In Federal Trade Commission v. Actavis Inc., the U.S. Supreme Court made a watershed recognition that will drastically affect a common practice in the pharmaceutical industry. The court held that a practice known as reverse settlement or reverse payment, in which the plaintiff pays the defendant, is not immune from antitrust laws, even if the patent holder's conduct falls within the exclusionary scope of the patent.
This ruling certainly will lead to an increase in antitrust challenges to reverse settlements in pharmaceutical-related patent litigation. The court's ruling also is likely to spill into other areas where antitrust law and patent law converge, as a basis to challenge the inherent "monopoly" granted to patent holders.
Yet, the June decision is a victory for consumers. The court recognized that reverse settlements may have a significant negative impact on competition — ultimately harming consumers — and, therefore, should not escape the reach of the antitrust laws.
In a 5-3 ruling, the court reversed the U.S. Court of Appeals for the Eleventh Circuit's determination that "reverse settlement" was immune from antitrust scrutiny.
Reverse settlements primarily occur in pharmaceutical patent litigation, where a brand-name drug manufacturer owning a patent sues a generic drug manufacturer for patent infringement. Reverse settlements were born out of the Hatch-Waxman Act, which governs the entry of generic drugs into the market in the United States. Under the act, once a pharmaceutical manufacturer obtains Food and Drug Administration clearance for a new drug, any generic drug manufacturer can apply for expedited FDA approval of a generic form of the new drug. One of the requirements for the generic manufacturer is assurance to the FDA that the generic drug will not infringe on any brand-name patent. The generic manufacturer can do this by taking several routes as mandated by the act's Paragraph IV. One path is clarifying that any relevant patent "is invalid or will not be infringed" by the generic-drug manufacture.
That path has two key effects. First, the act of employing Paragraph IV constitutes patent infringement and gives the patent-holding drug manufacturer 45 days to file a patent infringement suit. Second, if the generic manufacturer successfully defeats the patent, that generic manufacturer is rewarded with a 180-day exclusivity period to market the generic drug. That 180-day period of exclusivity — which is available only to the first generic manufacturer to challenge the patent — is an incredibly valuable incentive that in some cases can be worth several hundred-million dollars.
This framework helps to explain the true nature of reverse settlements. The plaintiff brand-name drug manufacturer, while nominally the plaintiff, is forced to litigate the validity of its patents due to the defendant generic manufacturer's invocation of Paragraph IV. In settling the claim, the brand-name manufacturer receives the dual benefit of securing the patent from challenge and preventing the generic drug manufacturer from competing with the new drug. This allows the brand-name drug manufacturer to ensure that it will benefit from the full time frame of the questioned patent to market the drug without any real threat of competition (other generic manufacturers are unlikely to invoke the Paragraph IV route without the potential reward of the 180-day exclusivity period available to them).
SUPREME COURT DISAGREED
In the case on appeal, the Eleventh Circuit held a reverse settlement is immune from antitrust attack so long as its anticompetitive effects fall within the scope of the exclusionary potential of the patent. In doing so, the Eleventh Circuit sided with the majority of circuits.
The Supreme Court disagreed and held that reverse settlement payments could run afoul of the antitrust laws. In doing so, the court construed its precedent as stating that challenged patent-related conduct is unlawful unless patent law policy offsets the antitrust law policy strongly favoring competition. This appears to be a recognition by the court that when antitrust and patent principles conflict, antitrust is the rule and patent is the exception, not the other way around.
While the court recognized that reverse settlements may violate the antitrust laws, it declined to apply any presumption of illegality to reverse settlements. Instead, the court held that reverse settlement payments are required to be reviewed under the lowest standard of review for antitrust violations — the rule of reason. The rule of reason requires the plaintiff to establish that the conduct (here, the reverse settlement) has an anti-competitive effect and that the conduct's anticompetitive harm outweighs any potential pro-competitive benefits.
The court used the particularities of the Actavis case to describe exactly how the rule of reason analysis will play out for challenged reverse settlement payments: "If the basic reason [for the reverse settlement] 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 went so far as to suggest that a large settlement payment in and of itself could be sufficient to show an improper motive.
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This article is reprinted from the August 19, 2013 issue of the Daily Business Review. © 2013 ALM Media Properties, LLC. Further duplication without permission is prohibited. All rights reserved.