On June 17, 2013, the U.S. Supreme Court handed down a decision that addressed a “reverse payment” settlement agreement between a brand-name pharmaceutical company (plaintiff patent holder) and multiple generic drug companies (alleged infringers).1 While the Supreme Court acknowledged that the anticompetitive consequences of the agreement fell within the patent holder’s lawful right to exclude others from the market, it disagreed with the lower courts that this fact alone immunized the agreement from the antitrust laws. The Supreme Court held that a settlement agreement in which a patentee pays an accused infringer not to enter the market – even if the agreement allows market entry before the patent term expires – is not presumptively lawful and is still subject to antitrust scrutiny. In remanding the case to the district court, the Supreme Court articulated the standard for the lower courts to apply when analyzing reverse payment settlements – “the FTC must prove its case as in other rule-of-reason cases.”
Underlying Facts
In 1999, Solvay Pharmaceuticals filed a New Drug Application (NDA) for AndroGel,2 and the FDA approved Solvay’s application in 2000. In 2003, Solvay obtained a patent covering AndroGel (U.S. Patent No. 6,503,894 – the “ʼ894 patent”), which was subsequently listed in the FDA’s Orange Book.3 Later that year, Actavis, Inc. filed the first Abbreviated New Drug Application (ANDA) for a generic version of AndroGel, and thereafter Paddock Laboratories filed an ANDA for its generic product. Both Actavis and Paddock certified under Paragraph IV of the Hatch-Waxman Act that they did not infringe the ʼ894 patent, and that the patent was invalid.4 Solvay sued Actavis and Paddock for infringing the ʼ894 patent, and 30 months later the FDA approved Actavis’ generic product. Then, in 2006, all parties to the litigation settled.
The Reverse Settlement Agreement
Under the settlement agreement, Actavis agreed that it would not bring its generic product to market until August 31, 2015, which was 65 months before the ʼ894 patent expired; Actavis and the other defendants agreed to promote AndroGel to urologists; and Solvay agreed to pay the generics millions of dollars. Because Actavis was the first filer, barring a successful challenge to the ʼ894 patent by another company, the settlement agreement blocked other generics from entering the market for generic AndroGel until 180 days after Actavis began marketing its generic product.5
The FTC’s Involvement
The FTC has reported that one of its “top priorities in recent years” has been to oppose patent settlements in which brand companies offer to pay generic companies not to bring lower-cost alternatives to market. The FTC believes that these “pay-for-delay” patent settlements, also known as reverse payment agreements, effectively block generic drug competition and “cost consumers and taxpayers $3.5 billion in higher drug costs every year.”6
When the FTC learned of Solvay’s reverse payment agreement with the generics,7 it filed suit in the Northern District of Georgia alleging that Solvay and the generics (collectively, the respondents) violated § 5 of the Federal Trade Commission Act, 15 U.S.C. § 45 by, among other things, agreeing “to share in Solvay’s monopoly profits” and refraining from launching generic products to compete with AndroGel for nine years.
The Northern District of Georgia Dismisses the FTC’s Complaint
The respondents moved to dismiss the FTC action, arguing that the FTC’s allegations, even if true, did not constitute an antitrust violation. The District Court granted the motion and the FTC appealed to the 11th Circuit.
The 11th Circuit Affirms the District Court
The 11th Circuit held that “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.”8 In other words, because the ʼ894 patent could have potentially prevented Actavis and Paddock from marketing their generic products, the settlement was lawful. The 11th Circuit noted that a patent “conveys the right to cripple competition,”9 and although the 11th Circuit recognized that if the parties had not settled, a court could have declared the patent invalid, it concluded that courts should not require parties to continue to litigate in view of the public policy favoring settlement of disputes.10
The FTC appealed to the Supreme Court, and the Supreme Court granted certiorari, noting that “different courts have reached different conclusions about the application of antitrust laws to Hatch-Waxman-related patent settlements.”11
The Supreme Court Reverses and Remands
The Supreme Court acknowledged that a valid and infringed ʼ894 patent may have permitted Solvay to charge drug prices sufficient to recoup the reverse settlement payments it agreed to make to its potential generic competitors. And the Court agreed with the 11th Circuit’s conclusion that the agreement’s “anticompetitive effects fall within the scope of the exclusionary potential of the patent.”12 But the Supreme Court did not agree “that that fact, or characterization, can immunize the agreement from antitrust attack.”13
“For one thing,” the majority noted, “to refer … simply to what the holder of a valid patent could do does not by itself answer the antitrust question.”14 The Court pointed out that the ʼ894 patent may or may not be valid and infringed, and that if the patent is invalid it confers no right to exclude, and if the patent is valid but not infringed, it likewise confers no right to exclude non-infringing products and processes.
Here, Solvay agreed to pay the generics millions of dollars to stay out of the market, even though the defendants had not claimed that the plaintiff was liable to them for damages. The Supreme Court observed that such settlements are “unusual” and “tend to have significant adverse effects on competition.”15 For example, if the litigation had resulted in a finding of invalidity or non-infringement, Solvay could have lost hundreds of millions of dollars, “a sum that then would flow in large part to consumers in the form of lower prices.”16 The Court also noted that under the Hatch-Waxman Act, “only the first challenger gains the special advantage of 180 days of an exclusive right to sell a generic version of the brand-name product.”17 This 180-day exclusivity period could be worth several hundred million dollars for the first-to-file generic. Subsequent challengers, though, cannot secure that exclusivity period, “and thus stand to win significantly less than the first if they bring a successful paragraph IV challenge.”18 Also, a generic company that files a Paragraph IV certification after learning the first filer has settled will, if sued by the patent holder, likely have to wait about 30 months before FDA can approve its ANDA.19 The Supreme Court concluded that “[t]hese features together mean that a reverse payment settlement with the first filer ... ‘removes from consideration the most motivated challenger, and the one closest to introducing competition.’”20
In light of these (and other) factors that could potentially stifle competition from lower-cost generic medicines, the Supreme Court found that it would be “incongruous to determine antitrust legality by measuring the settlement’s anticompetitive effects solely against patent law policy, rather than by measuring them against procompetitive antitrust policies as well.”21
The matter was remanded to the district court with instructions to analyze the settlement under the “rule-of-reason.”22