A Turducken Task: How Actavis Invites Relitigation Of Patent Merits

This article was first published in the December 4, 2013 issue of Westlaw Journal Pharmaceutical, December 2013 (Volume 29, Issue 10). Reprinted here with permission of Andrews Publications, a Thomson Reuters business © 2013.

For decades, the antitrust and patent law regimes have hung in a delicate balance, fostering the coexisting goals of innovation and competition. The two regimes exist as flip sides of the same coin: Patent law aims to incentivize innovation as a means to promote competition, while antitrust law promotes competition as a means to incentivize innovation. Patents reward innovators by granting them legal monopoly rights. They operate as limited exceptions to antitrust law's general prohibition of monopolies.

Antitrust law has been largely unconcerned with patent monopolies, intervening only when a patent is procured by fraud or its enforcement is objectively baseless. Both regimes traditionally recognize the presumptive validity of patents, which the U.S. Patent and Trademark Office grants only after what is assumed to be a rigorous process of prosecution.

The Supreme Court's recent decision in Federal Trade Commission v. Actavis Inc., however, expressly disavows the principle that patents — or at least patents subject to patent infringement litigation — are presumed to be valid.1 In so doing, the high court's decision threatens the delicate balance the law has long fostered. Ironically, the ruling may also significantly hamper innovation and competition in the pharmaceutical industry.

In Actavis the Supreme Court addressed the question of whether a "reverse-payment settlement" — one in which the patentee pays the alleged infringer — "can sometimes unreasonably diminish competition in violation of the antitrust laws."2

The high court answered this question in the affirmative, holding that because "large and unjustified" reverse payment settlements pose the risk of creating "significant anti-competitive effects," they should be analyzed under the traditional "rule of reason" analysis.3 But the court offered little guidance in the wake of this game-changing pronouncement, leaving "to the lower courts the structuring of the present rule-of-reason antitrust litigation."4

Under traditional rule-of-reason analysis, the fact-finder must consider anti-competitive effect, procompetitive justification and the availability of less restrictive alternatives in determining whether the questioned practice imposes an "unreasonable restraint" on competition.5 Responding to the oft-cited concern that subjecting reverse-payment settlements to this analysis will require a time-consuming and unreliable evaluation of the very patent validity the parties are trying to settle, the Actavis majority ruling remarked that "it is normally not necessary to litigate patent validity to answer the antitrust question."6

The high court observed that "the size of the unexplained reverse payment can provide a workable surrogate for the patent's weakness, ... without forcing a court to conduct a detailed exploration of the patent itself" because "[a]n unexplained large reverse payment itself would normally suggest that the patentee has serious doubts about the patent's survival" and any "payment (if otherwise unexplained) likely seeks to prevent the risk of competition."7 But careful consideration shows that these observations may be inaccurate. Careful consideration also calls into...