The settlements arise under the Hatch-Waxman Act, the law enacted by Congress in 1984 to foster drug innovation and challenges to invalid patents. Under the Act, the first generic to challenge a brand firm’s patent, claiming invalidity or noninfringement, obtains a valuable 180-day period of marketing exclusivity. This period, however, has encouraged brand firms to pay generics to drop their patent challenges and delay entering the market.
In the past decade, the Federal, Second, and Eleventh Circuits have upheld pay-for-delay agreements. They have emphasized the benefits of settlements, have claimed that payments fall within the “scope of the patent,” and have highlighted patents’ presumption of validity. In the summer of 2012, however, the Third Circuit created a circuit split by finding that pay-for-delay agreements were presumptively illegal.
In this case, the Supreme Court considered an arrangement by which brand firm Solvay paid generics Watson (now Actavis) and Paddock roughly $30 to $40 million to delay entering the market with generic versions of testosterone gel. The Eleventh Circuit upheld the activity, concluding that “absent sham litigation or fraud in obtaining the patent, a reverse payment settlement is immune from antitrust attack so long as its anticompetitive effects fall within the scope of the exclusionary potential of the patent.” The court explained that “[p]atent holders have a ‘lawful right to exclude others from the market’” and that a patent “conveys the right to cripple competition.”
The Supreme Court reversed the Eleventh Circuit, concluding that, while a valid patent allows a patentee to charge “higher-than-competitive” prices, “an invalidated patent carries with it no such right.” The Court recognized the policy encouraging settlements. But for five reasons, it found that that policy did not dictate immunity for pay-for-delay settlements.
First, “the specific restraint at issue has the ‘potential for genuine adverse effects on competition’” since “payment in return for staying out of the market . . . keeps prices at patentee-set levels.” The Court recognized what several other courts have not – that “the patentee’s payment to the initial challenger (in return for not pressing the patent challenge) will not necessarily provoke subsequent challenges” since “only the first challenger gains the special advantage of 180 days of an exclusive right to sell a generic version of the brand-name product.”
Second, “these anticompetitive consequences will at least sometimes prove unjustified,” such as where the payments are not for “avoided litigation costs or fair value for services.” Third, “where a reverse payment threatens to work unjustified anticompetitive harm, the patentee likely possesses the power to bring that harm about in practice.”
Fourth, “an antitrust action is likely to prove more feasible administratively than the Eleventh Circuit believed,” with an “unexplained large reverse payment itself . . . normally suggest[ing] that the patentee has serious doubts about the patent’s survival.” Given the difficulties presented by litigating patent validity, the Court’s statement is welcome that “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.”
Fifth, “the fact that a large, unjustified reverse payment risks antitrust liability does not prevent litigating parties from settling their lawsuit.” For example, generics could enter the market “prior to the patent’s expiration.”
The Court declined the FTC’s invitation to apply a framework of presumptive illegality since it was not the case that “an observer with even a rudimentary understanding of economics could conclude that the arrangements in question would have an anticompetitive effect on customers and markets.” The analysis is more nuanced since the likelihood of anticompetitive effects depends on a reverse payment’s “size, . . . scale in relation to the payor’s anticipated future litigation costs, . . . independence from other services for which it might represent payment, and the lack of any other convincing justification.”
As a result, the “FTC must prove its case as in other rule-of-reason cases.” And district courts “can structure antitrust litigation so as to avoid, on the one hand, the use of antitrust theories too abbreviated to permit proper analysis, and, on the other, consideration of every possible fact or theory irrespective of the minimal light it may shed on the basic question—that of the presence of significant unjustified anticompetitive consequences.”
Chief Justice Roberts, joined by Justices Scalia and Thomas, dissented, stating that a patent “carves out an exception to the applicability of antitrust laws.” He also highlighted the value of settlements and lamented that the majority decision would discourage them. And he worried that the majority decision ignored patent policy and forced generics to litigate.
The Actavis decision is crucial for two related reasons.
First, in one fell swoop, the Supreme Court has dispelled any doubt that pay-for-delay settlements present anticompetitive concern. The Court made crystal clear that such agreements are not immune from antitrust scrutiny. The decision by the Eleventh Circuit (together with those from the Federal and Second Circuits) applying near-per-se legality in assuming that payments for delay were legal is now relegated to the history books.
Second (and relatedly), the Court highlighted significant concerns with these agreements, pointing to “genuine adverse effects on competition.” The Court made clear that antitrust analysis need not involve full-blown assessments of patent validity, but can be based on the size of the payment. It confirmed that there are ways to settle cases other than with payments. And it highlighted the unique position occupied by the first-filing generic, which imbues this setting with anticompetitive potential.
While complicated issues will need to be worked out – such as the justifications from the settling parties that will be accepted and whether payments in any particular case are for delay or for related services – the shots fired across the Supreme Court’s bow should be heard loud and clear by drug companies. The FTC and private plaintiffs must be rejoicing now that their long-fought litigation against these concerning practices not only has not been blocked but also can charge full speed ahead with strong support from the Supreme Court.