U.S. Court of Appeals rejects antitrust claims by FTC against reverse payment settlement agreements

On 25 April 2012 the U.S. Court of Appeals for the 11th Circuit affirmed a District Court decision dismissing antitrust claims concerning so-called reverse payment settlements.

In the suit, the U.S. Federal Trade Commission (“FTC”) argued that a patent holder had entered into unlawful settlement reverse payment agreements with generic drug producers in order to protect its monopoly made vulnerable in preceding patent litigation. The District Court dismissed the antitrust claims because the settlements did not exceed the scope of the patent in question (see Newsletter 2/2010 p. 3).

In its appeal, the FTC contends that its allegations were sufficient because the patent holder was not likely to prevail in the underlying patent infringement actions against generic producers. According to the FTC, the settlements therefore did exceed the scope of the patent because the patent does not have exclusionary potential when the patent holder is not likely to prevail in the infringement suit. The FTC proposed a general rule that reverse payment settlements should be unlawful, if at the time of the settlement it is more likely than not that the patent would not have prevented generic entry before the date agreed by the parties in the settlement.

The 11th Circuit rejected the FTC’s approach in this case and as a proposed rule. According to the court, the likelihood that infringement claims would fail did not equate with the actual result that it would fail. The plain meaning of the word “likely” (more than 50% chance) meant that actually many infringement suits would in fact succeed. This diverged from the court’s established case-law that was based on the potential exclusionary effect of patents, not their likely exclusionary effects. Moreover, the court noted that parties might have a motive to settle even when they were likely to win because of the high risks of losing. According to the court, it was therefore reasonable for the parties to settle even when they had substantial chances of winning or losing.

The court also considered the FTC’s proposed approach to be problematic for practical reasons. In particular, the approach would require courts to estimate afterwards how likely the patent holder was to prevail at the time of the challenged settlement. Predicting the likely outcome of patent infringement suits would be difficult and would impose a significant burden on the parties and courts. These practical challenges of the approach to settlements would deny much of the benefits of settling patent litigation and discourage settlements.

The court also voiced suspicions about patent holders ultimately being able to protect vulnerable patents from challenges by settling with generic producers. The court noted that the patent holder ultimately would not be able to avoid competition by sharing monopoly profits with generic producers as profits would be reduced with the greater number of generic producers the profits needed to be shared with. [Juha Vesala]