Reverse Payment Settlement For Drug Patent Holder and Generic Manufacturer

Solvay Pharmaceuticals obtained a patent for its approved brand-name drug AndroGel. Subsequently, Actavis and Paddock filed applications for generic drugs modeled after AndroGel and certified under paragraph IV that Solvay's patent was invalid and that their drugs did not infringe it. Solvay sued Actavis and Paddock, claiming patent infringement. The FDA eventually approved Actavis' generic product, but instead of bringing its drug to market, Actavis entered into a settlement agreement with Solvay, agreeing not to bring its generic to market for a specified number of years and agreeing to promote AndroGel to doctors in exchange for millions of dollars. Because this type of settlement requires the patentee to pay the alleged infringer, rather than the other way around, this kind of settlement agreement is often called a “reverse payment” settlement agreement.  Paddock made a similar “reverse payment” settlement agreement with Solvay, as did Par, another manufacturer aligned in the patent litigation with Paddock.


The Federal Trade Commission (FTC) filed suit, alleging that all of the parties to the AndroGel patent suit violated Section 5 of the Federal Trade Commission Act by unlawfully agreeing to abandon their patent challenges, to refrain from launching their low-cost generic drugs, and to share in Solvay's monopoly profits.  The United States District Court for the Northern District of Georgia dismissed the FTC’s complaint for failure to state a claim, and the FTC appealed. The Eleventh Circuit concluded that as long as the anticompetitive effects of a settlement fall within the scope of the patent's exclusionary potential, the settlement is immune from antitrust attack. Specifically, noting that the FTC had not alleged that the challenged agreements excluded competition to a greater extent than would the patent, if valid, the Eleventh Circuit affirmed the complaint's dismissal. It further recognized that if parties to this sort of case do not settle, a court might declare a patent invalid. But since public policy favors the settlement of disputes, it held that courts could not require parties to continue to litigate in order to avoid antitrust liability.


The Supreme Court reversed and remanded. The court held that “reverse payment” settlement agreements in patent infringement litigation can sometimes unreasonably diminish competition in violation of the antitrust laws, abrogating In re Ciprofloxacin Hydrochloride Antitrust Litigation, 544 F.3d 1323 (C.A.Fed. (N.Y.), 2008) and In re Tamoxifen Citrate Antitrust Litigation, 466 F.3d 187 (C.A.2 (N.Y.), 2006). The Drug Price Competition and Patent Term Restoration Act of 1984 (Hatch–Waxman Act or Act) creates special procedures for identifying and resolving patent disputes between brand-name and generic drug manufacturers, one of which requires a prospective generic manufacturer to assure the Food and Drug Administration (FDA) that it will not infringe the brand-name's patents. One way to provide such assurance (the “paragraph IV” route) is by certifying that any listed, relevant patent “is invalid or will not be infringed by the manufacture, use, or sale” of the generic drug. 21 U.S.C.A. § 355(j)(2)(A)(vii)(IV). The Hatch–Waxman Act permits a generic manufacturer to file an Abbreviated New Drug Application (ANDA) specifying that the generic has the “same active ingredients as,” and is “biologically equivalent” to, the already-approved brand-name drug; in this way the generic manufacturer can obtain approval while avoiding the costly and time-consuming studies needed to obtain approval for a pioneer drug.


Here, the paragraph IV litigation put the patent's validity and preclusive scope at issue, and the parties' settlement—in which, the FTC alleges, the plaintiff agreed to pay the defendants millions to stay out of its market, even though the defendants had no monetary claim against the plaintiff—ended that litigation. That form of settlement is unusual, and there is reason for concern that such settlements tend to have significant adverse effects on competition.


The Court also held that the settlement at issue in this case was not immune from antitrust attack, even if the agreement's anticompetitive effects fell within the scope of the exclusionary potential of the patent. Although the anticompetitive effects of the reverse settlement agreement might fall within the scope of the exclusionary potential of Solvay's patent, this does not immunize the agreement from antitrust attack. To refer simply to what the holder of a valid patent could do does not by itself answer the antitrust question.


Patent and antitrust policies are both relevant in determining the scope of the patent monopoly, and consequently antitrust law immunity, that is conferred by a patent. Patent-related settlement agreements can sometimes violate the antitrust laws. The public interest in granting patent monopolies exists only to the extent that the public is given a novel and useful invention in consideration for its grant. An antitrust defendant may show in the antitrust proceeding that legitimate justifications for a reverse payment settlement are present, thereby explaining the presence of the challenged term and showing the lawfulness of that term under the rule of reason. The purpose of the rule of reason is to determine whether, on balance, a practice is reasonably likely to be anticompetitive or competitively harmless—that is, whether it yields lower or higher marketwide output.


See: F.T.C. v. Actavis, Inc., 2013 WL 2922122 (U.S., June 17, 2013) (not designated for publication).