Monday, June 24, 2013

Supreme Court Holds That "Pay for Delay" Pharmaceutical Patent Settlements May Violate the Antitrust Laws


On June 17, the United States Supreme Court issued its highly-anticipated decision in FTC v. Actavis Inc., a case with significant implications for patent law, antitrust law and healthcare law.  The case involved a settlement of a patent infringement lawsuit brought by a branded drug manufacturer against a generic drug maker, in which the branded manufacturer withdrew its claim that the generic infringed the patent and, in connection with the settlement, also paid the generic not to enter the market until the patent term expired.  In a 5-3 decision, the Supreme Court held that such settlements may violate the antitrust laws in some circumstances, reversing the lower court’s ruling that the settlement was immune, as a matter of law, from antitrust challenge.

The settlement in Actavis, and others like it, have been somewhat pejoratively described as “pay for delay” settlements, and for years the FTC has maintained that such settlements violate the antitrust laws.  For much of that time, the FTC was largely unsuccessful when challenging such settlements in the courts, as the lower courts maintained that the general public policy favoring settlements, and the fact that patent law generally provides a patent holder with the right to exclude all others from using its patent within the patent term, defeated any antitrust claim, regardless of the potential competitive consequences of such an agreement.  However, last year the 3rd Circuit Court of Appeals, in the K-Dur case, agreed with the FTC’s position, creating a split in the circuits on the issue.

While the K-Dur case was appealed to the Supreme Court, the Supreme Court chose to accept for review a similar case from the 11th Circuit – Actavis – in which an FTC action had been dismissed by the lower courts based upon the defendants’ “scope of the patent” argument.

Reversing the 11th Circuit’s decision, the Supreme Court held that the “scope of the patent” principle does not render the agreement immune from antitrust challenge, in large part because it is based upon a presumption that the branded manufacturer’s patent is valid, which is not necessarily the case. Accordingly, because an invalid patent carries no right for the patent holder to exclude others during the patent term, the Court concluded that patent law provides no justification for ignoring the antitrust laws, and each such settlement should be examined under antitrust law’s “rule of reason” – which requires a weighing of the pro-competitive and anti-competitive effects of the challenged conduct – to determine whether an antitrust violation exists.  Notably, in reaching this conclusion, the Court also rejected the FTC’s request that such settlements be declared “presumptively” unlawful under the antitrust laws.

As a consequence of the Court’s ruling, one can expect that these settlements will receive even greater scrutiny going forward, with the settling parties being required to justify, in economic terms, any payments being made to a court’s satisfaction.  Whether this burden will chill patent infringement settlements – as the defendants argued – remains to be seen. 

A copy of the Supreme Court’s decision can be found here.