by: Robert Wagner, intellectual property attorney at Picadio Sneath Miller & Norton, P.C. (Robert Wagner on G+)
Today, the United States Supreme Court in a 5-3 decision authored by Justice Breyer in Federal Trade Commission v. Actavis, Inc., No. 12-416, held that reverse payments by a patent holder to an accused infringer to settle a patent infringement lawsuit may implicate antitrust concerns and may be actionable. The Court declined to find that such payments are either per se actionable or immune from the antitrust laws. Instead, such payments must be analyzed under a “rule of reason” approach.
The case arose out of a “paragraph IV” patent infringement lawsuit brought by a pharmaceutical manufacture (Solvay Pharmaceuticals) against a generic manufacturer (Actavis). Solvay filed a New Drug Application in 1999 for a brand-name drug called AndroGel that is used in testosterone replacement therapy. In 2003, Solvay obtained a patent covering the drug, which was disclosed to the FDA. Later in 2003, Actavis filed an Abbreviated New Drug Application for a generic equivalent to AndroGel, and asserted, under paragraph IV of the Hatch-Waxman Act, that it did not infringe Solvay’s patent because the patent was invalid and it did not infringe. Solvay promptly filed suit alleging infringement under 35 U.S.C. § 271(e)(2)(A).
In 2006, the parties settled the litigation. Actavis agreed to not bring its generic drug to market until 2015 (which was 65 months prior to the expiration of Solvay’s patent) and to promote AndroGel to urologists. In return, Solvay agreed to pay Actavis $19–$30 million annually for nine years. Solvay reached similar agreements with other generic manufacturers.
The Federal Trade Commission found that the settlements were designed primarily to limit competition in the marketplace. In essence, Solvay was simply paying the generic manufacturers to stay out of the marketplace, which would have the side effect of increasing prices for consumers. The FTC then brought an antitrust lawsuit against the drug manufacturers.
The District Court found that the FTC’s allegations did not state a claim under the antitrust laws and dismissed the case. The Eleventh Circuit affirmed. They held that absent an allegation of sham litigation, it was not an antitrust violation to reach these kinds of settlements when the restrictions expired prior to the expiration of the patent in question.
Justice Breyer, writing for the majority, disagreed with the Eleventh Circuit’s blanket rule based on the expiration date of the patent. Instead, the Court held that courts must use a “rule of reason” approach and consider the purpose behind the settlement before they can determine whether the settlements run afoul of the antitrust laws.
In reaching this conclusion, the Court considered that the patent may, in fact, not be valid, and there is a strong public interest in removing invalid patents that is frustrated if these kinds of settlements are allowed. The Court also considered the unusual nature of these settlements—where a patent holder pays substantial amounts to the accused infringer. This was not a case where the two parties met in the middle on a settlement figure or where the accused infringer had more valuable counterclaims. Finally, the legislative history behind the Hatch-Waxman Act suggested that Congress was not attempting to justify settlements like these.
The Court also considered the countervailing interest of encouraging settlements and allowing parties to reach mutually-agreeable resolutions. Despite that important interest, the Court was not willing to create blanket immunity for these kinds of settlements. It was concerned that these settlements have a very real potential to hinder competition.
The Court will also quick to note that it would not hold such reverse payment settlements as per se violations. It recognized that some reverse payments may be justified because they save litigation costs, allow for increased distribution of the drug, or will help develop new markets. In the end, the relevant question for antitrust purposes is why did the parties enter the agreement? “If the basic reason is a desire to maintain and to share patent-generated monopoly profits, then, in the absence of some other justification, the antitrust laws are likely to forbid the arrangement.”
The Court then remanded the case back for further proceedings. Justices Breyer wrote the opinion of the Court and was joined by Justices Kennedy, Ginsburg, Sotomayor, and Kagan. Chief Roberts dissented and was joined by Justices Scalia and Thomas. Justice Alito took no part in the decision.