Maura L. Hughes

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, the Supreme Court recognized for the first time that reverse-payment settlements in patent litigation may violate the antitrust laws, even when the settlement is within the exclusionary scope of the patent. The 5-to-3 majority settled a split among the federal appellate courts.

	The case involved “pay-for-delay” settlements, in which a drug patent holder settles an infringement action by paying the patent challenger to drop its challenge and stay out of the market. Settlements occur between drug makers because of a statutory scheme set forth in the Drug Price Competition and Patent Term Restoration Act of 1984. 

	A generic manufacturer piggy-backing on the brand drug must certify that it is not infringing the brand-name patent, because, for instance, the patent is invalid. Drug manufacturers sometimes settle cases by paying the generic manufacturer to stay out of the market for a certain period of time. Essentially, they share monopoly profits of the brand-name patent with the generic manufacturer and keep their own drug prices high.

	In Actavis, Solvay Pharmaceuticals owned a patent related to the drug Andro-Gel. Generic manufacturers Actavis and Paddock Laboratories filed applications for generic approvals for competing drugs under section IV of the Act, and certified that Solvay’s patent was invalid. Solvay subsequently sued Actavis and Paddock, and then entered into a pay-for-delay settlement with those companies and a third generic competitor, Par. Solvay agreed to pay $12 million to Paddock, $60 million to Par and an estimated $19 million to $30 million annually to Actavis for nine years. The generics agreed to stay out of the market for nine years. The FTC challenged the agreements as anticompetitive under Section 5 of the FTC Act.

	The Supreme Court held that such agreements have “significant adverse effects on competition” by eliminating the one competitor most likely to introduce competition quickly. The majority rejected the argument that a pay-for-delay settlement cannot be anticompetitive, noting that the consequences may be unjustified because the patent could have been invalid or because the generic may not have been within the patent’s scope.

	The Court, however, declined the FTC’s request to hold that such settlements are presumptively unlawful, instead holding that agreements must be judged by antitrust’s “rule of reason,” under which the anticompetitive consequences must be weighed against potential justifications for the settlement. The Court noted that “an unexplained large reverse payment itself would normally suggest that the patentee has serious doubts about the patent’s survival,” serving as a surrogate for a patent’s weakness, without the court examining the patent’s validity itself.

	By opening such reverse payments to antitrust challenge, the Actavis decision raises as many questions as it resolves. A violation of the “rule of reason” is in most contexts difficult to prove. However, the Supreme Court’s recognition that pay-for-delay agreements have “significant adverse effects on competition” provides a route for lower courts to invalidate pay-for-delay agreements even under the fact-specific antitrust standard. Companies that engage in pay-for-delay arrangements must now consider whether they can justify the settlement as a pro-competitive agreement, and be aware that the more lucrative the settlement is, the more difficult it may be to justify.

Maura L. Hughes is a partner in the Litigation group at Calfee, Halter & Griswold LLP. She can be reached at 216.622.8335, or by email at mhughes@calfee.com.

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