Patent Docs: U.S. Supreme Court rules ‘reverse payment’ settlements in ANDA litigation not unlawful
Payments must be assessed using ‘rule of reason’
Reverse-payment settlement agreements involve situationswhere a patentee settles a patent lawsuit, generally in litigation broughtunder the Hatch-Waxman framework, by paying the generic challenger(s) to remainoff the market for a time longer than if they had prevailed in their challengeto the innovator's patent. In making this ruling, the court rejected the respondents'arguments that these agreements should be presumptively lawful, providing thatthe exclusion remains within the "scope of the patent" and that other antitrustviolations (such as sham litigation or litigating a patent obtained throughfraud on the U.S. Patent and Trademark Office) are not implicated. The "scopeof the patent" test had been applied to find reverse-payment settlementagreements lawful in cases before the 2nd, 11th andfederal circuit courts (including the case at issue before the court)—althoughearlier this year, the 3rd Circuit Court agreed with the FTC thatsuch agreements should be presumptively unlawful.
The majority reversed based on their belief that the FTCshould be allowed to challenge such agreements, using antitrust law to checkthe application and exercise of the patent grant. Using prior Supreme Courtprecedent open to alternative interpretations (as evidenced in a dissent by thechief justice coming to the opposite conclusion citing this self-sameprecedent), the court held that sometimes, patent litigation settlements couldbe anticompetitive enough to raise antitrust liability, and that the FTC (andthe courts) need to be able to address these concerns.
The court announced five factual considerations relevant tobe the question for lower courts to use in assessing the legality of suchagreements:
(1) Whether the settlement has a "genuine adverse effect oncompetition," primarily related to the size of the settlement;
(2) Where "these anticompetitive consequences proveunjustified under antitrust principles;"
(3) Where a patentee has market power so that a "reversepayment threatens to work unjustified anticompetitive harm;"
(4) if "an unexplained large reverse payment itself wouldnormally suggest that the patentee has serious doubts about the patent'ssurvival," and using a "payment … to prevent the risk of competition …constitutes the relevant anticompetitive harm" (and thus it is "not necessaryto litigate patent validity to answer the antitrust question"); and
(5) Whether parties that may still "settle in other ways,"such as "by allowing the generic manufacturer to enter the patentee's marketprior to the patent's expiration, without the patentee paying the challenger tostay out prior to that point" instead (or in addition to) of including a largecash payment in the settlement.
The dissent, by Chief Justice Roberts and joined by JusticesScalia and Thomas (Justice Alito recused himself from consideration of thiscase), contends that these considerations beg the question of whether thepatent provides justification for such settlements, which the chief says thecourt has always assessed using patent law rather than antitrust law. Accordingto the chief, the existence of a patent, properly cabined within its properscope, should be enough to justify a reverse payment settlement of ANDAlitigation.
Calling the rule of reason"amorphous," the dissent asserts that "settling a patent claim cannot possiblyimpose unlawful anticompetitive harm if the patent holder is acting within thescope of a valid patent, and therefore permitted to do precisely what theantitrust suit claims is unlawful" (emphasis in opinion).
The court's decision will likely end reverse-paymentsettlement agreements. Because they will be unable to settle, innovatorpatentees will litigate every case to conclusion in order to avoid antitrustscrutiny involving the same or similar infringement and validity questionsbetter settled in ANDA litigation. Coupled with the FTC's position thattransfer of "anything of value" from the branded drugmaker to a genericcompetitor should also merit antitrust scrutiny, there may be little advantagefor either party in an ANDA lawsuit to settle and thus, greater costs that shoulddeter rather than incentivize generic challenges.
This is not the likely consequence that themajority envisioned, but it is almost certainly the outcome they are likely toget.
Kevin Noonan is a partnerwith the law firm McDonnell Boehnen Hulbert & Berghoff LLP and representsbiotechnology and pharmaceutical companies on a myriad of issues. A formermolecular biologist, he is also the founding author of the Patent Docs weblog, http://patentdocs.typepad.com/.