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From Health Law Daily, June 17, 2013

Pay-for-delay settlements may violate antitrust laws

By Michelle L. Oxman, JD, LLM

The United States Supreme Court has ruled that “pay-for-delay” or “reverse payment” settlements of patent disputes are not automatically immune from attack under the antitrust laws (Federal Trade Commission v Actavis, Inc., June 17, 2013, Breyer, S). The Court reversed the decision of the Eleventh Circuit Court of Appeals, which had affirmed the dismissal of an antitrust action by the Federal Trade Commission (FTC) against the manufacturer of AndroGel® and applicants to market the generic version of the drug.

The patent litigation and settlement. The FDA approved the new drug application of Solvay Pharmaceuticals, Inc. (Solvay) for AndroGel, a topical form of testosterone, in 2000. Solvay obtained a patent for the drug in 2003. Later that year, Actavis, Inc., then known as Watson Pharmaceuticals, Inc. (Actavis), filed an abbreviated new drug application (ANDA) seeking approval to market a generic version of AndroGel. Paddock Laboratories (Paddock) filed an ANDA, and Par Pharmaceutical (Par) joined in Paddock’s ANDA. The ANDAs alleged that Solvay’s patent was invalid or that the generic drugs would not infringe the patent.

Under the Drug Price Competition and Patent Term Restoration Act of 1984, popularly known as the Hatch-Waxman Act (21 USC sec. 355(j)), Solvay sued the other applicants for patent infringement. The statute required the FDA not to approve any generic version of AndroGel for 30 months or, if sooner, the resolution of the patent suit. After 30 months, the FDA granted Actavis’ ANDA. Under the statute, Actavis, the first party to develop a generic, would have a 180-day period of market exclusivity before other generic manufacturers could enter the market; this right often is worth hundreds of millions of dollars. However, in 2006, all the parties to the patent litigation settled. Solvay agreed to pay Actavis between $19 million and $30 million each year for nine years and to make total payments of $82 million to Paddock and Par. Actavis, Paddock, and Par agreed to help promote AndroGel and to refrain from marketing their drugs until 2015, about 65 months before the patent would expire.

The FTC action. In 2009, the FTC sued all four drug makers for violation of 15 USC sec. 45. The agency claimed that the three generic manufacturers agreed to withdraw their challenges to the patent and refrain from competing with Solvay’s monopoly for nine years in return for a share in the profits; paying others not to compete, it argued, violates the antitrust laws. The district court dismissed the complaint on the ground that it did not state a claim under the antitrust laws.

The Eleventh Circuit agreed. Patent law is an exception to antitrust law in that the law gives patent holders the right to a monopoly on their invention for the duration of the patent. Settlements of patent litigation were immune from attack under the antitrust laws as long as the scope of the restraint on competition was within the scope of the patent protection.

The Supreme Court ruling. The majority rejected the Eleventh Circuit’s ruling that patent litigation settlements were not subject to review under the antitrust laws. The court found that the settlement of patent claims under the Hatch Waxman Act was significantly different from the settlement of other patent litigation because of the reversal of the parties’ positions. Typically, a patent holder seeks damages for alleged infringement and receives payment to compensate for the harm it has suffered. In pay-for-delay settlements of patent disputes under Hatch Waxman, however, parties who were never harmed are paid large sums of money not to compete with the patent holder, whether or not the patent was valid or actually was infringed.

Five considerations. The court ruled that five considerations outweighed the policy in favor of settlement of litigation. First, pay-for-delay agreements have a great potential for adverse effect on competition and on harm to consumers because their effect is to maintain prices at the artificially high level set by the brand name manufacturer. The court noted that the payments often exceed the anticipated profit of the generic manufacturer, reflecting special incentives for collusion. Second, the anticompetitive effects may be unjustified. A patent holder with confidence in its case would not pay such large sums of money to settle its claims. As defendants in the antitrust litigation, the parties to the settlement should be required to show that the anticompetitive results of their settlement are consistent with the law.

The third consideration was that the patent holder, who is paying the large sums to parties who have not been harmed, is the party with the power to harm consumers by restraining competition. Fourth, the resolution of the patent issues in the antitrust litigation may not be as necessary as the Eleventh Circuit believed. Finally, there were other ways to settle the claims of invalidity or noninfringement of the patent, such as allowing the competitors to enter the market earlier.

No presumption of invalidity. The court rejected the FTC’s argument that the pay-for-delay settlements should be presumed invalid after a “quick look.” The quick look should be applied in situations where anyone with the most basic knowledge of economics would see the anticompetitive effects of an arrangement. Rather, the court should apply the “rule of reason” typically used to resolve antitrust cases.

Breakdown of votes. Justice Breyer wrote the 5-3 decision, joined by Justices Ginsburg, Kalgan, Sotomayor, and Kennedy. Chief Justice Roberts dissented, joined by Justices Scalia and Thomas. Justice Alito was recused from the matter.

The case number is 12-416.

Attorneys: Donald B. Verrilli Jr., United States Department of Justice, for the Federal Trade Commission. Eric Grannon (White & Case) for Par Pharmaceutical Companies, Inc. and Paddock Holdings, Inc. Clifford M. Sloan (Skadden Arps Slate Meagher & Flom LLP) for Actavis, Inc. Jeffrey I. Weinberger (Munger, Tolles & Olson LLP) for Solvay Pharmaceuticals, Inc.

Companies: Federal Trade Commission; Par Pharmaceutical Companies, Inc.; Paddock Holdings, Inc.; Actavis, Inc.; Solvay Pharmaceuticals, Inc.

MainStory: TopStory AntitrustNews GenericDrugNews DrugBiologicalNews HatchWaxmanNews SupCtNews

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