USSC in FTC v Actavis Holds Reverse Payment Settlements Subject to “Rule of Reason”

FTC v. Actavis, Inc. 2013 USSC

In FTC v Actavis, the USSC has held, by a 5-3 majority, that so-called reverse payment settlements are not presumptively unlawful as a matter of competition law, as the FTC had asked (M20), nor are they immune from antitrust scrutiny, as the 11^th Cir held, and the dissent would have affirmed. Instead, they are subject to competition law scrutiny on the basis of the “rule-of-reason” under which the agreements will be assessed for anti-competitive effects on a case-by-case basis. On the whole, the majority’s position strikes me as one which is reasonable as a matter of principle, but the specter of repeated, complex, and expensive litigation raised by the dissent is very real. In some ways either extreme position might have been preferable to the principled, but uncertain, position adopted by the majority.

In reverse payment settlements a patentee, normally a pharmaceutical patentee, makes a payment to an alleged infringer, normally a generic, in return for an agreement by the challenger to drop its challenge to the patent and stay out of the market until (closer to) the end of the patent term. The basic point made by Breyer J, for the majority, is that if the patent is in fact invalid, then, as compared with the scenario in which the patent is litigated to invalidity, this settlement will have the effect of keeping prices higher until the end of term. The patentee and challenger split the monopoly profit, and the consumer is the loser (M15). This is illegitimate and anti-competitive. Consequently, reverse payment settlements should be subject to antitrust scrutiny. On the other hand, a reverse payment settlement is a settlement, and it may have the same virtues as any other settlement, such as avoiding litigation expenses. The payment may also be compensation for ancillary services that the challenger agrees to provide under the agreement. Therefore, reverse payment settlements should not be presumptively unlawful. Instead, each settlement should be individually scrutinized to discern the true motivation (M19):

Although the parties may have reasons to prefer settlements that include reverse payments, the relevant antitrust question is: What are those reasons? If the basic reason is a desire to maintain and to share patent-generated monopoly profits, then, in the absence of some other justification, the antitrust laws are likely to forbid the arrangement.

Roberts CJ wrote for the dissent, and would have held that “If [the patentee’s] actions are within the scope of the patent, they are not subject to antitrust scrutiny” (D3). He acknowledged that there may be uncertainty as to the validity of the patent, but said that this does not justify subjecting the settlement to antitrust scrutiny:

The difficulty with such an approach is that a patent holder acting within the scope of its patent has an obvious defense to any antitrust suit: that its patent allows it to engage in conduct that would otherwise violate the antitrust laws. . . Its behavior would be unlawful only if its patent were invalid or not infringed. And the scope of the patent – i.e., what rights are conferred by the patent – should be determined by reference to patent law. (D4, D5, original emphasis)

I must admit that I am not sure whether I follow the point Roberts CJ is making. His argument seems to implicitly concede that the payments are unlawful if the patent is in fact invalid, and the point of the majority ‘s reasoning is that we will never make that determination as a matter of patent law if the reverse payments settlements are not subject to antitrust scrutiny. If Roberts CJ’s point is that it is somehow unprincipled to subject these settlements to antitrust scrutiny, then I am not persuaded.

But I think the point he is really making is that it is wrong to conduct a patent trial as part of an antitrust action. Settlements may make it more difficult to challenge invalid patents “but such a result – true of all patent settlements – is no reason to adjudicate questions of patent law under antitrust principles” (D11). The argument here appears to be pragmatic. If the patentee can raise validity of the patent as a defence in the antitrust action, then in those cases in which the settlement was a legitimate effort to avoid the costs of litigation, the whole point of the settlement will be defeated when the patentee is be forced to litigate validity as a defence (D11). The majority responds to this by saying that

it is normally not necessary to litigate patent validity to answer the antitrust question . . . An unexplained large reverse payment itself would normally suggest that the patentee has serious doubts about the patent’s survival. (M18)

But if this means that the patentee cannot raise the validity of the patent in the antitrust action, then the patentee may be found to violate antitrust law even though it has done nothing wrong (D12-13). There is also the practical problem that an inquiry into the patentee’s motivation will itself be uncertain (D13). Unless the majority is of the view that only settlements that are less than anticipated litigation costs are acceptable, which it nowhere states, then the majority implicitly accepts that uncertainty over validity may be a legitimate motivating factor; so, a settlement motivated by a 5% chance of invalidity of a valuable patent might pass antitrust scrutiny. And the majority clearly accepts that ancillary services “such as distributing the patented item or helping to develop a market for that item,” may form the basis for a legitimate settlement. This means that discerning the true motivation will be very difficult, the more so because ancillary services will no doubt start to feature prominently in such settlements.

Neither the majority nor the dissent addresses what seems to me to be the central issue in deciding whether a per se analysis is appropriate. If, as the FTC believes, reverse payment settlements are normally anticompetitive, then the dissent’s objections largely melt away. There will be no need to assess patent validity in the antitrust action, and while the result will be that patentees will sometimes be prevented from entering into legitimate settlements, this will be rare, and those rare errors are the price paid for the certainty and simplicity of a per se regime; it is better than the expensive errors of a rule of reason regime. By rejecting the per se rule, the majority implicitly acknowledges that legitimate settlements are reasonably common, and if that is so, then there is considerable force to the dissent’s complaint that the rule of reason scrutiny adds considerable complexity for little benefit. Overall then, my initial reaction is that the USSC should have directly addressed the central issue: are the reverse payments normally anti-competitive? If so, they should be per se unlawful, and if not, they should be immune from antitrust scrutiny. The rule of reason analysis may be sound in principle, but the litigation costs of that inquiry will defeat the point of legitimate settlements.

What does Actavis imply for Canadian law? The majority reasoning turned on, or at least adverted to, some features of the US system, such as the 180 day exclusivity for the first generic (M16), that make anti-competitive settlements attractive. As this paper by Ron Dimock & Geoff Mowatt explains, differences between the US and Canadian systems means that “there is a much greater incentive in the U.S. for the brand to bargain with the first generic.” This suggests that the argument for per se immunity is stronger in Canada than in the US. This implies that if Canadian law is influenced by Actavis, reverse payment settlements should not be considered presumptively illegal, and the argument for the dissenting position that they should be per se immune, is stronger here than in the US. Whether Canadian courts and policy makers will, or should, be influenced by Actavis is, of course, a different question.