The US Supreme Court Decision on FTC v. Actavis, Inc.: The Legality of Reverse-Payment Settlements of Pharmaceutical Patent Infringement Litigations

Moderator:
Charles Miller, Senior Counsel / Member, Intellectual Property Law Practice Group, 
Sills Cummis & Gross P.C.

• On June 17, 2013, in a 5-to-3 decision, the U.S. Supreme Court in Federal Trade Commission v. Actavis, Inc., _ U.S. _ (Breyer, J.) (Roberts, C.J., joined by Scalia, Thomas, JJ. dissenting, Alito, J. abstaining) reversed the 11th Circuit holding (which was consistent with those of the 2d and Federal Circuits) that reverse-payment license agreements in settlement of Hatch-Waxman Act Paragraph IV ANDA-based patent infringment litigations can be essentially shielded from antitrust scrutiny because of their presumptive legality under the “scope of the patent test”, and imposing the burden of persuasion on those challenging such settlements. In so doing, the Court also rejected the FTC’s position endorsed by the 3rd Circuit that such settlements should be examined using a “quick look” test premised on their presumptive illegality under antitrust law, which would place the burden of proving otherwise on the settlors.
• Rather, in a departure from those precedents, the Court unsurprisingly adopted a middle-of-the-road approach by requiring that the legality of reverse-payment settlements be adjudged under a full rule-of-reason analysis that takes into account all pertinent issues of law and economics, and evidence relevant to the predictive merits of the patent case, consumer benefit/prejudice, and business considerations.
• The Court’s decision has largely resolved the uncertainly in negotiating and crafting reverse-payment settlement agreements caused by splits among varioius circuits that had plagued the pharmaceuticfal industry — both branded and generic — for over a dozen years. Whether the consequent allocation of evidentiary burdens on parties in antitrust actions — administrative as well as private — will discourage such settlements remains to be seen. It does seem likely, however, that absent the enactment of proposed overriding legislation, such settlements will continue to be a viable — and preferred — dispute resolution modality in some Paragrpah IV litigations in lieu of (i) trying those cases in district court whose outcomes can often be uncertain regardless of the merits of the patent issues, and (ii) “at risk” market entry of the generic product during the period following the statutory 30-month delay in ANDA approval and pror to trial and final decision, where the financial consequences of an unsuccessful litigation defense can be devastating for generic defendants.

SEGMENT 1:
Mark Woodward, Attorney, 
Federal Trade Commission

• The Supreme Court’s rejection in FTC v. Actavis of the “scope of the patent test,” which had effectively shielded pay-for-delay agreements from antitrust scrutiny, was a significant victory for American consumers.
• The Supreme Court’s opinion affirms that eliminating the risk of competition is an anticompetitive harm; there is no need to determine whether the generic firm would have prevailed in the patent case.
• As the Supreme Court recognized and as available data confirm, pharmaceutical patent cases can and do settle without reverse payments.
• Stopping anticompetitive pay-for-delay agreements in the pharmaceutical industry remains one of the FTC’s top priorities

SEGMENT 2:
James Langenfeld, Ph.D., Managing Director, Head of Antitrust & Competition Practice, Adjunct Professor, Loyola University Chicago Law School, 
Navigant Economics

• The SC rejected the FTC’s urging of in effect treating “reverse payments” as virtually per se illegal and also rejected the 3rd Circuit’s treatment of these payments as being per se legal if within the scope of the patent, stating that the payments should be evaluated under a rule of reason.
• The majority of the SC apparently believes that the uncertainty of the validity and infringement of patent under challenge should limit the scope of enforceability of the patent, where the dissenters do not.
• Despite indicating these cases should be analyzed under a rule of reason, the SC majority lays out what may be called a “quick look” type of approach. That approach requires (1) a “reverse payment” from the patent holder to the generic that is for delay and not for other services rendered by the generic, (2) size of the payments is large compared to litigation costs, and (3) there are no “convincing justifications”.
• The economics of the industry indicates the size of the payment relative to the hard litigation costs is not a good indication of anticompetitive effects or the weakness of the patent. First, the payments must be put in the context of the size of the markets involved, and the payments are often a small percent of drugs sales. Second, as I and others have shown, the potential for (1) a generic not being able to compensate the patent holders if the patent is upheld or (2) reasonable risk aversion on the part of patent holder can explain the size of the payments even with a strong patent and no anticompetitive intent.
• Certainly the SC’s ruling will reduce the opportunities for structuring settlements, as the Dissent argues, and will at least at the margin reduce innovations. The lost benefits to consumers from only a few innovations being discourage could greatly outweigh the benefits to consumers from early generic entry driving down prices, as I have shown in my research.

SEGMENT 3:
Professor C. Scott Hemphill, Professor of Law, 
Columbia University Law School

• The Supreme Court recognized that pay-for-delay settlements are anticompetitive because they allow competitors to share monopoly profits. The Court’s opinion describes a focused and structured analysis under the rule of reason, in which a large unexplained payment provides evidence of anticompetitive effect.
• Direct examination of the merits of the patent case is de-emphasized in this inquiry. If patent strength were central, a new study in Science (Hemphill & Sampat 2013) shows that most pay-for-delay settlements involve weak patents.
• In the future, one important issue for lower courts will be to determine whether a payment was for value provided by the generic firm, rather than delayed entry. A useful baseline for this determination is brand-generic business deals outside the context of settlement.
• A second issue is “retained exclusivity” settlements, in which the settling generic drug maker enjoys 180 days of exclusivity when it enters the market. The reasoning of the Court’s opinion indicates that retained exclusivity, like cash, is an impermissible mechanism for sharing monopoly profits

SEGMENT 4:
Charles Miller, Senior Counsel / Member, Intellectual Property Law Practice Group, 
Sills Cummis & Gross P.C.

• Of the two main patent issues that can arise in ANDA litigations, namely, validity and infringement, the validity of the Orange-Book-listed patent(s)-in-suit can now be adressed concurrent with the litigation and relatively quickly under the provisions for contested (inter partes) adminsitrative patent validity assessment proceedings in the USPTO as enabled by the recently-enacted America Invents Act (2011). Of particular interest is the statutory right of settlement of the patent valildity issue in such proceedings which can entail entry into and submission to the USPTO of reverse-payment license agreements in settlement of the underlyhing ANDA litigation