On Monday, 17 June 2013, the Supreme Court of the United States released its opinion in Federal Trade Comm’n v. Actavis (formerly captioned as FTC v. Watson Pharmaceuticals, Inc.). The decision, with a 5-3 split, found that pay-for-delay settlement agreements are unusual, raising concerns of anticompetitive behavior, and are not immune from antitrust scrutiny. Although public policy generally favors settlements, the facts of pay-for-delay agreements raise a number of considerations rejecting the general support for settlements. However, the Court declined to create a rule that pay-for-delay settlement agreements are presumptively anticompetitive and instead applied the rule-of-reason test.
In brief, the present case involves a circuit split regarding the legality of “pay-for-delay” settlement agreements, also known as “reverse payments,” where a branded pharmaceutical will pay a generic that has filed an ANDA application (challenging that their product will not infringe the branded pharmaceutical’s patent or that the patent-at-issue is invalid) under the Hatch-Waxman Act in return for the generic firm’s agreement to delay entry into the market for a certain period of time. Prior coverage of this case is available here (under “Pay-for-Delay”), and KEI’s amicus brief is available here.
Justice Breyer wrote for the majority, joined by Justices Kennedy, Ginsburg, Sotomayor and Kagan. Justice Roberts wrote a dissenting opinion, joined by Justices Scalia and Thomas. Justice Alito formerly recused himself from the case and took no part in the opinion.
Majority Opinion
Justice Breyer begins the opinion by succinctly describing a typical pay-for-delay scenario, noting that “the basic question
here is whether such an agreement can sometimes unreasonably diminish competition in violation of the antitrust laws.” Covering the facts of the case, Justice Breyer summarized that the Eleventh Circuit had essentially held that pay-for-delay, or reverse payment agreements, were generally immune from antitrust scrutiny provided that the agreement fell within the “scope-of-the-patent.” The Eleventh Circuit held that “absent sham litigation or fraud in obtaining the patent, a reverse payment settlement is immune from antitrust attack so long as its anticompetitive effects fall within the scope of the exclusionary potential of the patent.” In the Court’s view, however, these agreements can be anticompetitive and therefore should not be shielded from antitrust scrutiny.
The Court acknowledges that, if a patent is valid, then the actions of branded pharmaceuticals may well be lawful under the exclusionary function of a patent. However, patent validity is not determined because of these agreements:
Solvay’s patent, if valid and infringed, might have permitted it to charge drug prices sufficient to recoup the reverse settlement payments it agreed to make to its potential generic competitors. And we are willing to take this fact as evidence that the agreement’s “anticompetitive effects fall within the scope of the exclusionary potential of the patent.” 677 F. 3d, at 1312. But we do not agree that that fact, or characterization, can immunize the agreement from antitrust attack.For one thing, to refer, as the Circuit referred, simply to what the holder of a valid patent could do does not by itself answer the antitrust question. The patent here may or may not be valid, and may or may not be infringed. “[A] valid patent excludes all except its owner from the use of the protected process or product,” United States v. Line Material Co., 333 U. S. 287, 308 (1948) (emphasis added). And that exclusion may permit the patent owner to charge a higher-than-competitive price for the patented product. But an invalidated patent carries with it no such right. And even a valid patent confers no right to exclude products or processes that do not actually infringe. The paragraph IV litigation in this case put the patent’s validity at issue, as well as its actual preclusive scope. The parties’ settlement ended that litigation. The FTC alleges that in substance, the plaintiff agreed to pay the defendants many millions of dollars to stay out of its market, even though the defendants did not have any claim that the plaintiff was liable to them for damages. That form of settlement is unusual. And, for reasons discussed in Part II–B, infra, there is reason for concern that settlements taking this form tend to have significant adverse effects on competition.
Citing caes such as Line Material, United States v. United States Gypsum, and Walker Process Equipment v. Food Machinery & Chemical Corp., Justice Breyer’s opinion also confirms that the Court’s precedent establishes that both patent as well as antitrust policies are relevant in determining the “scope of the patent”:
In short, rather than measure the length or amount of a restriction solely against the length of the patent’s term or its earning potential, as the Court of Appeals apparently did here, this Court answered the antitrust question by considering traditional antitrust factors such as likely anticompetitive effects, redeeming virtues, market power, and potentially offsetting legal considerations present in the circumstances, such as here those related to patents. See Part II–B,
In discussing a patent settlement dispute involving three sewing machine companies in the 1960s that was held to violate antitrust scrutiny, the Court reminds that the public interest is central in these disputes. It notes that it previously found antitrust violations in patent cases “in important part, . . . because ‘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.'” (internal citations omitted).
The majority opinion addresses the dissenting opinion, once again noting the importance of keeping the public interest in mind:
These cases do not simply ask whether a hypothetically valid patent’s holder would be able to charge, e.g., the high prices that the challenged patent-related term allowed. Rather, they seek to accommodate patent and antitrust policies, finding challenged terms and conditions unlawful unless patent law policy offsets the antitrust law policy strongly favoring competition.Thus, contrary to the dissent’s suggestion, post, at 4–6, there is nothing novel about our approach. What does appear novel are the dissent’s suggestions that a patent holder may simply “pa[y] a competitor to respect its patent” and quit its patent invalidity or noninfringement claim without any antitrust scrutiny whatever, post, at 3, and that “such settlements . . . are a well-known feature of intellectual property litigation,” post, at 10. Closer examination casts doubt on these claims. The dissent does not identify any patent statute that it understands to grant such a right to a patentee, whether expressly or by fair implication. It would be difficult to reconcile the proposed right with the patent-related policy of eliminating unwarranted patent grants so the public will not “continually be required to pay tribute to would-be monopolists without need or justification.” Lear, Inc. v. Adkins, 395 U. S. 653, 670 (1969). And the authorities cited for this proposition (none from this Court, and none an antitrust case) are not on point.
Although the dissent suggests that traditional settlement agreements do not differ from pay-for-delay settlement agreements, the majority of the Court disagrees:
In the traditional examples cited above, a party with a claim (or counterclaim) for damages receives a sum equal to or less than the value of its claim. In reverse payment settlements, in contrast, a party with no claim for damages (something that is usually true of a paragraph IV litigation defendant) walks away with money simply so it will stay away from the patentee’s market. That, we think, is something quite different. Cf. Verizon Communications, Inc. v. Law Offices of Curtis V. Trinko, LLP, 540 U. S. 398, 408 (2004) (“[C]ollusion” is “the supreme evil of antitrust”).
In supporting its decision, the majority also points to the Hatch-Waman Act itself which “does not embody a statutory policy” to support immunization of pay-for-delay from antitrust scrutiny. Instead, “the general procomeptitive thrust of the statute, its specific provisions facilitating challenges to a patent’s validity” do not support the lower court’s assessment. Additionally, the majority opinion points to Congressional statements, including statements by Senator Hatch and Representative Waxman made prior to the 2003 amendments to the Act that explicitly reject pay-for-delay.
The majority also turns to the general public policy favoring settlement agreements, but that while, “We recognize the value of settlements and the patent litigation problem . . . we nonetheless conclude that this patent-related factor should not determine the result here. Rather, five sets of considerations lead us to conclude that the FTC should have been given the opportunity to prove its antitrust claim.” The five factors include: 1) potential for genuine adverse effects on competition; 2) anticompetitive consequences will at least sometimes prove unjustified; 3) where a reverse payment threatens to work
unjustified anticompetitive harm, the patentee likely possesses the power to bring that harm about in practice; 4) antitrust action is likely to prove more feasible administratively than the Eleventh Circuit found (it is not normally necessary to determine patent validity to answer the antitrust question); and 5) the fact that a large, unjustified reverse payment
risks antitrust liability does not prevent litigating parties from settling their lawsuit. The Court summarizes its decision with regard to the general policy favoring settlements by noting:
In sum, a reverse payment, where large and unjustified, can bring with it the risk of significant anticompetitive effects; one who makes such a payment may be unable to explain and to justify it; such a firm or individual may well possess market power derived from the patent; a court, by examining the size of the payment, may well be able to assess its likely anticompetitive effects along with its potential justifications without litigating the validity of the patent; and parties may well find ways to settle patent disputes without the use of reverse payments. In our view, these considerations, taken together, outweigh the single strong consideration—the desirability of settlements—that led the Eleventh Circuit to provide near-automatic antitrust immunity to reverse payment settlements.
The majority, however, declined to adopt the FTC’s proposed rule that reverse payment settlements are presumptively unlawful. The FTC had proposed a “quick look” approach (placing the burden on the defendant to show a pro-competitive benefit), but the majority instead applied the “rule-of-reason” test. In rejecting the “quick look” approach, the FTC noted that the anticompetitive effects of a pay-for-delay agreement would likely “depend upon its size, its scale in relation to the payor’s anticipated future litigation costs, its independence from other services for which it might represent payment, and the lack of any other convincing justification.”
Dissenting Opinion
The three-justice dissent authored by Justice Roberts, as noted by the majority opinion, calls the Court’s decision a “novel approach.” In doing so, the dissent claims:
A patent carves out an exception to the applicability of antitrust laws. The correct approach should therefore be to ask whether the settlement gives Solvay monopoly power beyond what the patent already gave it. The Court, however, departs from this approach, and would instead use antitrust law’s amorphous rule of reason to inquire into the anticompetitive effects of such settlements. This novel approach is without support in any statute, and will discourage the settlement of patent litigation.
The dissent argues that the “scope-of-the-patent” test is appropriate, and only where sham litigation or fraud is present would antitrust scrutiny be appropriate:
The point of antitrust law is to encourage competitive markets to promote consumer welfare. The point of patent law is to grant limited monopolies as a way of encouraging innovation. Thus, a patent grants “the right to exclude others from profiting by the patented invention.” Dawson Chemical Co. v. Rohm & Haas Co., 448 U. S. 176, 215 (1980). In doing so it provides an exception to antitrust law, and the scope of the patent—i.e., the rights conferred by the patent—forms the zone within which the patent holder may operate without facing antitrust liability.[ . . . ]
The key, of course, is that the patent holder—when doing anything, including settling—must act within the scope of the patent. If its actions go beyond the monopoly powers conferred by the patent, we have held that such actions are subject to antitrust scrutiny.
The dissenting opinion takes issue with the majority’s opinion characterizations of certain precedent:
The majority is therefore right to suggest that these “precedents make clear that patent-related settlement agreements can sometimes violate the antitrust laws.” Ante, at 10 (emphasis added). The key word is sometimes. And those some times are spelled out in our precedents. Those cases have made very clear that patent settlements—and for that matter, any agreements relating to patents—are subject to antitrust scrutiny if they confer benefits beyond the scope of the patent. This makes sense. A patent exempts its holder from the antitrust laws only insofar as the holder operates within the scope of the patent. When the holder steps outside the scope of the patent, he can no longer use the patent as his defense. The majority points to no case where a patent settlement was subject to antitrust scrutiny merely because the validity of the patent was uncertain. Not one. It is remarkable, and surely worth something, that in the 123 years since the Sherman Act was passed, we have never let antitrust law cross that Rubicon.
The dissenting opinion also rejects the majority’s characterization of the Hatch-Waxman Act as being “procompetitive”:
It is especially disturbing here, where the Court discerns from specific provisions a very broad policy—a “general procompetitive thrust,” in its words—and uses that policy to unsettle the established relationship between patent and antitrust law. Ante, at 13. Indeed, for whatever it may be worth, Congress has repeatedly declined to enact legislation addressing the issue the Court takes on today. See Brief for Actavis, Inc. 57 (citing 11 such bills introduced in the House or Senate since 2006)
Additionally, Justice Roberts asserts that reverse payment settlement agreements, that is “paying an alleged infringer to drop its invalidity claim–are a well-known feature of intellectual property litigation, and reflect an intuitive way to settle such disputes.” The dissent suggests that there is no distinction between these settlements and traditional settlements because “While the alleged infringer may not be suing for the patent holder’s money, it is suing for the right to use and market the (intellectual) property, which is worth money.”
Justice Roberts attempts to clearly separate patent policy from antitrust law, asserting that “Our cases establish that antitrust law has no business prying into a patent settlement so long as that settlement confers to the patent holder no monopoly power beyond what the patent itself conferred—unless, of course, the patent was invalid, but that again is a question of patent law, not antitrust law”
The dissent criticizes the majority for not upholding the general policy favoring settlements:
The majority’s rule will discourage settlement of patent litigation. Simply put, there would be no incentive to settle if, immediately after settling, the parties would have to litigate the same issue—the question of patent validity—as part of a defense against an antitrust suit. In that suit, the alleged infringer would be in the especially awkward position of being for the patent after being against it.
The dissent further criticizes the five factors that the majority uses to support its rejection of supporting reverse-payment settlement agreements by arguing the factors “are unresponsive to the basic problem that settling a patent claim cannot possibly impose unlawful anticompetitive harm if the patent holder is acting within the scope of a valid patent and therefore
permitted to do precisely what the antitrust suit claims is unlawful.”
It also suggests that the majority’s ruling does not create any bright lines or clear law and will therefore make it difficult for lower courts to follow:
Thus, although the question posed by this case is fundamentally a question of patent law—i.e., whether Solvay’s patent was valid and therefore permitted Solvay to pay competitors to honor the scope of its patent—the majority declares that such questions should henceforth be scrutinized by antitrust law’s unruly rule of reason. 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.”
Additionally, the dissenting opinion suggests that
The irony of all this is that the majority’s decision may very well discourage generics from challenging pharmaceutical patents in the first place. Patent litigation is costly, time consuming, and uncertain . . . Taking the prospect of settlements off the table—or limiting settlements to an earlier entry date for the generic, which may still be many years in the future—puts a damper on the generic’s expected value going into litigation, and decreases its incentive to sue in the first place.
Ultimately, although the majority opinion rejects the FTC’s proposed rule that these agreements be considered presumptively unlawful, the decision is still a win for the FTC. It rejects the holding of a majority of the Courts of Appeals that have ruled of pay-for-delay that applied the “scope-of-the-patent” test and restores antitrust scrutiny to these reverse payment agreements under the “rule of reason” test.