FTC v. Actavis: An Analysis

Editor’s note: This is part 4 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.

In my view, the approach embodied in K-Dur strikes the right balance in terms of preserving patent incentives, on the one hand, and fulfilling the legislative mandate of the Hatch-Waxman Act and the antitrust goal of promoting competition, on the other.  A rebuttable presumption of illegality rightly places the burden on the settling parties to present evidence that the settlement promotes competition.  Allocating the burden of coming forward with such evidence to the settling parties makes sense, since they are likely to be better situated than anyone else to provide and substantiate such information if it exists.  At the same time, a rebuttable presumption of illegality avoids the risks inherent to a per se rule, which might condemn some reverse payment agreements that threaten little or no anticompetitive harm—for example when the amount of the payment is consistent with the patent owner’s desire to avoid litigation expenses or, as suggested in K-Dur, when the payment enables a cash-starved generic firm to remain in business.

Among the factors that should be relevant to the question of whether the settling parties have rebutted the presumption of illegality, the most important is the amount of consideration flowing from the brand-name to the generic firm.  Where that amount is less than the amount of the patent owner’s expected litigation costs, this fact alone may be sufficient to rebut the presumption, and thus shift to the antitrust plaintiff the burden of proving that the anticompetitive harm outweighs the procompetitive benefit of the settlement.  Under these circumstances, the payment may represent nothing more than a good-faith effort to avoid litigation costs; and the fact that payment flows from plaintiff to defendant may be attributable only to the unusual procedural posture of the Hatch-Waxman Act, which as noted permits patentees to file suit in advance of the defendant’s having marketed any product.  See Hovenkamp et al., supra, § 15.3a1(C), at 15-47 to -49.  Other relevant evidence may include the presence of other agreements between the settling parties (for example, authorizing the defendant to market an authorized generic drug, or licensing the defendant other intellectual property rights), which should be taken into account for the limited purpose of accurately estimating the value of the consideration flowing from plaintiff to defendant; whether the generic is “cash-strapped,” and therefore willing to accept a later entry date to remain in business; whether the patent owner sought, and succeeded in obtaining, a preliminary injunction against the generic manufacturer; whether the generic manufacturer agrees to waive its 180-day exclusivity, thus removing the risk of a bottleneck potentially blocking other ANDA applicants; and whether the patent in suit has withstood other validity challenges arising after the filing of the settled action.  See, e.g., Carrier, supra, at 378-82; Thomas F. Cotter, Refining the “Presumptive Illegality” Approach to Settlements of Patent Disputes Involving Reverse Payments:  A Commentary on Hovenkamp, Janis & Lemley, 87 Minnesota L. Rev. 1789, 1812-15 (2003).  On the other hand, where the amount of consideration flowing from patent owner to generic manufacturer exceeds the generic firm’s expected profit from the sale of the generic drug in question, the inference that the patent owner is simply paying a potential competitor to exit the market is much stronger, and the presumption of illegality should be very difficult to rebut.  Moreover, although it probably would not be advisable to require the factfinder to estimate the ex ante probability that the patent would have been found valid and infringed had the infringement action not been settled—a matter that courts in some of the reverse payment cases understandably have been reluctant to undertake—all that the proposed approach requires is for courts to draw appropriate inferences from the amount of the settlement in comparison to other expected costs and benefits, along with any other relevant facts and circumstances.

By contrast, the “scope of the patent” test embraced by the Second, Eleventh, and Federal Circuits appears to make it virtually impossible to condemn reverse payment settlements resulting in generic exclusion unless the parties overreach by agreeing to restraints on the sales of collateral products.  The amount of the reverse payments in cases such as Valley Drug ($123 million), Tamoxifen ($66.4 million), Ciprofloxacin and Arkansas Carpenters ($398 million), and Watson Pharmaceuticals (over $200 million) surely exceeded the patent owners’ avoided litigation costs many times over, see Elhauge & Krueger, supra, at 306-07, and thus should have raised serious questions concerning the settlements’ anticompetitive potential.  Indeed, the payments in Tamoxifen and Ciprofloxacin were each alleged to exceed the profit the generic manufacturers themselves expected to earn from sales of the generic drugs at issue over the relevant time period.  See Herbert Hovenkamp, Mark D. Janis, Mark A. Lemley & Christopher R. Leslie, IP and Antitrust, § 15.3a(B), at 15-37 n.133, 15-41 (2d ed. 2010).  In any other context, such agreements among competitors likely would be viewed as naked restraints of trade.  The fact that these cases involve patents does not change that fundamental conclusion:  as § 211 of the Patent Act itself expressly states, “Nothing in this chapter shall be deemed to convey to any person immunity from civil or criminal liability, or to create any defense to actions, under any antitrust law.”

Arguments that sometimes have convinced courts to apply the more lenient “scope of the patent” test are not persuasive.  First, although settlement generally is viewed as a positive good, antitrust law is replete with examples of patent settlements that were, rightly, understood as nothing more than disguised restraints on trade.  See Hovenkamp et al., supra, § 7.1a, at 7-3 (noting that “much of our legal doctrine concerning the permissible scope of licensing agreements was developed in cases in which the arrangements were undertaken in settlement of an IP dispute”).  Moreover, as the FTC Reports make clear, reverse payments are not necessary to induce settlement.  Most settlement agreements of pharmaceutical patent litigation do not contain reverse payment terms—although those that do contain such terms generate losses to consumers measured in the billions of dollars and therefore are a legitimate focus of antitrust scrutiny.  Second, any perceived administrative ease of applying a vague “scope of the patent” standard does not outweigh the courts’ responsibility to enforce the antitrust laws.  Third, while it may be possible to imagine situations in which risk aversion or asymmetric information could lead to substantial reverse payments notwithstanding an objectively high likelihood that the patent infringement action would have succeeded on the merits, scholars have doubted whether these considerations are likely to be common enough in reality to justify the countervailing anticompetitive risk.  See Jeremy Bulow, The Gaming of Pharmaceutical Patents, in 4 Innovation Policy and the Economy 145, 167-68 (Adam B. Jaffe et al. eds. 2004); Elhauge & Krueger, supra.  Fourth, a rebuttable presumption of invalidity does not undermine the statutory presumption of patent validity which, as the Third Circuit noted, only goes to the question of the infringement defendant’s burden of proof on the defense of validity.  As noted in the Introduction, between 40 and 50% of all litigated patents are invalidated, see John R. Allison & Mark A. Lemley, Empirical Evidence on the Validity of Litigated Patents, 26 AIPLA Q.J. 185, 205-07 (1998); Elhauge & Krueger, supra, notwithstanding the statutory presumption of validity; and in any event that presumption has nothing to do with the separate question of infringement, the burden of proving which always rests with the patent owner.  Finally, the effects on innovation of a rebuttable presumption of illegality are not likely to be substantial.  Plaintiffs with strong patents can still exclude competition during the statutory patent term—though to the extent there is a potential conflict between innovation and competition, Hatch-Waxman clearly reflects a legislative judgment to favor generic competition.  See K-Dur, 686 F.3d at 217-18; Hemphill, supra, at 1612-16.  The lenient approach to reverse payments evidenced in some of the cases tends to undermine that legislative judgment.  See Thomas Brom, Full Disclosure:  Dealing for Dollars, California Lawyer, Oct. 2012, at 18, 19 (quoting Senator Orrin Hatch as stating “As a coauthor, I can tell you that I find these type of reverse payment collusive arrangements appalling . . . .  We did not wish to encourage situations where payments were made to generic firms not to sell generic drugs and not to allow multisource generic competition.”); Sheryl Gay Stolberg & Jeff Gerth, Keeping Down the Competition:  How Companies Stall Generics and Keep Themselves Healthy, N.Y. Times, July 23, 2000 (quoting Congressman Henry Waxman as stating that “The law has been turned on its head”), available at http://www.nytimes.com/2000/07/23/us/keeping-down-competition-companies-stall-generics-keep-themselves-healthy.html.

In summary, in my view a rebuttable presumption of illegality makes the most sense for evaluating reverse payment settlements of patent infringement litigation conducted in the shadow of Hatch-Waxman.  The approach proposed above retains the ability to settle such litigation on other terms, and would enable courts in reverse-payment cases to consider potentially mitigating factors in evaluating the legality of specific agreements.

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Posted on February 25, 2013, in Infringement, Invalidity, Other IP, Patent and tagged , , , , . Bookmark the permalink. Comments Off on FTC v. Actavis: An Analysis.

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