Reverse payment settlements and antitrust law: like cats and dogs?

Last week, in Federal Trade Commission v Actavis Inc. et Al., the US Supreme Court turned its attention to a fascinating crossroad of IP and competition law, reverse payment settlements. The phenomenon consists in an agreement between the alleged infringer and a patentee, under which the former agrees not to produce the patented items, and the latter pays a (usually large) sum of money. A reverse payment settlement raises an interesting question: what is the patentee’s incentive to conclude this kind of settlement? Although there may be reasons that justify the reverse payment (e.g. if it is compensation for services that the other parties agree to provide, or if it is equivalent to the litigation costs that the party would have incurred if continuing the lawsuit), it usually suggests that the patentee is willing to trade in some of the profits gained through its monopoly, in order to avoid the risks of litigation, and the possible invalidation of its patent. In this perspective, similar settlements may yield unjustified anti-competitive effects, if they prevent a court from reviewing the validity of a patent and possibly dissolving the patentee's monopoly. In the pharmaceutical field, they could also delay the marketing of generic drugs, to the detriment of both competitors and consumers. In a split decision (5-3) issued last Monday, the Supreme Court, rejecting the Court of Appeals' approach, held that reverse payment settlements are not immune from antitrust law, but clarified that they are not unlawful per se, and should be evaluated through the rule of reason.

This case originated in 2009, when the Federal Trade Commission (FTC) filed a lawsuit, under Section 5 of the Federal Trade Commission Act, against the four parties of a reverse payment settlement. Back in 1999, Solvay Pharmaceuticals had filed a New Drug Application for a drug named AndroGel. Soon after, two other companies, Actavis and Paddock (the latter in agreement with a third company, Par Pharmaceutical) had filed Abbreviated New Drug Applications for generic drugs modeled after AndroGel, declaring that Solvay’s patent 6,503,894 was invalid, under paragraph 4 of the Hatch-Waxman Act. Solvay sued the generic manufacturers, and the parties reached a reverse payment settlement in 2006: the alleged infringers agreed to delay their entry to the market till 2015 (65 months before the expiry of Solvay’s patent), and the brand manufacturer accepted to pay several million dollars in return. In 2009, the FTC filed lawsuit against all the parties, alleging that they unlawfully agreed ‘to share in Solvay’s monopoly profits, abandon their patent challenges, and refrain from launching their low-cost generic products to compete with AndroGel for nine years’. The District Court for the Northern District of Georgia dismissed the FTC’s complaint for failure to state a claim, under Federal Rule of Civil Procedure 12(b)(6). The Court of Appeals for the Eleventh Circuit affirmed, clarifying that ‘absent sham litigation or fraud in obtaining the patent, a reverse payment settlement is immune from antitrust attach as long as its anticompetitive effects fall within the scope of the exclusionary potential of the patent’. It added that public policy considerations favouring settlement of disputes suggested that courts could not require the parties to continue litigation in order to avoid antitrust liability. In light of the contrast between the decisions of different courts, the Supreme Court granted the certiorari asked by the FTC.

The majority recognized that reverse payment settlements are ‘unusual’ (at least when the defendants do not have any claim for damages against the plaintiff), and rejected the Court of Appeals' approach, centred upon ‘whether [they] fall within the scope of the patent’s exclusionary potential’. Reciting previous case law (Line Material), the Supreme Court stated that the privileges granted by patents should be balanced with competition law rules, to the effect that ‘rather than measur[ing] the length or amount of a restriction solely against the length of the patent’s term or its earning potential, as the Court of Appeals apparently did here’, courts are expected to also evaluate traditional antitrust factors (anticompetitive effects, market power, etc.). The judges observed that the Hatch-Waxman Act appears to be very sensitive to antitrust concerns, and cited several cases (inter alia, United States v Singer Mfg. Co. and Standard Oil Co.), which sought ‘to accommodate patent and antitrust policies, finding challenged terms and conditions unlawful unless patent law policy offset the antitrust law policy strongly favoring competition’.

The Supreme Court finally examined arguments concerning the legal policy favouring the settlement of disputes. In light of these considerations, the Court of Appeals had rejected the idea that antitrust law could require the parties of a reverse payment settlement to litigate the validity of the patent in order to demonstrate what would have happened to competition in the absence of the settlement. The Supreme Court dismissed this reasoning and held that the FTC complaint should have been heard, for five reasons:

(1)  the fact that a patentee agrees to pay a substantial amount of money ‘may provide strong evidence that [it] seeks to induce the generic challenger to abandon its claim with a share of its monopoly profits that would otherwise be lost in the competitive market’. The judges noted that, although such settlements could signal to competitors that the patents at issue are weak, in the pharmaceutical field the first filer has much stronger incentives to dispute the validity of the patents, and other companies may refrain from initiating a lawsuit, if the first filer settled;

(2)  the anticompetitive consequences may be unjustified and the parties have the possibility to show, in an antitrust proceeding, the lawfulness/unlawfulness of the settlement under the rule of reason;

(3)  a reverse payment of a large sum usually signals that the patentee enjoys substantial market power;

(4)  ‘it is normally not necessary to litigate patent validity to answer the antitrust question’, as the size of a reverse payment settlement may provide a ‘workable surrogate for a patent’s weakness’;

(5)  the parties remain free to settle their controversies on other terms, without negatively affecting competition.  

The majority of the Court concluded that:

In sum, a reverse payment, where large and unjustified, can bring with it the risk of significant anticompetitive effects; one who makes such a payment may be unable to explain and to justify it; such a firm or individual may well possess market power derived from the patent; a court, by examining the size of the payment, may well be able to assess its likely anticompetitive effects along with its potential justifications without litigating the validity of the patent; and parties may well find ways to settle patent disputes without the use of reverse payments.

Dismissing the FTC’s arguments, which suggested applying a ‘quick-look approach’ to reverse payment settlements, the judges recognised that the rule of reason should be applied instead. ‘That is’, the Court explained, ‘because the likelihood of a reverse payment bringing about anticompetitive effects depends upon its size, its scale in relation to the payer’s anticipated future litigation costs, its independence from other services for which it might represent payment, and the lack of any other convincing justification’.

Chief Justice Roberts, joined by two other judges, filed a dissenting opinion, which criticized the majority’s approach, stating that the correct approach would have been to assess whether the settlement gave the patentee a monopoly power beyond that awarded by its patent. In this perspective, he noted that the majority departed from the rules set out in previous case law, which established that antitrust law had 'no business prying into a patent settlement so long as that settlement confer[red] to the patent holder no monopoly power beyond what the patent itself conferred’. The minority held that the judgment would discourage generics from challenging pharmaceutical patents and the parties from settling patent litigation. Further, it suggested that the link between payment of a large sum and patent weakness is unjustified, as the patentee’s approach may be determined by many factors. Therefore, the minority concluded:

The majority today 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. 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.