Reverse Payment Schemes Risk Antitrust Liability: U.S. Supreme Court Declines to Adopt Bright Line Test
Intellectual Property Newsletter
A divided Supreme Court recently held in an opinion by Justice Breyer that “reverse payment” or “pay for delay” agreements between patent holders and potential competitors are not immune from scrutiny under antitrust laws. The 5-3 decision in Federal Trade Commission v. Actavis, Inc. reversed the holding of the Eleventh Circuit which found that such deals escape antitrust liability, as long as any resulting anticompetitive effects fall within the exclusionary scope of the relevant patent.
What is a Reverse Payment Agreement?
A reverse payment agreement is one between a patent holder and a potential competitor in which the patent holder agrees to pay the potential competitor in return for the potential competitor’s delay in offering its product for sale until a later date. Typically, this later date is the end of the patent term. These “pay for delay” schemes usually terminate a lawsuit by a competitor challenging a patent’s validity.
The reverse payment arrangements also may include covenants by the generic competitor to distribute or promote the patent holder’s product until the relevant patent term expires. Although the terms of reserve payment agreements generally are secret, the amounts paid by patent holders can be large. Each of the generic competitors (that is, the generic drug producers) in the Actavis case received millions of dollars, a potential aggregate amount of over one hundred million dollars.
In the Actavis decision, the Supreme Court analyzed reverse payment transactions under the federal antitrust laws, and by doing so, highlighted the Court’s suspicion that patent holders may be paying would-be competitors to protect insecure or shaky patent rights.
Hatch-Waxman Act Creates Environment for Reverse Payment Arrangements
Frequently, as in Actavis, reverse payment transactions arise in the context of a brand-name drug manufacturer (the patent holder) paying a generic drug producer (the potential competitor) to delay the generic drug producer’s introduction of a generic drug to the relevant market until the patent held by the brand-name drug manufacturer expires.
Reverse payment arrangements recur in the drug manufacturing industry due to a federal statute, the Hatch-Waxman Act, which allows the Food and Drug Administration (FDA) to provide an expedited approval process to a generic drug producer when that producer assures the FDA that the drug it submits for approval will not infringe any relevant patents. One permitted method of assurance is a certification signed by the generic drug producer that any relevant patent “is invalid or will not be infringed by the manufacture, use or sale” of the generic drug.
These certifications often provoke patent litigation with the patent holder. With unstinting frequency before the Actavis decision, patent holders (the brand-name drug manufacturers) found it more advantageous to settle patent litigation with the generic competitor (the generic drug producer) by paying the competitor not to compete with the patent holder until the end of the patent term. This settlement arrangement ended the cost and effort of prolonged patent litigation which necessarily included the risk that the patent holder’s patent is found invalid.
Deciding Where Patent Law and Antitrust Law Collide
The Supreme Court majority in Actavis was concerned that payments to generic competitors, especially payment of large amounts, could have significant adverse effects on competition. Even though each party in Actavis took a stand on the role of patent law and the role of antitrust law in evaluating pay for delay schemes, the Supreme Court ultimately adopted neither.
The brand-name and generic drug manufacturers maintained (as did Chief Justice Roberts in the dissent and the Eleventh Circuit in its earlier decision) that patent law carves out an exception to antitrust law. Their approach stressed that a patent gives a patent holder certain exclusionary rights and monopoly power and that as long as the patent holder does not exceed the scope of those rights in a settlement, then the settlement should be immune from antitrust liability.
Conversely, the FTC argued that all reverse payment agreements should be presumptively unlawful and that the defendants in suits challenging the agreements under antitrust laws (that is, the patent holder and the generic manufacturer that entered into the agreement) should bear the burden of demonstrating by empirical evidence that the agreement has pro-competitive effects.
Supreme Court Majority Takes Middle Ground
The Supreme Court declined to take either bright-line position advanced by the parties. Instead, it held that the nebulous “rule of reason” analysis under the antitrust law should be used to review all challenged reverse payment agreements. In other words, courts must decide, using previous antitrust cases as a guide, whether the terms of reverse payment agreements are reasonable.
The Court’s decision clarified that the basic question in determining whether reverse payment arrangements violate antitrust laws is:
"Why do the parties prefer settlements that include reverse payments as opposed to other types of settlements?"If the answer to that question is that the parties want to share in “patent-generated monopoly profits,” then the Court’s finding is that “antitrust laws likely forbid that arrangement.”
What Should You Consider if You are Contemplating a Reverse Payment Settlement?
Those advocating a reverse payment arrangement should be able to produce a cogent explanation of how the payment terms are to be calculated. The Court indicates that two potential “redeeming virtues” of a reverse payment that passes antitrust scrutiny are that either:
Ensure that the amount which the patent holder pays the potential competitor is supported by justifiable and tangible costs, such as avoided litigation costs or fair value for services.
the amount is “no more than the rough approximation of the litigation expenses saved through settlement;” or
the amount reflects compensation for services which the generic competitor has promised to perform, such as distribution of the relevant patented item, development of a market for that item, or advertising it.
Additionally, the Supreme Court suggests in dicta that the settlement price should not be more than the profits which the generic competitor would have gained if it had won its patent litigation against the patent holder and entered the market.
2. Try other means of settlement
In Actavis, the Supreme Court identifies at least one alternative action for those considering settling a patent suit: The parties could settle on terms which permit the potential competitor to enter the market before the relevant patent expires without receiving any payment from the patent holder.
Before entering into a reverse payment arrangement, both patent holders and generic producers, alike, should carefully assess the now real (and potentially expensive) risk of antitrust liability.
If you or your company currently is a party to a reverse payment agreement, we suggest that you review the terms of the arrangement with an experienced patent attorney. Existing reverse payment agreements and related arrangements are subject to the Actavis decision. However, your agreement does not necessarily risk antitrust liability if its terms are determined to be reasonable, a decision that, after Actavis, is based on balancing the anticompetitive and pro-competitive effects of the agreement’s terms and conditions.