U.S. Court of Appeals holds reverse payment settlements to be presumptively illegal

On 16 July 2012 the U.S. Court of Appeals for the Third Circuit held that payments from a patent holder to a generic manufacturer of pharmaceutical products who agrees to delay entry into the market are presumptively illegal, unless the payment is shown to be made for a purpose other than delayed entry or to offer a pro-competitive benefit.

The ruling is noteworthy because it rejects the scope of the patent test approach employed by the Courts of Appeal for the Second, Eleventh and Federal Circuits (See e.g. Newsletter 3/2012 p. 4, 3/2010 p. 2 and 1/2008 p. 2). Under the scope of the patent test, reverse payment settlements are considered lawful when the settlement does not extend beyond the scope of the patent in question, unless the patent was procured by fraud or the enforcement action was objectively baseless.

The Third Circuit refused to follow the scope of the patent test since, according to the court, the test improperly restricts the application of antitrust law and is contrary to the policies underlying the Hatch-Waxman Act (Pub. L. No. 98-417, 98 Stat. 1585 (1984); see 21 U.S.C. § 355 for the relevant passage) and U.S. Supreme Court case-law, as outlined below.

The court criticized the scope of the patent test on the grounds that the test presumes that the patent is valid almost without chance of rebuttal. As a practical matter, that approach does not subject reverse payment settlements to any antitrust scrutiny. The test also effectively presumes that the patent holder would have prevailed, even though the very issue of validity would be litigated in the underlying patent suit. According to the court, there is no significant policy basis for such a presumption of validity. In particular, the presumption of validity of patents is not a substantive right of patent holders, but merely a procedural presumption. The presumption that the patent holders would have been able to exclude generic competitors is also especially inappropriate when the underlying suit concerns infringement because in infringement cases it is the patent holder who bears the burden of showing infringement.

The court noted that studies indicate that many granted patents are later found to be invalid or not infringed, which reinforces the conclusion that reverse payments could allow patent holders to protect themselves from competition and invalidation of weak patents. The court also questioned the suggestion that other generic manufacturers would invalidate weak patents when a reverse payment settlement prevents an initial challenger from doing so. The court noted that the first challenger would be the most motivated one to challenge a patent because it would benefit, if successful, from a 180-day period of exclusivity under the Hatch-Waxman Act. Upholding the scope of the patent test would also enable the monopolist patent holder with its high profits to make reverse payments to several subsequent challengers.

The court explained that holding reverse payment settlements presumptively illegal is supported by U.S. Supreme Court case-law that supports elimination of weak patents, which other courts following the scope of the patent test have overlooked. According to the court, reverse payment settlements are contrary to that public interest as well as the Hatch-Waxman Act that specifically seeks to promote the entry of generic producers of pharmaceuticals by encouraging challenges of weak or narrow patents. The court further explained that the judicial preference for settlement, which could be served by the scope of the patent test, should not outweigh the objective to protect consumers from unjustified monopolies. Moreover, settlements not involving reverse payments – which comprise the vast majority of pharmaceutical settlements – would not be deterred by the approach of the court since only settlements in which reverse payments are made would be subject to presumptive illegality.

The Third Circuit remanded the case back to the U.S. District Court of New Jersey to be reconsidered under this “quick look” type of rule of reason analysis. However, petitions for certiorari have been filed with the U.S. Supreme Court (Dockets 12-245 and 12-265) which may bring the issue of appropriate antitrust standard for reverse payment settlements before the Supreme Court. A petition for certiorari was also filed in another reverse payment settlement case by the U.S. Solicitor General on behalf of the FTC (see Newsletter 3/2012 p. 4 for the 11th Circuit ruling in that case). The Supreme Court has denied petitions for certiorari in previous cases  (see Newsletter 2/2011 p. 3 and 4/2009 p. 2), but at least this time there is an apparent conflict between the Third Circuit and the Second, Eleventh and Federal Circuit. [Juha Vesala]