Drug Company Patent Settlements Subject To Rule Of Reason Antitrust Scrutiny

This week, the Supreme Court announced that "reverse payment" settlements of patent litigation between branded and generic pharmaceutical companies are, when challenged in a subsequent antitrust case, to be judged under the rule of reason. Reconciling a split among the circuits, the Court rejected both the majority "scope-of-the-patent" test, which upheld such settlements as long as they did not foreclose competition any more so than the patent would have, and the minority "quick look" approach urged by the Federal Trade Commission (FTC), under which they were deemed presumptively unlawful. The Court's ruling promises to generate more—and more complex—disputes about the legality of reverse payment settlements.

The FTC v. Actavis case (formerly captioned FTC v. Watson Pharmaceuticals, Inc., 677 F.3d 1298 (11th Cir. 2012)), together with the decision in In re K-Dur Antitrust Litigation, 686 F.3d 197 (3d Cir. 2012), presented the Supreme Court with its first clear opportunity to address the standard for judging the legality of reverse payment settlements between brand-name drug makers and generic companies. Reverse payment patent settlements are those in which the patent holder (the brand-name drug manufacturer), in addition to agreeing to let the allegedly infringing generic firm to enter before patent expiration, makes some form of payment to the generic firm. This is termed a "reverse" payment because settlements of other patent disputes typically involve payments going the other way: the alleged infringer pays the patent holder for a license permitting it to enter before patent expiration. Critics of these settlements call them "pay-for-delay" settlements, based on the assumption that the brand-name company pays in exchange for the generic firm's agreement to postpone marketing of its product. The supposition is that but for the payment, the generic firm would have entered earlier—either after a victory in the patent case or under a different settlement in which the generic had insisted on an earlier entry date.

In Actavis, the Eleventh Circuit, in keeping with its ruling in prior cases1and in harmony with decisions by the Second and Federal Circuits,2 held that such settlements are lawful so long as they fall within the exclusionary scope of the patent—meaning that they restrain competition to no greater extent than the patent itself. In the subsequent K-Dur case, the Third Circuit departed from the majority rule. The Third Circuit held that reverse payment settlements should be subject to a "quick look" analysis, which deems the settlements presumptively unlawful and puts the burden on the settling parties to show that they are procompetitive or otherwise justified. In Actavis, the Supreme Court rejected both tests and held that the traditional rule of reason analysis governs the settlements—with a catch.

Background

Reverse payment settlements are a byproduct of the Drug Price Competition and Patent Term Restoration Act, better known as the Hatch-Waxman Act of 1984. Hatch-Waxman sought to speed generic entry by incentivizing generic firms to challenge patents covering the brand-name drug. It did this in part by creating a fast-track "abbreviated new drug application" (ANDA) process for Food and Drug Administration approval of generic versions of brand-name drugs for which the patent has not yet expired.3 When notified that an ANDA has been filed for a patented drug, the branded company typically sues the would-be generic manufacturer for patent infringement. Settlements of these cases sometimes provide for generic entry before patent expiration along with a "reverse" payment to the generic firm.

The FTC, charged with enforcing the federal antitrust laws, has long viewed these settlements as unlawful agreements not to compete. Most circuit courts have recognized the importance of the patent, which gives the inventor an exclusive right to sell its invention—or not to. These courts have applied the "scope-of-the-patent" test: if the agreement does not delay competition beyond patent expiration or apply to products not covered by the patent, it is within the patent's scope; and so long as the litigation to enforce it was not a sham, the settlement is lawful. A few courts,4 however, have scrutinized the agreements more closely or rejected them outright. In 2012, a clear split emerged from the divergent standards used by the Third Circuit in K-Dur and the Eleventh Circuit in Watson.

The legacy of unsettled law regarding reverse payment settlements owes its existence in large part to the tension between antitrust and patent law. A valid patent gives its owner monopoly rights to its invention. It limits competition by definition. Critics of reverse payment settlements argue that because those lawsuits ended without a determination of validity, there is no reason to presume it. Thus, whether the settlement rightfully forecloses competition under patent law or wrongfully does so in violation of the antitrust laws depends on whether the underlying patent is valid.

But since the settlement deprived the patent court of the opportunity to decide the question of validity...