Distribution, Competition, and Antitrust / Intellectual Property (IP) Law

Reverse-Payment Patent Settlements Subject to Antitrust Analysis

The Supreme Court today decided FTC v. Actavis, Inc. and held, in a 5-3 decision authored by Justice Breyer, that so-called reverse-payment patent settlements are subject to full antitrust Rule of Reason analysis.

In a reverse-payment settlement, which often occurs in the context of pharmaceuticals and the Hatch-Waxman Act, the patentee sues an alleged infringer, and the parties settle the litigation with the patentee agreeing to pay the alleged infringer monetary consideration in return for an agreement that the alleged infringer will stay out of the market during some period of time up to the full remaining duration of the patent.  Some circuit courts and many commentators had agreed that such settlements — as long as they do not extend the patent monopoly or involve sham patents or sham patent litigation — are lawful under the antitrust laws.

The Supreme Court disagreed and largely sided with the FTC on this issue (although it declined to apply the truncated “Quick Look” Rule of Reason to such settlements, instead preferring the full Rule of Reason inquiry into pro-competitive and anticompetitive effects).  Instead, the Court discussed a handful of factors that led it to believe reverse-payment settlements, even if their anticompetitive effects fall within the zone of exclusion of the patent, can be unlawful under the Rule of Reason.

I covered reverse-payment settlements previously (check out the settlement tags/categories).  As the Patently-O blog correctly notes, as a result of Actavis, “antitrust implications should be considered for any major patent settlement. In addition, the decision opens the door further for antitrust action against patent enforcement entities willing to settle cases at rates below the likely litigation costs of the accused infringers.”

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The Continuing Saga of Reverse Payment Patent Litigation

Lower generic drug costs

Lower generic drug costs (Photo credit: BC Gov Photos)

In FTC v. Watson Pharmaceuticals, Inc. (Supreme Court No. 12-416), the FTC unsurprisingly filed a merits brief this month again arguing that pay-for-delay (or “reverse payment”) patent settlements are presumptively anti-competitive.

These settlements often occur in connection with the Hatch-Waxman Act and patent lawsuits filed by a patent-owning pharmaceutical manufacturer against a would-be generic manufacturer. Following a patent lawsuit, the branded manufacturer will pay the generic compensation in return for the generic’s agreement to stay off the market for some period of time.  According to the FTC:

Given the significant difference between monopoly and competitive drug prices, a brand-name manufacturer has a strong economic incentive to induce its would-be generic competitor to forgo competition. And while the generic manufacturer will profit if it prevails in paragraph IV [Hatch-Waxman] litigation and enters the market, its profits will be much less than the brand-name manufacturer stands to lose. As a result, both the brand-name and generic manufacturers may benefit (at the expense of consumers) if the brand-name manufacturer agrees to share its monopoly profits in exchange for the generic manufacturer’s agreement to defer its own entry into the market.

FTC brief at 8-9. The FTC’s position is contra that of the Eleventh Circuit and mostly in line with that of the Third Circuit, which in In re K-Dur Antitrust Litigation, 686 F.3d 197, 214 (3d Cir. 2012), held that reverse payment agreements are subject to a “quick look rule of reason analysis” under which “any payment from a patent holder to a generic patent challenger who agrees to delay entry into the market [is] prima facie evidence of an unreasonable restraint of trade.” Id. at 218.

Oral argument is set for March 25.

I previously covered Watson and K-Dur.

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Supreme Court Grants Cert in Watson Pay-For-Delay Case

On December 7, 2012, the Supreme Court granted certiorari in FTC v. Watson Pharmaceuticals.  The Supreme Court is now poised to resolve the circuit split on the treatment of so-called “pay for delay” Hatch-Waxman Act patent litigation settlements.

The Second, Eleventh, and Federal Circuits have all allowed such settlements where they do not exceed the duration or scope of the patent (or involve sham litigation or fraudulently-obtained patents).  The Third Circuit has disagreed, finding that payments from patent-holding pharmaceutical manufacturers to generics to stay off the market are prima facie evidence of an antitrust violation.

You can find past blog entries on pay-for-delay issues and the Hatch-Waxman act by using the search feature.

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Court Approves DOJ Antitrust Settlement with Three E-Book Publishers

Last week the Southern District of New York approved the DOJ’s settlement with Hachette Book Group Inc., HarperCollins Publishers LLC, and Simon & Schuster, Inc. (I previously covered the Apple e-book case here and here.)

Under the Tunney Act, consent settlements with the DOJ are subject to court review and public comment. The three e-book publishers reached a settlement with the DOJ before the Department filed its antitrust suit.

Under the settlement agreements, the publishers must end their e-book agency agreements with Apple within seven days of final judgment. They must also end any contracts with other e-book retailers that prevent them from setting their own prices or include most-favored nation (“MFN”) clauses that guarantee that retail competitors are not receiving better terms. Additionally, under the settlements, distribution provisions limiting retailers’ ability to set e-book pricing are banned for several years.

The DOJ has received hundreds of Tunney Act comments about the settlements. Additionally, Apple, Penguin, and others have filed amicus briefs with the court criticizing one or more aspects of the settlements. Bob Kohn, the founder of eMusic, has been a particularly vocal critic. You may have read about his creative five-page cartoon or graphic novel format brief (which he filed due to the court’s page constraints).

Kohn (and perhaps others) have argued that DOJ essentially accused Amazon of price predation, and that the Apple e-book deals were a lawful and appropriate response to such predation.

Apple, Macmillan, and Penguin remain in the DOJ suit.

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Third Circuit Rules that Reverse Patent Payment Agreements May Violate the Sherman Act

On Monday, in In Re: K-Dur Antitrust Litigation, No. 10-2078 (3rd Cir. July 16, 2012), the Third Circuit ruled that reverse patent payments (where a pharmaceutical product patentee pays a generic manufacturer to stay off the market for some period of time) are prima facie evidence of an antitrust violation. Under the Third Circuit’s “quick look rule of reason” standard, parties to reverse payment agreements can then rebut the evidence by showing either that the payment is pro-competitive or is for something other than delayed market entry.

The Third Circuit rejected the scope of the patent test, endorsed by courts including the Eleventh Circuit in FTC v. Watson Pharmaceuticals, Inc. (Under that test, if the settlement is even arguably within the scope of the patent, it is not subject to antitrust attack, absent sham litigation or fraud in obtaining the patent.) “The judicial preference for settlement, while generally laudable, should not displace countervailing public policy objectives or, in this case, Congress’ determination — which is evident from the structure of the Hatch-Waxman Act and the statements in the legislative record — that litigated patent challenges are necessary to protect consumers from unjustified monopolies by name-brand drug manufacturers,” the Third Circuit concluded.

The Third Circuit’s decision opens the door for possible review by the Supreme Court of a circuit split on the issue of reverse patent payments.

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New Article on Reverse Payment Patent Settlements

Downloads

I’ve added to the downloads section my May 2012 article for E-commerce Law Reports on the Eleventh Circuit’s decision in Federal Trade Commission v. Watson Pharmaceuticals, Inc.  In that case, the Eleventh Circuit rejected the argument that a reverse payment by a branded pharmaceutical manufacturer to a generic manufacturer in exchange for the generic’s agreement to stay off the market violates the antitrust laws, where the agreement resulted from a settlement of patent litigation.

Settling a Patent Lawsuit Can’t Violate the Antitrust Laws

So the court in Federal Trade Commission v. Watson Pharmaceuticals, Inc., No. 10-12729 (11th Cir. Apr. 25, 2012) held (or more accurately reconfirmed). I’ve written about this issue previously (see my 2009 article on “The Lawfulness of Antitrust Settlements” in the downloads section of this blog).

In Watson, despite previous rejections of its position, the FTC once again argued that a patent litigation settlement between a branded pharmaceutical manufacturer (the patentee) and a generic pharmaceutical manufacturer that results in a payment from the branded manufacturer to the generic in return for the generic’s agreement to stay off the market can violate the antitrust laws. The FTC added a new gloss in Watson: such an agreement violates the antitrust laws if, at the time of the patent settlement, the patent was more likely than not invalid.

The Eleventh Circuit rejected the FTC’s argument. Unless a patent is obtained fraudulently, or unless the patent litigation is itself a sham, a settlement of patent litigation cannot violate the antitrust laws. (The one exception to this rule: if the settlement imposes restrictions beyond the terms of the patent itself, e.g., if it restricts competition beyond the remaining term of the patent.) As the court wrote, “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.” (emphasis supplied).

The court articulated a number of rationales for its ruling, including the fact that patent litigation is usually high stakes, and parties rationally may want to settle even if the probability of a finding of validity or infringement is, strictly speaking, less than 50%. Additionally, the FTC’s approach would require an after-the-fact calculation of how “likely” a patent holder was to succeed in a settled lawsuit if it had not settled. Making such predictions is very difficult, and “is too perilous an enterprise to serve as a basis for antitrust liability and treble damages.” The FTC’s approach would also impose heavy burdens on the parties and the courts to essentially re-litigate patent issues. And finally, circuit courts other than the Federal Circuit have no expertise in the patent area, and they are not well-equipped to make determinations about patent infringement.

The best lines of the opinion are the following: “In closing, it is worth emphasizing that what the FTC proposes is that we attempt to decide how some other court in some other case at some other time was likely to have resolved some other claim if it had been pursued to judgment. If we did that we would be deciding a patent case within an antitrust case about the settlement of the patent case, a turducken task. Even if we found that prospect palatable, we would be bound to follow the simpler recipe for deciding these cases that is laid out in our existing precedent.”

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