FTC v. Actavis: Case Law

Editor’s note: This is part 3 of a 4-part series on FTC v. Actavis:  How Should the Supreme Court Rule on the Legality of Pay-for-Delay Settlements of Patent Disputes Litigated in the Shadow of the Hatch-Waxman Act? This series is adapted from a document that Professor Cotter coauthored while serving on ABA-Intellectual Property Law Section Task Force last fall.  See http://www.americanbar.org/content/dam/aba/administrative/intellectual_property_law/leadership/agendabook_nov2012.authcheckdam.pdf, pages 39-55.  The views expressed, however, are his own, and do not represent the views of the ABA or the Task Force.

The case law has reflected different perspectives on the legality of pay-for-delay agreements.  Two early cases disapproved of them.  In Andrx Pharmaceuticals, Inc. v. Biovail Corp. Int’l, 256 F.3d 799 (D.C. Cir. 2001), the second ANDA applicant for a generic version of Cardizem CD argued that the first ANDA applicant’s agreement with the brand-name drug manufacturer to delay entry of the generic drug violated sections 1 and 2 of the Sherman Act.  Although the D.C. Circuit did not clearly articulate the level of antitrust scrutiny that would be appropriate for these types of agreements, the court reversed a district court judgment dismissing with prejudice the second ANDA applicant’s antitrust claim, stating that the settlement agreement “could reasonably be viewed as an attempt to allocate market share and preserve monopolistic conditions.”  Two years later, the Sixth Circuit held the pay-for-delay agreement that was at issue in Andrx to be per se illegal.  See In re Cardizem Antitrust Litigation, 332 F.3d 896 (6th Cir. 2003).  One feature of the agreement in these two cases was that the brand-name manufacturer would stop making payments to the first ANDA applicant when the latter started marketing its generic drug.  Until the first ANDA applicant began marketing the drug, however, no one other generic manufacturer could do so either due to the 180-day exclusivity period, resulting in a bottleneck.

Other courts, however, developed more lenient standards for evaluating pay-for-delay agreements.  The Eleventh Circuit, first in Valley Drug Co. v. Geneva Pharmaceuticals, Inc., 344 F.3d 1294, 1311 & n.27 (11th Cir. 2003), and again in Schering-Plough Corp. v. FTC, 402 F.3d 1056, 1065-66 (11th Cir. 2005), adopted a standard—neither a per se rule nor a traditional rule of reason approach—that purports to take into account “the extent to which antitrust liability might undermine the encouragement of innovation and disclosure, or the extent to which the patent laws prevent antitrust liability for such exclusionary effects.”  Citing the benefits of settlement generally, and expressing a desire not to undermine the patent incentive, the court in both cases concluded that neither the presence nor the size of the payments flowing from the brand-name manufacturer to the generic manufacturer are necessarily indicative of anticompetitive effects.  Rather, as long as the agreement is within the scope of the patent’s exclusionary potential, the agreement does not violate the antitrust laws.  See Schering-Plough, 402 F.3d at 1066-76 (suggesting, however, that an agreement involving restraints on the sale of products not within the potential scope of the patent would be invalid under this approach); Valley Drug, 344 F.3d at 1308-13.  Similarly, the Second Circuit in In re Tamoxifen Citrate Antitrust Litigation, 466 F.3d 187, 208-09 & n.22, 212-13 (2d Cir. 2006), held that pay-for-delay settlements are illegal only if the patentee is extending the scope of its patents or is engaging in fraud or sham litigation.  The Federal Circuit followed Tamoxifen in In re Ciprofloxacin Hydrochloride Antitrust Litigation, 544 F.3d 1323 (Fed. Cir. 2009), and the Second Circuit itself reaffirmed the Tamoxifen approach in Arkansas Carpenters Health & Welfare Fund v. Bayer AG, 604 F.3d 98 (2d Cir. 2010), cert. denied, 131 S. Ct. 1606 (2011).  Yet more recently, the Eleventh Circuit equated its approach in Valley Drug and Schering-Plough with that of the Second Circuit in Tamoxifen and Arkansas Carpenters, stating 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.”  FTC v. Watson Pharmaceuticals, Inc., 677 F.3d 1298, 1312 (11th Cir. 2012), cert. granted, 133 S. Ct. 787 (2012) (No. 12-416).  Further, the court rejected the FTC’s argument that an allegation that the patentee was “not likely to prevail” in the underlying litigation sufficed to avoid a motion to dismiss, asserting that its previous “decisions focus on the potential exclusionary effect of the patent, not the likely exclusionary effect,” and that “the FTC’s retrospective predict-the-likely-outcome–that never-came-approach would also impose heavy burdens on the parties and courts.”  Id. at 1313-14.

Taking something of an intermediate view is the Third Circuit’s decision in In re K-Dur Antitrust Litigation, 686 F.3d 197 (3d Cir. 2012), pet’n for cert. filed, 81 U.S.L.W. 3090 (Aug. 24, 2012) (No. 12-245), pet’n for cert. filed, 81 U.S.L.W. 3090 (Aug. 29, 2012) (No. 12-265), a class action involving the same two agreements that were at issue in the Eleventh Circuit’s decision in Schering-Plough.  In K-Dur, the Third Circuit rejected the “scope of the patent” test, reasoning that neither the presumption of patent validity, see 35 U.S.C. § 282, which the court characterized as a “merely . . . a procedural device,” nor the judicial preference for settlement should “displace countervailing public policy objectives or . . . Congress’s determination—which is evident from the structure of the Hatch-Waxman Act and the statements in the legislative record—that litigated patent challenges are necessary to protect consumers from unjustified monopolies by name brand drug manufacturers.”  Id.  at 214, 217.    In place of the “scope of the patent” test, the court adopted “a quick look rule of reason analysis based on the economic realities of reverse payment settlement rather than the labels applied by the settling parties.”  Id.  Under this approach, “the finder of fact must treat any payment from a patent holder to a generic patent challenger who agrees to delay entry into the market as prima facie evidence of an unreasonable restraint of trade, which could be rebutted by showing that the payment (1) was for a purpose other than delayed entry or (2) offers some procompetitive benefit.”  Id.  As for the potential rebuttal evidence, the court suggested two possibilities.  First, the patent holder might be able to show that there was “no reverse payment because any money that changed hands was for something other than a delay in market entry.”  Id.  Second, the patent holder might be able to show “that the reverse payment offers a competitive benefit that could not have been achieved in the absence of a reverse payment,” for example where “a modest cash payment that enables a cash-starved generic manufacturer to avoid bankruptcy and begin marketing a generic drug might have an overall effect of increasing the amount of competition in the market.”  Id.

My own analysis follows in the next, final part of this series.

Posted on February 22, 2013, in Infringement, Invalidity, Other IP, Patent and tagged , , , , . Bookmark the permalink. Comments Off on FTC v. Actavis: Case Law.

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