Solvay Pharmaceuticals, Inc. sued Watson Pharmaceuticals, Inc., a generic drug manufacturer, for infringement of Solvay’s patent for its drug AndroGel. In response, Watson argued that Solvay’s patent was invalid. Before a judgment, however, the parties settled the case. As part of the agreement, Solvay would pay Watson in exchange for Watson’s agreement to delay entering the market with a generic version of AndroGel. The FTC then brought an action against all of the parties to the AndroGel case, contending that the agreement amounted to an anticompetitive attempt to share in the profits afforded by a patent that, but for the settlement agreement, would have been invalidated in court. The District Court dismissed the FTC’s claims and the Court of Appeals affirmed. The Supreme Court’s decision in this case may determine whether agreements such as those in this case, commonly referred to as reverse payments, constitute unfair competition in violation of federal law.
Questions as Framed for the Court by the Parties
Federal competition law generally prohibits an incumbent firm from agreeing to pay a potential competitor to stay out of the market. See Palmer v. BRG of Ga., Inc., 498 U.S. 46, 49-50 (1990). This case concerns agreements between (1) the manufacturer of a brand-name drug on which the manufacturer assertedly holds a patent, and (2) potential generic competitors who, in response to patent-infringement litigation brought against them by the manufacturer, defended on the grounds that their products would not infringe the patent and that the patent was invalid. The patent litigation culminated in a settlement through which the seller of the brand-name drug agreed to pay its would-be generic competitors tens of millions of dollars annually, and those competitors agreed not to sell competing generic drugs for a number of years. Settlements containing that combination of terms are commonly known as "reverse payment" agreements. The question presented is as follows:
Whether reverse payment agreements are per se lawful unless the underlying patent litigation was a sham or the patent was obtained by fraud (as the court below held), or instead are presumptively anticompetitive and unlawful (as the Third Circuit has held).
Whether a payment by one company to keep a competitor from entering the market with an identical product is always prohibited, or whether such a payment is permissible where the company merely exercises its rights as the holder of a valid patent.
This case arises out of the settlement of a patent infringement lawsuit between manufacturers of pharmaceutical drugs. Besins Healthcare, S.A. had originally developed AndroGel, a treatment for low testosterone in men, but licensed it to Solvay Pharmaceuticals, Inc. (“Solvay”) to sell in the United States. Following approval for sale by the Food and Drug Administration (“FDA”), Solvay filed for and received a patent for AndroGel. Solvay also began selling AndroGel, which proved very profitable: sales reached $1.8 billion in the United States between 2000 and 2007.
Around the time that Solvay’s patent for AndroGel was granted, generic drug manufacturers, including Watson Pharmaceuticals, Inc. (“Watson,” which since merged with and assumed the name Actavis), filed with the FDA for approval to start selling the same drug. Hoping to prevent approval of these generic versions, Solvay filed a patent infringement lawsuit against these manufacturers. Because Solvay’s patent was still pending, the FDA delayed approval of the generic manufacturers’ applications; however, the FDA’s 30-month waiting period expired before the litigation was resolved, allowing the manufacturers to begin selling their drugs. Yet no generic versions of AndroGel were ultimately sold, as the parties settled the lawsuit shortly after the FDA’s waiting period expired. The agreement reached by the parties is commonly known as a “reverse payment” or alternatively a “pay for delay” agreement. As part of the settlement agreement, Solvay paid Watson and the other manufacturers to wait until 2015 to sell generic versions of AndroGel. Under the agreement, Watson would also receive a portion of Solvay’s AndroGel profits.
After Solvay’s settlement with Watson and the other manufacturers, the Federal Trade Commission (“FTC”) filed an action against all of the parties for antitrust violations. In this lawsuit, the FTC alleged that the settlement agreement violated federal statutes prohibiting unfair competition as it allowed Watson to maintain a monopoly over the sale of AndroGel, despite its patent likely being invalid. According to the FTC, whereas litigation would have resulted in Solvay having no protection against competition for AndroGel, the settlement thus allowed it to expand its rights with respect to the product. Additionally, the lack of competition in the market allowed Solvay to charge higher prices, the profits from which all of the parties shared. The parties to the previous lawsuit between Solvay and the generic manufacturers, now all defendants in the FTC’s action (collectively, “Watson”), entered a motion to dismiss the FTC’s action for failure to state a claim pursuant to Federal Rule of Civil Procedure 12(b)(6). The United States District Court for the Northern District of Georgia granted Watson’s motion, concluding that the FTC’s complaint had not sufficiently demonstrated that the settlement had improperly extended Solvay’s rights as holder of the AndroGel patent.
The United States Court of Appeals for the Eleventh Circuit affirmed the district court, agreeing that the settlement was lawful and did not improperly expand any rights conferred on Watson by its patent for AndroGel. The court applied its rule that a reverse payment is lawful where it involves neither sham litigation nor a patent that had been obtained by fraud. The court reasoned that the fact that Watson’s patent might have been invalid was not enough to render the settlement allowing it to exercise its rights as patent holder improper. Moreover, in the court’s opinion, neither the FTC nor the court itself should inquire extensively into the original infringement litigation’s potential outcomes.
The Supreme Court granted the FTC’s petition for writ of certiorari on December 7, 2012.
The parties dispute whether reverse payments should be prohibited on antitrust grounds. The FTC argues that reverse payments should be presumptively unlawful for their anticompetitive effects. In opposition, Watson asserts that the proper test for these settlement agreements is to ask whether they expand a patent owner’s rights beyond those conferred by the patent. The Supreme Court’s treatment of reverse payments may have effects not only on participants in the pharmaceutical industry but also consumers and the legal system charged with resolving patent disputes.
COMPETITION IN THE PHARMACEUTICAL INDUSTRY
Watson argues that a prohibition on reverse settlements would reduce the number of settlements in general, which in turn would make generic manufacturers, fearing expensive litigation, less likely to attempt to sell generic drugs. Watson contends that such a prohibition would reduce innovation in the pharmaceutical industry. Solvay adds that reverse payment agreements might actually increase competition in the pharmaceutical industry by allowing for faster generic entry into the market. Solvay explains that this would be the case where a brand-name manufacturer with a valid patent settles with a generic manufacturer and the agreement allows the generic manufacturer to enter the market before the patent would expire.
AARP, writing in support of the FTC, argues that competition is better promoted by patent litigation. AARP contends that, contrary to litigation, the availability of reverse payments only incentivizes generic manufacturers to settle lawsuits in order to obtain that payment rather than attempting to enter the market. AARP thus distinguishes between productive patent litigation, invalidating unworthy patents and thus allowing entry into the market of generic drugs, and litigation merely leading to payments to generic manufacturers. Representative Henry A. Waxman echoes this statement, emphasizing that the goal underlying the laws governing FDA approval of generic drugs was to help generic manufacturers enter the market.
EFFECTS ON CONSUMERS
AARP notes that generic drugs can reduce the costs imposed on purchasers but that reverse settlements hinder those beneficial effects. AARP explains that the unavailability of generic drugs may make prescription drugs too expensive for some consumers—even some with health insurance. According to AARP, the costs imposed on consumers by allowing reverse payments and its resultant delay in availability of generic drugs vastly exceeds the litigation costs otherwise borne by drug manufacturers. AARP contends that these heightened drug costs will prevent some consumers from obtaining the prescriptions that they need. The effect of this, AARP continues, is a decline in consumers’ health, which only necessitates more expensive healthcare later on.
Solvay counters that consumers would be hurt by the delay of generic drugs entry into the market caused by a prohibition of reverse payments. Solvay explains that such a ban would reduce the number of settlements in litigation between drug manufacturers, which in turn would decrease incentives for pharmaceutical research as well as the manufacturing of generic drugs. Solvay reasons that drug patents will be less valuable to manufacturers if they are unable to enforce them through settlement agreements, and this loss in value will cause manufacturers to hesitate in investing in research for new drugs. Solvay adds that increased costs will also be borne by generic manufacturers, thus reducing the availability of generic drugs.
ENSURING PATENT VALIDITY THROUGH LITIGATION
Supporting the FTC, the Public Patent Foundation (“PUBPAT”) argues that patent owners may use their patents as threats of litigation to block activities that would prove beneficial to the public, even where a patent was improperly issued. PUBPAT contends that litigation has the ability to weed out improperly granted patents, and therefore drug manufacturers should not be able to avoid potentially adverse judgments of patent invalidity with reverse payments. Along the same lines, the FTC expresses concern that other generic drug manufacturers may not take up the challenge after litigation has ended in settlement. Moreover, the FTC argues that the brand-name manufacturer might simply enter in reverse payment settlements with any new challengers.
Watson maintains that a prohibition on reverse payment settlements takes an erroneous view of patents from the start: such an approach would treat patents as bestowing no real rights on their holders until upheld in court. On the contrary, Watson urges the Court to permit reverse payments in order to acknowledge that patents presumptively do give rights to their owners. Solvay adds that a prohibition would put an increased strain on the judicial system as it would insert patent litigation, the outcomes of which are already uncertain, into antitrust lawsuits. Moreover, Solvay suggests that not one but many antitrust lawsuits would follow any settlement in patent litigation if reverse payments were prohibited as anticompetitive, further adding to the judicial burden.
The legal issue in this case falls between antitrust law, patent law, and settlement law. Specifically, the parties disagree as to whether a reverse payment agreement should be presumed anti-competitive or if the patent context dictates that such settlements are lawful.
REVERSE PAYMENTS AND ANTITRUST LAW
Generally, the Federal Trade Commission ("FTC") notes that a firm paying a competitor to stay out of the market is illegal because such an agreement would restrict supply and therefore increase price. The FTC asserts that reverse payments perform this exact function--brand-name manufacturers pay generic manufacturers not to enter the market and force those reliant on their medicines to pay a higher price longer. The FTC also contends that reverse payments debilitate the purpose of the Hatch-Waxman Amendments. The purpose of the Hatch-Waxman Amendments was to address the scope and validity of pharmaceutical patents and provide a better framework for generic entry. The FTC contends that reverse payments frustrate these Amendments by “short-circuiting” the framework, and by doing so, favor innovation too strongly over competition.
Actavis, Inc., formerly known as Watson Pharmaceuticals, Inc. (“Watson”), counters that the FTC ignores the critical fact that the antitrust analysis is different in the patent context. Patents, by definition, dampen competition, but Watson asserts that the Supreme Court clarifies that a patent-holder, acting within the scope of their patent, is free from antitrust liability. Additionally, Watson points to economic research that contends that reverse payments may, in fact, be pro-competitive. Furthermore, Watson notes that in 2006, the Department of Justice argued that the Hatch-Waxman Amendments created a dynamic environment for litigation so that some settlements are reasonable. Watson asserts that such an about-face would be inappropriate.
REVERSE PAYMENTS AND PATENT LAW
The FTC argues that reverse payments disserve the purposes of patent law. Specifically, if a brand-name manufacturer commences a patent infringement lawsuit against a generic manufacturer, the brand-name manufacturer cannot be liable in antitrust, even if the purpose of the lawsuit is to stall the generic manufacturer’s entry into the market. The only thing the brand-name manufacturer needs to demonstrate for protection from antitrust liability is that the patent infringement lawsuit is not a sham. The FTC asserts that this process gives the patent holder too much power, especially in light of the fact that patents are often held to be invalid.
Watson asserts that the FTC ignores the patent and the presumption that patents are valid. Watson argues that applying an antitrust analysis to patents changes this presumption, thus violating well-established patent law. Patents are exclusionary by their nature, and this is because the Constitution directed Congress to pass a statute that gives exclusive rights in order “to promote the Progress of Science and useful Arts.” Exclusive rights provide proper incentives for inventors, and Watson asserts that presuming reverse payment agreements are illegal would chill scientific innovation. Finally, Watson notes that Congress explicitly gave the Federal Circuit jurisdiction over patent claims, and that allowing other circuit courts the opportunity to review reverse payment settlements would frustrate this command.
REVERSE PAYMENTS AND SETTLEMENT LAW
The FTC notes that voluntary settlements are usually legal because they represent an assessment of the parties’ relative chances of success at trial; however, the FTC asserts that the presence of reverse payments demands that these settlements be examined. The FTC argues that typically generic manufacturers will have an incentive to push for the earliest entry date, but that the presence of reverse payments may distort this incentive. The FTC asserts that a striking feature of reverse payments is that generic manufacturers receive money, something they could not have obtained even if they won the lawsuit.
Watson acknowledges that public policy encourages settlements, and that settlements provide benefits beyond the terms of the agreement. Furthermore, Watson notes that the presence of an exchange of money in a reverse payment is not a good indicator whether or not the settlement is anticompetitive. Watson contends that a monetary settlement (rather than splitting the patent rights the between brand-name and generic manufacturers) may be necessary due to parties' differing assessments of litigation risks or the time before a drug's market entry. Finally, Watson argues that various circuit courts have recognized that reverse payments may be pro-competitive and permit earlier generic entry.
The FTC proposes the Supreme Court adopt a “quick look” rule that presumes the reverse payment is anticompetitive unless the brand-name manufacturer demonstrates a pro-competitive aspect of the settlement. The FTC asserts that a brand-name manufacturer could demonstrate pro-competitive aspects of a settlement by showing that the payment was for something other than delayed entry or the payment was equivalent to how much it would have cost to complete the lawsuit. Lastly, the FTC notes that there may be usual circumstances that satisfy the pro-competitive requirement, such as preventing a generic manufacturer from going bankrupt, such that brand-name defendants deserve to be fully heard.
Watson contends that the “quick look” rule is unwarranted because that kind of analysis is typically reserved for actions that are intrinsically unlawful. Additionally, a quick look analysis is appropriate when a court can easily ascertain whether actions are anticompetitive or not, but Watson argues that reverse payment settlements are not obviously and actually anticompetitive. Watson further asserts that the FTC’s rule is too ambiguous and applying this rule would lead to confusion. For example, Watson notes that the FTC definition of “payment” is very broad and includes money and other consideration. Thus, Watson contends that lower courts would not have proper guidance for what types of value transfers are “payments.” Lastly, Watson expresses concern that the “quick look” presumes an anticompetitive result simply by showing an agreed upon generic entry date without analyzing what the generic entry date could possibly be without the reverse payment agreement.
In contrast to the “quick look” rule, Watson asserts the Court should adopt the scope-of-the-patent approach. Under this rule, as long as the original lawsuit was not a sham and the patent was not fraudulently obtained, a reverse payment would not violate antitrust law unless the agreement expanded the rights granted by the patent. Watson notes that this rule has been adopted by the Second, Eleventh, and Federal Circuit Courts. Watson argues that the scope-of-the-patent approach is superior because it recognizes the essence of a patent, it is a clearly defined rule, and it respects the longstanding policy to encourage settlement.
The FTC contends that the scope-of-the-patent approach is inferior because it provides too strong of a defense against potential antitrust claims. Additionally, the FTC asserts that the scope-of-the-patent approach mistakenly assumes reverse payments are in the public interest and that reverse payments are necessary for brand-name and generic manufacturers to arrive at a settlement. Finally, the FTC argues that the scope-of-the-patent approach is inappropriate because it honors reverse payments as long as the agreed-upon entry date is no later than the date of patent expiration even though generic manufacturers would otherwise demand the earliest possible date of entry.
The FTC argues that reverse payment settlements are in violation of antitrust, patent, and settlement law and therefore presumed to be anti-competitive. Watson counters that reverse payment settlements are not inherently anti-competitive and in some situations, in fact, increase competition. Because of this, Watson argues that the scope-of-the-patent approach should apply because it provides proper deference to the current legal checks and economic incentives balances in current patent law. The FTC responds that there is too much deference to the patent and, consequently, courts should take a “quick look” to analyze whether the reverse payment is anti-competitive or not. In deciding this case, the Supreme Court may address the level of inquiry courts should give to reverse payment settlements, affecting the role of patents in the pharmaceutical industry.
- Jonathan Stempel, Supreme Court to Hear “Pay-for-Delay” Drug Case, Thompson Reuters (Dec. 7, 2012).
- William Sage & John Golden, FTC v. Watson Pharmaceuticals: Another Piece of the Puzzling Marketplace for Health Care Innovation, Health Affairs Blog (Dec. 21, 2012).
- Steven Seidenberg, The Flip Side of ‘Reverse Payments’, ABA Journal: The National Pulse (Feb. 1, 2010).