by Traci Medford-Rosow and Peter Richardson
On June 17, 2013 the Supreme Court decided FTC v. Actavis by a 5-3 vote. Justice Breyer delivered the majority opinion with Justices Kennedy, Ginsburg, Sotomayor and Kagan concurring. Chief Justice Roberts filed the dissenting opinion in which Justices Scalia and Thomas joined. For unstated reasons, Justice Alito took no part in the case.
The majority opinion reaches an outcome that is in accord with our view that pay-for-delay provisions in patent settlements are not in the best interests of the research-based industry. However, we find the court’s reasoning partially flawed and the guidelines for assessing the legality of these provisions problematic. Ironically, the dissenting opinion is virtually flawless in its reasoning and appears to understand he current “real world” situation well, but nevertheless reaches an outcome that would perpetuate the imbalance that has led to the existence of these pay-for-delay provisions in the first place. In a partial victory for the Federal Trade Commission, the court overruled the Eleventh Circuit decision, holding that the FTC was not precluded from pursuing its antitrust claim against the defendants.
The first reason cited by the majority opinion is “the specific restraint at issue has the potential for genuine adverse effects on competition.” Ironically, in practice, the opposite is true. Pay-for-delay provisions in patent settlements foster, and indeed encourage, a plethora of weak, and in some cases, meritless patent challenges. Generic companies understand that the mere filing of a patent challenge might very well produce a nice settlement reward. A sort of heads, I win, tails, you lose scenario. Either the generic wins the patent litigation or the innovator pays it a hefty sum to drop its challenge. The majority opinion notes that sometimes the generic has even been paid a sum of money larger than what it could have earned if its product had gone to market.
As Chief Justice Roberts correctly notes in his dissent, “The irony of all this is that the majority’s decision may very well discourage generics from challenging pharmaceutical patents in the first place….limiting settlements to an earlier entry date for the generic….puts a damper on the generic’s expected value going into litigation, and decreases its incentive to sue in the first place.” His view was shared by Judge Richard Posner a decade ago when he wrote, “A ban on reverse-payment settlements would reduce the incentive to challenge patents by reducing the challenger’s settlement options.”
The majority opinion also states “the fact that a large, unjustified reverse payment risks antitrust liability does not prevent litigating parties from settling their lawsuit.” While this may be a true statement on its face, the inability to do this will not only reduce the settlement options, but as Roberts and Posner understand, it will certainly reduce the incentive of the generic companies to challenge pharmaceutical patents in the first place.
The majority also believes that “an antitrust action is likely to prove more feasible administratively than the Eleventh Circuit believed.” Respectfully, we disagree with this conclusion, as well. As Chief Justice Roberts correctly opines, “Good luck to the district courts that must, when faced with a patent settlement, weigh the likely anticompetitive effects, redeeming virtues, market power, and potentially offsetting legal considerations present in the circumstances.”
The court held that the “rule of reason” should be used when deciding whether a reverse payment is lawful. How this rule will be applied presents major challenges and uncertainties. However, the court also held that “an unexplained large reverse payment itself would normally suggest that the patentee has serious doubts about the patent’s survival.” This is not always true. Because the research-based company has so much at stake, and the generic challenger so little, many companies have been willing to settle even “slam dunk” litigations. As Chief Justice Roberts correctly notes, “A patent holder may be 95% sure about the validity of its patent, but particularly risk averse or litigation averse, and willing to pay a good deal of money to rid itself of the 5% chance of a finding of invalidity.”
As we stated in “FTC v Actavis: The Wrong End of the Telescope,” the underlying problem in this thorny debate is not the way patent litigations are settled, but rather the Hatch-Waxman regime that was designed to encourage patent challenges in the first place. While the act was intended to be a fair compromise between research-based and generic companies when first enacted in 1984, and worked reasonably well for the first ten years, it broke down in the ensuing two decades.
The result of this is that precious dollars that could have been used by Big Pharma to find cures for devastating diseases, including cancer, have been diverted and spent defending patent challenges instead. Worse yet, many companies have paid large sums of money to foreign generic companies, resulting in loss of American jobs, in order to protect its intellectual property from the “what if” factor in litigation. It would be as if your doctor said you might have cancer, but all you had to do to ensure your survival was amputate your little toe. Almost all of us would quickly find ourselves in the operating room.