Good Luck With That: US Supreme Court Tells Lower Courts to Analyze Pharma “Reverse Payment” Agreements Under “Rule of Reason”

For years, E-TIPS® has been following challenges to “pay-for-delay” or “reverse payment” settlement agreements between brand name and generic drug manufacturers in the United States (see here, here and here, for example). Under the terms of such agreements, the brand name manufacturer of a drug pays a generic manufacturer to abandon its challenges to the validity of any patents covering the drug, and to delay entry of the generic copy of the drug. By this means, the brand name manufacturer can prolong its monopoly on the drug. The US Supreme Court (USSC) has now issued a long-awaited ruling on determining the legality of such settlement agreements in Federal Trade Commission (FTC) v. Actavis. Prior to this decision, different federal appeals courts in the US had arrived at opposite conclusions as to whether these agreements reduce competition in violation of antitrust laws: Some courts had found the agreements to be presumptively illegal, while the others had held them to be generally immune from antitrust attacks. In a 5-3 decision, the USSC found that some reverse payment settlement agreements may be anticompetitive. The majority disagreed with the argument that if an agreement’s anticompetitive effects were within the exclusionary potential of the subject patent, it was sufficient to immunize the agreement from antitrust scrutiny. In an opinion penned by Justice Breyer, the majority remarked that the problem is that if the patent is not valid, then there is no right to exclude. Further, the majority, while recognizing the benefits of settling litigation, stated that reverse payment agreements, especially large and unjustified ones, may have significant adverse effects on competition. As a result, the antitrust legality of reverse settlement agreements should be assessed not only based on patent law policy, but on antitrust policy as well. After reviewing case law, the statutory scheme and policy considerations, the majority determined that some reverse payment settlement agreements could violate antitrust laws. However, the majority rejected the FTC’s argument that the determination of whether a settlement agreement is anticompetitive should be based on a “quick look” of the agreement because of complexity of the issues. The assessment of the anticompetitive effects of an agreement depends upon factors such as the payment’s size, scale relative to future litigation costs, and whether it included payment for other services. Consequently, a “rule of reason” analysis, which considers the circumstances of each individual case, is the appropriate approach. The USSC majority stated that the FTC will not be required to litigate patent validity to succeed in showing a reverse payment settlement is anticompetitive, but did not detail what would be needed for the FTC to meet its case. In fact, the majority left to the lower courts the task of structuring the rule-of-reason antitrust litigation in these situations. The dissenting opinion, written by Chief Justice Roberts, criticized the majority opinion because a patent is an exception to antitrust laws. The concern in these situations is whether the patent is valid, which is fundamentally a question of patent law, not antitrust law. Therefore, a patentee should not be prohibited from doing anything it is entitled to within the scope of the patent. The dissent noted that applying the “unruly” rule of reason analysis to reverse payment settlements will be a difficult and uncertain endeavour by commenting: “Good luck to the district courts that must, when faced with a patent settlement, weigh the ‘likely anticompetitive effects, redeeming virtues, market power, and potentially offsetting legal considerations present in the circumstances.’” The dissent observed that the effect of the majority decision will be to discourage reverse payment settlements, which would likely have negative implications. Forcing litigation to completion can result in higher litigation costs that are passed to the consumer. As well, without the option for settlement, the incentive for generic drug companies to challenge patents may decrease, thereby discouraging generics from challenging patents in the first place. Summary by: Cheryl Cheung