Supreme Court Rules Pharmaceutical Patent Settlements Are Not Presumptively Illegal
By Brian P. O'Shaughnessy, Brian S. Seal
 
This article first appeared in the Licensing Executives Society (U.S.A & Canada), Inc.'s Insights Newsletter - June 25, 2013

On June 17, 2013, the U.S. Supreme Court ruled that "reverse payment" agreements in settlement of pharmaceutical patent litigation are not per se antitrust violations. The Court ruled instead that courts must evaluate such agreements under the "rule of reason" analysis. The decision reassures the pharmaceutical industry, both branded and generic, that so called Hatch-Waxman patent litigation may, in fact, be settled without the presumption of an antitrust violation. However, the decision leaves a great deal of uncertainty as to how the rule of reason will be applied in these cases, and what specific forms of consideration will pass muster. Accordingly, some cases that should settle will not; and some patented products that might otherwise face a generic challenge will not.
 
These reverse payment agreements were described by Justice Breyer (writing for the 5-3 majority) as follows: "Company A sues Company B for patent infringement. The two companies settle under terms that require (1) Company B, the claimed infringer, not to produce the patented product until the patent's term expires, and (2) Company A, the patentee, to pay B many millions of dollars. Because the settlement requires the patentee to pay the alleged infringer, rather than the other way around, this kind of settlement agreement is often called a ‘reverse payment' settlement agreement."
 
These are peculiar to the pharmaceutical world due to the incentives of the Hatch-Waxman regime. Under that regime, a generic drug maker may reduce its regulatory burden by showing biological equivalence to a patented approved drug, and, under certain circumstances, asserting that the corresponding patent is invalid or not infringed. That assertion is an act of infringement, and grounds for suit. Hatch-Waxman aims to rid the system of defective patents by encouraging such challenges. The incentive is that the first successful challengers are given 180-days exclusivity over late comers. During that time they enjoy a profit margin akin to that of the patentee. The so called "first filers" thus possess a substantial and valuable right, albeit inchoate and uncertain throughout litigation.
 
It is that inchoate, but nonetheless valuable, right that gives rise to unusual settlements. Here, the defendant, which in other settings is eager to extricate itself from a costly lawsuit and eliminate the prospect of damages, is in a position of strength. It has the prospect of a 180-day exclusivity period, it holds a cloud over the patent's presumption of validity, and it has no prospect of damages. Even a defendant with only a modest prospect of success would expect consideration for surrendering that position. Because Hatch-Waxman defendants effectively instigate these actions, reliance on such consideration is part of the decision to mount the challenge.
 
This particular case arose from a so-called "pay for delay" settlement agreement. The patentee, Solvay Pharmaceuticals, agreed to license various generic challengers of its patent for a testosterone supplement, AndroGel, which would have permitted the challengers to enter the market at a future date but prior to patent expiry. As consideration for relinquishing their counterclaims, and in exchange for certain collaborative marketing efforts, Solvay was to compensate the challengers with a multi-million dollar payment.
 
In the courts below, the FTC challenged this settlement, and urged that such agreements be deemed per se antitrust violations. The FTC argued that such agreements illegally reduce competition by allowing the patentee to pay potential competitors to stay out of the market, thereby increasing drug prices. The district court dismissed the case, focusing on the fact that the delay did not extend the life of the patent (and in fact ended five years before the patent's expiration date). The U.S. Court of Appeals for the Eleventh Circuit upheld that decision, stating that "absent sham litigation or fraud in obtaining the patent, a reverse payment settlement is immune from antitrust attack so long as its anticompetitive effects fall within the scope of the exclusionary potential of the patent."
 
The FTC appealed to the Supreme Court. The majority agreed that such settlements implicate antitrust policy, in addition to patent policy, and reversed the Eleventh Circuit, calling it "incongruous to determine antitrust legality by measuring the settlement's anticompetitive effects solely against patent law policy, and not against procompetitive antitrust policies as well." The Court remanded the case to the Eleventh Circuit to give the FTC an opportunity to make its case. Thus, the Court did not say that this particular agreement constituted an antitrust violation; but only that the lower courts were obligated to listen to the evidence and assess it under the rule of reason.
 
The Supreme Court identified five factors supporting a closer analysis of the affect on competition: (1) the reverse payment agreement has the potential for genuine adverse effects on competition, (2) the alleged anticompetitive consequences will at least sometimes prove unjustified, (3) where a reverse payment threatens to work unjustified anticompetitive harm, the patentee likely possesses the power to bring that harm about in practice, (4) an antitrust action is likely to prove more feasible administratively than the Eleventh Circuit believed, and (5) the fact that a large, unjustified reverse payment risks antitrust liability does not prevent litigating parties from settling their lawsuit in other ways.
 
Chief Justice Roberts, with whom Scalia and Thomas joined in dissent, however, would have affirmed the Eleventh Circuit. The dissent urged that the patent right, by its very nature, is a limited and temporary exemption from the antitrust laws; and, provided the patentee does nothing to improperly extend that right, the patentee's exploitation of it cannot fairly be challenged.
 
The dissent noted that the Hatch-Waxman regime created unusual incentives, and so the parties' resolution of litigation on terms that took those incentives into account should not be subjected to the uncertainties of the rule of reason. The dissent further urged that the majority overlooked a patent's presumption of validity, and that it rationalized its decision on the mere prospect that a patent might not be valid; and thus, the reverse payment alone keeps the challenger out of the market. The dissent noted the potential for perverse results from that approach, as where an early settlement is subjected to antitrust challenge under the rule of reason, with potential adverse consequences, but later litigation against another proves the patent valid and enforceable.
 
Critically, however, the Court's majority rejected the proposition that reverse payments should be deemed per se anticompetitive, holding instead that they are subject to a rule of reason analysis. It identified several factors that should be included in any such analysis, including (i) the size of the reverse payment, (ii) its scale in relation to the payor's anticipated future litigation costs, (iii) its independence from other services for which it might represent payment, and (iv) the lack of any other convincing justification for the payment. The Court further noted that "[t]he existence and degree of any anticompetitive consequence may also vary as among industries."
 
While the Court opted for a rule of reason approach over a per se rule to such settlements, the prospect of antitrust liability remains. Nonetheless, the decision provides valuable guidance to industry in structuring patent settlements to minimize that prospect; and affords suitable protection to consumers by empowering courts to assess specific settlements on a reasoned, case by case basis.
 
Mr. O'Shaughnessy is a Shareholder, RatnerPrestia, Washington, D.C.; and Regional V.P., USA, of the Licensing Executives Society (USA and Canada), Inc. Mr. Seal is Counsel, RatnerPrestia, Washington, D.C. The opinions and views expressed herein are those of the authors alone, and are not necessarily those of either RatnerPrestia or LES (USA and Canada).
 


 
 
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