The fight to curtail “pay-for-delay” or “reverse payment” settlements between pharmaceutical patent holders and generic drug makers received a shot in the arm on Monday, as the Supreme Court held this week that these agreements are not immune from antitrust scrutiny.[1] The decision, however, was not a complete victory for either regulators or private plaintiffs. The Court refused to find pay-for-delay agreements presumptively unlawful. Instead, they are subject to a “rule of reason” analysis.

Background: Reverse payment settlements and the drive to reduce their use

The issue of reverse payment settlements arises from the framework of the Hatch-Waxman Act, which regulates patents for brand name pharmaceutical drugs and the permissibility of similar generic drugs entering the market. To gain approval from the FDA, generic drug makers must demonstrate that their product will not violate the patent of any brands on the market. One way to accomplish this is to take the “paragraph IV” route and certify to the government that the patent at issue “is invalid or will not be infringed by the manufacture, use, or sale” of the generic drug.

These paragraph IV applications often lead to litigation, with the patent holder suing for infringement and the new market entrant counterclaiming on grounds of patent invalidity. Frequently, the patent holder settles these disputes by paying the alleged infringer money in exchange for that generic agreeing not to enter the market for a specified period of time.

The FTC and private plaintiffs have persistently argued that these settlements violate antitrust laws and cost consumers money. Fundamentally, the challengers argue that pay-for-delay settlements discourage challenges to patent validity. They also argue that providing monopoly power to companies whose patents have not been adjudged valid runs counter to the pro-competitive goals of the Hatch-Waxman Act. Based on these challenges, a circuit split emerged on the appropriate treatment of reverse payment agreements, with some circuits applying a scope-of-the-patent test and some finding the agreements subject to antitrust scrutiny and presumptively unlawful.[2] The scope of the patent test looks purely at the extent to which a settlement agreement falls within the exclusionary zone of the patent at issue, without consideration of antitrust law or policy.

The Supreme Court weighs in: Federal Trade Commission v. Actavis, Inc.

In light of the deep divide in the circuit courts, the Supreme Court entered the fray. On Monday, the Court handed down its decision in Federal Trade Commission v. Actavis, Inc. The Court concluded that reverse payment agreements are subject to antitrust scrutiny and will not be found valid simply because they fall within the scope of the patent’s exclusionary power, which pertains, for example, to the subject matter of the patent and its time limit. The case came up to the Court from the Eleventh Circuit, where a three judge panel affirmed the district court’s use of the scope-of-the-patent test.

Justice Breyer wrote for the Court in a 5-3 majority. The Court first stated that the policies underlying antitrust law are relevant in determining the extent of the monopoly power granted by a patent in this context. Settlement of patent validity cases can have “significant adverse effects on competition” and while holders of valid patents have the privilege of an exception from the antitrust laws, holders of invalid patents do not. Settlement of suits like the one at issue here conclude without answering the question of validity and so do not answer whether a patentee has the right, as a matter of antitrust law and policy, to behave anti-competitively. Furthermore, the Court held that the structure of these settlements, in which “a party with no claim for damages . . . walks away with money simply so it will stay away from the patentee’s market,” to be different in an important way from more traditional settlements in which a party is paid some amount in correspondence to the value of its claim. In recognition of these factors, the Court held that an inquiry into antitrust law is called for in these cases.

Answering arguments by the dissent that its holding was novel, the majority looked to past Court precedent in noting that other patent-related settlements had been held invalid because they ran afoul of antitrust law and policy. The majority further argued that its decision was supported by the “procompetitive thrust” of the Hatch-Waxman Act.

The Court next grappled with what it deemed to be the best argument for the Eleventh Circuit’s decision: that a strong public policy favors settlement and allowing challenges to reverse payment settlements will discourage efficient disposition of claims and further increase costs in the already expensive field of patent litigation. The Court gave five reasons why the challengers should, in spite of these arguments, still be able to press antitrust claims:

  • First, the Court held that the specific restraints on commerce presented by the reverse payment settlement arrangement have the potential to lead to “genuine adverse effects on competition.”
  • Second, in some unspecified number of cases, these adverse effects on competition will not be justified by normal settlement considerations like avoiding the costs of litigation.
  • Third, in situations where the potential for unjustified anticompetitive harm exists, a patentee likely has the “power to bring that harm about in practice.”
  • Fourth, the Court held that these antitrust actions are likely to prove more feasible to administer than the Eleventh Circuit predicted they would be. The Court expressed confidence that the “size of the unexplained reverse payment” would be a useful proxy for patent validity and that an expensive mini-trial of sorts on the issue of validity will not be necessary.
  • Fifth, the Court held that the increased difficulty of settling via reverse payment that its decision creates does not preclude other forms of settlement. For example, a patentee can simply compensate a generic drug maker by granting them early entry into the market.

In a brief coda to the opinion, the Court refused to apply a “quick look” approach to the reverse payment issue and held that such settlement arrangements are not presumptively invalid. The Court held that the antitrust issues implicated by reverse payments are of sufficient complexity and variability across industries that a “rule of reason” inquiry is called for. The Court was quick to note that disavowing the “quick look” approach did not imply an endorsement of an unduly heavy burden on the challengers in challenging these settlements.

The Court concluded by leaving open to the discretion of district courts how these suits will be structured going forward. Those trial judges will do so using the sparse guidance from the Court that the burden of proof should vary according to the circumstances of each case and that the burden should not necessarily require the challenger to “litigate the patent’s validity, empirically demonstrate the virtues or vices of the patent system, present every possible supporting fact or refute every possible pro-defense theory.”

What comes next?

With some resolution coming to this area of the law, there are still key open issues. First, the Court’s opinion provided minimal guidance on how future challenges to reverse payment settlements will proceed, aside from its clear repudiation of the antitrust presumptions adopted by the circuit courts. Second, the Court’s endorsement of non-monetary forms of settlement compensation, like giving a generic drug maker the right to enter a market early, could have an impact on the types of settlement compensation offered in this context. The FTC, for example, has sought to take legal doctrine hostile to reverse payments and extend it to “no-authorized generic” commitments, where a patent holder settles a dispute by securing the other party’s delayed market entry by pledging to not compete with the generic manufacturer for a certain period of time by bringing an authorized generic drug to market.[3] Federal Trade Commission Chairwoman Edith Ramirez issued a statement indicating that the Commission looks “forward to moving ahead with the Actavis litigation and showing that the settlements violate antitrust law. [The agency is] also studying the Court’s decision and assessing how best to protect consumers’ interests in other pay for delay cases.”[4]

This legal update comes from the Antitrust and Competition Practice Group and the Life Sciences Group and was prepared by Pamela Jones Harbour, Darryl Anderson, Layne Kruse, and John Byron of Norton Rose Fulbright.[5]

[1] FTC v. Actavis, Inc., No. 12-416 (U.S. June 17, 2013).
[2] Compare In re K-Dur Antitrust Litig., 686 F.3d 197, 218 (3d Cir. 2012), petition for cert. filed, 81 U.S.L.W. 3090 (U.S. Aug. 24, 2012) (applying a “quick look” test and holding that reverse payment settlements are prima facieunlawful); In re Cardizem CD Antitrust Litig., 332 F.3d 896, 907-09 (6th Cir. 2003) (holding that these agreements are per se illegal restraints of trade), with Schering-Plough Corp. v. FTC, 402 F.3d 1056, 1075-76 (11th Cir. 2005) (applying a scope of the patent analysis and finding the agreement legal).
[3] See FTC Submits Amicus Brief Explaining that Drug Companies Use “No-Authorized Generic” Agreements to Delay Generic Competition, FTC.gov (Oct. 9, 2012), http://www.ftc.gov/opa/2012/10/amicusbrief.shtm.
[4] Statement of FTC Chairwoman Edith Ramirez on the U.S. Supreme Court’s Decision in FTC v. Actavis, Inc., FTC.gov (June 17, 2013), http://www.ftc.gov/opa/2013/06/actavis.shtm.
[5]The authors gratefully acknowledge the assistance of Jim Powers of the University of Texas School of Law in the preparation of this legal update.