DOJ Switches Position and Narrows The Playing Field for Reverse Payments in Hatch-Waxman Settlements

By JP Ellison –

The amicus brief recently filed by the Department of Justice’s (“DOJ”) Antitrust Division makes it clear that at least on the issue of so-called “reverse payments” the antitrust lawyers at DOJ agree with their colleagues at the Federal Trade Commission (“FTC”) – reverse payments are a bad thing.  That was not the case in the Bush Administration when the two antitrust enforcement agencies openly quarreled about the propriety of such payments.

DOJ’s brief does not go so far as to say that reverse payments are per se illegal, and thus stops short of current legislative proposals to ban such payments entirely.  Rather, the brief says that the payments are presumptively illegal.  While few law-abiding companies aspire to engage in presumptively illegal conduct, the really important question is how does one rebut the presumption?  That’s where the recent DOJ brief makes life complicated.

In virtually all litigated disputes, there are at least two settlement reference points: (1) the expected loss/gain resulting from a judgment; and (2) the cost of litigation to get to number 1.  At different points in the litigation settlement process, each of the parties to the litigation may have different calculations for those two numbers, but even so they tend to represent the goal posts of the field on which the settlement game is played.  In its amicus brief, DOJ seems to narrow the Hatch-Waxman settlement playing field – at least in certain respects – but doesn’t clearly identify the out-of-bounds areas. 

There are some markers on the field.  Nuisance value/cost of litigation settlements are OK with DOJ.  See Amicus Brief at 28 (“The defendants clearly rebut the presumption if they show the payment was no more than an amount commensurate with the patent holder’s avoided litigation costs.”).  DOJ similarly makes clear what is not OK, namely a settlement that prevents generic competition until the end of the patent term.  Id. at 29 (“The defendants will be unable to carry their burden [of rebutting the presumption of illegality] if the settlement allowed no generic competition until patent expiration.”).  Significantly, DOJ explicitly states:  “That is so even if the parties believed that the patentee would have a greater than 50% likelihood of prevailing if the case were litigated to conclusion.”  Id.  Thus, if the parties agree that there is a 99.99% chance that the patent holder will win, and as a result, the patent holder agrees to pay a $1 settlement in exchange for dismissal of the claims and no generic competition, an illegal agreement has been struck.

DOJ’s brief similarly makes it clear that entry of a generic before the expiration of the patent is a necessary ingredient in any reverse payment settlement.  Id. at 30 (“If the settlement provides for generic entry before the expiration of the patent, the defendants can carry their burden by showing that the settlement preserved a degree of competition reasonably consistent with what had been expected if the infringement litigation went to judgment.”) (emphasis added).  DOJ concedes that in making this calculation “precision is impossible,” id. at 31, and states that “defendants can carry their burden by providing a reasonable explanation . . . .”

For more than five years, the FTC and DOJ have received copies of reverse payment settlements (and other Hatch-Waxman settlements) pursuant to the Medicare Modernization Act of 2003.  The antitrust enforcers are under no obligations to approve such settlements, however.  Nevertheless, one would expect that parties contemplating settlement would increasingly use these and other channels to seek feedback from FTC and DOJ prior to entering into any reverse payment settlements.  Additionally, DOJ’s position is likely to increase the prevalence and importance of safety valve or escape clause provisions that address a challenge to the legality of the settlement by the antitrust enforcement agencies.

DOJ’s position is also likely to affect the structure of Hatch-Waxman settlements.  Given the sophisticated nature of the parties in these cases, some cases may still settle for the parties’ assessment of the expected value of the judgment, but with different generic entry dates and payment structures than might otherwise have existed absent the presumed illegality of reverse payments.  In sum, it is too early to tell what the DOJ brief means, which is a bit of problem if you are otherwise ready to settle your pending Hatch-Waxman case.