Supreme Court Issues Decision in Pay-for-Delay Case FTC v. Actavis

Practical Law Legal Update 9-532-2637 (Approx. 6 pages)

Supreme Court Issues Decision in Pay-for-Delay Case FTC v. Actavis

by PLC Antitrust

Background

In February 2000, the Food and Drug Administration (FDA) approved Solvay Pharmaceuticals' New Drug Application for AndroGel, a topical testosterone gel for men. The US Patent and Trademark Office issued Solvay's patent concerning the AndroGel product in January 2003. Four months later, Actavis, Inc. filed an Abbreviated New Drug Application (ANDA) for a generic form of AndroGel making a Paragraph IV certification asserting that, either or both:

Solvay's patent is invalid.
Its generic product did not infringe Solvay's patent.

(For more information on the Hatch-Waxman Act and Paragraph IV certifications in ANDAs, see Practice Note: Overview, Hatch-Waxman Act: Overview.)

Solvay filed a patent infringement suit against Actavis (and other generic manufacturers filing ANDAs with Paragraph IV certifications) in federal court. The parties reached a settlement after the 30-month stay of the FDA's approval of the ANDAs but before the court ruled on the patent's validity. The terms of the settlement included a yearly reverse payment between $19 million and $30 million from Solvay to Actavis for nine years. Soon after the settlement, the Federal Trade Commission (FTC) challenged the reverse payments as anticompetitive. The FTC specifically alleged that:

Solvay was unlikely to prevail in the patent infringement litigation against Actavis.
Because the original patent was unlikely to prevent entry by generic brands, Solvay's reverse payments to the generic drug producers continued and extended a monopoly not authorized by US patent law.

The US District Court for the Northern District of Georgia granted the defendants' motion to dismiss, agreeing with the defendants that precedent allowed for reverse payment settlements in patent disputes so long as the settlement exclusion was not greater than any exclusion under the patent.

On appeal, the Eleventh Circuit affirmed the district court's opinion. The Eleventh Circuit explained that patents by their nature give the holder the right to exclude competitors. Because Solvay held a patent, the Eleventh Circuit reasoned, the reverse payment agreements did not necessarily decrease competition in the market. The Supreme Court granted certiorari, seeking to settle the circuit court split over whether reverse payment settlements are immune from antitrust attack.

For more information on the background of this case, see Legal Update, Eleventh Circuit Approves Patent "Pay for Delay" Settlements.

Outcome

The Supreme Court held that the Eleventh Circuit improperly dismissed the FTC's complaint. The Court reasoned that because reverse payment settlements like the one in Actavis may potentially violate antitrust laws, a reverse payment settlement is not immune from antitrust litigation simply because the anticompetitive effects fall within the scope of the patent. The Court explained that contrary to the Eleventh Circuit's analysis, an inquiry into whether a reverse payment settlement violates the antitrust laws requires analysis of both antitrust and patent issues, and not patent issues alone. The Court also held that the policy of encouraging settlements was not dispositive and disagreed with the Eleventh Circuit that analyzing reverse payment settlements under the antitrust laws required the parties to fully litigate the patent validity issues.

Rather, the Court listed five considerations to support giving the FTC an opportunity to prove its antitrust claim under the rule of reason:

Reverse payment settlements may adversely effect competition. The reverse payment at issue is large enough to indicate that Solvay hoped to induce Actavis to exit the market completely in favor of sharing Solvay's monopoly profits. If Actavis exited the market, Solvay would be able to continue setting high prices that harm consumers.
The rule of reason allows the settling parties to justify their reverse payment settlement, such as when the settlement amount reflects legitimate considerations, including:
- approximate litigation expenses saved because of the settlement; or
- compensation for other services that the generic manufacturer has agreed to perform on behalf of the branded manufacturer, such as marketing or distribution.
Reverse payment settlements may cause unjustified anticompetitive harm, particularly where the branded manufacturer has market power and can obtain higher-than-competitive profits.
Generally, it is unnecessary to litigate the validity of the patent to determine whether the settlement violates antitrust law; rather, a large reverse payment with no legitimate basis is evidence of:
- the patent holder's serious doubts about the patent's validity; and
- the objective of the parties to share in monopoly profits rather than compete against one another.
Settlement is not prohibited. The parties may use other forms of settlement including agreeing that the generic manufacturer can enter the market before the patent expires without an additional reverse payment. Alternatively, if the parties prefer to use a reverse payment to settle the dispute, they must be prepared to justify their reasons for doing so. If the ultimate reason for the reverse payment is to maintain patent-generated monopoly profits, there is likely an antitrust violation.

The Court held that in further litigation, the FTC must prove its case under the rule of reason. The Court explained that a quick look analysis was inappropriate because anticompetitive effects of reverse payments depend on a deeper analysis, including:

The size of the payment.
The scale of the payment in relation to the payor's anticipated litigation costs.
Whether the payment could be considered payment for other services.
Any other convincing justification for the payment.

For more information on the rule of reason in the antitrust context, see Practice Note, Analyzing Restraints of Trade under the Rule of Reason.

Chief Justice Roberts and Justices Scalia and Thomas dissented from the opinion. The dissent agreed with the lower court that patent settlements should only be subject to antitrust scrutiny if the settlements exceed the scope of the patent. The dissent explained that the majority opinion will discourage patent litigation settlements if parties are afraid of facing antitrust claims after settling, and may even discourage generic brands from challenging patents in the first place if they face threats of extensive and expensive patent litigation.

FTC Chairwoman Edith Ramirez issued a statement shortly following release of the decision. Chairwoman Ramirez applauded the Court's decision, stating that it was a significant victory for American consumers, who face $3.5 billion a year in costs from high drug prices. Chairwoman Ramirez said that the FTC looks forward to moving ahead in the Actavis litigation and will seek ultimate victory from the lower court.

Practical Implications

The Court made clear that large, unjustified reverse payment settlements are likely to violate antitrust laws under the rule of reason. However, determining whether a settlement payment is too large or unjustified is left to the lower courts to analyze. It is likely that these questions will be addressed by opposing experts (including intellectual property experts and economists) testifying on the reasonableness of the settlement payment.

As the dissent points out, patent infringement litigation settlements are likely to decrease given the lack of a clear bright-line test. Whether the ruling results in decreased patent challenges by generic manufacturers remains to be seen.

Supreme Court Issues Decision in Pay-for-Delay Case FTC v. Actavis | Practical Law