rule of reason analysis or require at least some additional analysis of the anticompetitive effects beyond either the “scope of the patent” and “quick look” tests. A decision is expected in the early summer.