FTC v. Actavis, Inc.

FTC v. Actavis, Inc., 570 U.S. ___ (2013), was a United States Supreme Court case that questioned the relationship between patent law and antitrust law. The question at hand was whether it was illegal for brand-name manufacturers to use reverse payment settlements to keep would-be generic competitors out of the market, even if the brand-name drug company held a legal limited monopoly in the form of a patent. While the Court refused to declare that such settlements were presumptively illegal, it did rule 5-3 that the Federal Trade Commission (FTC) could not be prevented from bringing antitrust action against the defendants to try for the unlawfulness of the reverse payment settlement. ^[1]

Background

Issue and Filing

Under the "paragraph IV route" of the Hatch-Waxman Act, a generic drug manufacturer could assure the U.S. Food and Drug Commission (FDA) that it would not infringe upon the patent of a brand-name drug by proving that the patent was invalid or that the sale of the generic drugs will not violate the brand-name's patent. This would constitute a challenge to the patent, and oftentimes lead to litigation between the brand-name and generic manufacturer. The FDA then must withhold approving the generic drugs for a 30-month period while the courts resolve the dispute. If the dispute did not resolve within that period, the FDA could then approve the generic for the market.^[1]

Respondent Solvay Pharmaceuticals had received a patent in 2003 for its approved brand-name drug, Androgel, used for treating low testosterone levels in men.^[2] Two generic-drug companies, Actavis and Paddock then filed patents for generic drugs that were modeled after Androgel later that year.^[3] Solvay sued Actavis for patent infringement under "paragraph IV" litigation, but the FDA eventually approved Actavis's generic drug for the market after the dispute over the validity of Solvay's patent continued for three years.^[3] Rather than bringing its generic drug to the market, Actavis instead entered a reverse payment settlement agreement with Solvay in 2006. Under the terms of the agreement, Actavis would keep its generic drug off the market for a "specified number of years" and also agree "to promote Androgel to doctors."^[1] In exchange, Actavis would receive monetary compensation.^[4]

The Federal Trade Commission filed suit, alleging that Actavis had unlawfully abandoned its patent challenge by agreeing to share in the "monopoly profits" of Solvay, and withdrawing its generic drug from the market. Solvay was simultaneously accused of attempting to extend its monopoly rights further than what its patent would have conferred if otherwise left as valid.^[3]

Previous Court History

Both the district court and Eleventh Circuit dismissed the plaintiff's claims. The district court cited the analysis used in Valley Drug Co. v. Geneva Pharmaceuticals, Inc., No. 02-12091 (11th Cir. Sept. 15, 2003) in deciding whether the defendants' settlements were "unreasonable restraints of trade." The court ultimately sided with the defendants, ruling that the settlements did not provide unreasonable restraints outside the scope of the patents.^[5]

The Eleventh Circuit ruled that the Federal Trade Commission had not shown that the reverse payment settlement was excluding competition more than what a patent would have, affirming the district court's decision. To demonstrate this point, Eleventh Circuit stated that "although a patent holder may be able to escape the jaws of competition by sharing monopoly profits with the first one or two generic challengers, those profits will be eaten away as more and more generic companies enter the waters by filing their own paragraph IV certifications attacking the patent." Furthermore, the circuit court ruled that courts could not require parties to further litigate in order to avoid antitrust liability.^[1][6]

Opinion of the Court

Majority

The majority opinion reversed the Eleventh Circuit's ruling that antitrust laws would only apply to patent holders if they acted outside the scope of their patent monopoly. Instead, the majority decided that the antitrust question could be decided not only by measuring the anticompetitive effects against patent law policy, but must also by measuring against "procompetitive" antitrust law policies. Drawing upon precedent cases, the majority contended that there have been examples in which patent settlements have nonetheless violated antitrust laws, which have shown that patent policies must be weighted against antitrust policies as well. In addition, the majority pointed out the uniqueness of reverse payment settlements in which "the party with no claim on damages" is the one that pays the other party for the sake of staying out of the patentee's market. This is in contrast to how a settlement would normally proceed in which the patentee demands a set amount as reparation for damages done by the patent infringer. Noting this unusual distinction, the majority argued that reverse payments are not a normal form of settlement in patent suits, and thus cannot be scrutinized solely under the lens of patent law where there seems to be an anticompetitive purpose. The majority gave five reasons for why it believed that the FTC should have been allowed to prove its antitrust claim:^[1]

1. Reverse payment settlements have "the potential for genuine adverse effects on competition." By paying a settlement that keeps its generic competitors out of the market, the patentee can set a price that's above the market level with its monopoly. With the profit it obtains from this monopoly, the patentee splits it with its original challenger and the consumer loses out in the form of higher drug prices due to a non-competitive market. In addition, under the Hatch-Waxman Act, only the first generic filer gains the coveted 180-day exclusive right to sell the generic brand of a drug. All subsequent filers do not get this right and must also be subjected to the same 30-month waiting period before FDA approval in paragraph IV litigation. As a result, a reverse payment settlement gets rid of the first and presumably most motivated competitor from the patentee's market.
2. The anticompetitive consequences of reverse payment settlements will at least sometimes be unjustifiable. The majority recognized that there are situations in which settlements are justified in a patent dispute (e.g. saving litigation expenses, exchanging of services, etc.), but this does not warrant dismissing the FTC's complaint. If the settlement has legitimate reasons, then the antitrust defendant can prove it in court.
3. When a reverse payment will likely bring about anticompetitive harm, the patentee likely has the power to bring about that harm. A brand-name manufacturer that can afford to pay large sums to its challengers to keep them out of the market likely has the power to continue to charge prices higher than the competitive level.
4. Antitrust suits are more "administratively feasible" than what the Eleventh Circuit believed. Antitrust questions usually do not require litigation of patent validity. A large unexplained payment already suggests that a patentee has doubts about its patent's survival, and as such, would rather settle and split the monopoly profits rather than face the lower payoff of a competitive market. There is no need for a detailed examination of a patent's validity.
5. A reverse payment settlement is not the only way to settle a lawsuit. Although a reverse payment risks antitrust liability, it does not necessarily reduce the possibility of settlement because there are other ways to settle, e.g. the patentee could allow the challenger entrance into the market prior to the patent's expiration, without payment. Reverse payments are still possible as a form of settlement, but it cannot be for the sake of sharing monopoly profits.

Due to the many factors and complexities that determine whether a reverse payment settlement causes anticompetitive harm (“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 majority opinion ruled that the FTC must still "prove its case as in other rule-of-reason cases" rather than holding that reverse payments were presumptively illegal.^[1]

Dissent

In contrast to the majority, the dissent rejected the application of antitrust law that the majority used for this case, arguing that it was a "novel approach" and "without any support in statute." Pointing out that a "patent carves out an exception to the applicability of antitrust laws," the dissenting opinion argued that it is only when a patent holder acts beyond the scope of its granted monopoly does scrutiny under antitrust law become applicable. Otherwise, the patent holder is operating within his rights to be excepted from antitrust liability. As a result, the dissent believed that the real question was whether the reverse payment settlement "gives Solvay monopoly power beyond what the patent already gave it."^[1]

Dissent contended that it is within the rights of a patent holder to exclude competition from its patented invention, and as such, Solvay's reverse payment settlement to Actavis was lawful.

In addition, dissent argued that there has been no precedence in the Court's history in which a competitor's refraining from challenging a patent violated antitrust laws. Dissent continued by pointing out that settlements are common in patent litigation, some of which can even violate antitrust law (e.g. licensing products to competitors to sell at fixed prices), and yet they are still not liable for antitrust allegations as long as they act within the scope of the patent. Noting that patent litigation is particularly costly and expensive, the dissent also viewed the majority's limitation on settlements as eroding what is generally seen as "a good thing."^[1] Dissent also viewed majority's conclusion that litigants would still settle without payment as unpersuasive because “parties are more likely to settle when they have a broader set of valuable things to trade.” ^[7]

Dissent disagreed with majority's opinion that a detailed analysis of a patent's validity would not be required and could be substituted with the fact that a patent holder's large payment indicates doubt about its patent's strength. Dissent noted that even a risk averse patent holder that is 95% certain of his patent's validity may pay a large sum in order to avoid litigation and that 5% risk of a finding of invalidity.^[7] Furthermore, dissent also pointed out that it would be absurd for a patent holder to be liable for antitrust infringement because it took away a chance of having his patent proven invalid by settling, and not be liable in another case in which it decides to litigate to the end and have its patent ultimately proven valid.^[1]

Because the real pertinent question was whether a patent holder acted beyond the scope of its patent, dissent's fundamental point was that the case was a matter of only patent law, not one of antitrust law.^[1]

Impact of the Case

This decision presented a challenge to what has been the prominent practice of "pay-for-delay" settlements in the drug industry. With this ruling, patent owners no longer maintain immunity from the "rule of reason" scrutiny of antitrust laws when making reverse payment settlements, even if the settlements are only for the terms of the patents. In effect, this limits patent owners' scope of power in holding their monopolies. In addition, as a result, using reverse payment settlements to resolve patent disputes now carries a greater risk of coming under litigation, and being ruled as infringing of antitrust laws.^[3]

Moreover, the implications of the decision could impact the effect of antitrust laws on general intellectual property cases, outside of the drug industry. Specifically, the outcome could be applied to general cases regarding "patent pools, cross-licensing arrangements, and more routine patent licensing decisions."^[8]

On the whole, it is considered that the outcome of this case will reduce the number of settlements with respect to patent litigation. However, the Court "did not set forth a clear structure for reviewing settlement agreements and left this job to the district courts," which still leaves the full effect of this case to be determined, even with respect to generic drug manufacturers.^{[9] [10]}

See also

• Patent infringement
• United States antitrust law
• Rule of reason

References

External links

Text of FTC v. Actavis, Inc., 570 U.S. ___ (2013) is available from:  Supreme Court of the United States  Text of Valley Drug Co. v. Geneva Pharmaceuticals, Inc., No. 02-12091 is available from:  United States Court of Appeals for the Eleventh Circuit 

• Federal Trade Commission Case List
• Health Affairs Legal Blog on Implications
• Statement by FTC Commissioner
• Patent Legal Blog
• Listing of Statements in Support of Petitioners and Respondents