Supreme Court Rules in ANDROGEL Patent Settlement Agreement Case; Holds that Agreements are Subject to Antitrust Scrutiny, But Not Presumptively Unlawful

June 17, 2013

By Kurt R. Karst –      

On June 17th, the U.S. Supreme Court issued its much-anticipated opinion in Federal Trade Commission v. Actavis, Inc., 570 U.S. ___ (2013) (Docket No. 12-416) concerning drug patent settlement agreements (aka “reverse payment agreements” or “pay-for-delay agreements”).  In a 5-3 opinion delivered by Justice Breyer (joined in by Justices Kennedy, Ginsburg, Sotomayor, and Kagan), the Court declined to hold that reverse payment settlement agreements are presumptively unlawful, and that “Courts reviewing such agreements should proceed by applying the ‘rule of reason,’ rather than under a ‘quick look’ approach.”  Notwithstanding the Court’s holding on the appropriate test to apply to drug patent settlement agreements, however, the Court – applying a set of five circumstances – also held that the FTC should have been given the opportunity to prove its antitrust claims and that the exclusionary potential of a patent does not immunize a drug patent settlement agreement from antitrust attack.  The FTC, a longtime opponent of drug patent settlement agreements, almost immediately issued a press release hailing the decision as a “significant victory.”

As we previously reported (here, here, and here) the Supreme Court agreed to hear the case after the U.S. Court of Appeals for the Eleventh Circuit affirmed, in April 2012, a February 2010 decision by the U.S. District Court for the Northern District of Georgia largely dismissing multidistrict litigation brought by the FTC (and certain private plaintiffs) challenging certain drug patent settlement agreements in which Solvay Pharmaceuticals, Inc. (“Solvay”) allegedly paid some generic drug companies to delay generic competition to Solvay’s drug product ANDROGEL (testosterone gel).  The Eleventh Circuit, following the Court’s previous holdings in Valley Drug Co. v. Geneva Pharm., Inc., 344 F.3d 1294, 1296 (11th Cir. 2003), Schering-Plough Corp. v. FTC, 402 F.3d 1056 (11th Cir. 2005), and Andrx Pharmaceuticals, Inc. v. Elan Corp., 421 F.3d 1227 (11th Cir. 2005), held 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.”  This “scope of the patent test” is different from the so-called “quick look rule of reason” analysis advocated by the FTC.  As the U.S. Court of Appeals for the Third Circuit explained in In Re: K-DUR Antitrust Litigation in rejecting the “scope of the patent test” and applying the “quick look” rule, under the “quick look” rule “the finder of fact must treat any payment from a patent holder to a generic patent challenger who agrees to delay entry into the market as prima facie evidence of an unreasonable restraint of trade, which could be rebutted by showing that the payment (1) was for a purpose other than delayed entry or (2) offers some pro-competitive benefit.”

The Court’s three-part holding is as follows:

(a)  Although the anticompetitive effects of the reverse settlement agreement might fall within the scope of the exclusionary potential ofSolvay’s patent, this does not immunize the agreement from antitrust attack.  For one thing, to refer simply to what the holder of a validpatent could do does not by itself answer the antitrust question.  Here, the paragraph IV litigation put the patent’s validity and preclusive scope at issue, and the parties’ settlement—in which, the FTC alleges, the plaintiff agreed to pay the defendants millions to stay outof its market, even though the defendants had no monetary claim against the plaintiff—ended that litigation.  That form of settlement is unusual, and there is reason for concern that such settlements tend to have significant adverse effects on competition.  It would be incongruous to determine antitrust legality by measuring the settlement’s anticompetitive effects solely against patent law policy, and not against procompetitive antitrust policies as well.  Both are relevant in determining the scope of monopoly and antitrust immunityconferred by a patent, see, e.g., United States v. Line Material Co., 333 U. S. 287, 310, 311, and the antitrust question should be answered by considering traditional antitrust factors. For another thing, this Court’s precedents make clear that patent-related settlement agreements can sometimes violate the antitrust laws.  See, e.g., United States v. Singer Mfg. Co., 374 U. S. 174; United States v. New Wrinkle, Inc., 342 U. S. 371; Standard Oil Co. (Indiana) v. United States, 283 U. S. 163.  Finally, the Hatch-Waxman Act’s general procompetitive thrust—facilitating challenges to a patent’s validity andrequiring parties to a paragraph IV dispute to report settlement terms to federal antitrust regulators—suggests a view contrary to the Eleventh Circuit’s.  Pp. 8-14.

(b)  While the Eleventh Circuit’s conclusion finds some support in a general legal policy favoring the settlement of disputes, its related underlying practical concern consists of its fear that antitrust scrutiny of a reverse payment agreement would require the parties to engage in time-consuming, complex, and expensive litigation to demonstrate what would have happened to competition absent the settlement.  However, five sets of considerations lead to the conclusion that this concern should not determine the result here and that the FTC should have been given the opportunity to prove its antitrust claim.  First, the specific restraint at issue has the “potential forgenuine adverse effects on competition.”  FTC v. Indiana Federation of Dentists, 476 U. S. 447, 460-461.  Payment for staying out of themarket keeps prices at patentee-set levels and divides the benefit between the patentee and the challenger, while the consumer loses.  And two Hatch-Waxman Act features—the 180-day exclusive-rightto-sell advantage given to the first paragraph IV challenger to win FDA approval, §355(j)(5)(B)(iv), and the roughly 30-month period that the subsequent manufacturers would be required to wait out before winning FDA approval, §355(j)(5)(B)(iii)—mean that a reversesettlement agreement with the first filer removes from considerationthe manufacturer most likely to introduce competition quickly.  Second, these anticompetitive consequences will at least sometimesprove unjustified.  There may be justifications for reverse paymentthat are not the result of having sought or brought about anticompetitive consequences, but that does not justify dismissing the FTC’scomplaint without examining the potential justifications.  Third, where a reverse payment threatens to work unjustified anticompetitive harm, the patentee likely has the power to bring about thatharm in practice.  The size of the payment from a branded drugmanufacturer to a generic challenger is a strong indicator of such power.  Fourth, an antitrust action is likely to prove more feasibleadministratively than the Eleventh Circuit believed.  It is normally not necessary to litigate patent validity to answer the antitrust question.  A large, unexplained reverse payment can provide a workablesurrogate for a patent’s weakness, all without forcing a court to conduct a detailed exploration of the patent’s validity.  Fifth, the fact that a large, unjustified reverse payment risks antitrust liability doesnot prevent litigating parties from settling their lawsuits.  As in other industries, they may settle in other ways, e.g., by allowing the generic manufacturer to enter the patentee’s market before the patentexpires without the patentee’s paying the challenger to stay out prior to that point.  Pp. 14-20. [(Emphasis added)]

(c)  This Court declines to hold that reverse payment settlement agreements are presumptively unlawful.  Courts reviewing suchagreements should proceed by applying the “rule of reason,” rather than under a “quick look” approach.  See California Dental Assn. v.FTC, 526 U. S. 756, 775, n. 12. Pp. 20-21.

Chief Justice Roberts filed a dissenting opinion in the case (joined in by Justices Scalia and Thomas) saying that the majority opinion “departs from the settled approach separating patent and antitrust law, weakens the protections afforded to innovators by patents, frustrates the public policy in favor of settling, and likely undermines the very policy it seeks to promote by forcing generics who step into the litigation ring to do so without the prospect of cash settlements.”  (Justice Alito took no part in the consideration or decision of the case.)  Indeed, within minutes of the decision, some commentators were already speculating an end to drug patent settlement agreements.  That seems unlikely, although as PhRMA notes in a press release: “the Court’s decision creates a degree of uncertainty that will make it less likely that innovator pharmaceutical and generic companies will be able to settle these disputes in the future.”  GPhA's press release echoes a similar concern: “the Court’s ruling will require generic companies to take on a greater administrative burden to pursue a patent challenge, potentially lowering the number of challenges.  As a result, consumers may have access to fewer generic options.”   

The full import of the Court’s decision will likely take some time to appreciate as courts – in currently pending and in new antitrust cases – grapple with how to apply the various circumstances and tests identified by the Supreme Court.  In turn, brand and generic companies will have to determine on a case-by-case basis whether and how to structure drug patent settlement arrangements.  As Actavis notes in a press release about the decision, althought it “does place an additional and unnecessary administrative burden on our industry,” it “continues to provide for a lawful and legitimate pathway for resolving patent challenge litigation in a manner that is pro-competitive and beneficial to American consumers.” 

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