On June 17, 2013, the Supreme Court issued its much-anticipated ruling in Federal Trade Commission v. Actavis, Inc. et al. (No. 12-416), holding that reverse settlement payments (also known as “pay for delay” settlements) between branded and generic pharmaceutical companies in patent infringement litigation are subject to “rule of reason” analysis. The case represents a victory for the FTC, whose bid to bring “pay for delay” settlements under antitrust scrutiny was rejected by the district court and Eleventh Circuit on the grounds that any anticompetitive effects of the settlement at issue fell within the exclusionary scope of the patent and were therefore immune from antitrust scrutiny.

The case arose from Solvay Pharmaceutical’s patent on its approved brand-name drug AndroGel. Several pharmaceutical companies, including Actavis and Paddock, filed Federal Drug Adminsitration (FDA) applications for generic drugs modeled on AndroGel. They claimed, pursuant to a provision under the Hatch-Waxman Act (“paragraph IV”), that Solvay’s patent was invalid and that their drugs did not infringe it. The FDA approved the generics. Solvay nevertheless sued Actavis, Paddock and Par, for patent infringement pursuant to Hatch-Waxman Act procedures. The parties entered into a settlement whereby Solvay (the patent holder) agreed to pay millions of dollars to Actavis and Paddock (the alleged infringers) in exchange for Actavis’ and Paddock’s agreements (1) not to bring their generic drugs to market for a set number of years within the scope of the challenged patent’s term and (2) to promote AndroGel to doctors during the settlement period. These types of agreements are labeled “reverse payment” settlements because they require that the patent holder pay the alleged infringer despite the fact that the alleged infringer has no claim for damages in the underlying dispute. Such agreements are also known as “pay for delay” settlements because the alleged infringer agrees to postpone entry into the market during the settlement period.

The FTC brought suit challenging the settlements under Section 5 of the FTC Act, claiming that the parties unlawfully agreed to delay competition in order to share in Solvay’s alleged monopoly profits. The district court dismissed the case, and the Eleventh Circuit affirmed, concluding that the settlement was immune from antitrust scrutiny because any anti-competitive effects of the settlement fell within the exclusionary scope of the patent.

In a 5-3 ruling, the Supreme Court reversed. The majority concluded that patent policy does not completely displace antitrust policy in the context of reverse settlements and that the Hatch-Waxman Act’s goal to facilitate entry by generic drug manufacturers supports the need for antitrust scrutiny of such settlements. Op. at 12-14. The majority further concluded that the policy favoring settlement of disputes, particularly in complex patent litigation, was outweighed by competing antitrust considerations in the reverse settlement context. “[A] reverse payment, where large and unjustified, can bring with it the risk of significant anticompetitive effects; one who makes such a payment may be unable to explain and justify it; such a firm or individual may well possess market power derived from the patent; a court, by examining the size of the payment, may well be able to assess its likely anticompetitive effects along with its potential justifications without litigating the validity of the patent; and parties may well find ways to settle disputes without the use of reverse payments.” Op. at 19-20. The three-justice dissent would have affirmed on the ground that antitrust laws are not applicable to settlements that fall within the scope of the patent.

It remains unclear whether and to what extent Actavis will deter reverse settlements, stimulate private antitrust litigation related to them, or influence antitrust analysis of other conduct where patent and antitrust law overlap (e.g., standard-essential patents). At minimum, Actavis signals that patent holders can no longer rely exclusively on “scope of the patent” arguments to immunize reverse or pay-for-delay settlements from antitrust analysis. As a result, patent holders likely will be unable to fend off suits challenging such settlements by motions to dismiss. Companies considering such settlements will need to evaluate, in particular, what procompetitive justifications support the terms of the settlement. The majority offered little guidance regarding which procompetitive justifications might pass muster under a rule-of-reason analysis beyond litigation costs and services performed by the generics, and this topic seems ripe for future litigation. A copy of the opinion is available at the Supreme Court’s website.