Reverse-Payment Patent Settlements Can Violate U.S. Antitrust Laws

On June 17, 2013, in FTC v. Actavis, the Supreme Court resolved a long-brewing battle between the FTC and the antitrust and patent defense bar over whether reverse-payment patent settlements between patentees and alleged infringers violate federal antitrust laws.  These settlements are categorized as reverse-payments because the settlement arises in the following circumstance:

• Alleged infringer – often a generic new entrant with respect to a patented drug – introduces or threatens to introduce a product that patentee believes infringes on its patent
• Patentee sues alleged infringer
• Patentee and alleged infringer settle with the patentee paying the alleged infringer for damages – the reverse of a typical lawsuit – and alleged infringer agrees not to compete against the patentee

Since at least the George W. Bush Administration, the FTC has oft asserted that these reverse-payment settlements violate the federal antitrust laws.  The Agency argues that such settlements are merely veiled market allocation schemes that are anticompetitive and always violate the antitrust laws.  The antitrust defense bar has uniformly disagreed.  It argues that reverse-payment settlements are merely part of the monopoly Congress granted patentees and, for that reason, can never violate the antitrust law.  For the most part, the federal District Courts and Courts of Appeal, including the Eleventh Circuit in this case, have sided with the antitrust defense bar.

The Supreme Court in Actavis split the baby – although it gave the FTC the larger piece.  It ruled that reverse-payment settlements could be anticompetitive, were not immune to an antitrust challenge under the patent laws, and therefore could violate the antitrust laws.  The Supreme Court reversed the Eleventh Circuit’s dismissal of the FTC’s claim and remanded, holding the FTC (and all antitrust plaintiffs) could possibly prove that reverse-payment settlements violate federal antitrust laws by meeting its burden under the rule of reason or, depending on the circumstances, the quick-look version of the rule of reason. 

Some might characterize the Supreme Court’s reasoning as a throwback to a bygone era.  After acknowledging that federal patent laws permit a holder of a valid patent to charge monopoly prices and to exclude competition, Justice Breyer (speaking for Justices Kennedy, Ginsburg, Sotomayor, and Kagan) reasoned that (a) invalid patents do not provide the patentee such rights; (b) even valid patents confer no right to exclude products or processes that do not actually infringe on the patents; (c) reverse-payment settlements involve patentees making payments to alleged infringers even though the alleged infringers have no claims for damages against the patentee; and (d) such reverse-payment settlements “tend to have significant adverse effects on competition.”  Relying on pre-Chicago School precedent from the early 1960s and before, the majority reasoned that federal trial and appellate courts should, with respect to reverse-payment settlements, (a) not defer to patent laws; (b) balance patent and antitrust laws and policies to determine the scope of the patent monopoly and the antitrust laws; and (c) employ the rule of reason’s breadth and flexibility to consider all aspects of patent and antitrust laws and policies.    

Actavis will have practical effects.  While it seems likely that we will see more reverse-payment cases by the FTC and class action counsel, it is not entirely clear that the Actavis decision will result in greater success for the FTC or class action counsel on the merits of the rule of reason, which historically has favored defendants.  Because of litigation costs and risks involved, however, settlements of reverse-payment antitrust cases may well increase in frequency and size.