Supreme Court Partially Sides with FTC in Ruling that Reverse Payment Settlements in Hatch-Waxman Disputes May Violate Antitrust Laws

Yesterday, the U.S. Supreme Court held that reverse payments in Hatch-Waxman disputes including may violate federal antitrust laws, and that the traditional “rule-of-reason” will govern the determination.  In the 5-3 decision, the Court reversed the Eleventh Circuit decision that reverse payments are not subject to federal antitrust laws because they fall within the exclusionary rights granted to patentees.  The Supreme Court, characterizing such settlements as an unusual situation in which a party without a claim for damages ”walks away with money,” ruled that reverse payments are subject to antitrust review.

The case involved a “reverse payment” settlement agreement between Actavis (the first-to-file generic) and Solvay Pharmaceuticals (the patent holder on brand name drug AdroGel).  Under the terms of the settlement, the generic drug manufacturer received a large payment from the patentee in return for agreeing not to launch a generic product until about 5.5 years before expiration of the patent (unless another generic entered the market sooner).  Other, later-filing generics received similar agreements, but for less money.

The Supreme Court identified five rationales supporting its conclusion that the FTC should be allowed to monitor reverse payments.

1. Reverse payments pose a genuine potential of adversely affecting competition:  settlements that keep competitors out of the market invariably result in higher prices, and later-filing generics may have a reduced economic incentive to challenge the patent;
2. These anticompetitive consequences will at least sometimes be unjustified;
3. Large reverse payments indicate that a patentee has large market power, and that it is wielding that power to achieve an unjustified anticompetitive advantage (as reflected by studies embraced by the Court suggesting that reverse payments are associated with higher-than-competitive profits);
4. Antitrust actions are administratively feasible because it will not normally be necessary to litigate patent validity to answer the antitrust question (e.g., an unexplained large reverse payment may indicate serious doubts about the validity of the patent, suggesting that the true motivation behind the payment is the maintenance of supracompetitive prices); and
5. Parties will still settle patent disputes even if large, unjustified reverse payments risk antitrust scrutiny.

Ultimately, it seems the Court concluded that if the basic reason for a reverse payment settlement is a desire to maintain and to share patent-generated monopoly profits, then, in the absence of some other justification, antitrust laws likely forbid the arrangement.

But it was not all bad news for reverse payment settlement agreements.  The Court rejected the FTC’s invitation to hold such agreements presumptively unlawful, and also declined to subject such agreements to a “quick-look” approach (in which case the burden would have been on the companies to provide empirical evidence of pro-competitive effects).  Instead, the Court adopted the traditional “rule-of-reason” approach used in other antitrust contexts, under which the outcome of the antitrust inquiry will depend upon factors such as the size of the reverse payment, its scale in relation to the payor’s anticipated future litigation costs, its independence from other services or consideration for which it might represent payment, and the lack of any other convincing justifications.

Although members of the pharmaceutical industry will likely disagree on the implications of yesterday’s Supreme Court decision, only time will tell whether antitrust scrutiny of reverse payments will pose a meaningful obstacle to the settlement of Hatch-Waxman disputes, or whether this decision materially impacts the terms of typical settlement agreements in the pharmaceutical sector.