High Court Considers Options for Antitrust Review of Reverse Payment Patent Settlement

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By Tony Dutra  

The Hatch-Waxman Act created a special process for drug patent infringement, and that may call for a special analysis for determining whether so-called “pay-for-delay” settlements violate antitrust laws, according to several of the Supreme Court justices in oral argument on March 25 (Federal Trade Commission v. Actavis Inc., U.S., No. 12-416, argued 3/25/13).

While there was little support for the Federal Trade Commission's position that the deals--in which a patent-owning brand name drug manufacturer pays a generic maker to cease its patent challenge in court--should be presumptively illegal, some justices wanted to limit the antitrust analysis to a small list of easily determined factors. The possible factor causing the biggest debate among the justices was whether the strength of the patent must be analyzed by the court.

Patent cases have not been decided by the Supreme Court along their traditional conservative or liberal split in the last few years. However, in this case, the more liberal members of the court were readily identifiable as opposing the drug firms' view, though they did not go so far as to endorse in full the government's approach.

Hatch-Waxman Creates Scenario

These reverse payment cases arise because of the Hatch-Waxman Act's unique way of handling patent infringement. A generic maker must get approval to market a generic version of a patented drug from the Food and Drug Administration, and in so doing, gives notice of its intent to enter the market without actually doing so. The generic's abbreviated new drug application triggers a 45-day deadline for the brand-name drug maker to file a patent infringement lawsuit.

Therefore, unlike other patent infringement actions between companies with competing products in the market, a Hatch-Waxman case features only one player in the market still realizing monopoly pricing benefits. A reverse payment deal is arguably then a way for competitors to share monopoly profits.

Also, under the Act, the first company to challenge a patent gets 180 days as the exclusive generic drug maker whenever it is finally allowed to enter the market. There is an open question of whether, after a settlement between the first filer and the brand name maker, other generic firms have much of an incentive to take up a validity or noninfringement challenge if they will still be barred from the market during those 180 days.

AndroGel Settlement in 2006

In the instant case, Solvay Pharmaceuticals Inc. paid generic drug makers--Actavis Inc. f/k/a Watson Pharmaceuticals Inc., Par Pharmaceuticals Inc., and Paddock Laboratories Inc.--to delay introduction of their ANDA versions of testosterone-replacement drug AndroGel as part of a patent litigation settlement. The agreement also would allow the generic drug makers to introduce generic versions of AndroGel in August 2015, nine years after the deal was signed but five years before the contested patent (U.S. Patent No. 6,503,894) will expire.

For Par and Paddock, the payment would be made annually regardless of Solvay's sales, but they received additional funds for providing backup manufacturing assistance.

Solvay's agreement with Actavis was a profit-sharing deal, projected to be between $19 and 30 million per year.

The Federal Trade Commission challenged the agreements, but the U.S. Court of Appeals for the Eleventh Circuit rejected its arguments in April 2012. Federal Trade Commission v. Watson Pharmaceuticals Inc., 677 F.3d 1298, 102 U.S.P.Q.2d 1561 (11th Cir. 2012) (80 PTD, 4/26/12).

Significant Interest in Outcome

The high court granted the FTC's petition for writ of certiorari Dec. 7 (236 PTD, 12/10/12).

Thirty-two amicus briefs were filed, divided roughly equally in support of the parties (16 PTD, 1/24/13); (50 PTD, 3/14/13), though associations of both generic and brand-name makers supported Actavis's position.

The FTC's support came from consumer organizations, health plans, and drug resellers. Congress is waiting in the wings (26 PTD, 2/7/13), with a bill (S. 214) that was approved by the Senate Judiciary Committee in the last session but went no further. That bill would essentially implement the FTC's approach.

The question presented by the FTC in the case is:

Whether reverse-payment agreements are per se lawful unless the underlying patent litigation was a sham or the patent was obtained by fraud (as the court below held), or instead are presumptively anticompetitive and unlawful (as the Third Circuit has held).  


The reference to the Third Circuit is to its July 16 opinion in In re K-Dur Antitrust Litigation, 686 F.3d 197, 103 U.S.P.Q.2d 1497 (3d Cir. 2012) (137 PTD, 7/18/12), which disagreed with the Eleventh Circuit's conclusion. Branded drug company Merck & Co. and generic drug company Upsher-Smith Laboratories Inc. are seeking high court review of that ruling, which involves the patented blood pressure drug K-Dur 20 (potassium chloride). The petition for certiorari is pending in that case.

Government's 'Quick Look' Approach

Malcolm L. Stewart, deputy solicitor general in the Department of Justice, represented the government. “Reverse payments … subvert the competitive process by giving generic manufacturers an incentive to accept a share of their rival's monopoly profits as a substitute for actual competition,” he began.

Stewart presented the FTC's preference for the “quick look” approach taken by the Third Circuit in the K-Dur case. Under that approach, reverse payments are presumed to be anticompetitive and the defendants have the burden to show that the agreement is procompetitive.

Justice Antonin Scalia tipped his hand right away. The only difference he saw between a typical antitrust analysis and this case is that “Hatch-Waxman made a mistake. It did not foresee that it would produce this kind of payment. … Why should we overturn understood antitrust laws just to patch up a mistake that Hatch-Waxman made?”

Stewart disagreed that its approach would be “overturning” antitrust laws and contended that it would be “just enforcing antitrust principles.” He relied on NCAA v. Board of Regents of the University of Oklahoma, 468 U.S. 85 (1984), for support of an antitrust standard between per se illegality and a rule of reason analysis, though he acknowledged that the case never used the term, “quick look.”

Why Not Rule of Reason Analysis?

Justice Stephen G. Breyer took that position further, though, saying that one could see in the pay-for-delay deals serious anticompetitive effects while also seeing that “sometimes there are business justifications.” And he would leave it to the discretion of the district court, “as in many complex cases, to structure their case with advice from the attorneys.”

But Stewart wanted to limit the analysis further. The government would allow for an agreement to delay entry only--without a payment--as a reasonable agreement by the parties after their assessment of the likelihood they would win the case. Stewart also said the FTC would be unlikely to have a problem if the payment was directed to some other value provided by the generic firm.

Breyer added two other business justifications he read from the briefs: (1) that a difference in the two parties' valuation of the market size could be a risk similar to the case-winning risk Stewart had already acknowledged, and (2) that the generic might need both time and money to be a more formidable competitor in any case, and the payment and delay provide both.

Justice Sonia M. Sotomayor was concerned about the burden shifting in the government's approach. She asked “why the burden of proving that the payment for services or the value given was too high” did not stay with the government.

Stewart resisted a bit, but he ultimately called that requirement “a fairly minor tweak to our theory.”

But when Sotomayor pressed for a full rule-of-reason analysis, Stewart fought back, because that analysis “would include presumably a strength of the patent claim.”

Drug Firms' Scope-of-the-Patent Approach

The defendants' preferred antitrust analysis--now used by the Second, Eleventh, and Federal Circuits--is known as the scope-of-the-patent approach. Jeffrey I. Weinberger of Munger, Tolles & Olson, Los Angeles, presented the case for that approach before the high court. Under that view, the rights granted by the patent are paramount, and any settlement agreement passes muster under antitrust law so long as it does not extend the scope of the patent rights.

Weinberger's criticism of the government's position often centered on the FTC's implicit assumption that the patent would be found invalid, or else the brand maker would not settle. However, Sotomayor confronted him with the opposite, that Actavis's assumption is that the generic firms are settling because their products would be found to infringe.

Weinberger acknowledged each party's risk in proceeding with the case, but he said, that is typical in litigation settlements. “[It is] just as if … someone was entering into a license agreement with someone who had a product that they claimed did not infringe the patent, they sat down, negotiated a license and resolved [their disagreement].”

“But there, you'd know that they're not sharing the profits,” Sotomayor said. “A reverse payment suggests something different, that they're sharing profits. I don't know what else you can conclude.”

Sotomayor, a prior circuit judge on the Second Circuit, commented that the appellate court was concerned about the scope-of-the-patent approach. But Weinberger reminded her of the outcome, which adopted that analysis.

Breyer's Five-Factor Test

Breyer then expanded on his preferred approach in a discussion with Weinberger. He equated the rule-of-reason approach with allowing consideration of everything in “the kitchen sink,” and sought to limit the number of factors to be considered by a district court. He identified five:

• Sometimes these settlements can be very anticompetitive, especially when the parties are dividing monopoly profit.

• Do not take into account the strength of a patent.

• Do not try to relitigate the patent.

• There are several possible business justifications, such as litigation costs, the other products, and different assessments of value.

• There could be, in fact, no anticompetitive effect here because the first settlement will instigate multiple challenges from other generic makers.


Weinberger argued that the test was too unpredictable. Scalia was even more critical.

“You can't possibly figure it out … without assessing the strength of the patent,” he said. “To say you can consider every other factor other than the strength of the patent is to leave out the elephant in the room.”

Weinberger readily agreed, but now Sotomayor shot back. She characterized the government's position as wanting the same thing--to decide these Hatch-Waxman cases based on the strength of the patent. But, she said, that means that either the litigation should then proceed to the end, or, if the parties are going to settle, any payment should be based on “a royalty for use or settling as most cases do, on an early entry alone, so there's no sharing of profits. What's so bad about that?”

Kennedy Would Shift Payment Analysis

Justice Elena Kagan was equally critical of the drug companies' position. “I think if we give you the rule that you're suggesting we give you, … the incentive of both the generic and the brand name manufacturer in every single case is to split monopoly profits in this way to the detriment of all consumers.”

Justice Anthony M. Kennedy essentially worked off that as the underlying problem, and turned it into a suggestion to set a different standard for looking at the deals. He identified the type of deal where the payment is for a share of monopoly profits--and not simply the fact that a payment is made--as the real problem. He would, “consider not what the branding company would have made, but what the generic company would have lost, and use the latter as the limit” for whether a deal should be considered presumptively illegal.

“Why don't you just put a cap on what the generic can make and then we won't have a real concern with the restraint of trade, or we'll have a lesser concern,” he said.

Value of 180-Day Exclusivity Contested

Breyer's fifth factor to consider--the likely challenges by multiple generic makers after the first pay-for-delay settlement--was in response to Weinberger's argument about what can happen in the market.

But Kagan disagreed that such competition is likely to arise, given the 180-day exclusivity provision. She and Kennedy said that, based on their reading of the briefs, that period was “crucial” to the profitability of the generic manufacturer.

There is “a kind of glitch in Hatch-Waxman, and the glitch is that the 180 days goes to the first filer,” Kagan said. “And once the 180-day first filer is bought off, nobody else has the incentive to [file a challenge].”

Weinberger disagreed with that characterization of the value of the exclusivity period. “It's an incentive for the first six months, I don't debate that,” he said, “but after that, the market opens up.” And he noted that the 2003 amendments to Hatch-Waxman gave the ability for second-filing generics to trigger the 180-day period, thus ending the possibility that the first filer, through a provision in the pay-for-delay agreement, may further delay entry of generic drugs.

Stewart countered Weinberger in his rebuttal. “Subsequent manufacturers would realize not only that they wouldn't get that period of heightened profits themselves, but they would have to wait in line for others, and they might focus their attention on other patents that were perceived to be weak as to which they could hope to get the 180-day exclusivity contract.”

“My understanding is that the generics would usually charge around 80 to 85 percent of the brand name's price during that period,” Stewart said. “And after there is full competition, the price would drop to a fraction of that.”

“Our natural instinct is to compare the settlement to the expected outcome of litigation,” he said in conclusion, summarizing the government's argument. “But everyone also recognizes that it just isn't feasible to try the patent suit. And, therefore, our approach focuses on whether the competitive process has been preserved.”

By Tony Dutra