Antitrust Alert: Supreme Court Holds Reverse Payment Settlements Potentially Anticompetitive – Further Guidance Awaits

The Supreme Court issued its opinion in FTC v. Actavis, Inc., No. 12-416, a case with the potential to have far-reaching effects both within the pharmaceutical industry and for intellectual property litigation more generally.  Actavis concerned the appropriate standard to apply in antitrust challenges to the settlement of Hatch-Waxman patent litigation between branded and generic drug makers.

Background.  For the past decade, such patent litigation settlements have been under sustained governmental scrutiny and private antitrust attack, at least when the settlements involve consideration flowing from the patentee to the accused infringer (a "reverse payment").  However, until last year, all circuits to have confronted the issue had decided that the "scope of the patent" test was the appropriate standard.  Under this rubric, a settlement within the exclusionary potential of the patent could not give rise to antitrust liability unless the patent litigation was a sham or the patent itself procured by fraud.

In May 2012, the Third Circuit created a circuit split by adopting the Federal Trade Commission’s proposed presumption of illegality.  This standard begins with an assumption that a reverse-payment settlement violates antitrust law, and it then places the burden on the antitrust defendants to prove either (1) that the settlement compensation was for some other purpose than delaying generic entry or (2) had other pro-competitive redeeming virtues, such as saving a generic drug maker on the brink of bankruptcy. 

The merits briefing in Actavis presented the Court with a stark choice between these two standards.  But the oral argument quickly revealed that the justices were not limiting their options.  Justice Breyer and Sotomayor repeatedly asked both advocates why district courts could not simply apply the standard antitrust rule of reason.  Their view ultimately carried the day. 

The Majority.  Justice Breyer wrote the majority opinion on behalf of five justices.  The opinion rejects both the scope of the patent test applied by the Eleventh Circuit in Actavis itself and the presumption of illegality urged by the Government and adopted by the Third Circuit in its K-Dur decision.  Instead, the majority instructed district courts to apply a rule of reason analysis that broadly considers "traditional antitrust factors such as likely anticompetitive effects, redeeming virtues, market power, and potentially offsetting legal considerations present in the circumstances, such as here those related to patents." 

The potential anticompetitive effect, said the majority, occurs when the patentee gives the generic "a share of its monopoly profits" rather than "face what might have been a competitive market" if litigation continued.  Regarding the patent merits, the Court suggested that the unexplained presence of a large payment could be used as a "workable surrogate for the patent’s  weakness," so that courts would not be "forc[ed] to conduct a detailed exploration of the validity of the patent."

The Dissent.  Chief Justice Roberts dissented, joined by Justices Scalia and Thomas.  (Justice Alito was recused).  The dissent criticized reliance on the "amorphous" and "unruly" rule of reason test and would have held that the patent merits governed the antitrust issue.  Indeed, the first words of the dissent were the simple declaration that "Solvay Pharmaceuticals owned a patent."  The dissent also critiqued the majority’s "new rule," explaining that the scope of the patent test was dictated "under our precedent."  The majority’s reasoning, argued the Chief Justice, is "unresponsive to the basic problem that settling a patent claim cannot possibly impose unlawful competitive harm if the patent holder is acting within the scope  of a valid patent and therefore permitted to do precisely what the antitrust suit claims is unlawful."

The Impact.  The Actavis decision is likely to have significant practical effects on present and future patent settlements and antitrust litigation related to them.  Litigation over patent settlements will now be more complex and less certain, because Actavis raises many more questions than it answers.

The most obvious open question concerns the effect of the patent merits on remand.  The dissent made plain that it viewed the patent merits as a defense available to drug companies on remand.  The majority was not as clear.  One of the "traditional antitrust factors" listed for consideration was "those related to the patents," but the majority also thought the size of a payment could offer "a workable surrogate for a patent’s weakness."   Nonetheless, the majority stopped short of saying that the patent merits are wholly irrelevant or cannot be raised by the defense.  Thus, it is unclear whether antitrust cases will now entail mini-patent trials within the antitrust case.

A second question concerns the breadth of the Actavis ruling.  While the majority repeatedly listed competitive concerns unique to the Hatch-Waxman context, its rule may allow antitrust challenges to good-faith settlements of any intellectual property litigation.  Antitrust plaintiffs may seek to use the Supreme Court’s opinion to challenge alleged reverse-payment settlements in other industries.

In addition, courts may be asked to apply the new rule in antitrust suits seeking monetary compensation.  Throughout briefing in Actavis, the government stressed that it was seeking prospective injunctive relief only.  Thus, the lower courts will be left to determine whether there are other rules that apply to private antitrust cases for damages, where the plaintiff has an obligation to show causation and antitrust injury to an extent that the Government arguably does not.

How Do You Settle?  The effect of Actavis on future settlements of Hatch-Waxman (and perhaps other) patent litigation will be profound, but not in the way that most people reading the opinion may expect.  That is because parties to Hatch-Waxman settlements during the last decade have long since stopped including cash payments, inasmuch as the FTC has made it clear that including a cash payment risks a burdensome investigation of anyone who does so.  The FTC has continually represented to Congress that reverse payment settlements still occur, but could do so only because it changed the definition of a "payment" to include (1) side deals, such as co-promotion, distribution, and cross-licensing agreements, and (2) wholly exclusive licenses in which the patentee agrees to allow no other "authorized generic" licensee, at least for some period of time.  Both provisions are common in settlement agreements.

As to side deals, the Supreme Court tacitly accepted the argument that the side deals in Actavis could constitute a potentially anticompetitive payment if, as the FTC alleged, they were pretextual. Thus, future trials of antitrust cases challenging such settlements will surely contest whether the side deal was actually made for fair value.  Those who are structuring settlements involving co-promotion or supply agreements will have added incentive to generate contemporary evidence that the consideration for the side deal constitutes fair value for the services received.

As to exclusive licenses, the issue is more complicated, because the right to award an exclusive license is a fundamental and time-honored privilege of patent ownership, and the majority opinion in Actavis contains no suggestion that mere exclusivity could raise the same concerns it had regarding "unexplained large payments."  In addition, a settlement provision allowing no other "authorized generic" is understandably important to generics who have access to Hatch-Waxman’s 180-day exclusivity right. The FTC has yet to bring an enforcement action based purely on a "no authorized generics" clause, and the only court to consider the FTC’s argument (made in an amicus brief) that an exclusive license is similar to the "payment" at issue in Actavis rejected it and dismissed the complaint.  Nonetheless, other private plaintiffs are pushing the argument that exclusive licenses are a form of reverse payments, and the courts will have to settle the issue with no guidance from the Actavis majority.

Actavis opens a new chapter in the saga of antitrust scrutiny of settlements of intellectual property litigation.  But the end of the book is many chapters away and may take decades to finish.

Lawyer Contacts 

For more information, please contact your principal Jones Day representative or either of the lawyers listed below. 

Kevin D. McDonald

Geoffrey D. Oliver

Michael H. Knight

Mark Lentz, an associate in the Washington Office, assisted in the preparation of this Alert. 

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