The Supreme Court Rejects Prima Facie Rule Against Reverse Payment Settlements

Mitchell IP LAW Alert!
entranceIn a decision sure to disappoint the Federal Trade Commission, FTC v. Actavis, Inc. (Supreme Court 2013), the Supreme Court has ruled 5-3 to reject the FTC’s request for a rule following the Third Circuit decision in K-Dur, to the effect that reverse payment settlements are prima facie a violation of the anti-trust laws in litigation involving pharmaceutical patents and generic applications for FDA approval (ANDAs). In a reverse payment settlement, the patent owner pays the first generic company to challenge the patent, to accept the patent validity and infringement thereof, in return for a license which will delay the generic entry into the market, but allow it to occur sooner than the patent would otherwise expire. Under the Hatch Waxman law governing generic pharmaceuticals, such a settlement will prevent other generics from obtaining approval any sooner, unless they go to the expense of challenging the patent and win at the appellate level. The FTC has been lobbying for years for a rule making such settlements an illegal violation of the anti-trust laws. For years they have preached this gospel annually at the Hatch Waxman Paragraph iv conference held by the American Conference Institute.
The Supreme Court has held instead that a rule-of-reason analysis applies to whether a reverse-payment patent settlement violates federal antitrust laws. Contrary to what other commentators may say, this decision does not change the present state of the law (except in the Third Circuit, where K-Dur is now abrogated). Reverse payment settlements have always been subject to anti-trust scrutiny under a rule of reason analysis. Most have been found reasonable, but some have not. If the settlement is reasonable in scope and duration, and affords pro-competitive benefits, it will not be found to violate the anti-trust law.
The law would have changed had the majority agreed with Chief Justice Roberts dissent, in which he argued that patents trump anti-trust and that a patentee should have the right to settle without regard to the anti-competitive nature of any settlement. Instead, the rule of reason will continue to apply to reverse payment settlements, and the possibility of such settlements will continue to be a major consideration in any generic company’s Hatch Waxman strategy decisions.