A controversy over what the Supreme Court has now defined as “reverse payment settlement agreements” has been brewing for years. A reverse payment settlement agreement is a settlement agreement resolving patent infringement litigation brought by an innovator against a generic drug manufacturer in which the innovator company makes a payment to the generic drug manufacturer, and the generic manufacturer agrees to delay its market entry until patent expiration or some time prior to patent expiration but after the date of the settlement. In a reverse payment settlement the generic manufacturer may also dismiss its challenge to the validity or enforceability of the asserted patent. In the spring of 2013, this controversy finally reached the Supreme Court and the Court issued a ruling on June 17, 2013.
Until now, there had been a sharp circuit split on the issue, with several Circuit Courts of Appeal ruling that reverse payment settlement agreements were illegal under federal antitrust law, while others – including the 11th Circuit, which ruled on the case that eventually reached the Supreme Court – held that such agreements were legal so long as the concession from the generic manufacturer did not exceed the scope of the patent in question. In Federal Trade Commission v. Actavis, Inc., No. 12-416, a 5-to-3 ruling, the Supreme Court reinstated the FTC’s challenge to a reverse payment settlement agreement. The Actavis decision turns on important issues at the intersection of patent, regulatory, and antitrust law.
The FTC had sought a ruling that reverse payment settlement agreements were presumptively illegal and that it was up to the defendants – the parties to such agreements – to demonstrate empirical evidence of “procompetitive” effects of the agreement. The majority opinion, written by Justice Breyer, did not go that far. But in reversing the Eleventh Circuit’s decision, the Court made clear that federal courts will carefully scrutinize such agreements to ensure their legality under antitrust law.
The Hatch-Waxman Act
To understand the Actavis decision, a brief overview of the regulatory regime is necessary. In 1984, the Hatch-Waxman Act amended the Federal Food, Drug and Cosmetic Act. One of the goals of Hatch-Waxman was to allow generic drug companies to bring generics to the market as quickly as possible. Prior to the Act, a generic manufacturer had little incentive to develop generic drugs: it would be required to conduct the same extensive research and trials as new drug applicants (“NDA”).
Hatch-Waxman changed the process by which generic drugs gain FDA approval. Now, a generic manufacturer may submit an Abbreviated New Drug Application (“ANDA”), and the ANDA applicant is not required to conduct new studies or trials. Instead, the FDA permits the generic drug manufacturer to rely on the information submitted by the original drug developer.
All ANDA applicants must show that their drug will not violate the existing drug’s patent protection. The applicant must certify that there is either no relevant patent, that it plans to wait until a patent expires, or it may make a so-called “Paragraph IV application” asserting that the innovator’s patent is invalid or will not be infringed by the generic.
Hatch-Waxman contains an important incentive to be the first generic manufacturer to successfully challenge an existing patent and bring a new drug to market. The first company to do so is entitled to a 180-day period of exclusivity; during this time, other firms are barred from selling competing generics. The purpose of this statutory period of exclusivity is to encourage generic manufacturers to challenge weak patents. In its opinion, the Supreme Court noted that this period of exclusivity could be “worth several hundred million dollars.”
FTC v. Actavis
In January 2003, Besins Healthcare, S.A. and Solvay Pharmaceuticals obtained a patent for AndroGel, a treatment for low testosterone in men. The AndroGel patent expires in 2020. Shortly after Besins and Solvay obtained the patent, Watson Pharmaceuticals (which later changed its name to Actavis) and another generics manufacturer filed a Paragraph IV ANDA seeking FDA approval to introduce a generic competitor to AndroGel. Actavis alleged that the AndroGel patent was invalid.
The AndroGel manufacturers filed suit against Actavis in August 2003. The parties eventually reached a settlement agreement in which the AndroGel plaintiffs agreed to pay Actavis’s partner $10 million per year for six years, and to share AndroGel profits with Actavis through September 2015, at an estimated value of $19 to $30 million. In exchange, Actavis and the other generic manufacturer defendants agreed not to enter the AndroGel market until August 31, 2015, approximately five years prior to expiration of the innovator’s patent.
Soon after the settlement agreement, the FTC filed an action against the parties to the settlement agreement, alleging that the parties had unlawfully agreed not to compete in violation of Section 5(a) of the Federal Trade Commission Act. The District Court dismissed the FTC’s lawsuit for failure to state a claim. On appeal, the Eleventh Circuit Court of Appeals reached the same conclusion, 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 potential of the patent.” In other words, as long as the generics manufacturer did not agree to refrain from acting in a way that would constitute infringement under a valid patent, the settlement agreement would not violate antitrust law.
The FTC appealed again, seeking a writ of certiorari from the Supreme Court. In view of the split among various U.S. Courts of Appeal on the issue of reverse payment settlement agreements, the parties each advocated for the Supreme Court to hear the case. The Supreme Court heard arguments on March 25, 2013 and issued its ruling on June 17, 2013.
Competing Legal Standards
Prior to the Supreme Court’s ruling, the legality of reverse payment settlement agreements was a question of geography – it depended on which federal court decided the case. Different Circuit Courts of Appeal followed different tests that often produced dramatically different results. The FTC advocated that the Supreme Court adopt the “prima facie / quick look” approach followed by the Third Circuit, while Actavis and the other defendants advocated for the “scope of the patent” test followed by other Circuit Courts.
“Scope of the Patent” Test: Actavis and the other drug companies argued that the Supreme Court should adopt the test applied by the Second, Eleventh, and Federal Circuit Courts of Appeal. Under this “scope of the patent” test, a court generally upheld a reverse payment settlement agreement if it did not exceed the scope of the patent, unless the underlying patent litigation was a sham or the patent was obtained by fraud. During oral argument, Actavis likened reverse payment settlement agreements to licensing dispute resolutions, explaining “[t]here’s always an argument to be made with any delayed entry situation that monopoly profits are shared. That’s just . . . inherent in the nature of it.”
“Prima Facie / Quick Look” Approach: In contrast, the Third, Sixth and D.C. Circuits typically concluded that reverse payment settlement agreements violate antitrust laws. These circuits adopted a rebuttable presumption that reverse payment settlement agreements are prima facie evidence of unreasonable restraints of trade. Agreements were upheld only if the defendants satisfied a “quick look” test by showing either that (1) payment was made for something other than delay of market entry and, therefore, no reverse payment existed or (2) reverse payment provided a competitive benefit. During oral arguments, the FTC urged the Court to adopt this test, asserting that it was necessary to stop the alleged anticompetitive impact of such agreements resulting from the agreement by generic manufacturers to delay market entry.
The Supreme Court Rejects Both Tests And Adopts The Rule Of Reason
The Supreme Court held that the Eleventh Circuit erred in affirming the dismissal of the FTC’s complaint under the “scope of the patent” evaluation, but declined to adopt the FTC’s “quick look” approach. The Court emphasized that the case implicated both patent law and antitrust law and policy given the “unusual” nature of reverse payment settlement agreements.
The bulk of the Court’s opinion addresses why the “scope of the patent” test should not apply. Among other things, the Court emphasized that by allowing the parties to share monopoly profits, reverse payment settlement agreements benefit both the patentee and the challenger, to the detriment of the consumer. Likewise, given the patent protection, the patentee likely has the power to bring about anticompetitive harm by setting prices higher than the competitive level. Antitrust challenges to reverse payment settlement agreements do not, the Court noted, require a ‘mini-trial’ on the validity of the patent itself, and accordingly, such challenges are more feasible than the Eleventh Circuit predicted. Finally, parties may settle patent litigation in ways other than the plaintiff paying the defendant to stay out of the market for some period of the patent’s term.
Although the Court refused to deem reverse payment settlement agreements presumptively unlawful, it stressed that such payments may have anticompetitive effects. The Court announced that such agreements will now be evaluated under the “rule of reason.” In its most simple form, the rule of reason requires only that the restraint on trade does not “unreasonably” limit competition. Despite the fluid nature of this test, the Court decided to “leave to the lower courts the structuring of the present rule-of-reason antitrust litigation.”
In his dissent, Chief Justice Roberts wished “[g]ood luck to the district courts that must, when faced with a patent settlement, weigh the likely anticompetitive effects, redeeming virtues, market power, and potentially offsetting legal considerations present in the circumstances.” While the Court refrained from setting out specific rules to govern the going-forward legality of reverse payment settlement agreements, the Court did identify certain factors that may be relevant to the determination of legality of a reverse payment settlement agreement, including the payment’s: “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.”
The Court held, however that “[i]f the basic reason” behind entering the reverse payment settlement agreement “is a desire to maintain and to share patent-generated monopoly profits, then, in the absence of some other justification, the antitrust laws are likely to forbid the arrangement.” However, “[w]here a reverse payment reflects traditional settlement considerations, such as avoided litigation costs or fair value for services, there is not the same concern that a patentee is using its monopoly profits to avoid the risk of patent invalidation or a finding of noninfringement.”
The Future Legality Of Reverse Payment Settlement Agreements
Application of the Supreme Court’s “rule of reason” test is likely to raise many questions and issues as lower courts seek to apply the ruling and companies seek to evaluate the circumstances in which such agreements may be proper.
Published June 21, 2013.