The U.S. Supreme Court yesterday ruled on the long-awaited FTC v. Actavis
ANDA reverse payments, resolving a sharp circuit split. The Court held that settlement agreements
that include reverse payments to end litigation between brand pharmaceutical companies and
generic chal engers must be evaluated under a “rule of reason” analysis to determine whether
they violate federal antitrust laws. The decision could open the door for more government and
private antitrust suits against pharmaceutical companies, both brand and generic, when they
Whereas in typical patent litigation settlements the al eged infringer pays a royalty to the patentee,
in Hatch-Waxman cases the payments are from the patentee (brand) to the al eged infringer
(generic) with an agreement that the generic will forestall market entry for a specified period
of time. Hence the name, “reverse payments.” There was a split among various circuit courts on
how to evaluate the legality of these arrangements, most recently between the Eleventh and
Third circuits. The Eleventh Circuit, along with the Second and Federal Circuit courts,2 applied
a lenient “scope of the patent” test, where the reverse payment is presumptively legal absent a
showing of sham litigation or fraud in obtaining the patent and so long as any anticompetitive
effects fall within the scope of the exclusionary potential of the patent. To be unlawful under
this test, an agreement would have to extend beyond a patent’s expiration or somehow restrict
competition for products or services unrelated to the patent. In contrast, the Third Circuit, along
with the Sixth and D.C. Circuit courts,3 applied a stricter “quick look
rule of reason” test. Under
this test, there is a rebuttable presumption that any reverse payment is an unreasonable restraint
on trade, which can be overcome only by a showing that the payment (1) was for a purpose
other than to delay entry or (2) offers some pro-competitive benefit. The Supreme Court’s Actavis
decision rejects both approaches, instead applying a standard
that fal s in the middle. While not finding them presumptively il egal, as the FTC argued, the
Court explained that such agreements should be evaluated under a “rule of reason” test that
weighs their pro-competitive benefits against their potential harm to competition.
FTC v. Actavis, Inc.
, No. 12-416 (June 17, 2013).
FTC v. Watson Pharms.
, Inc., 677 F.3d 1298, 1323 (11th Cir.2012), In re Tamoxifen Citrate Antitrust Liti-
, 466 F.3d 187 (2d Cir.2006), and In re Ciprofloxacin Hydrochloride Antitrust Litigation
, 544 F.3d 1323 (Fed. Cir. 2008).
In re K-Dur Antitrust Litigation
, 686 F.3d 197, 218 (3d Cir.2012), See also In re Cardizem CD Antitrust Liti-
, 332 F.3d 896 (6th Cir.2003), Andrx Pharmaceuticals, Inc,. v. Biovail Corp. International,
256 F.3d 799 (D.C.
Under the rule of reason test, the FTC or private plaintiffs bear the initial burden to prove the
chal enged action has an actual
adverse effect on competition as a whole. If so, then the
burden shifts to the defendant to establish a pro-competitive redeeming value. At which point
the burden shifts back to the plaintiff to show that the same pro-competitive effect could have
been achieved through less restrictive means.
With these general guidelines, the Court directed the lower courts to structure the exact rule
of reason to be used in this type of antitrust analysis. But it did indicate that such factors as
the reverse payment size, scale in relation to the payer’s anticipated future litigation costs,
independence from other services for which it might represent payment, and the lack of any
other convincing justification will all dictate the likelihood of finding of anticompetitive effects.
The result of this landmark decision is that reverse payments are no longer shielded by the
exclusionary power of the scope of the patent and transactions will be scrutinized much
more closely. Practical y, this means that settling companies must ensure that payments and
agreements are justified with economic metrics balanced against the strength of the patent.
But the ultimate burden will rest with the FTC (or private plaintiffs) to prove that the agreements
Special thanks to Summer Associate Sarah I. Danley for her role as a contributing author of this alert.
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