The Supreme Court Refuses Antitrust Immunity for “Reverse Payment” Hatch-Waxman Pharmaceutical Settlements
On June 17, the Supreme Court decided FTC v. Actavis, Inc., a landmark case at the intersection of antitrust and patent law that may have far-reaching consequences for the pharmaceutical industry and the scope of antitrust exposure associated with patent infringement litigation generally. A sharply divided 5-3 Court held that settlements of Hatch-Waxman litigation between brand name drug companies and their potential generic competitors should be scrutinized by courts under traditional rule of reason analysis for antitrust violations if they contain so-called reverse payments from the patentee brand to the generic challenger. (The Hatch-Waxman Act allows a generic manufacturer its own exclusivity period for an Abbreviated New Drug Application (ANDA) if it can demonstrate the brand manufacturer’s issued patent is invalid or noninfringed.) The settling ANDA parties will have to demonstrate why an individual settlement is not anticompetitive and will no longer be able to rely on the legal monopoly provided by patents as immunizing them from antitrust liability.
The FTC has for nearly a decade been aggressively seeking to enforce the antitrust laws against Hatch-Waxman settlement payments, which it terms “pay for delay,” despite being rebuffed by nearly all lower courts since 2005. Whether the Actavis decision will accomplish the FTC’s and the majority’s pro-consumer, pro-competition goals remains to be seen. In a dissenting opinion, Chief Justice Roberts warns that the majority approach could ironically have substantial anticompetitive effects. According to the dissent, by refusing to immunize reverse payment settlements under the scope-of-the-patent rule, the Court’s decision will likely deter parties from entering into such settlements, which may result in fewer generic challenges being made, may tend to concentrate power in larger generic companies which can better afford litigating multiple cases to the end, and could potentially factor into innovator companies decisions about research and development. Whether consumers will actually benefit from this ruling is thus likely to remain controversial for some time.
In Actavis, the high court resolved a split between the Second, Eleventh, and Federal Circuits – which have all held that settlements of ANDA patent litigation are immune from antitrust scrutiny so long as they are within the scope of the patent, barring sham litigation or fraud on the patent office – and the Third Circuit. Last year, the Third Circuit ruled in favor of the FTC’s position that a reverse payment from the brand to the generic challenger, which is a defendant in the Hatch-Waxman scheme, makes a settlement payment presumptively illegal under a “quick-look” antitrust analysis.
Choosing a middle ground that rejected the FTC’s position of holding all reverse payment ANDA settlements illegal per se, the majority opinion by Justice Breyer disclaimed immunity for patent settlements. The Court explained that such settlements are subject to antitrust scrutiny on a case-by-case basis under the long-established Sherman Act rule of reason approach, where a “large” payment from the brand to the generic in return for a promise to delay marketing the generic drug may appropriately be found as a sign that the agreement has an anticompetitive effect not warranted by the strength of the patent. Rule of reason violations in the ANDA context may lead to both injunctive relief nullifying the settlement in cases brought by the FTC and to monetary awards in class action suits by private plaintiffs seeking treble damages for the alleged overcharges caused by delayed generic competition. The minority opinion by Chief Justice Roberts (joined by Justices Scalia and Thomas) would have affirmed the Eleventh Circuit’s scope-of-the-patent rule, largely immunizing settlements, regardless of any reverse payments, due to concerns over deterring settlements in uncertain, complex litigation and judicial ability to accurately weigh the strength of infringement claims and risk of patent invalidation against the size of monetary payments.
The majority opinion provides guidance for the case-by-case analysis it adopts by discussing five “sets of considerations” to inform rule of reason antitrust analysis. These include the size of the payment, whether it is “unexplained,” and whether there are “legitimate justifications” for the agreement. The decision leaves it up to the lower federal courts to develop answers to those inquiries, using traditional rule of reason balancing of procompetitive and anticompetitive effects, directed to the particular facts presented in each case.
In the Actavis case, the underlying patent infringement actions were brought in 2003 by the French company that developed the AndroGel formulation (Besins) and the U.S. company that performed the clinical development leading to the AndroGel NDA (Unimed, later Solvay, now Abbvie). Watson (now Actavis) and Paddock had filed ANDAs with Paragraph IV certifications alleging the sole Orange Book-listed patent for AndroGel was invalid and noninfringed. Defendant Par was Paddock’s partner in the litigation. After partial summary judgment motions were briefed but before any decision on the merits, both cases were settled in 2006. The settlements provided for payments from Abbvie to the three generic companies and that in return the generics would provide certain marketing and manufacturing services with regard to AndroGel. The settlements also provided that the generics could enter the market in 2015, several years before expiration of the AndroGel patent, but that until then they would not compete with AndroGel. In the antitrust suit later brought by the FTC, the FTC alleged that the services provided by the generics were of little value and that the payments by the brand were in fact simply compensation not to compete with AndroGel.
When the FTC and private plaintiffs brought antitrust claims against the settling parties, the district court, applying Eleventh Circuit precedent, dismissed all reverse payment claims but allowed the private plaintiffs’ sham claims to proceed. The FTC appealed, and the Eleventh Circuit’s affirmance was the decision reversed by the high court. (Separately, the District Court granted summary judgment dismissing sham litigation claims that had been asserted by private plaintiffs, holding that Abbvie’s patent suits were not “objectively baseless” as a matter of law. This decision is now on appeal to the Eleventh Circuit.)
The risks involved in settling a Hatch-Waxman pharmaceutical case are significantly elevated in light of the decision in Actavis. Although the substantive strength of the underlying infringement action - which the FTC had viewed as crucial - was not directly relied by the Supreme Court, the subjective intent of settling parties, and how their competitive purposes are reflected in documents and other communications, will become much more important as a rule of reason “consideration,” with the need for early and creative legal counseling on such points correspondingly more important. In addition, ANDA case strategy, for both brands and generics, will no doubt be affected as a result of the absence of cash to bridge a settlement in at least some Hatch-Waxman cases. Whether the Court’s analysis holding patentee actions in connection with infringement litigation subject to antitrust scrutiny even without fraud or inequitable conduct will extend to other areas of the IP-antitrust interface, such as Walker Process counterclaims and ITC exclusion orders as remedies, remains to be seen as well.
Note: Troutman Sanders New York intellectual property partner Daniel A. Ladow was litigation counsel to one of the parties in the underlying AndroGel ANDA case and assisted in preparation for Supreme Court oral argument.
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