Supreme Court Weighs in on Reverse Payment Settlement Agreements

In Actavis, the Food and Drug Administration (FDA) approved Solvay's New Drug Application (NDA) for AndroGel, a topical gel that treats the symptoms of low testosterone in men, in February 2000. Watson Pharms., 677 F.3d at 1304. U.S. Patent No. 6,503,894 (the '894 patent) issued on Jan. 7, 2003. Id. The '894 patent did not expire until August 2020. Id.

Two generic manufacturers ' Watson Pharmaceuticals, Inc. and Paddock Laboratories, Inc. ' filed Abbreviated New Drug Applications (ANDAs) with the FDA in May 2003. Id. Both generic manufacturers made paragraph IV certifications, asserting that their generic AndroGel product did not infringe the '894 patent and/or that the '894 patent was invalid. Id . Solvay filed a patent infringement lawsuit in federal district court, which triggered a 30-month stay of the FDA's approval of Watson and Paddock's ANDAs. Id. Paddock partnered with Par Pharmaceutical Companies, Inc., which agreed to share Paddock's litigation costs in exchange for part of the potential profits from Paddock's generic AndroGel product if that product received final FDA approval. Id.

When the 30-month stay expired in January 2006, the parties had conducted discovery and the defendants' summary judgment motions on the issue of patent validity had been fully briefed, but not yet decided by the court. Id. at 1304-1305. The FDA approved Watson's generic AndroGel ANDA in January 2006 after expiration of the stay. Id. at 1304. However, in September 2006, before the district court ruled on the pending summary judgment motions and before any generic AndroGel was brought to market, the parties settled the patent litigation with a series of settlement agreements. Id. at 1305. Under the settlement agreements, Watson and Paddock/Par were granted a license to launch their generic AndroGel products starting in August 2015 ' five years before the '894 patent was set to expire. Id . Watson agreed to promote branded AndroGel to urologists, and Par agreed to promote it to primary care physicians. Par/Paddock also agreed to provide back-up manufacturing capabilities for the branded AndroGel product. Id. In return, Solvay agreed to pay Paddock/Par $10 million per year for six years and an additional $2 million per year for the back-up manufacturing services. Id. Solvay also agreed to share a portion of its AndroGel profits with Watson and projected that the payments to Watson would be between $19 million and $30 million per year. Id.

FTC Steps In

The settlement agreements were reported to the Federal Trade Commission (FTC) as required by law, and the FTC subsequently filed an antitrust lawsuit against Solvay, Watson, Paddock and Par. Id. The FTC claimed that the settlement agreements were unlawful agreements not to compete in violation of Section 5(a) of the Federal Trade Commission Act. Id. According to the FTC, the agreements were attempts to defer generic competition for the branded AndroGel product by postponing the entry date of the generic drugs, which maintained Solvay's monopoly and allowed the parties to share those monopoly profits at the expense of consumers. Id.

The district court granted the defendants' Rule 12(b)(6) motion to dismiss the FTC's complaint because Eleventh Circuit precedent immunized reverse payment settlement agreements from antitrust attack unless the settlement imposes an exclusion greater than that contained in the patent at issue. In re AndroGel Antitrust Litig., 687 F.Supp.2d 1371 (N.D. Ga. 2010). On appeal, the Eleventh Circuit affirmed the dismissal because the FTC had not alleged that the patent infringement litigation was a sham litigation, that the '894 patent was obtained by fraud, or that any anticompetitive effects of the settlement agreements were outside the scope of the exclusionary potential of the '894 patent. Watson Pharms., 677 F.3d 1298 (11th Cir. 2012).

Supreme Court Opinion

In reversing the Eleventh Circuit's ruling, the U.S. Supreme Court noted the Eleventh Circuit's practical concern that antitrust scrutiny of a patent litigation settlement would require the parties to litigate patent infringement and validity issues and also noted the public policy favoring settlements. Actavis, 133 S.Ct. at 2234. However, the Court cited five sets of considerations that led it to adopt the rule-of-reason analysis: 1) “the specific restraint at issue has the 'potential for genuine adverse effects on competition'”; 2) “the[] anticompetitive consequences will at least sometimes prove unjustified”; 3) “where a reverse payment threatens to work unjustified anticompetitive harm, the patentee likely possesses the power to bring that harm about in practice”; 4) “an antitrust action is likely to prove more feasible administratively than the Eleventh Circuit believed”; and 5) “the fact that a large, unjustified reverse payment risks antitrust liability does not prevent litigating parties from settling their lawsuit.” Id. at 2234-2237.

As the dissent points out, it is not clear that the Court's five sets of considerations are always true. For example, the Court posits that “an antitrust action is likely to prove more feasible administratively than the Eleventh Circuit believed” because it concludes that “it is normally not necessary to litigate patent validity to answer the antitrust question.” Id. at 2236. According to the majority, this is so because “[a]n unexplained large reverse payment itself would normally suggest that the patentee has serious doubts about the patent's survival.” Id. In that case, “the size of the unexplained reverse payment can provide a workable surrogate for a patent's weakness, all without forcing a court to conduct a detailed exploration of the validity of the patent itself.” Id. at 2236-37. This assumption is, of course, not always true. As the dissent points out, “[a] patent holder may be 95% sure about the validity of its patent, but particularly risk averse or litigation averse, and willing to pay a good deal of money to rid itself of the 5% chance of a finding of invalidity.” Id. at 2244. The dissent also commented:

I therefore don't see how the majority can conclude that it won't normally be “necessary to litigate patent validity to answer the antitrust question,” unless it means to suggest that the defendant (patent holder) cannot raise his patent as a defense in an antitrust suit. But depriving him of such a defense ' if that's what the majority means to do ' defeats the point of the patent, which is to confer a lawful monopoly on its holder.

Id. (emphasis in original; internal citations omitted).

Rule of Reason

The U.S. Supreme Court provided some general guidance for how lower courts should assess reverse payment settlement agreements under the rule-of-reason test. First, the courts should “consider[] traditional antitrust factors such as likely anticompetitive effects, redeeming virtues, market power, and potentially offsetting legal considerations present in the circumstances.” Id. at 2231. Second, the Court cautioned that a large, unexplained reverse payment can indicate anti-competitive effects and “provide strong evidence that the patentee seeks to induce the generic challenger to abandon its claim with a share of its monopoly profits” or otherwise “provide a workable surrogate for a patent's weakness.” Id. at 2235, 2236-37. Third, in assessing a reverse payment, “the likelihood of a reverse payment bringing about anti-competitive effects depends upon it size, its scale in relation to the payor's anticipated future litigation costs, its independence from other services for which it might represent payment, and the lack of any other convincing justification.” Id. at 2237. Finally, a reverse payment settlement may be legal where the payment “amount[s] to no more than a rough approximation of the litigation expenses saved through the settlement” or it “reflect[s] compensation for other services that the generic has promised to perform ' such as distributing the patented item or helping to develop a market for that item.” Id. at 2236.

Aside from this general guidance, the Court left it to the trial courts to structure the rule-of-reason antitrust litigation, stating that “trial courts can structure antitrust litigation so as to avoid, on the one hand, the use of antitrust theories too abbreviated to permit proper analysis, and, on the other hand, consideration of every possible fact or theory irrespective of the minimal light it may shed on the basic question ' that of the presence of significant unjustified anticompetitive consequences.” Id. at 2238.

Conclusion

It remains unclear how far the Court's holding in FTC v. Actavis will reach. While this opinion addresses reverse payment agreements in the context of Hatch-Waxman patent litigation, the Court's opinion could be read as applicable to any settlement agreement that involves intellectual property rights and includes a “large” payment to the alleged infringer. Although the majority asserts that “most if not all reverse payment settlement agreements arise in the context of pharmaceutical drug regulation.” Id. at 2227. Chief Justice Roberts, writing for the dissent, describes this characterization as “unlikely” and “fear[s] the Court's attempt to limit its holding to the context of patent settlements under Hatch-Waxman will not long hold.” Id. at 2243.

It also remains to be seen if FTC v. Actavis will affect either the number of Hatch-Waxman litigation settlements or the number of ANDAs filed by generic pharmaceutical manufacturers. The Court appears to acknowledge that its holding may reduce the number of settlements, but suggests that the parties to a Hatch-Waxman patent litigation may still “settle in other ways, for example, by allowing the generic manufacturer to enter the patentee's market prior to the patent's expiration, without the patentee paying the challenger to stay out prior to that point.” Id. at 2237. However, the dissent points out that “there ' [may be] no incentive to settle if, immediately after settling, the parties would have to litigate the same issue ' the question of patent validity ' as part of a defense against an antitrust suit.” Id. at 2243.

Melanie L. Mayer is an associate in Fenwick & West LLP's Litigation Group, focusing on intellectual property litigation. David K. Tellekson is a partner in Fenwick & West LLP's Litigation Group, specializing in life science patent litigation.

On June 17, 2013, the U.S. Supreme Court held in Federal Trade Commission v. Actavis, Inc., 133 S.Ct. 2223 (2013) (a 5-3 decision), that so-called “reverse payment” settlement agreements should be analyzed under a rule-of-reason analysis under which the court weighs the pro- and anti-competitive effects of such agreements on a case-by-case basis. Reverse payment settlement agreements are a type of litigation settlement that requires the patent holder to pay the alleged infringer, often in exchange for the alleged infringer agreeing not to enter the market until a specified date. See Actavis, 133 S.Ct. at 2227; FTC v. Watson Pharms., Inc', 677 F.3d 1298, 1301 (11th Cir. 2012).

In so holding, the Court rejected the rule previously adopted by the U.S. Courts of Appeals for the Eleventh, Second and Federal Circuits, under which a reverse payment settlement is immune from antitrust attack so long as its anticompetitive effects fall within the scope of the exclusionary potential of the patent and there is no sham litigation or fraud in obtaining the patent. Watson Pharms., 677 F.3d at 1312; In re Tamoxifen Citrate Antitrust Litig., 429 F.3d 370 (2d Cir. 2005), amended, 466 F.3d 187 (2d Cir. 2006), cert. denied, 551 U.S. 1144 (2007); In re Ciprofloxacin Hydrochloride Antitrust Litig., 544 F.3d 1323 (Fed. Cir. 2008), cert. denied, 557 U.S. 920 (2009). The Court also rejected the rule previously adopted by the U.S. Court of Appeals for the Third Circuit, which treats reverse payment agreements as presumptively anticompetitive and unlawful unless the parties to the agreement can show that the payment was for a purpose other than delayed entry or it offered some pro-competitive benefit. In re K-Dur Antitrust Litig., 686 F.3d 197 (3d 2012).

Case Details

In Actavis, the Food and Drug Administration (FDA) approved Solvay's New Drug Application (NDA) for AndroGel, a topical gel that treats the symptoms of low testosterone in men, in February 2000. Watson Pharms., 677 F.3d at 1304. U.S. Patent No. 6,503,894 (the '894 patent) issued on Jan. 7, 2003. Id. The '894 patent did not expire until August 2020. Id.

Two generic manufacturers ' Watson Pharmaceuticals, Inc. and Paddock Laboratories, Inc. ' filed Abbreviated New Drug Applications (ANDAs) with the FDA in May 2003. Id. Both generic manufacturers made paragraph IV certifications, asserting that their generic AndroGel product did not infringe the '894 patent and/or that the '894 patent was invalid. Id . Solvay filed a patent infringement lawsuit in federal district court, which triggered a 30-month stay of the FDA's approval of Watson and Paddock's ANDAs. Id. Paddock partnered with Par Pharmaceutical Companies, Inc., which agreed to share Paddock's litigation costs in exchange for part of the potential profits from Paddock's generic AndroGel product if that product received final FDA approval. Id.

When the 30-month stay expired in January 2006, the parties had conducted discovery and the defendants' summary judgment motions on the issue of patent validity had been fully briefed, but not yet decided by the court. Id. at 1304-1305. The FDA approved Watson's generic AndroGel ANDA in January 2006 after expiration of the stay. Id. at 1304. However, in September 2006, before the district court ruled on the pending summary judgment motions and before any generic AndroGel was brought to market, the parties settled the patent litigation with a series of settlement agreements. Id. at 1305. Under the settlement agreements, Watson and Paddock/Par were granted a license to launch their generic AndroGel products starting in August 2015 ' five years before the '894 patent was set to expire. Id . Watson agreed to promote branded AndroGel to urologists, and Par agreed to promote it to primary care physicians. Par/Paddock also agreed to provide back-up manufacturing capabilities for the branded AndroGel product. Id. In return, Solvay agreed to pay Paddock/Par $10 million per year for six years and an additional $2 million per year for the back-up manufacturing services. Id. Solvay also agreed to share a portion of its AndroGel profits with Watson and projected that the payments to Watson would be between $19 million and $30 million per year. Id.

FTC Steps In

The settlement agreements were reported to the Federal Trade Commission (FTC) as required by law, and the FTC subsequently filed an antitrust lawsuit against Solvay, Watson, Paddock and Par. Id. The FTC claimed that the settlement agreements were unlawful agreements not to compete in violation of Section 5(a) of the Federal Trade Commission Act. Id. According to the FTC, the agreements were attempts to defer generic competition for the branded AndroGel product by postponing the entry date of the generic drugs, which maintained Solvay's monopoly and allowed the parties to share those monopoly profits at the expense of consumers. Id.

The district court granted the defendants' Rule 12(b)(6) motion to dismiss the FTC's complaint because Eleventh Circuit precedent immunized reverse payment settlement agreements from antitrust attack unless the settlement imposes an exclusion greater than that contained in the patent at issue. In re AndroGel Antitrust Litig., 687 F.Supp.2d 1371 (N.D. Ga. 2010). On appeal, the Eleventh Circuit affirmed the dismissal because the FTC had not alleged that the patent infringement litigation was a sham litigation, that the '894 patent was obtained by fraud, or that any anticompetitive effects of the settlement agreements were outside the scope of the exclusionary potential of the '894 patent. Watson Pharms., 677 F.3d 1298 (11th Cir. 2012).

Supreme Court Opinion

In reversing the Eleventh Circuit's ruling, the U.S. Supreme Court noted the Eleventh Circuit's practical concern that antitrust scrutiny of a patent litigation settlement would require the parties to litigate patent infringement and validity issues and also noted the public policy favoring settlements. Actavis, 133 S.Ct. at 2234. However, the Court cited five sets of considerations that led it to adopt the rule-of-reason analysis: 1) “the specific restraint at issue has the 'potential for genuine adverse effects on competition'”; 2) “the[] anticompetitive consequences will at least sometimes prove unjustified”; 3) “where a reverse payment threatens to work unjustified anticompetitive harm, the patentee likely possesses the power to bring that harm about in practice”; 4) “an antitrust action is likely to prove more feasible administratively than the Eleventh Circuit believed”; and 5) “the fact that a large, unjustified reverse payment risks antitrust liability does not prevent litigating parties from settling their lawsuit.” Id. at 2234-2237.

As the dissent points out, it is not clear that the Court's five sets of considerations are always true. For example, the Court posits that “an antitrust action is likely to prove more feasible administratively than the Eleventh Circuit believed” because it concludes that “it is normally not necessary to litigate patent validity to answer the antitrust question.” Id. at 2236. According to the majority, this is so because “[a]n unexplained large reverse payment itself would normally suggest that the patentee has serious doubts about the patent's survival.” Id. In that case, “the size of the unexplained reverse payment can provide a workable surrogate for a patent's weakness, all without forcing a court to conduct a detailed exploration of the validity of the patent itself.” Id. at 2236-37. This assumption is, of course, not always true. As the dissent points out, “[a] patent holder may be 95% sure about the validity of its patent, but particularly risk averse or litigation averse, and willing to pay a good deal of money to rid itself of the 5% chance of a finding of invalidity.” Id. at 2244. The dissent also commented:

I therefore don't see how the majority can conclude that it won't normally be “necessary to litigate patent validity to answer the antitrust question,” unless it means to suggest that the defendant (patent holder) cannot raise his patent as a defense in an antitrust suit. But depriving him of such a defense ' if that's what the majority means to do ' defeats the point of the patent, which is to confer a lawful monopoly on its holder.

Id. (emphasis in original; internal citations omitted).

Rule of Reason

The U.S. Supreme Court provided some general guidance for how lower courts should assess reverse payment settlement agreements under the rule-of-reason test. First, the courts should “consider[] traditional antitrust factors such as likely anticompetitive effects, redeeming virtues, market power, and potentially offsetting legal considerations present in the circumstances.” Id. at 2231. Second, the Court cautioned that a large, unexplained reverse payment can indicate anti-competitive effects and “provide strong evidence that the patentee seeks to induce the generic challenger to abandon its claim with a share of its monopoly profits” or otherwise “provide a workable surrogate for a patent's weakness.” Id. at 2235, 2236-37. Third, in assessing a reverse payment, “the likelihood of a reverse payment bringing about anti-competitive effects depends upon it size, its scale in relation to the payor's anticipated future litigation costs, its independence from other services for which it might represent payment, and the lack of any other convincing justification.” Id. at 2237. Finally, a reverse payment settlement may be legal where the payment “amount[s] to no more than a rough approximation of the litigation expenses saved through the settlement” or it “reflect[s] compensation for other services that the generic has promised to perform ' such as distributing the patented item or helping to develop a market for that item.” Id. at 2236.

Aside from this general guidance, the Court left it to the trial courts to structure the rule-of-reason antitrust litigation, stating that “trial courts can structure antitrust litigation so as to avoid, on the one hand, the use of antitrust theories too abbreviated to permit proper analysis, and, on the other hand, consideration of every possible fact or theory irrespective of the minimal light it may shed on the basic question ' that of the presence of significant unjustified anticompetitive consequences.” Id. at 2238.

Conclusion

It remains unclear how far the Court's holding in FTC v. Actavis will reach. While this opinion addresses reverse payment agreements in the context of Hatch-Waxman patent litigation, the Court's opinion could be read as applicable to any settlement agreement that involves intellectual property rights and includes a “large” payment to the alleged infringer. Although the majority asserts that “most if not all reverse payment settlement agreements arise in the context of pharmaceutical drug regulation.” Id. at 2227. Chief Justice Roberts, writing for the dissent, describes this characterization as “unlikely” and “fear[s] the Court's attempt to limit its holding to the context of patent settlements under Hatch-Waxman will not long hold.” Id. at 2243.

It also remains to be seen if FTC v. Actavis will affect either the number of Hatch-Waxman litigation settlements or the number of ANDAs filed by generic pharmaceutical manufacturers. The Court appears to acknowledge that its holding may reduce the number of settlements, but suggests that the parties to a Hatch-Waxman patent litigation may still “settle in other ways, for example, by allowing the generic manufacturer to enter the patentee's market prior to the patent's expiration, without the patentee paying the challenger to stay out prior to that point.” Id. at 2237. However, the dissent points out that “there ' [may be] no incentive to settle if, immediately after settling, the parties would have to litigate the same issue ' the question of patent validity ' as part of a defense against an antitrust suit.” Id. at 2243.

Melanie L. Mayer is an associate in Fenwick & West LLP's Litigation Group, focusing on intellectual property litigation. David K. Tellekson is a partner in Fenwick & West LLP's Litigation Group, specializing in life science patent litigation.