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U.S. Supreme Court Dooms HWA Reverse Payment Settlements

June 19, 2013

In a decision that alters the risks of Hatch-Waxman Act litigation, the Supreme Court in FTC v. Actavis held that settlements involving reverse payments may violate U.S. antitrust laws. The decision imposes a unique burden on generic drug companies, to justify the terms of such settlements or face potential antitrust actions by an agency of the government or private plaintiffs who are not involved in the HWA litigation. Although the Court declined to hold that reverse payment settlements are presumed to violate antitrust laws, it reached essentially the same conclusion under the “rule of reason.”

The Court’s suggestion is troubling, that “an unexplained large reverse payment itself would normally suggest” that “the payment’s objective is to maintain supracompetitive prices to be shared among the patentee and the challenger rather than face what might have been a competitive market.” The Court considered that the expected payment to Actavis of more than $200M over 9 years may provide “strong evidence that the patentee seeks to induce the generic challenger to abandon its claim with a share of its monopoly profits.” The Court assumed that “there is reason for concern that settlements taking this form tend to have significant adverse effects on competition” because in reverse payment settlements “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 is of course the purpose of settlement in a HWA action.

Express pay-for-delay settlements are likely to end, based on the Court’s instruction that “if the basic reason is a desire to maintain and to share patent-related monopoly profits, then, in the absence of some other justification, the antitrust laws are likely to forbid the arrangement.” The problem with the Court’s rationale is that it may apply to other common settlement terms that provide significant benefits to a generic “so that it will stay away from the patentee’s market.”

The Court considered that “settlement on terms permitting the patent challenger to enter the market before the patent expires would also bring about competition, again to the consumer’s benefit.” However, a settlement providing that a generic may enter the market before patent expiration also induces the generic to abandon its claim of patent invalidity, in exchange for a share of the branded’s “monopoly profits” during the period of shared exclusivity. The generic’s financial reward is merely deferred.

The Court stated that under the “rule of reason” antitrust concerns may not arise when a reverse payment amounts “to no more than a rough approximation of the litigation expenses saved through settlement.” The payment may also “reflect compensation for other services that the generic has promised to perform—such as distributing the patented item or helping to develop a market for that item.” Presumably, the FTC will consider whether a settlement is “unreasonably” large, and the “reasonable” value of the generic’s other services, under the Court’s vague observation that “there is always something of a sliding scale in appraising reasonableness.”

The consequences of an “anticompetitive” settlement may include treble damages based on the supposed injury to the public, competitors, or the U.S. government, as well as the expenses of prolonged and complex litigation, which would dwarf fees in typical HWA litigation. The new rule is unlikely to have the pro-competitive result expected by the Court. As Chief Justice Roberts observed in dissent, “the irony of all this is that the majority’s decision may very well discourage generics from challenging pharmaceutical patents in the first place.” Paragraph IV filers who certify that a patent is invalid may find that they later risk antitrust actions based on the FTC’s conjecture that a patent is “weak” in view of the ¶ IV allegations. The unknown risks of settlement on terms other than recovery of litigation costs and early market entry may now be significant.