FTC_Man_Controlling_TradeThe U.S. Supreme Court’s 2013 FTC v. Actavis, Inc. decision held that “reverse payment” settlement agreements—in which a drug company suing a generic competitor for patent infringement pays the alleged infringer a substantial amount of cash to settle the litigation—are subject to antitrust scrutiny.  The Court reasoned that such reverse payments are unusual and may indicate that the generic company is really being paid not to compete.

An August 21, 2017 decision from the U.S. Court of Appeals for the Third Circuit has stretched the Actavis holding far beyond anything intended by the Supreme Court.  If the appeals court’s decision in In re: Lipitor Antitrust Litigation is allowed to stand, it may become virtually impossible for drug companies to settle patent-infringement litigation.

The Hatch-Waxman Act Drives Reverse Payments

While it may seem odd that a patentee would even consider paying cash to an alleged infringer to settle its infringement claims, the unique litigation dynamics created by the Hatch-Waxman Act create very strong incentives for such “reverse payments.”  The Act in essence forces brand-name drug companies to sue potential generic competitors for patent infringement years before the generic is ready to bring its drug to market, thereby permitting the generic to challenge the patent’s validity in a court proceeding without ever having to face a claim for money damages (for having sold an infringing product).

All parties have an incentive to settle infringement litigation, which is always expensive and time-consuming.  But the patentee faces particularly strong settlement pressures.  It faces a huge litigation downside: if it loses, its biggest single asset (the drug patent) will be wiped out.  If it wins, it simply maintains the status quo: one competitor (out of many potential competitors) will be kept off the market.  The generic competitor, on the other hand, has little to lose except the costs of continued litigation.

A victory provides it with the huge competitive advantages granted by the Hatch-Waxman Act to companies that successfully challenge drug patents.  Given those dynamics, it is hardly surprising that generic drug companies hold the upper hand in any litigation settlement talks.

Actavis: A Compromise between Competing Antitrust and Patent-Law Considerations

In its Actavis decision, the Supreme Court recognized the importance of encouraging settlement of litigation.  The five-justice majority nonetheless deemed it essential to maintain some limits on reverse-payment settlements that have the potential to limit competition.  The Court explained that it needed to maintain a “balance” between antitrust law (which seeks to encourage competition) and patent law (which is inherently anti-competitive because it grants a time-limited monopoly to patentees as a reward for inventing new products).

The Court held that drug patent litigation settlements are subject to antitrust scrutiny when they involve “unusual” settlement terms—even when the settlement permits the generic company to begin competing no later than the date on which the challenged patent was scheduled to expire.  When the settlement terms are unusual, the courts are to apply a rule-of-reason analysis, under which conduct violates the antitrust laws if its anti-competitive effects outweigh its pro-competitive benefits.

Actavis held that a large cash payment from the patentee to the alleged infringer qualifies as an “unusual” settlement term.  It also identified several other “traditional settlement forms” that do not qualify as unusual and thus do not trigger antitrust scrutiny.  For example, no antitrust concerns arise if, in return for the generic company’s agreement to delay its entry into the market, the patentee grants the alleged infringer a license to begin competing in advance of the patent’s scheduled expiration date—even though such a license may be worth hundreds of millions of dollars to the generic.

The Court also said that antitrust concerns do not arise if the benefit conferred on the generic consists of settling the patentee’s damages claims for a fraction of the amount initially asserted—in the example provided by the Court, settling a $100 million claim for $40 million.  The Third Circuit appears not to have received the Actavis message; its Lipitor decision endorses antitrust scrutiny of virtually any benefit conferred on a generic in connection with a drug patent settlement.

Challenge to the Lipitor Patents

The Third Circuit’s antitrust decision arose in the aftermath of a challenge by a generic company (Ranbaxy) to several patents covering Lipitor, Pfizer’s blockbuster cholesterol-reducing drug.  Ranbaxy challenged both the ’893 Patent (scheduled to expire in 2010) and the ’995 Patent (scheduled to expire in 2011).  A prior challenge to those patents by another generic company, Teva, had been largely unsuccessful.  The Patent and Trademark Office in 2009 examined alleged deficiencies in the patents but nonetheless reissued the ’995 Patent—thereby remedying the small procedural deficiency in that patent identified in the Teva litigation.

In 2008, Ranbaxy and Pfizer entered into a near-global settlement of their numerous pending infringement lawsuits.  As part of the settlement, Ranbaxy agreed not to seek to market a generic form of Lipitor until after expiration of the ’995 Patent in 2011.  Pfizer in turn agreed to drop its damages claims against Ranbaxy for alleged infringement of a patent covering another Pfizer drug (Accupril), in return for a $1 million payment from Ranbaxy.  Pfizer conveyed no cash or property to Ranbaxy in connection with the global settlement.

Antitrust Challenges to the Patent Settlement

Plaintiffs’ attorneys filed numerous antitrust claims against Pfizer and Ranbaxy in response to the 2008 settlement agreement.  They alleged that the drug companies had conspired to restrain trade in violation of the Sherman Act—that the courts would have declared one or both Lipitor patents invalid (thereby permitting generic competition to begin before 2011) in the absence of a settlement, and that Pfizer had paid Ranbaxy (in the form of a sweetheart settlement of the Accupril infringement litigation) to drop its invalidity claims.

A New Jersey district court dismissed the antitrust claims, concluding that the Pfizer-Ranbaxy settlement did not include any of the “unusual” settlement terms identified by Actavis.  The Third Circuit reversed, holding that virtually any drug patent settlement should be subject to antitrust scrutiny.  The court noted allegations that Pfizer’s damages claims in the Accupril litigation were worth hundreds of millions of dollars, and stated, “If parties could shield their settlements from antitrust review by simply including a token payment by the purportedly infringing generic manufacturer, then otherwise unlawful reverse payment settlement agreements attempting to eliminate the risk of competition would escape review.”

Third Circuit_LS_option1_0The Third Circuit Decision Conflicts with Actavis

By justifying its decision in this manner, the Third Circuit essentially ignored Actavis’s limitation on antitrust scrutiny: that scrutiny of a patent settlement agreement is warranted only if the benefits flowing to the alleged infringer take an “unusual” form.  The Third Circuit held that regardless of the form of the settlement, it is not “shielded” from antitrust scrutiny if those benefits are sufficiently large.  That holding directly conflicts with Actavis’s holding that certain common forms of settlement, including a patentee’s agreement to compromise its damages claims in pending litigation, are not subject to antitrust scrutiny.

The plaintiffs’ bar might argue that the Lipitor settlement was more extreme than the sorts of exempt settlements that Actavis had in mind.  In explaining that a compromise of damages claims was not subject to antitrust scrutiny, the Supreme Court gave as an example an agreement to settle a $100 million claim for $40 million.  The Lipitor plaintiffs contend that the Accupril damages claims—which Pfizer settled for $1 million—were actually worth more than $100 million.  But the categorical exemptions created by Actavis would cease to exist if plaintiffs’ lawyers could evade those exemptions simply by alleging that the non-cash benefit conferred on the alleged infringer was particularly large in their case.

Moreover, the Third Circuit failed to discuss a major logistical problem created by its ruling: there would be no way for a jury to determine whether Pfizer intentionally undervalued the worth of its Accupril damages claims without conducting a full-fledged trial on Ranbaxy’s claim that the Accupril patent was invalid.  Indeed, the Actavis dissenters based their dissent to a large extent on their conclusion that permitting antitrust scrutiny of reverse-payment settlements would lead to overly complicated litigation precisely because it would require a trial on the value of the settled infringement claim.

Justice Breyer, writing for the Actavis majority, recognized the importance of avoiding a trial on the patent claim as a prerequisite to deciding the antitrust issues; but he thought that a patent trial could be avoided, concluding that “the size of the unexplained reverse payment can provide a workable surrogate for a patent’s weakness, all without forcing a court to conduct a detailed exploration of the validity of the patent itself.”  In contrast, there exists no “workable surrogate” for attaching a value to damages claims that the patentee agrees to settle—the sole means of computing a value in Lipitor is to conduct a trial on the validity of the Accupril patent.

Actavis imposed limits on the types of “reverse payment” settlements warranting antitrust scrutiny precisely to avoid unduly complicated trials of the sort that would be necessary to resolve the antitrust claims raised in Lipitor.

Settlements Are Virtually Impossible Under the Third Circuit Standard

Actavis was decided based on the assumption that it would still be possible for litigants to settle pharmaceutical patent-infringement litigation even without cash payments to the alleged infringer.  Yet, under the Third Circuit’s expansive definition of what constitutes a “reverse payment,” it is doubtful that a drug-patent lawsuit would ever settle.

The Third Circuit held that any time a patent settlement provides significant value to the defendant, it is subject to antitrust scrutiny because the defendant’s agreement to delay market entry might have an anti-competitive effect.  Common sense suggests, however, that no litigant will agree to settle a suit unless he perceives that it is advantageous.

Accordingly, if a patentee cannot transfer anything of “considerable value” to a generic drug company without facing antitrust scrutiny, and if there are no potential damages that a patentee could offer to forgo, there may never again be a settlement of any drug-patent litigation because a patentee will be unable to offer lawful settlement terms that a generic drug company would find sufficiently attractive to induce it to abandon the huge financial rewards that Hatch-Waxman offers to drug-patent challengers.

The Third Circuit’s advocacy of antitrust criteria that would halt virtually all future drug-patent litigation settlements cannot be squared with Actavis, given that decision’s stated intent to create a standard under which settlements could still flourish.  The Supreme Court ought to overturn the Third Circuit’s Lipitor decision and restore the proper balance between federal antitrust and patent-law policy.

Also published by Forbes.com on WLF’s contributor page.