Supreme Court: Rule of Reason Governs Reverse-Payment Agreements

June 18, 2013

The Supreme Court issued its opinion June 17 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. As we predicted in our earlier alerts, “Five Things You Need to Know About FTC v. Actavis,” and “Report on the March 25 Oral Argument in FTC v. Actavis: Supreme Court Seems to Endorse a ‘Rule of Reason’ Approach,” the Justices issued a narrow ruling rejecting the FTC’s request for a strong presumption against these agreements. Instead, the Court’s 5–3 decision endorsed using the traditional antitrust balancing test known as the “Rule of Reason,” which requires full consideration of the legal, factual and economic circumstances of each agreement, and places most of the burdens of proof and production on the plaintiff (including, in a government case, on the FTC). The Court suggested numerous factors that it said should be weighed as part of this balancing test; however, it provided little guidance with respect to their relative weight. Here are the key things to know about the decision, a copy of which is available at this link.

1. The Rule of Reason is alive and well in even the most complicated cases.

Both sides had asked the Court to issue new standards in order to simplify highly complicated cases in this critical industry, arguing that predictability and finality hold high value. Some commentators had suggested that the Court might consider applying a “quick look” test or other types of presumptions against such settlements, as the FTC had urged, or declaring a rule of automatic legality to all agreements confined within the scope of the patent, as Actavis had urged. However, the Court rejected these arguments. It embraced the Rule of Reason, but provided no clear roadmap showing how the Rule of Reason should be applied. Instead, the Justices listed general factors to be considered. Its summary conclusion reads: “[A] reverse-payment, where large and unjustified, can bring with it the risk of significant anticompetitive effects; one who makes such a payment may be unable to explain and justify it; such a firm or individual may well possess market power derived from the patent; a court, by examining the size of the payment, may well be able to assess its likely anticompetitive effects along with its potential justifications without litigating the validity of the patent; and parties may well find ways to settle patent disputes without the use of reverse-payments.”

2. The lack of clarity will result in divergent standards developing among the Circuits.

Antitrust law is the quintessential common law practice, in which a high court sets forth general principle, followed by years of refinement by lower courts in specific cases. This refinement process may lead to differing standards emerging as various circuits apply the Supreme Court’s general principles. Some courts, in particular the 11th Circuit, have been hostile to challengers of reverse payment agreements. While the Supreme Court rejected the 11th Circuit’s rule of near-automatic legality, the 11th Circuit’s skepticism of challengers is unlikely to disappear. Rather, the 11th Circuit might develop a “Rule of Reason” standard that imposes a relatively heavy burden on the challenger. The 3rd Circuit lies at the other end of the spectrum, where the defenders of reverse payment agreements have been met with raised eyebrows. These two circuits, and others, will be free to develop circuit-specific rules governing application of the Rule of Reason by their trial courts, and the rules may vary greatly. As a result, the party selecting the forum (plaintiffs in the trial courts, and appellants from adverse administrative decisions at the FTC) will anchor their cases in the friendliest circuit. If sufficiently divergent standards emerge, the Supreme Court may be inclined to re-visit these issues down the road.

3. The winners.

The FTC eked out a small tactical victory but one that only means that it gets to stay on the battlefield — it did not win its war. Since the Supreme Court rejected the FTC’s proposed rule of presumptive illegality, reverse payment agreements will continue to be an important business tool. Likewise, private plaintiffs can continue to challenge these agreements under the Rule of Reason, without benefit of presumptions in their favor. Defendants will continue to defend the agreements by justifying them on the merits, without benefit of safe harbors. What the Supreme Court has done is to rule out a quick path to victory by either side. Practically speaking, class action plaintiffs stand to gain because this is a “no shortcuts” decision — the Court has done nothing to curtail the agreements, strengthen the defenses or limit the challenges — and the prospect of such drawn-out, fact-intensive litigation likely will increase these cases’ settlement value. But the clearest winners are litigation-related specialists like economists, who will be indispensable in constructing claims and defenses, and in building a comprehensive and sustainable record for use in settlement or at trial.

4. The losers.

Market participants in the pharmaceutical industry are disappointed. The greatest loss to industry is not the risk of adverse judgments but the certainty of increased expense: what the industry wished most to receive from this decision was predictability, clarity and finality, and it got very little. This unclear “it depends” standard in predictably recurring, high stakes litigation does not serve business interests. Yes, the industry could have fared worse if the Court had accepted the FTC’s presumption, but the tool that the Court has left available to the business community comes with some very expensive and uncertain strings attached.

5. Practice before the FTC hasn’t changed at all.

Despite the press attention to this decision (and the agency’s loud declaration of victory), the small group of lawyers who defend such deals before the FTC have reacted with a collective shrug. The FTC always has acted as if the 11th Circuit’s decisions did not exist, so lawyers have been counseling clients to ensure that settlements are justified — and making Rule of Reason arguments to the FTC during investigations — for the better part of a decade. The Actavis decision may somewhat embolden the FTC but it will not fundamentally change the course of the agency’s investigations, a fact that should give some comfort to the many pharma companies that are repeat players before the FTC.


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Thane Scott

This article was originally published by Bingham McCutchen LLP.