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Reverse Payments, Actavis, and the Lower Courts at Sea, Part 1: What Is a Reverse Payment?

The intersection of IP and antitrust has always been fraught.  The raison-d’être of the Sherman, Clayton, and FTC Acts is to bust trusts and promote competition.  Meanwhile, intellectual property laws create lawful exclusionary rights.

This series will explore one particular point of tension: the battle over “reverse payment settlements” pursuant to which the plaintiff in a patent infringement action agrees to “pay” the alleged infringer to keep the infringer’s product off the market for a period of time.  In these “pay-for-delay” arrangements, the province of the pharmaceuticals industry, the settling parties are a brand-name drug manufacturer and the maker of a generic equivalent.

Over the years, reverse payment settlements have drawn different levels of antitrust scrutiny from the lower courts.  Some circuit courts determined that such arrangements are presumptively illegal.  See, e.g.In re K-Dur Antitrust Litigation, 686 F. 3d 197, 214-218(3d Cir. 2012).  Others have held that, absent fraud in the acquisition of the patent, sham litigation, or other activity falling outside the “scope of the patent,” reverse payment settlements cannot trigger antitrust liability.  See, e.g., In re Ciprofloxacin Hydrochloride Antitrust Litigation, 544 F. 3d 1323, 1332-1337 (Fed. Cir. 2008).

Recently, the Supreme Court stepped in, ostensibly to resolve the conflict.  FTC v. Actavis, Inc., 133 S. Ct. 2223 (2013).  But its decision—rather than imposing uniformity and clarity on an uncertain field—may lead to even greater unpredictability as trial and circuit courts attempt in individual cases to resolve the tension between the competing policies of the patent and antitrust laws.

The Court determined that the “scope of the patent” analysis, which the more forgiving lower courts had applied to reverse payments, fails to account for antitrust concerns; “to refer simply to what the holder of a valid patent could do does not by itself answer the antitrust question.”  Treating the settlements in question as presumptively legal simply because they fall within the scope of the patent’s “exclusionary potential” ignores that the purpose of the underlying infringement action is to determine the validity of the patent and whether the generic product infringes.  Reverse payments, the Court held, short-circuit that process and amount essentially to “payment in return for staying out of the market.”  In turn, prices continue at monopoly levels, with the settling parties reaping the supracompetitive profits and customers shouldering the cost.

Thus, according to the Actavis Court, reverse payment settlements can “sometimes violate the antitrust laws,” because their “anticompetitive consequences [can] at least sometimes prove unjustified.”  But which times?  In addition to rejecting the forgiving “scope of the patent” test, the Court also rejected the FTC’s proposal to treat reverse payment settlements as presumptively unlawful.  Instead, the Court instructed the lower courts to apply the traditional antitrust “rule of reason” analysis.

In doing so, the Court noted some factors that come into play when applying the rule of reason to a reverse payment settlement: “its size, its scale in relation to the payor’s anticipated future litigation costs, its independence from other services for which it might represent payment, and the lack of any other convincing justification.”  And with that guidance, the Court has left it to the lower courts to develop the antitrust jurisprudence of reverse payments, as plaintiffs and the FTC seek to broaden what may constitute an impermissible settlement.

Also left open in this ongoing debate is what role, if any, the brand company’s patents play in assessing competitive harm resulting from a reverse payment settlement.  While the majority in Actavis gave this issue the back of the hand, Chief Justice Roberts’ dissent notes the continued importance of the fact that the settlement is of a dispute that may well have been within the patent holder’s legitimate exclusionary rights.

Future posts in this series will explore how the battles are being fought in the district and circuit courts, and the role that the FTC—an aggressive opponent of reverse payments—is playing in the contests.