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Supreme Court Adopts "Rule of Reason" Approach on Pay-for-Delay Settlements, BNA's Health Care Daily Report

June 18, 2013

In a decision eagerly anticipated by the government, drugmakers, and consumer groups, the U.S. Supreme Court June 17 ruled in a 5-3 decision that the legality of drug patent litigation settlements should be evaluated under a "rule of reason" approach, but declined to hold that reverse payments are presumptively illegal (FTC v. Actavis Inc., U.S., No. 12-416, 6/17/13).

The ruling means that the Federal Trade Commission will get another chance to prove that a patent litigation settlement involving the testosterone-replacement drug AndroGel is anti-competitive.

Justice Samuel Anthony Alito Jr. took no part in considering or deciding the case.

Under the high court's ruling, reverse payments-which generally involve payments from branded drug companies to generic drug companies in exchange for the generic staying off the market-will not be able to escape antitrust scrutiny.

The majority opinion, written by Justice Stephen G. Breyer, rejected the FTC's suggestion to treat all so-called reverse payments as presumptively illegal. Breyer said the deals are too complex to apply that approach. "These complexities lead us to conclude that the FTC must prove its case as in other rule-of-reason cases," Breyer said, directing lower courts to look at several factors to determine whether such settlements are reasonable under antitrust law, including assessing the size of the reverse payment.

Reversing the U.S. Court of Appeals for the Eleventh Circuit's decision in the AndroGel case, the high court remanded the case, and said that the FTC must prove its case in the lower court.

"This Court declines to hold that reverse payment settlement agreements are presumptively unlawful," the opinion said. "Courts reviewing such agreements should proceed by applying the 'rule of reason,' rather than under a 'quick look' approach."

"[T]he likelihood of a reverse payment bringing about anticompetitive effects depends upon its 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," the high court said, adding that "[t]he existence and degree of any anticompetitive consequence may also vary as among industries."

But in a dissent joined by Justices Antonin Scalia and Clarence Thomas, Chief Justice John G. Roberts Jr. criticized the majority's "rule of reason" approach, saying that such a rule will discourage litigants from settling patent cases.

In the dissent, Roberts also predicted that lower courts will have a hard time deciding cases under the rule of reason approach, and also expressed concern that the majority's holding would be applied in circumstances other than Hatch-Waxman Act settlements. "I fear that the Court's attempt to limit its holding to the context of patent settlements under Hatch-Waxman will not long hold," he said.

The Hatch-Waxman Act created an artificial act of infringement-the filing of an abbreviated new drug application by a generic drug company to make a generic version of a branded drug before its patent expires-as a mechanism to resolve patent infringement actions before generic products actually come to market and possibly face damages.

New Questions for Industry

Although some had hoped that the Supreme Court's ruling in the Actavis case could resolve a long-standing circuit split on whether such pay-for-delay deals are anti-competitive, the ruling instead opens up a myriad of issues going forward for the drug industry, including questions about the status of already executed patent litigation settlements, FTC's future enforcement plans, the feasibility of settling drug patent suits, and even the effect of the ruling on subsequent generic drug companies challenging a brand-name patent, antitrust experts told BNA June 17.

The ruling "may well lead to greater uncertainty and have a chilling effect on parties' willingness to settle patent cases," Steven A. Reed, of Morgan, Lewis & Bockius LLP, in Philadelphia and co-chair of the firm's antitrust litigation group, told BNA June 17. The high court, he said, described its "approach as a 'sliding scale' and left it to the lower courts to give substance to the rule in Hatch-Waxman settlements."

In the Actavis case, the U.S. Court of Appeals for the Eleventh Circuit found that a branded drugmaker did not violate federal antitrust laws in paying two generic drugmakers to delay introduction of their generic version of AndroGel as part of a patent litigation settlement. The U.S. Supreme Court accepted the FTC's certiorari petition in the case in December 2012 (236 HCDR, 12/10/12).

FTC, Drugmakers Advocated Different Approaches

The FTC argued that all so-called reverse payments are presumptively illegal, while the pharmaceutical industry argued that deals are illegal only if they exceed the scope of the underlying patent.

FTC now will have a chance to prove its case under the new rule of reason approach at the district court level.

FTC applauded the decision. "The Supreme Court's decision is a significant victory for American consumers, American taxpayers, and free markets," FTC Chairwoman Edith Ramirez said in a June 17 statement. "The Court has made it clear that pay-for-delay agreements between brand and generic drug companies are subject to antitrust scrutiny, and it has rejected the attempt by branded and generic companies to effectively immunize these agreements from the antitrust laws."

Meanwhile, in a June 17 statement, Parsippany, N.J.-based Actavis, one of the parties to the underlying patent litigation settlement in the case, said it "intends to defend its position" when the case is remanded.

Chilling Effect on Settlements?

In statements released June 17, the drug industry voiced the same concerns as the dissent about the effect the decision might have on drug patent litigation settlements.

"Unfortunately, the Court's decision creates a degree of uncertainty that will make it less likely that innovator pharmaceutical and generic companies will be able to settle these disputes in the future," Pharmaceutical Research and Manufacturers of America (PhRMA) Executive Vice President and General Counsel Mit Spears said in a statement June 17. "This will negatively affect patients and discourage investment in future biomedical research."

"[T]he Court's ruling will require generic companies to take on a greater administrative burden to pursue a patent challenge, potentially lowering the number of challenges," Ralph G. Neas, president and chief executive officer of the Generic Pharmaceutical Association (GPhA), said in a June 17 statement. "As a result, consumers may have access to fewer generic options."

The ruling "does place an additional and unnecessary administrative burden on our industry," Paul Bisaro, president and chief executive of Actavis, agreed in a June 17 statement.

Rule of Reason Portends Changes

Some antitrust experts told BNA that the Supreme Court's decision could portend huge changes for the pharmaceutical industry because courts will not be able to simply give such reverse payment deals a free pass.

"The ruling is an important change in how lower courts evaluate these deals," C. Scott Hemphill, professor of law at Columbia Law School in New York, told BNA June 17. "The Supreme Court ruling is entirely different from the 'scope of the patent' test."

"The defendants had argued that a drugmaker is free to pay a rival an unlimited amount of money, and delay entry until patent expiration," Hemphill said, adding that the Supreme Court "squarely rejected that view."

"This is a big win for the FTC, and a significant change in the intersection of patent and antitrust law," James M. Burns, an antitrust partner in the Washington office of Dickinson Wright, told BNA June 17.

"It's a significant change," Washington antitrust lawyer David A. Balto, who formerly served as assistant director for policy and evaluation in FTC's Bureau of Competition, agreed. "It's a significant victory for consumers. The Supreme Court has clarified that these agreements raise serious competitive concerns," Balto told BNA June 17.

In the opinion, the majority criticized the Eleventh Circuit for providing "near-automatic antitrust immunity to reverse payment settlements" by holding that reverse payment deals only violate antitrust laws when they exceed the scope of the underlying patent.

"The Court's ruling reflects a changing world, where simple-to-apply tests like the 'scope of the patent' test are increasingly believed to be insufficient to protect against improper conduct," Burns said. "The Supreme Court rejected a simple, easy to administer test in favor of a far less tangible standard-the rule of reason."

"While the court did not embrace the 'scope of the patent' test that had been adopted by the Eleventh, Second and Federal circuits, neither did it accept either a per se rule or the 'quick look rule of reason' approach that the FTC sought, in which patent settlements would have been presumptively illegal with the burden shifting to the defendants to justify the settlement," Morgan Lewis's Reed said.

Case-by-Case Assessment

Meanwhile, Actavis and GPhA said the ruling would not deter patent litigants from settling Hatch-Waxman cases.

GPhA's Neas said the group is "pleased that the Court clearly recognized that settlements require a case-by-case assessment."

"In establishing the 'rule of reason,' and leaving the decision to lower courts, the ruling continues to provide a lawful pathway for companies to resolve disputes through settlements," he said.

"We believe this decision continues to provide for a lawful and legitimate pathway for resolving patent challenge litigation in a manner that is pro-competitive and beneficial to American consumers," Actavis's Bisaro said. "Patent settlements have saved and continue to save consumers billions of dollars, and ensure more-timely introduction of generic competition. We plan to continue to defend the propriety of such settlements against any further legislative or judicial challenges."

But Shashank Upadhye, with Seyfarth Shaw, in Chicago, told BNA June 17 that different companies are going to have different appetites for entering into such settlements.

Under the new ruling, settling companies must justify the quantum of the reverse payment, he said. How companies will do that or whether they will have the appetite to do that remains to be seen, he said.

Consumer Groups Applaud Decision

Although the high court did not adopt FTC's "per se" illegal approach to reverse payment settlements, consumer groups nonetheless hailed the ruling.

U.S. PIRG health policy analyst Laura Etherton said in a June 17 statement that the decision should spur Congress to act. "Lawmakers should put a stop to these drug company shenanigans that unnecessarily delay generics and inflate drug prices," she said.

On Feb. 4, Sen. Amy J. Klobuchar (D-Minn.) introduced the Preserve Access to Affordable Generics Act (S. 214). The bill would make drug company pay-for-delay settlements presumptively illegal.

In a statement released June 17, Rep. Henry A. Waxman (D-Calif.), co-author of the Hatch-Waxman Act, said: "This is a significant victory for consumers." He promised to "continue to vigilantly watch to ensure that Waxman-Hatch patent settlements are pro-competitive and pro-consumer in the future."

Waxman said the high court's ruling mirrored the purpose of the Hatch-Waxman Act. "[T]he Court echoed what I, along with many other members of Congress, have repeatedly said: the over-arching goal of Waxman-Hatch is to foster competition in the pharmaceutical industry. The type of collusive agreement at issue in this case represents a total perversion of the spirit of this law," he said.

Meanwhile, lawyers told BNA that the ruling leaves open more questions than it answers.

"Neither the majority opinion nor the dissent reflects a great understanding of the nuances of the Hatch-Waxman Act," James N. Czaban, chair of Wiley Rein LLP's FDA Practice Group, told BNA June 17. "They don't begin to explore the notion of the generic's 'free litigation shot' in Hatch-Waxman cases; in fact, they greatly oversimplify it."

"They are throwing a lot of the careful Hatch-Waxman provisions out of balance," he said.

In fact, he said, the ruling could spur Congress to reopen the act, which could include changing or eliminating the 180 days of market exclusivity awarded to the first generic filer to challenge a patent, including considering awarding rolling exclusivity.

Steven Bradbury, an antitrust partner in Dechert LLP's Washington office, who authored an amicus brief on behalf of the American Intellectual Property Law Association in support of respondents in the Actavis case, predicted that the Supreme Court's ruling "will make it harder to defeat these antitrust challenges on motions to dismiss."

"Many parties to patent settlements in the Hatch-Waxman context have already been structuring their settlements to include additional business arrangements in order to justify these so-called reverse payments," he told BNA June 17. The ruling "means there's a greater onus on ensuring strong justifications for the payments, because the parties will no longer have the safe harbor of the scope-of-the-patent argument," he said. "That means this decision will increase the costs and legal risks of patent settlements in the pharmaceutical industry, which could end up decreasing generic competition, rather than increasing competition."

At least one thing seems certain, antitrust lawyers told BNA: the decision will create more work for lawyers. "It is the Full Employment Act for lawyers," Udaphye said.

Justice Breyer wrote the opinion in which Justices Anthony M. Kennedy, Ruth Bader Ginsburg, Sonia Sotomayor, and Elena Kagan joined. Chief Justice Roberts filed a dissenting opinion which was joined by Justices Antonin Scalia and Clarence Thomas.

The high court heard oral argument in the case in March (58 HCDR, 3/26/13).