Report on the March 25 Oral Argument in FTC v. Actavis: Supreme Court Seems to Endorse a “Rule of Reason” Approach

March 26, 2013

The Supreme Court heard oral argument yesterday in the Actavis case (formerly titled FTC v. Watson Pharmaceuticals, Inc., et al.), the FTC’s appeal of its most recent “pay-for-delay” defeat in the Court of Appeals for the Eleventh Circuit. A decision is expected in the early summer of 2013. As we predicted in our earlier alert, “Five Things You Need to Know About FTC v. Actavis,” the Justices focused on exactly what question was presented and appeared likely to issue a narrow ruling, not a broad one that would satisfy the FTC or fully resolve all the issues in this area. Here are the key things to know about the oral argument, a transcript of which is available at this link.

Most of the Justices perceive a potential for abuse, but some blame the statute. So-called “pay for delay” settlements occur in patent litigation filed under Paragraph IV of the Hatch-Waxman Act, when a patent holder offers something of value to a generic challenger — beyond the mere dismissal of the lawsuit — at the same time as (and allegedly in exchange for) the challenger’s agreement to stay out of the market for a period of time. Most of the Justices stated that they perceived a potential for such settlements to harm competition; however, several Justices questioned whether this is a harm that antitrust law, as opposed to lawmakers, should address. Justice Scalia said, “I have the feeling that what happened is that Hatch-Waxman made a mistake” because the law (or rather, lawmakers) “did not foresee that it would produce this kind of payment.” Justice Sotomayor agreed that “there’s a kind of glitch in Hatch-Waxman, and the glitch is that the 180 days [of exclusive generic entry] goes to the first filer.” Justice Scalia expressed skepticism that “in order to rectify the mistake, the FTC comes in and brings in a new interpretation of antitrust law that did not exist before,” and he stated, “Why should we overturn understood antitrust laws just to patch up a mistake that Hatch-Waxman made?”

To avoid analysis of the patent case would be to ignore “the elephant in the room.” Justice Sotomayor asked the FTC’s counsel, “You seem to be arguing that this is price fixing … so that it has to fall into something greater than the rule of reason” that typically governs antitrust cases (the rule of reason is recognized as a difficult burden for plaintiffs to meet). But she questioned how the FTC could go that far in a case involving patent rights. Justice Kennedy said of the FTC’s position that his “concern is your test is the same for a very weak patent as a very strong patent. That doesn’t make a lot of sense.” And Justice Scalia observed that “to say you can consider every other factor other than the strength of the patent” is to ignore “the elephant in the room.” Thus, the Justices gave the strong impression that a correct antitrust analysis, however applied, must consider the strength of the underlying patent case.

A special pharma-settlement rule could be an “administrative monster” and “nightmare.” Justice Sotomayor observed that the unique incentives created by the Hatch-Waxman Act could potentially create “a different economic reality here that requires a different rule” under the antitrust laws. And the FTC has suggested such a “different” or unique rule: a presumption of anticompetitive harm for settlements involving “payments.” Justice Breyer, however, appeared to speak for several Justices when he said that “the problem of deciding whether other matters are or are not really payments for something else” in patent settlements can be “a true nightmare.” He stated, “I’m worried about creating some kind of administrative monster.” Even Justice Sotomayor did not appear convinced of the merits of a special rule, and the other Justices who spoke appeared to oppose a special rule.

“So answer the more fundamental question: Why is the rule of reason so bad?” That was Justice Sotomayor’s question to the FTC’s counsel, and the FTC did not appear to have a satisfactory answer. Justices Kennedy and Breyer echoed this comment in pointed questions to both sides. Justice Breyer appeared to express the mood of the Court when he paraphrased a leading academic, the late Professor Phillip Areeda: “Don’t try for more precision than you can give. The quality of proof required should vary with the circumstances.” Justice Breyer suggested that the FTC should be able to make its arguments about anticompetitive “division of profit, monopoly profit” to a trial judge — “It takes probably 3 minutes or less” to do so — and then ask the judge to review the entire circumstances of the settlement. He expressed confidence in trial courts’ ability to handle this kind of balancing test — “district judges, that’s their job” — and he noted that this has been the general approach to antitrust “for 40 years.” If Justice Breyer’s statements become the holding of the case, the Court would reverse the Court of Appeals for the Eleventh Circuit, but also would reject the FTC’s call for a presumption of illegality against “pay for delay” settlements. The Court would apply a general rule-of-reason test, one in which the FTC would bear the burden of proof and would need to address the strength of the patent case, something the FTC has said would be very difficult for it to do.

Why aren’t payoffs self-defeating? Finally, Justice Kagan asked the FTC’s counsel: Why, if “pay for delay” settlements are anticompetitive payoffs, doesn’t the payoff quickly lead to more challengers seeking similar payoffs — “a long line” of challengers that would ultimately make payoffs self-defeating? The FTC’s counsel admitted, “There is a conundrum.” Conundrum or not, the Justices appear not to be convinced that “pay for delay” settlements are so suspicious that the FTC’s special rule against them should apply. Although the FTC’s counsel pleaded in his closing words that “it just isn’t feasible to try the patent suit” when the agency challenges such settlements, the FTC may have to accept something close to that burden if the Court endorses a full rule-of-reason approach.


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Thane Scott

This article was originally published by Bingham McCutchen LLP.