U.S. DOJ files amicus brief on reverse payment settlements

On 6 July 2009 the U.S. Department of Justice filed an amicus brief in a reverse payment settlement case on appeal before the 2nd Circuit (In re Ciprofloxacin Hydrochloride Antitrust Litigation). The filing is in response of an invitation by the Court to address, in particular, the question whether reverse payments violate antitrust laws. The Court has previously considered such settlements virtually per se legal if they do not extend beyond the scope of the patent (In re Tamoxifen Citrate Antitrust Litigation, 466 F.3d 187 (2d Cir. 2006)).

The brief, first, explains the dynamics of patent infringement suit settlements involving reverse payments in the context of the Hatch-Waxman Act. It, in particular, notes the risk of potential generic competition that a settlement can remove by eliminating the possibility that the patent in question is not infringed or is invalidated.

The brief, second, addresses the appropriate antitrust standards for reverse payment settlements. Because agreements to settle patent infringement suits may serve efficiency enhancing purposes, the brief does not consider per se illegality appropriate but that such settlements should be evaluated under the rule of reason.

Presumptive anti-competitiveness. However, the brief argues settlements involving substantial reverse payments should be presumptively anti-competitive, because payments to a generic firm can be viewed as consideration for the generic firm delaying its entry. Without the payment, a settlement agreement either would have allowed earlier entry or, absent the settlement agreement, the patent could have been held invalid in litigation. A prima facie case would according to the brief be made by showing that

1)   a generic manufacturer withdrew its validity challenge,

2)   money or other consideration flowed from the patent holder to the generic firm, and

3)   the payment accompanied the agreement to withdraw the validity challenge.

No consideration of the whether the patent holder likely would have prevailed in the patent suit is necessary or even appropriate according to the brief.

Rebuttal of the presumption. The brief would, however, allow defendants to rebut the presumption that the reverse payment purchased reduced competition beyond the situation that reflects the parties’ contemporaneous views. If the defendants show that the reverse payment did not exceed the litigation costs avoided by the patent holder, the presumption would be clearly rebutted as such amounts do not suggest a departure from the expected outcome in litigation. Payments not greatly in excess of avoided litigation costs would be unlikely to significantly harm competition.

In case of payments greatly in excess of avoided litigation costs, the rule of reason analysis would focus on the terms of the settlement, in particular, the nature and extent of generic competition allowed. In case no generic competition is allowed before patent expiration, the defendants would not be able to justify the agreement. This is because the settlement eliminates the possibility of generic competition before patent expiry.

Settlements that do provide for generic entry before the expiration of the patent can be justified by defendants if the agreement preserved a degree a competition reasonably consistent with the parties’ expectations on the outcome of litigation. It is the defendants’ burden to show the terms of generic entry reflected their contemporaneous evaluations on whether a judgment would have resulted in generic competition before patent expiration. The defendants can justify the agreement by providing a reasonable explanation that the reverse payment purchased something else than exclusion from the market, in which case there is no reason for finding that the settlement diverges from the competition consistent with the parties’ contemporaneous expectations. [Juha Vesala]

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