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Reverse Payments by Drug Companies: The Supreme Court Declines to Adopt a Bright-Line Test

The Federal Trade Commission has long opposed “reverse payments,” the practice by which a pioneer drug company selling a brand-name drug pays a generic drug company to not enter the market. These payments arise in connection with the settlement of litigation of an Abbreviated New Drug Application (ANDA) filed with the Food and Drug Administration. These ANDA litigations typically challenge the validity of the pioneer drug company’s relevant patents.

While the FTC has challenged such settlements on several occasions, it has usually lost. In several instances, federal appeals courts have held such settlements to be a valid exercise of the patent rights of the proprietary drug company.

The FTC had one recent victory before the Third Circuit Court of Appeals, which agreed that such payments were presumptively illegal. At about the same time, however, the Eleventh Circuit Court of Appeals dismissed a case brought by the FTC involving Androgel, a patent-protected drug sold by Solvay Pharmaceuticals. The FTC appealed the Androgel ruling to the Supreme Court, which agreed to resolve the split of authority among the circuit courts.

On June 17, a bare majority of the Supreme Court ruled in FTC v. Actavis, Inc. that neither side was right. It refused to apply the presumption of illegality that the FTC urged, but also refused to rule that any exercise of patent power is immune from antitrust scrutiny, as several lower courts had held. Instead, the court reverted to the “rule of reason,” an antitrust standard by which the trial court is asked to weigh the pro- and anti-competitive aspects of a business practice.

The court relied on two 1948 price-fixing cases that invalidated cross-licensing by multiple patent holders and involved agreements to charge minimum prices and, in one case, involved agreements that restricted trade in unpatented items. Applying these precedents to the Androgel settlement, the court held that reverse payments may be unlawful even though they appear to be an exercise of patent rights. The court reversed the dismissal of the FTC’s complaint and remanded the case for a trial on the merits.

The Supreme Court’s guidance to the trial court was murky in the extreme: “[P]atent and antitrust policies are both relevant in determining the scope of the patent monopoly.” More helpfully, the court noted that an “unexplained large reverse payment itself would normally suggest that the patentee has serious doubts about the patent’s survival. And that fact, in turn, suggests that the payment’s objective is to maintain supracompetitive prices … rather than face what might have been a competitive market — the very anticompetitive consequence that underlies the claim of antitrust unlawfulness.”

With this passage, the court nearly accepts the FTC’s main point, but stops short of granting the FTC’s wish to place the burden of proof on the patentee to prove that its reverse payment was lawful.

The court quoted a leading antitrust scholar to the effect that there “is always something of a sliding scale in appraising reasonableness,” and as such “the quality of proof required should vary with the circumstances.” The court declared that it was leaving “to the lower courts the structuring of the present rule-of-reason antitrust litigation.”

The opaqueness of the court’s advice to the lower courts was not lost on the dissent: “Good luck to the district courts that must, when faced with a patent settlement, weigh the ‘likely anticompetitive effects, redeeming virtues, market power, and potentially offsetting legal considerations present in the circumstances’.”

Pioneer drug companies remain free to make reverse payments they will just have to be careful to justify them by reference to some value added by the generic drug company through marketing, manufacturing and other services. Whether these explanations prove persuasive will determine the future of reverse payments. Certainly, the complexity of proving (or disproving) the reasonableness of the payment will require substantial expert testimony, market studies and the like.

FTC v. Actavis will make both generic and pioneer drug companies less likely to settle their ANDA litigations, knowing that both parties could be sued by the FTC and/or class action plaintiffs for antitrust violations. The ruling may also discourage ANDA patent challenges by generic companies that lack a strong non-infringement and/or invalidity argument.

On the flip side, the ruling may discourage pioneer drug companies from listing patents on the FDA’s Orange Book if they are of questionable validity or arguably do not cover the product. After all, if a generic company challenges the patents through an ANDA filing, a long and costly lawsuit may ensue in which settlement options are limited and subject to scrutiny by both the FTC and the class-action plaintiff bar.

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