The US Supreme Court Decision on FTC v. Actavis, Inc.: The Legality of Reverse-Payment Settlements of Pharmaceutical Patent Infringement Litigations
“Reverse-payment” license agreements in settlement of Hatch-Waxman Act ANDA Paragraph IV patent infringement litigations are characterized by the transfer of valuable consideration to “generic” drug company defendants by innovative (“brand-name”) pharmaceutical company plaintiffs asserting their Orange-Book-listed patents on drug products approved for marketing by the U.S. Food and Drug Administration, in exchange for delayed market entry of bioequivalent (generic) drugs coupled with the parties’ withdrawal of their respective contentions in, and the termination of, the infringement action.
Last year, two closely watched and hotly debated cases at the interface between the patent and antitrust laws were decided by the U.S. Court of Appeals. The Eleventh Circuit in April 2012 in what later became known as FTC v. Actavis, Inc. (“the Androgel case”) held that payments made by brand-name patent holders to potential generic entrants in exchange for the latters’ delayed market entry in settlement of Paragraph IV litigations were, in effect, per se legal if such settlements fell within the bounds of the so-called “scope of the patent test”. Three months later, the Third Circuit in Louisiana Wholesale Drug Co., Inc. v. Merck & Co. et al. (“the K-Dur case II”), in stark conflict with the Eleventh Circuit, held that such settlements are, in effect, presumptively illegal.
In light of the circuit split, the U.S. Supreme Court agreed to resolve this exceptionally important question affecting the multi-trillion-dollar global pharmaceutical marketplace. On June 17, 2013 the Court, after examining the reverse payment” agreement at issue in the Androgel case in light of the statutory and regulatory structure and incentives created by the Hatch-Waxman Act, reversed the Eleventh Circuit decision of presumptive legality while at the same time rejecting the FTC’s theory of presumptive illegality announced in the July 2012 Third Circuit decision in the K-Dur case II. Instead, in a 5-3 ruling, the Court held that the legality of reverse payment or “pay-for-delay” agreements must be judged under a fuller rule-of-reason standard of analysis. A week later, on June 24, 2013 the Court, in a GVR order, vacated and remanded the Third Circuit decision in the K-Dur case II for further consideration in light of the Court’s decision in the Androgel case.
In the upcoming Knowledge Congress live webcast, a diverse panel of experts will identify the legal, economic, and policy concerns facing the world-wide healthcare community following the Supreme Court’s decision in the Androgel case. In particular, they will debate and discuss how the decision will change the way future settlements of Paragraph IV infringement cases are analyzed and its effect on the behavior of the brand-name and generic sectors, including licensing negotiations, and further incentivizing product innovation. In a broader sense, the decision will be dissected in terms of how it, potential follow-up legislation, and recent apposite U.S. Patent and Trademark Office rulemaking in administrative post-patent-grant review proceedings under the 2011 America Invents Act will affect the way business is conducted in America and in other countries in the contexts of IP laws governing the interpretable scope of patent rights and the role of antitrust laws in the acquisition of market share and the use of market power.
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.
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
James Langenfeld, Ph.D., Managing Director, Head of Antitrust & Competition Practice, Adjunct Professor, Loyola University Chicago Law School,
- 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.
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
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
Who Should Attend:
Pharmaceutical company executives; lawyers practicing in the field of pharmaceutical patent law; antitrust lawyers; and academicians
Charles E. Miller is Senior Counsel to the Sills Cummis & Gross Intellectual Property Group and is resident in the Firm’s New York office.
Dr. Miller’s practice focuses on counseling clients mainly in the chemical and pharmaceutical industries, managing their intellectual property portfolios and representing their interests extensively in technology-related litigation, proceedings before the U.S. Patent and Trademark Office, alternative dispute resolution and licensing.
Prior to joining Sills Cummis & Gross, Dr. Miller was a partner and then senior counsel at Dickstein Shapiro and a partner at Pennie & Edmonds, where he practiced intellectual property law beginning in 1971. At Pennie & Edmonds, he served on the executive, membership/partner compensation, recruitment, and practice development committees. Before that, from 1966 to 1971, he worked in the law departments of Allied Chemical Corporation (now Honeywell International, Inc.) and of Celanese Corporation, where he was involved in patenting the companies’ inventions.
Charles E. Miller is Senior Counsel to the Sills Cummis & Gross Intellectual Property Group and is resident in the …
Mark is an attorney in the FTC’s Bureau of Competition, Health Care Division, where he focuses primarily on investigations and law enforcement actions involving the pharmaceutical industry. Among other things, Mark has investigated and litigated enforcement challenges to pay for delay agreements between branded and generic pharmaceutical companies, including FTC v. Actavis, recently decided by the United States Supreme Court. From 2010-2011, Mark served as an Attorney Advisor to Federal Trade Commissioner Julie Brill. Prior to joining the FTC, Mark was in private law practice in Washington, D.C. Mark holds an undergraduate degree in physics from Swarthmore College and a law degree from Columbia University, where he was an editor of the Columbia Law Review.
Mark is an attorney in the FTC’s Bureau of Competition, Health Care Division, where he focuses primarily on investigations and …
Dr. James Langenfeld is a Managing Director and the Head of the Antitrust & Competition Practice at Navigant Economics, and an Adjunct Professor at Loyola University School of Law. In over 25 years as a professional economist, Dr. Langenfeld has testified on economic matters in many industries, including pharmaceuticals and medical devices. Dr. Langenfeld has published several articles on intellectual property and patent issues in general and specifically on “reverse-payment” issues, which have appeared in journals such as Antitrust Law Journal, International Journal of the Economics of Business, University of San Francisco Law Review, and Case Western Reserve Law Journal. As a consultant, Dr. Langenfeld regularly provides his expertise on these topics for private parties and government agencies engaged in litigation and regulatory proceedings at the federal and state levels in the US, and in Europe, Canada, and other countries. Dr. Langenfeld’s professional experience also includes ten years with the Federal Trade Commission, the last six of which he served as Director for Antitrust in the Bureau of Economics. In that role, he managed 45 PhD economists and was one of main contributors to the 1992 Department of Justice and Federal Trade Commission Horizontal Merger Guidelines and the 1993 Statements of Antitrust Enforcement Policy in Health Care.
Dr. James Langenfeld is a Managing Director and the Head of the Antitrust & Competition Practice at Navigant Economics, and …
Scott Hemphill is Professor of Law at Columbia Law School, where his research examines the balance between innovation and competition set by antitrust law, intellectual property, and other forms of regulation. From 2011 to 2012, he served as Chief of the Antitrust Bureau, in the Office of the New York State Attorney General. Before joining the Columbia faculty, he served as a law clerk to Judge Richard Posner on the U.S. Court of Appeals for the Seventh Circuit, and to Justice Antonin Scalia on the United States Supreme Court. He holds a J.D. and Ph.D. in economics, both from Stanford, and is a graduate of Harvard and the London School of Economics, where he studied as a Fulbright Scholar.
Professor Hemphill’s research on pharmaceutical patenting and competition has been cited by the Supreme Court and lower courts. He has testified before Congress about the anticompetitive effects of “pay-for-delay” settlements between competing drug makers. Other research considers the problem of exclusion in concentrated industries, copyright protection for original fashion designs, and regulation of broadband Internet access providers. His writing has appeared in Science, the Wall Street Journal, leading law reviews, and peer-reviewed journals in economics and law.
Scott Hemphill is Professor of Law at Columbia Law School, where his research examines the balance between innovation and competition …
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About Sills Cummis & Gross P.C.
Sills Cummis & Gross P.C. is a general commercial and corporate practice law firm of several hundred lawyers including a broad-client-based, full-service intellectual property group whose professional capabililties complement those of the Firm’s other practice groups. Sills Cummis’ world-wide client roster ranges from Fortune 500 companies to foreign, institutional, and emerging entities involved in or planning to enter American markets. The physical location of the Firm’s offices in New York and New Jersey offers particularly convenient and significant logistical and economic advantages to clients in the pharmaceutical / life sciences and chemical arts having intellectual property and other business assets and concerns in the United States. Further information regarding Sills Cummis & Gross, its lawyers, and practice areas can be found on the Firm’s website at www.sillscummis.com
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About Columbia University Law School
Columbia Law School, founded in 1858, stands at the forefront of legal education and of the law in a global society. Columbia Law School combines traditional strengths in corporate law and financial regulation, international and comparative law, property, contracts, constitutional law, and administrative law with pioneering work in intellectual property, digital technology, tax law and policy, national security, human rights, sexuality and gender, and environmental law.