Antitrust Implications of Reverse Patent Settlements

By Ryan Abbott

Last month the US Supreme Court rendered its decision on the reverse payments question.  The Court held in Federal Trade Commission v. Actavis, Inc. that reverse payment settlements in patent infringement litigation may violate antitrust laws, and therefore, these settlements are not immune from antitrust attack.  Actavis, a generic drug manufacturer, settled its patent challenge against Solvay Pharmaceuticals in exchange for a share in the originator drug manufacturer’s monopoly profits. The Court found that a substantial reverse payment suggested that Solvay had serious doubts about the validity of its patent, and that by the settlement the parties intended to suppress competition.

Special procedures for resolving patent disputes between originator and generic drug manufacturers were created by the Drug Price Competition and Patent Term Restoration Act, also known as the Henry-Waxman Act.  Under the “paragraph IV” certification route, a generic drug company may file an abbreviated new drug application certifying that a listed patent is invalid or will not be infringed by the manufacture, use or sale of a generic product. Here, Actavis filed an application for its generic drug, and certified under paragraph IV that the sale of the generic product would not infringe on the originator’s patent because the patent was invalid.  In response, the originator patent holder sued Actavis for infringement.  Rather than allowing a court to determine whether the patent was invalid, the parties entered into a reverse payment settlement agreement.  This reverse payment settlement prohibited Actavis from bringing its generic drug to market until 2015 and required it to promote the brand name drug to urologists in exchange for millions of dollars in compensation.

The Federal Trade Commission (FTC) brought suit based on Actavis’ violation of section 5 of the Federal Trade Commission Act based on the alleged unlawful abandonment of its patent challenge.  The District Court dismissed the complaint, and the Eleventh Circuit affirmed the dismissal on the grounds that public policy favors the settlement of disputes.  However, the US Supreme Court considered five sets of factors when deciding that the FTC should have been given the opportunity to prove the antitrust claim.  These factors included: the potential for adverse effects on competition, the unjustified use of a reverse payment settlement, the power of the patentee to bring about anticompetitive harm, the feasibility of antitrust litigation, and the unhindered ability of parties to settle lawsuits in alternative ways if reverse payment settlements are found to violate antitrust laws.  In general, the Court determined that the lower courts’ dismissal of the FTC’s complaint might unjustifiably allow the elimination of competition, and that costs resulting from the settlement would be borne by consumers.  Consumers would not enjoy the benefits of the generic drug price. They are left with high prices enabled through a potentially invalid patent.

It is important that the Court recognized that acting within the exclusionary zone of the patent does not automatically confer antitrust immunity.  This is an interesting decision in which the majority posits that a large reverse payment settlement may constitute evidence of anticompetitive intent, thereby potentially making it unnecessary to determine whether the underlying patent is valid in order to make an assessment about anticompetitive conduct.  Presumably the “safe harbor” for the patent owner is to allow the patent invalidity litigation to reach a conclusion because if the patent is found valid, the patent owner will not be open to antitrust liability.

The dissent may be correct that removing the possibility of a reverse payment will discourage generic challengers. But, the fundamental flaw in the dissent’s reasoning is that it seems to presume that otherwise the benefits of generic challenges will flow to consumers. The majority’s point is that if the benefits of settlements are simply shared between patent owners and generic producers, consumers lose.

While generally favorable to the FTC position, the Court did not accept that an abbreviated antitrust analysis should substitute for a rule of reason assessment. This may place a substantial burden on the FTC and private litigants in terms of expenditure of antitrust resources. It may be that this will impel Congress to create a legislative solution.

3 thoughts on “Antitrust Implications of Reverse Patent Settlements

  1. The parties agreed that the generic manufacturers would delay market entry until 2015, which was 65 months before the patent expiration date. So, customers stood to benefit more under the settlement agreement than if the generic manufacturers had never filed a paragraph IV certification. The key question is whether the costs to consumers that result from reducing the incentives to challenge patents in the first place are offset by the benefits of eliminating suspect settlements involving weak patents. If the former effect predominates, then customers stand to lose as a result of this opinion.

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