The Supreme Court held today in FTC v. Actavis that so-called “reverse payment” settlement agreements are subject to antitrust law’s “rule of reason” analysis. The Court, however, largely downplayed whether such analysis would require inquiry into what Justice Scalia deemed “the elephant in the room” at oral argument: the strength of the patent at issue. The 5-3 majority endorsed the concept of using the size of the “reverse payment” as a “surrogate” for the patent’s weakness in order to avoid a “detailed exploration” of patent validity. The dissent notes, however, that the settling parties will likely raise the patent as a defense to an antitrust challenge.

Background of the Case

Some settlements of cases brought under the Hatch-Waxman Act are structured such that the patent holder (the brand name manufacturer) agrees to pay the accused infringer (the generic competitor) a sum to resolve the patent infringement suit, and the generic competitor typically receives a date certain, prior to expiration of the latest expiring patent, on which the generic can enter the market. The FTC has dubbed such agreements “reverse payment” agreements, and the FTC has broadly interpreted payments to include any consideration flowing to the generic competitor other than an earlier date of entry. The FTC contends that the payment to the generic competitor is collusive, resulting in a delay of generic entry and extending monopoly pricing for the brand name manufacturer. Both branded and generic pharmaceutical companies contend that these agreements should be permitted as they provide certainty in resolving legal disputes and typically allow for generic entry prior to expiration of the patents at issue.

FTC v. Actavis involved such a settlement agreement. Solvay Pharmaceuticals obtained a formulation patent for the testosterone gel AndroGel^®, U.S. Patent No. 6,503,894. The ’894 patent is set to expire in August 2020. Watson Pharmaceuticals and Paddock Laboratories submitted ANDAs including paragraph IV certifications under the Hatch-Waxman Act challenging that the ’894 patent was invalid and not infringed and seeking approval to market a generic version of AndroGel^® before the patent’s expiration (Paddock subsequently partnered with Par Pharmaceutical Companies).

Solvay sued for patent infringement, and, after three years of litigation, the parties settled. As part of the settlement, Solvay entered into co-marketing and supply agreements with Watson and Paddock/Par, agreeing to pay Watson an estimated $19 to $30 million annually for Watson’s efforts to market AndroGel^® to urologists, and $12 million total to Paddock and $60 million in total to Par to provide back-up supply of AndroGel^® and to market the drug to primary care physicians. The parties additionally agreed that Watson and Paddock/Par could bring their generic versions of AndroGel^® to market in 2015, more than five years before the ’894 patent is scheduled to expire, but nine years after the settlement agreement.

The FTC challenged the agreements, alleging that the marketing and backup supply agreements were of little to no value to Solvay and served as payments to its generic competitors in violation of established antitrust principles. The FTC urged the Court to uphold the Third Circuit’s decision in In re K-Dur, 686 F.3d 197 (3d Cir. 2012) which applied a rigid “quick look” test under which reverse payment agreements are presumptively anticompetitive unless proven otherwise.

The settling parties advocated for the “scope of the patent” test adopted by the Federal, Second, and Eleventh Circuits under which Hatch-Waxman settlement agreements are valid so long as their terms do not expand the subject patent’s exclusionary scope by, for example, prohibiting a generic drug from entering the market until after the patent’s expiration. FTC v. Watson Pharmaceuticals, Inc., 677 F.3d 1298 (11th Cir. 2012); In re Ciprofloxacin Hydrochloride Antitrust Litigation, 544 F.3d 1323 (Fed. Cir. 2008); In re Tamoxifen Citrate Antitrust Litigation, 466 F.3d 187 (2nd Cir. 2006).

The Decision

The Supreme Court rejected both approaches in favor of a middle ground, subjecting Hatch-Waxman settlement agreements to the traditional “rule of reason” approach, with the size of the “reverse payment” playing a featured role in the anticompetitive effects analysis. The rule of reason affords district courts leeway in balancing the anticompetitive effects and offsetting justifications of the reverse payments.

Mindful of the difficulties in scrutinizing such agreements by engaging in time-consuming, complex, and expensive litigation to determine what would have happened to competition absent the settlement agreement, the Court placed heavy emphasis on the size of the payment at issue:

[I]t is normally not necessary to litigate patent validity to answer the antitrust question (unless, perhaps to determine whether the patent litigation is a sham). An unexplained large reverse payment itself would normally suggest that the patentee has serious doubts about the patent’s survival. And that fact, in turn, suggests that the payment’s objective is to maintain supracompetitive prices to be shared among the patentee and the challenger rather than face what might have been a competitive market—the very anticompetitive consequence that underlies the claim of antitrust unlawfulness. The owner of a particularly valuable patent might contend, of course, that even a small risk of invalidity justifies a large payment. But, be that as it may, the payment (if otherwise unexplained) likely seeks to prevent the risk of competition. And, as we have said, that consequence constitutes the relevant anticompetitive harm. In a word, the size of the unexplained reverse payment can provide a workable surrogate for a patent’s weakness, all without forcing a court to conduct a detailed exploration of the validity of the patent itself.

(Slip op. at 18-19) (emphasis added) (citations omitted).

Some Thoughts

It is important to remember that the Supreme Court’s decision addresses the specific situation of a dismissal on the pleadings where all facts are construed in the FTC’s favor. Given this posture, the Court has largely left it to the lower courts to determine how to administer challenges to Hatch-Waxman settlement agreements. While the Court downplayed the concern that such cases would involve a “mini-litigation” on the patent’s validity and infringement, and placed heavy emphasis on the size of the payment as a surrogate for the patent’s strength, (slip op. at 18-19), branded and generic companies are still likely to want to litigate the issue as part of their reason to show that the settlement, presumably with an early date for generic entry, is pro-competitive. (See slip op. at 12-13 (dissent)). Whether such a showing by the settling parties will be sufficient to rebut the assumption created by the surrogate of a “large payment” is left to the trial and appellate courts to decide in the first instance.

Furthermore, little, if any, guidance is provided as to when a payment is large enough and unjustified enough to act as “a workable surrogate” for a patent’s strength or weakness. (Slip Op. at 19). And nothing is discussed about the situation, which is often the case, where more than one patent was asserted in the underlying patent litigation. The Supreme Court’s decision today provides little, if any, guidance on how, if at all, a payment could act as a surrogate for multiple patents having different dates of expiration.

Finally, the majority did not address whether other forms of consideration flowing from a patent holder to a generic pharmaceutical company as part of a settlement similarly may run afoul of the antitrust laws although the dissent indicated that the logic of the decision would reach that far. (Slip Op. at 14 (dissent)). In such a situation, however, it is unclear what types of “consideration” might rise to the level of acting as “a workable surrogate for a patent’s weakness.”

Conclusion

Today’s decision, although resolving a circuit split on the issue, left many questions unanswered. Pharmaceutical companies will need to consider how those questions, as well as the Court’s framework in Actavis, resound in their particular context, both with respect to agreements that have already been entered into and in negotiating future settlement agreements.

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