Jurisdiction - Australia
Reports and Analysis
Australia – US Supreme Court Says “Reverse Payment” Settlements Attract Competition Law Scrutiny.

24 June, 2013

 

Legal News & Analysis – Asia Pacific – Australia – Competition & Antitrust

 

WHAT YOU NEED TO KNOW

 

  • The US Supreme Court has issued a landmark decision in relation to "reverse payment" settlement agreements between originator and generic pharmaceutical companies in Federal Trade Commission v Actavis, Inc.

 

  • By a 5-3 majority, the Supreme Court ruled that reverse payment settlements may sometimes violate US competition (or "antitrust") law and should not be immune from antitrust scrutiny, even where the agreement does not go beyond the scope of the underlying patent. Instead, such agreements should be subject to "rule of reason" analysis.

 

  • The decision comes after many attempts by the FTC to challenge reverse payment settlements. It will likely be viewed with great interest by competition regulators in other jurisdictions, including the ACCC in Australia, and the EU Commission in Europe, which is itself pursuing similar cases against pharmaceutical companies.

 

  • An agreement between an originator pharmaceutical company and a generic that the latter will drop its challenge to the validity of the former’s patent and remain off the market for a period of time equal to or less than the remaining term of the patent, combined with a "large and unjustified" payment by the patent holder, may give rise to competition law concerns should the ACCC follow the lead of the FTC and the EU Commission in scrutinising reverse payment settlements in Australia.


WHAT YOU NEED TO DO

 

  • Before settling patent litigation, carefully consider whether any proposed payment from the patent holder to the alleged patent infringer can be objectively justified on the basis of, for example, savings in litigation costs or value arising from distribution, marketing, or other mutually valuable arrangements to be included in the settlement.


The US Supreme Court has issued an important decision in relation to "reverse payment" settlement agreements between originator and generic pharmaceutical companies (often called "pay for delay" agreements).


Reverse payment settlements are most common in litigation involving pharmaceutical patents. They arise from litigation commenced by a patent holder against a third party seeking marketing approval to sell a generic version of the patented product, where the third party has claimed that its generic product either does not infringe the relevant patent, or that the patent in question is invalid. Under a reverse payment settlement, the originator will typically agree to end its infringement action and to pay the generic company a sum of money, in exchange for the generic’s agreement not to enter the relevant market for a period of time not to exceed the remaining life of the patent. Such agreements have often been used to settle patent litigation in the US, Europe, Australia and other jurisdictions.


In FTC v Actavis, Inc., a majority of the Supreme Court ruled in a 5-3 decision that reverse payment settlements may contravene competition (or "antitrust") laws, even when the patent holder in settling the litigation receives no more from the generic, by way of promise, than its patent, if valid, would entitle it to obtain. The majority concluded that reverse payment settlements should be subject to "rule of reason" analysis to determine in each case whether the agreement contravened US antitrust law. In doing so, the Supreme Court reversed the decision of the Court of Appeals of the Eleventh Circuit (Court of Appeals) affirming the District Court’s opinion dismissing the proceedings brought by the Federal Trade Commission (the FTC) against Actavis, Inc. (Actavis) and others. The case has been remanded to the Court of Appeals, which will likely direct the trial court to apply the "rule of reason" test to the agreement.


Facts


The essential facts of the case are that:

 

  • The US statutory scheme, in certain circumstances, deems a generic’s statutory filing of an application for Food and Drug Administration (FDA) approval an act of constructive patent infringement, and empowers the patent holder to bring a suit for infringement within 45 days of its learning of the filing. The commencement of the suit, in turn, triggers a 30-month stay in the FDA approval process, during which the parties may settle the infringement action on mutually agreeable terms.

 

  • Solvay Pharmaceuticals (Solvay) obtained a patent for "Andro-Gel", a testosterone gel that had been approved by the FDA.

 

  • Actavis and Paddock Laboratories developed generic testosterone gel products modelled on Andro-Gel. Both parties filed applications for FDA approval of the generic products on the basis that Solvay's patent in relation to Andro-Gel was invalid. Solvay then sued Actavis and Paddock for patent infringement.

 

  • Following three years of patent litigation, Solvay and Actavis entered into a settlement agreement under which Solvay agreed to pay Actavis an estimated $19-$30 million per year for nine years. In exchange, Actavis agreed not to bring its generic product to market until a date that was 65 months before Solvay's patent expired. Actavis also agreed to promote Andro-Gel to doctors.

 

  • Paddock Laboratories and Par (a manufacturer aligned with Paddock Laboratories) entered into similar agreements with Solvay.

 

  • The FTC commenced proceedings against all the parties to the settlement agreements. It alleged that the parties had breached section 5 of the FTC Act, which prohibits "unfair or deceptive acts or practices in or affecting commerce".

 

  • The District Court dismissed the proceedings.

 

  • The Court of Appeals observed that while antitrust laws typically prohibit agreements where one company pays a potential competitor not to enter the market, reverse payment settlements are different because one party owns a patent, and patent holders have a lawful right to exclude others from the market. The Court of Appeals therefore concluded that, in the absence of sham litigation or patent fraud, a reverse payment settlement is immune from antitrust challenge when it does not exclude competition to a greater extent than the patent (if valid) would have allowed.

 

  • As the settlement agreements in this case provided for generic entry 65 months before the Andro-Gel patent expired, the Court of Appeals found the restriction to be within the patent's exclusionary scope and dismissed the FTC's appeal.

 

  • The Supreme Court granted the FTC's petition for review of the decision on the basis that different Appeals Courts had reached different views on the application of antitrust laws to reverse payment settlements.


US Supreme Court decision


Reverse payment settlements should be subject to antitrust scrutiny


The Supreme Court found that the Court of Appeals erred in dismissing the FTC's case. The majority opinion, written by Justice Breyer, stated that the legality of reverse payment settlements must not be assessed solely by reference to patent law, but should also be measured against antitrust law. As a result, the fact that the potential anti-competitive effects of a reverse payment settlement fall within the scope of the relevant patent (eg, in terms of the length or breadth of the restriction on market entry) will not preclude the application of antitrust law to the agreement.


The Supreme Court recognised the public policy identified by the Court of Appeals that favours the settlement of litigation, and the related concern that courts should not require parties to continue timeconsuming and expensive patent litigation rather than settle, in order to avoid antitrust liability. The majority, however, did not consider this factor to be dispositive, and identified five reasons why reverse payment settlements should be subject to antitrust scrutiny:


1. The restraints on market entry contained in reverse payment settlements have the potential for genuine adverse effects on competition. They can operate to maintain prices at the level set by the patent holder, who may share the benefit of such "monopoly profits" with the challenger to the detriment of consumers.


2. These anti-competitive consequences will, at least sometimes, prove unjustified. This warrants analysis of potential justifications in each case.

 

3. Where a reverse payment settlement threatens to lead to unjustified anticompetitive harm, the patent holder likely possesses the power to bring that harm about in practice. The majority observed that the size of the payment may itself be a strong indicator of the weakness of the underlying patent, and thus of the anti-competitive nature of the settlement.


4. An antitrust action in this setting is likely to prove more administratively feasible than the Court of Appeals believed. It should not normally be necessary to litigate patent validity or infringement to determine whether a settlement agreement is consistent with antitrust laws. An unexplained large reverse payment would normally indicate that the patentee has serious doubts about the patent's validity, obviating the need for the trial court to conduct a detailed inquiry into the patent’s validity.


5. The fact that a large, unjustified reverse payment risks creating antitrust liability will not prevent parties from settling patent litigation, as there are other options for settlement (eg by allowing generic companies to enter the market prior to patent expiration).


The rule of reason test should be applied


The Supreme Court did, however, reject the FTC's position that “large” reverse payment settlements should be presumptively unlawful and that proof of their existence should place a strong burden on the defendants to present evidence of pro-competitive effects.


The majority deemed it more appropriate to apply a "rule of reason" test in each case. On its view, determining the likelihood that a reverse payment settlement will create anti-competitive effects is a complex exercise, involving consideration of such factors as the size of the payment, the scale of the payment in relation to future litigation costs, whether the payment is independent from other services that may be provided by the recipient of the payment, and the presence or lack of any other justification for the payment.


The Supreme Court observed that trial courts are wellpositioned to structure antitrust litigation so as to balance the quality of proof required to show antitrust contraventions according to the circumstances of each case.


Minority dissent


Chief Justice Roberts, writing for the dissenters, observed that a patent carves out an exception to the applicability of antitrust law, and that the correct approach should be to ask whether a reverse payment settlement gives the patent holder more monopoly power than the patent bestowed.


The dissent predicted that the approach adopted by the majority will discourage patent settlements in the pharmaceutical and other industries because there will be less incentive to settle if the parties are precluded from using one of the traditional tools – the payment of a mutually agreeable sum of money – that has historically been available as a bargaining chip in settlement negotiations. Further, to deprive the patent holder of the ability to defend its actions on the grounds that it has a valid patent which permits it to exclude others from the market would defeat the point of the patent, which is intended to confer a lawful monopoly on its holder.


Implications for other jurisdictions


Competition regulators in other jurisdictions will likely have been following the FTC v Actavis proceedings with interest.


In Europe, the EU Commission launched an extensive inquiry into the pharmaceutical sector in 2008, following a series of "dawn raids" of both originator and generic companies. A key focus in the sector inquiry was the nature and extent of reverse payment settlements. The Commission's report on the inquiry concluded that a number of structural shortcomings and behaviours had potentially led to distortions of competition and delays in the entry into EU markets of both new, innovative products and cheaper generic drugs. Following the inquiry, the Commission launched investigations into a number of companies in relation to reverse payment settlements. It will likely find support for its position in the US Supreme Court's decision.


The legality of reverse payment settlements has yet to be tested in Australia, and the ACCC has not challenged any such agreements. One reason for this may be that (unlike in the US and Europe), pharmaceutical and other companies in Australia have not so far been required to report patent settlement agreements to the ACCC.


If, however, the ACCC does decide to challenge reverse payment settlements in the future, it would have a number of potential bases on which to bring a claim. It could argue that an agreement between a patent holder and an alleged infringer not to compete falls within the prohibitions in the Competition and Consumer Act 2010 (Cth) on cartel conduct, exclusionary provisions, anti-competitive arrangements or potentially (as regards the patent holder) the misuse of market power. The prohibitions on cartel conduct are a particular enforcement priority of the ACCC, and have potentially serious consequences for companies and individuals in terms of both civil and criminal liability.


Guidance for parties in settling patent litigation


The legislative scheme in relation to pharmaceutical patent litigation in Australia differs from that in the United States. In particular, the US "Hatch-Waxman" Act provides for a 180 day period of exclusivity for the first generic company to file an FDA application, which may create more incentives for an originator company to enter into a reverse payment settlement than is the case in jurisdictions like Australia.


Nevertheless, in light of the Actavis decision, parties involved in patent litigation should carefully consider whether to enter into settlement agreements that involve payments by the patent holder to the alleged patent infringer.


While the Supreme Court's decision does not provide a clear framework for identifying which reverse payment settlements will give rise to competition law concerns, the following factors are evident in the decision.

 

  • Payments that amount to no more than a rough approximation of the litigation expenses saved through the settlement are likely to be justifiable.

 

  • Payments that reflect compensation for services that the alleged infringer has promised to perform may be justified. Examples of such services include the distribution of the patented product, or helping to develop a market for the product.

 

  • Conversely, a "large” payment unrelated to litigation costs or other bona fide services is apt to raise concerns that the patent holder is using its monopoly profits to purchase freedom from competition. In determining what constitutes a "large" payment, the Supreme Court observed that concerns may arise where a patent holder pays a challenger a sum that is greater than what the challenger could hope to earn in profits if it launched its product on the market.

 

  • The Supreme Court observed that there may be "other justifications" for a reverse payment, but did not specify what such justifications could be. On the other hand, patent settlement agreements that provide for payments by the alleged infringer to the patent holder, or for the patent holder to license its product on terms that do not involve a delay in market entry, are unlikely to raise competition concerns.


Further, as noted above, the Supreme Court majority considered that a large reverse payment can be an indication that the patent holder considers the patent to be weak and unlikely to survive challenge. To combat adverse findings of this nature, patent holders will need to carefully consider their approach to documenting internal views of patent strength and likely litigation outcomes. This in turn raises difficult questions as to legal professional privilege and litigation strategy that will no doubt add to the already complex nature of patent litigation.

 

Ashurst Logo

 

For further information, please contact:

 

Liza Carver, Partner, Ashurst
liza.carver@ashurst.com

 

Peter Armitage, Partner, Ashurst
peter.armitage@ashurst.com


Bill Reid, Partner, Ashust
bill.reid@ashurst.com


Ross Zaurrini, Partner, Ashurst
ross.zaurrini@ashurst.com


Alice Muhlebach, Partner, Ashurst
alice.muhlebach@ashurst.com


Darren Grondal, Partner, Ashurst
darren.grondal@ashurst.com

 

Mary Padbury, Ashurst
mary.padbury@ashurst.com


Peter Chalk, Partner, Ashurst
peter.chalk@ashurst.com


Grant Fisher, Partner, Ashurst
grant.fisher@ashurst.com

 

Ashurst Competition & Antitrust Practice Profile in Australia

 

Homegrown Competition & Antitrust Law Firms in Australia

 

International Competition & Antitrust Law Firms in Australia

 

Comments are closed.