June 19, 2013

AndroGel® Reverse Payments Held to "Rule of Reason" Says Supreme Court

supremecourt.pngOn June 17, the U.S. Supreme Court released its decision in the controversial case regarding Hatch-Waxman patent settlements, FTC v. Actavis . In a 5-3 decision the Court held that lower courts reviewing so-called reverse-payment settlement agreements should apply a "rule of reason" antitrust analysis instead of the scope-of-the-patent test or the "quick look" approach, which had been advocated by the Federal Trade Commission ("FTC"). This was the first time the Court weighed in on whether reverse-payment Hatch-Waxman patent settlements between brand and generic pharmaceutical companies were subject to antitrust scrutiny, and, if so, what that level of scrutiny should be. A previous blog on the oral arguments to this case may be found here.

The Court acknowledged the policy that settlement of complex patent litigation is generally preferred, yet then identified five reasons why it believes that the Eleventh Circuit was wrong when it held that the FTC should not have the opportunity to prove its antitrust claims. First, a large reverse payment may risk significant anticompetitive effects. Second, a large reverse payment may not be justified given its anticompetitive effects. Third, the patent holder paying a large or unjustified reverse payment may have market power that permits it to cause potential anticompetitive harm. Fourth, even without litigating the case, a court may be able to determine the likely anticompetitive effects or potential justifications caused by the payment by examining the size of the payment. And fifth, parties are able to settle their patent disputes in other ways without using reverse payments.

FTC brought the case challenging the reverse-payment settlements Solvay (now part of Abbot Laboratories) entered into with a number of generic drug companies that resolved their Hatch-Waxman patent disputes involving Solvay's AndroGel®--a testosterone-replacement drug. The settlement agreements involved the generics' agreement to abandon their patent challenges and thereby delay generic entry for nine years. In addition, Solvay made certain payments to the generic manufacturers in exchange for their manufacturing and marketing support.

The Court did not articulate specific factors that courts should consider when evaluating whether reverse-payment settlement agreements are anticompetitive. However, the Court's decision makes it clear that a threshold indicator of whether a settlement may be unlawful should be the size of any payment made by the branded manufacturer to the generic manufacturer. This means that going forward significant emphasis will be placed on valuing settlement terms that include more than cash payments. When payments are involved courts then may apply a market power screen to evaluate the settlement's competitive effects. Even if market power is found, the opinion leaves open the opportunity for the patent holder to defend the antitrust suit by relying on the strength of its patent and the merits of the underlying patent suit..

A dissenting opinion was filed by Chief Justice Roberts, which was joined by Justices Scalia and Thomas. The dissent disagreed with the majority interjecting antitrust scrutiny into a patent agreement that does not go beyond the exclusionary scope of the patent. The dissent thought lower courts would require "good luck" to weigh "the 'likely anticompetitive effects, redeeming virtues, market power, and potentially offsetting legal conclusions present in the circumstances.'"