Supreme Court Says Reverse Payment Deals May Be Anticompetitive; Reverses 11th Cir.

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By Tamlin H. Bason and Tony Dutra  

 

Reverse payment deals in which a patent-owning brand name drug manufacturer pays a generic maker to cease its patent challenge in court may violate antitrust laws regardless of whether the agreement falls within the scope of the patent, according to a June 17 decision by the U.S. Supreme Court (FTC v. Actavis Inc., U.S., No. 12-416, 6/17/13).

The high court, in a 5-3 ruling with Justice Samuel Alito recused, said that the U.S. Court of Appeals for the Eleventh Circuit erred when it dismissed a complaint brought by the Federal Trade Commission that challenged such reverse payments as being presumptively unlawful. The court declined to hold that reverse payments agreements are per se unlawful. Rather, Justice Stephen G. Breyer identified “five sets of considerations” that he said the appeals court should have weighed before dismissing the FTC's complaint.

Those factors, which were slightly different than the ones identified by Breyer during oral argument March 25 (58 PTD, 3/26/13), require a court to conduct a rule-of-reason analysis--adapted with the five considerations relevant to patent law--before dismissing challenges to pay-for-delay settlements.

“Courts reviewing such agreements should proceed by applying the 'rule of reason,' rather than under a 'quick look' approach,” Breyer said, the latter referring to the FTC's preference.

In a dissent joined by Justices Antonin Scalia and Clarence Thomas, Chief Justice John G. Roberts Jr. began with the view that a patent is by definition an antitrust exception. He thus endorsed the “scope-of-the-patent” approach, which asks only whether the settlement gives the patentee “power beyond what the patent already gave it.”

“The majority's rule will discourage settlement of patent litigation,” Roberts said.

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--usually with what as known as a “Paragraph IV” certification challenging patent validity or claiming noninfringement--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).

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

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.

Majority: Start With Antitrust Question

The opening question presented by the majority--Breyer was joined by Justices Ruth Bader Ginsburg, Elena Kagan, Anthony M. Kennedy, and Sonia M. Sotomayor--was whether a reverse payment “can sometimes unreasonably diminish competition in violation of antitrust laws.”

Though it acknowledged that such an agreement could “fall within the scope of the exclusionary potential of the patent,” the majority said, “we do not agree that that fact, or characterization, can immunize the agreement from antitrust attack.”

The court reviewed multiple precedents to support its conclusion that patent and antitrust policies both come into play. It perhaps relied most on United States v. Line Material Co., 333 U. S. 287, 76 USPQ 399 (U.S. 1948), for having “resolved the antitrust question in that case by seeking an accommodation 'between the lawful restraint on trade of the patent monopoly and the illegal restraint prohibited broadly by the Sherman Act.' ”

The court summarized the precedents by saying that “they seek to accommodate patent and antitrust policies, finding challenged terms and conditions unlawful unless patent law policy offsets the antitrust law policy strongly favoring competition.” Distinguishing agreements that were held not anticompetitive, the court said:  

In the traditional examples [of acceptable agreements], a party with a claim (or counterclaim) for damages receives a sum equal to or less than the value of its claim. In reverse payment settlements, in contrast, a party with no claim for damages (something that is usually true of a paragraph IV litigation defendant) walks away with money simply so it will stay away from the patentee's market. That, we think, is something quite different.

 

 

 

Majority Identifies Five Sets of Considerations

The rule of reason approach for reverse settlement cases will be governed by the competing interests at stake in such litigation, the court said. But it took pains throughout to parry the concern both parties expressed--coming to an antitrust decision without requiring a full blown patent infringement litigation to determine invalidity or noninfringement.

The court said:  

We recognize the value of settlements and the patent litigation problem. But we nonetheless conclude that this patent-related factor should not determine the result here. Rather, five sets of considerations lead us to conclude that the FTC should have been given the opportunity to prove its antitrust claim.

 

 

 

Those considerations are:

• Whether the settlement has the potential to have adverse effects on competition.

• Whether those anticompetitive effects are unjustified.

• If those harms are unjustified, whether the patentee has the power to bring about those adverse effects on competition.

• Whether an antitrust action can efficiently settle the anticompetitive aspects of the case without forcing the parties to litigate the validity of the patent.

• Whether the parties may still settle in other ways, such as “by allowing the generic manufacturer to enter the patentee's market before the patent expires without the patentee's paying the challenger to stay out prior to that point.”

 

“In our view, these considerations, taken together, outweigh the single strong consideration--the desirability of settlements--that led the Eleventh Circuit to provide near-automatic antitrust immunity to reverse payment settlements,” the court said.

Court Rejects 'Quick Look.'

The court closed by declining to follow the “quick look” approach proposed by the FTC and 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.

A quick look is reserved for cases where only “a rudimentary understanding of economics” would lead an observer to see the anticompetitive effect.

For reverse payments, in contrast, the court said, “the likelihood of a reverse payment bringing about anticompetitive effects depends upon its size, its scale in relation to the payor's anticipated future litigation costs, its independence from other services for which it might represent payment, and the lack of any other convincing justification.”

That list of “complexities” presents the burden on the FTC to make its case, the court said. But it made clear that district courts should not further require that the FTC “litigate the patent's validity, empirically demonstrate the virtues or vices of the patent system, present every possible supporting fact or refute every possible pro-defense theory.”

The court reversed the Eleventh Circuit's judgment and remanded.

Dissent: This Discourages Patent Settlements

Roberts criticized the court for making it more difficult for parties to reach settlements in costly litigation, calling the rule-of-reason approach “amorphous” in one place and “unruly” in another.

The dissent went over the same list of Supreme Court precedents on which the majority relied and saw a different proposition: “[E]ach of those cases stands for the same, uncontroversial point: that when a patent holder acts outside the scope of its patent, it is no longer protected from antitrust scrutiny by the patent.”

Roberts pointed to the majority's underlying statement that “sometimes” a reverse settlement agreement can violate antitrust laws, but said, “The key word is sometimes. And those some times are spelled out in our precedents.”

He also criticized the “five sets of considerations.” He said, “Almost all of these are unresponsive to the basic problem that settling a patent claim cannot possibly impose unlawful anticompetitive 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.”

Roberts would have analyzed the agreement under the scope-of-the patent approach. Under that approach, which was used by the Eleventh Circuit below and has also been used by the Second Circuit and the Federal Circuit, 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.

Roberts said, “I would keep things as they were and not subject basic questions of patent law to an unbounded inquiry under antitrust law, with its treble damages and famously burdensome discovery.”

Malcolm L. Stewart, deputy solicitor general in the Department of Justice, represented the government. Jeffrey I. Weinberger of Munger, Tolles & Olson, Los Angeles, represented Solvay and argued the case on behalf of the defendants. Eric Grannon of White & Case, Washington, D.C., is counsel of record for Par and Paddock. Clifford M. Sloan of Skadden Arps Slate Meagher & Flom, Washington, D.C. represented Actavis.

Senate Judiciary Committee Approves

Sen. Patrick J. Leahy (D-Vt.) is chairman of the Senate Judiciary Committee, where S. 214 and prior equivalents have been referred.

“In each of the last three Congresses, the Senate Judiciary Committee has reported bipartisan legislation to protect consumers from anticompetitive drug settlements,” Leahy said in a statement right after the decision was announced. “I am pleased that the Court today recognized that antitrust policies play an important role in protecting consumers even when patents are at issue. Today's decision should caution drug companies against making payments to delay competition and harm consumers.”

S. 214 was introduced by Sens. Amy Klobuchar (D-Minn.) and Chuck Grassley (R-Iowa). They issued a joint statement indicating that they did not intend to stop fighting for the bill in any case.

“The Supreme Court's opinion confirms what we have been saying all along--that pay for-delay deals are anti-consumer, anti-competitive and are in contrast to antitrust law,” Klobuchar said. “The Court goes a long way towards addressing these concerns, but our legislation goes even further to ensure Americans have access to the drugs they need at the prices they can afford, and I'll continue push to ensure consumers have access to a competitive prescription drug marketplace.”

“The action by the Supreme Court is a good step toward putting an end to this kind of anti-competitive behavior.” Grassley said. “Consumers should have access to the less expensive generic drugs they need as soon as possible. In the meantime, we'll continue to push our legislative remedy to put consumers first."

 


Text is available at http://pub.bna.com/ptcj/FTCvActavisJune1713.pdf.