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Reversing Reverse Payments: The Actavis Decision

Monday, September 9, 2013

In a recent ruling, the U.S. Supreme Court put an end to so-called 'reverse settlements' in pharmaceutical patent cases. But at what cost?

Branded pharmaceutical companies are often caricatured as the greedy, profit-seeking bad guys who jack up prices on life-saving medicines, modern day Bad King Johns deputizing an unfair patent system as their personal sheriffs of Nottingham. Meanwhile, the companies that make generic copies of those drugs are typically painted as today’s Robin Hoods, taking from the rich few to give to the poor masses.

But what happens when the figurative Robin Hood and King John make common cause, with the monarch paying off the leader of the Merry Men to relax his efforts? The king’s allies may have reason to rejoice, but the peasants would seethe with outrage.

Such was the case in real life as ongoing, noisy, populist opposition to so-called “reverse settlements” in pharmaceutical patent cases finally bore fruit in a recent ruling. In Federal Trade Commission v. Actavis, the Supreme Court for the first time applied antitrust scrutiny to payments by branded drug companies to their generic competitors in order to settle patent cases and keep the generics off the market for a certain period of time.

The ruling, while cheered by many Robin Hood fans, chips away at patent protection for innovators and appears likely to hinder, at least slightly, the development of new drugs for no real public benefit.

The ruling chips away at patent protection for innovators and appears likely to hinder, at least slightly, the development of new drugs for no real public benefit.

By way of overview, branded pharmaceutical companies expend great sums on research and development in order to produce new medicines that extend and enhance life. The companies typically patent these drugs, which affords them exclusive rights to sell and produce the drugs for 20 years.

Generic drug makers usually formulate the same or similar compounds pioneered by the branded companies and announce to the Food and Drug Administration their intention to market them publicly. Once they make such an announcement, the generics trigger a provision of federal law that gives rise to a near-immediate patent lawsuit.

Such suits usually take years to conclude and require the generic company to argue that its drug formulation differs from the patented compound, and/or (more commonly) to contend that the branded company’s patent should never have been issued in the first place because it wasn’t truly pioneering.

This is exactly what happened in Actavis; Solvay Pharmaceuticals held a patent on AndroGel, a popular form of synthetic testosterone that, by 2007, Solvay was selling $1.8 billion worth of annually in the United States.

In 2003, Watson Pharmaceuticals (now Actavis) announced its intention to market a generic version of AndroGel. Solvay promptly sued for patent infringement, and after several years of active litigation, settled in 2006.

Under the terms of the agreement, Solvay shelled out somewhere between $243 and $342 million, and in return Watson agreed to stay off the market until 2015. The issue seemed to have been resolved.

Flash forward three years to 2009, when a new administration arrived in Washington committed to “consumer equity.” President Obama’s Federal Trade Commission decided to file suit to undo the Solvay-Actavis reverse settlement under principles of antitrust law, most saliently that it was “anticompetitive.” Robin Hood’s erstwhile backers were growing restless.

The Actavis majority’s analysis neglects certain considerations, misstates others, and generally underappreciates the importance of the patent system in securing innovation.

The case worked its way up to the Court of Appeals for the 11th Circuit, which held that a reverse payment settlement agreement will usually be “immune from antitrust attack so long as its anticompetitive effects fall within the scope of the exclusionary potential of the patent.” In other words, when competitors reach a good-faith agreement to end a contentious patent case, the agreement cannot be challenged on anticompetitiveness grounds if the products involved are covered by the patent.

The appeals court reckoned that allowing a post-settlement antitrust case to proceed would entail a highly inefficient “trial within a trial” about the validity or infringement of the patent in question — precisely what the settlement helped the parties and the court avoid.

But the Supreme Court disagreed earlier this summer, holding by a 5-3 margin along ideological lines that “reverse payment settlements such as the agreement alleged in the complaint before us can sometimes violate the antitrust laws.”

Stating that “it would be incongruous to determine antitrust legality by measuring the settlement’s anticompetitive effects solely against patent law policy, rather than by measuring them against procompetitive antitrust policies as well,” Justice Stephen Breyer, writing for the majority, presented five key reasons for why reverse payments in the patent context can run afoul of antitrust concerns:

1. Such settlements, the Court held, carry the “potential for genuine adverse effects on competition. . . . Suppose, for example, that the exclusive right to sell produces $50 million in supra-competitive profits per year for the patentee. And suppose further that the patent has 10 more years to run. Continued litigation, if it results in patent invalidation or a finding of noninfringement, could cost the patentee $500 million in lost revenues, a sum that then would flow in large part to consumers in the form of lower prices.” In other words, simply because the case involves a patent doesn’t necessarily mean that the patent is either valid or infringed, and it would be an injustice to the public, the Court believed, to force that public to effectively subsidize the deal.

2. “These anticompetitive consequences,” Justice Breyer wrote, “will at least sometimes prove unjustified. . . . An antitrust defendant may show in the antitrust proceeding that legitimate justifications are present, thereby explaining the presence of the challenged term and showing the lawfulness of that term under the rule of reason.” Justice Breyer believed that the “rule of reason” inquiry required in an antitrust analysis will easily resolve whether or not the arguably anticompetitive conduct involved in a reverse payment can be justified.

3. “Where a reverse payment threatens to work unjustified anticompetitive harm,” the Court held, “the patentee likely possesses the power to bring that harm about in practice. At least, the ‘size of the payment from a branded drug manufacturer to a prospective generic is itself a strong indicator of power’ — namely, the power to charge prices higher than the competitive level.” The Court essentially presumed that a large reverse payment is strongly indicative of “market power,” the traditional bugaboo of antitrust law.

4. The Court also found that “an antitrust action is likely to prove more feasible administratively than the Eleventh Circuit believed,” because “it is normally not necessary to litigate patent validity to answer the antitrust question,” since “an unexplained large reverse payment itself would normally suggest that the patentee has serious doubts about the patent’s survival.” In other words, the fear of a trial within a trial is overblown, since all a court would really need to look at is the size of the reverse payment.

5. Finally, “the fact that a large, unjustified reverse payment risks antitrust liability,” Justice Breyer wrote, “does not prevent litigating parties from settling their lawsuit,” since the generic company can always agree to stay off the market without receiving a payment from the branded company.

Unfortunately, however, the Actavis majority’s analysis neglects certain considerations, misstates others, and generally underappreciates the importance of the patent system in securing innovation — and therefore ultimately benefitting consumers, as Chief Justice Roberts, joined by Justices Scalia and Thomas, recognized in a blistering dissent (Justice Alito recused himself).

Regarding the patentee skeptically on antitrust grounds for seeking to protect their legal monopoly, as the Actavis majority did, appears to misunderstand the nature of patents.

First, as a general matter, the entire purpose of the patent regime is to entrust an inventor with a monopoly for a limited time in return for the inventor’s complete and detailed disclosure to the public of his or her invention. Regarding the patentee skeptically on antitrust grounds for seeking to protect a legal monopoly, as the Actavis majority did, appears to misunderstand the nature of patents.

As the dissent put it, “a patent carves out an exception to the applicability of antitrust laws,” with two exceptions, namely sham litigation and obtaining a patent through fraud. In the Actavis case, neither of these exceptions applied, as the parties litigated the case intensely for three years and no allegations of fraud were presented. Thus, the Court gave insufficient weight to the benefits of the patent system.

Second, the Court majority underestimated the complexity of the antitrust analysis it is now foisting on settling parties. Cease-fire agreements will now become subject to anticompetitive scrutiny under the “rule of reason,” which is inherently fact-intensive, subjective, and unpredictable.

Worse, the Court gave little weight to the “trial within a trial” nature of these proceedings. In order to determine whether a reverse payment can be justified, the antitrust court will necessarily have to consider the validity and infringement of the patent — precisely the expensive and time-consuming analysis the parties sought to avoid by settling the underlying patent litigation in the first place.

Third, because of this complexity, parties will be significantly less likely to settle pharmaceutical cases going forward. As Justice Roberts wrote, “there would be no incentive to settle if, immediately after settling, the parties would have to litigate the same issue — the question of patent validity — as part of a defense against an antitrust suit.”

This in turn will continue to tax the court system — as well as the litigating parties’ resources — by unnecessarily prolonging cases that would otherwise resolve themselves harmoniously. The dissent cited one study that found the average pharmaceutical litigation costs roughly $10 million.

The Court majority underestimated the complexity of the antitrust analysis it is now foisting on settling parties.

Moreover, Justice Breyer’s stated alternative grounds for settlement — i.e., that the generic drug company can agree to stay off the market without receiving payment — is at odds with typical practice; after all, why would the generic company agree to forego its rights for free?

So the Court’s reasoning wasn’t especially sound and its holding is likely to have pernicious effects. Worse, the FTC, emboldened by the ruling, is already seeking to extend its reach.

In an ongoing antitrust case in a New Jersey federal court, the FTC sought permission in August to file a “friend of the court” brief challenging the propriety of an agreement by a branded company not to sell its own generic version during the exclusivity period that a rival generic company would otherwise enjoy.

In its filing, in which it sought to apply the logic of Actavis to this context, the FTC wrote that such agreements “can enable the brand-name drug manufacturer to forestall the date of generics entry and thus extend its enjoyment of monopoly profits.” These deals, the FTC argued, also “benefit the generics challenger by eliminating the only competition for sales of its generics drug product for a significant period of time — thus creating the prospect of hundreds of millions of dollars in extra revenue for the generics company, in part from its ability to charge supracompetitive prices for its product.”

It is hard to blame the FTC for taking this approach, which seems eminently reasonable under the holding of Actavis. But unfortunately, for both legal and economic reasons, that’s not saying much. At least for the foreseeable future, Robin Hood and King John will have to keep a respectful distance.

Michael M. Rosen, a contributor to The American, is an attorney and writer in San Diego.

FURTHER READING: Rosen also writes "Perry Ruling Spells Peril for States," "A Roundup: Myriad, Monsanto, and the Supreme Court," and "Austerity and Its Discontents." Robert Bate discusses "A Drug Market Wrecked by Government" and asks "Should Name-Brand Drug Makers be Held Liable for Injuries Caused by the Generic Versions of Their Products?" Scott Gottlieb contributes "Paying for New Drugs for New Bugs: Regulation Is Only One Side of the Coin.” James Pethokoukis blogs “How Choice and Competition are Slowing the Rise in U.S. Health Care Costs” and “Cancer vs. Innovation.”

Image by Dianna Ingram / Bergman Group

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