U.S. Supreme Court reverses Eleventh Circuit opinion in FTC v. Actavis, Inc

On 17 June 2013, the U.S. Supreme Court (“the Court”) reversed a decision by the Court of Appeals (Eleventh Circuit). The Court of Appeals had upheld a dismissal of a complaint made by the Federal Trade Commission (“FTC”), which claimed that a reverse payment settlement agreement between certain pharmaceutical companies (Actavis, Inc., Solvay Pharmaceuticals, Paddock Laboratories, and Par) violated U.S. antitrust law.

In brief, a reverse payment settlement agreement is one in which, in order to settle a dispute between the alleged patent infringer and the patentee, the patent holder pays the alleged infringer a considerable amount of money to keep the alleged infringer’s product off the market.

Under the Hatch-Waxman Act, a drug manufacturer is able to patent a new prescription drug and place it into the market upon submitting a New Drug Application to the Food and Drug Administration (hereinafter the “FDA”), pursuant to 21 U.S.C. § 355 (b)(1).  Similarly, a generic drug may be marketed by another drug manufacturer, upon submitting an Abbreviated New Drug Application to the FDA, pursuant to 21 U.S.C. §§ 355 (j)(2)(A)(ii), (iv), as long as it states in its application that it contains the same “active ingredients” and has the same effects as the previously branded drug.  The first generic to file an Abbreviated New Drug Application has a 180-day exclusivity period as long as it does not infringe the rights of the already branded drug.

In the case at hand, Solvay Pharmaceuticals introduced its branded drug, AndroGel, into the market in 1999, which was then approved by the FDA in 2000. In the same year Actavis, Inc. (also known as Watson Pharmaceuticals) filed an Abbreviated New Drug Application to the FDA for its generic version of AndroGel, which was approved by the FDA thirty months later.  However, in 2006, Solvay and Actavis reached a settlement in their patent-litigation dispute.  The terms of the settlement agreement provided that Actavis would not introduce its generic product into the market until 31 August 2015 (65 months before Solvay’s patent expires), and Solvay would pay Actavis $19-$30 million annually for nine years in exchange for its settlement.

The FTC claimed that this settlement agreement violated section 5 of the Federal Trade Commission Act, as Actavis had unlawfully agreed to share Solvay’s monopoly profits by abandoning its generic drug patent application, and as a result, eliminating the chance for American consumers to choose a cheaper alternative to the brand-name AndroGel for nine years.

The Court of Appeals held that a patent holder has a “lawful right to exclude others from the market,” and that a patent holder has “the right to cripple competition.” Id. Hence, as a matter of public policy, a reverse payment settlement agreement is consistent with the parties’ right to avoid litigation costs. It dismissed the FTC complaint on the basis that “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.” FTC v. Watson Pharmaceuticals, Inc., 677 F.3d 1298, 1312 (2012).

On appeal, the Court fundamentally disagreed, holding that even if the agreement’s anticompetitive effects fell within the scope of the exclusionary potential of the patent, such fact or characterization cannot immunize the agreement from antitrust attack, since patent and antitrust policies are both relevant in determining the “scope of the patent monopoly”—and consequently antitrust law immunity—that is conferred by a patent.

The Court’s 5-3 decision essentially entails that reverse payment settlement agreements may be a violation of antitrust laws, but the Court took a more pragmatic and fact-based approach to the matter, claiming that the Court of Appeals’ decision would create bad precedent and would incentivize settlements in the pharmaceutical sector in order to claim immunity from antitrust litigation.

The Court acknowledged that reverse payment settlement agreements are not a per se violation of antitrust laws, thus recognizing the impact that such a settlement agreement would have on American consumers in the pharmaceutical market, but their validity should be tested under the rule-of-reason. Yet, the Court did not provide any guidance as to the relevant factors to assess reverse payment settlement agreements, thus leaving to lower courts to ascertain the scope of the existing rule-of-reason precedent to reverse payment settlement agreements.

The Court’s ruling thus conceded that there is a general public interest in settling disputes between parties in order to avoid the heavy costs of litigation, but such large-scale corporate settlements may result in adverse and anticompetitive effects, and that requires analyzing antitrust law and patent law by way of a case-by-case approach.

Justice Breyer, writing for the majority, specifically states that “Solvay’s patent, if valid and infringed, might have permitted it to charge drug prices sufficient to recoup the reverse settlement payments it agreed to make to its potential generic competitors.”  F.T.C. v. Actavis, Inc., 133 S.Ct. 2223, 2230 (2013).  Thus, the Court characterizes this agreement as the creation of a monopoly in that particular brand of drug, AndroGel: if Solvay is able to remove Actavis from the market by preventing Actavis from producing its own generic drug at a lower cost than Solvay, then Solvay would be free to charge whatever price it wishes due to a lack of competition in the market. This, the Court holds, is a monopoly and a violation of antitrust laws (and broadly prohibited by the Sherman Act).

Justice Breyer referred to early precedent set by the Court in the area of antitrust law in order to emphasize that there must be a balancing of interests approach, otherwise known as a pragmatic approach, in order to best serve the interests of both the patent holder, its licensees, as well as the consumers within the general pharmaceutical market. In particular, United States v. United States Gypsum Co., 333 U.S. 364, 390-391 (1948) held that courts must “balance the privileges of [the patent holder] and its licensees under the patent grants with the prohibitions of the Sherman Act against combinations and attempts to monopolize.” Similarly, in Standard Oil Co. (Indiana) v. United States, 283 U.S. 163, 168, the Court held that certain cross-licensing agreements that settled litigation could sometimes “curtail the manufacture and supply of an unpatented product.”

Therefore, Justice Breyer rejects the claim that the dissenting opinion of Chief Justice Roberts that the Court in this decision is creating case law that is unlikely to withstand the test of time.  Contrarily, the Court in its majority opinion attempts to show that indeed previous case law deterred the acts of certain large corporations in order to prevent the anticompetitive effects that could result from such settlement agreements. [Gabriele Accardo and Anthony Reda]