Competition Ahead? The Legal Landscape for Reverse Payment Settlements After Federal Trade Commission v. Actavis, Inc.
BERKELEY TECHNOLOGY LAW JOURNAL
COMPETITION AHEAD? THE LEGAL LANDSCAPE FOR REVERSE PAYMENT SETTLEMENTS AFTER FEDERAL TRADE COMMISSION V. ACTAVIS, INC.
Allison A. Schmitt 0 1
0 J.D. Candidate , 2015 , University of California, Berkeley, School of Law. 1. Michael A. Carrier, Provigil: A Case Study of Anticompetitive Behavior , 3 H , USA
1 2014 Allison A. Schmitt
In 2006, pharmaceutical company Cephalon, holder of both an active ingredient patent and a narrow formulation patent for the sleep-disorder drug Provigil, faced competition from four generic manufacturers seeking to enter the market with generic competitors to Provigil.1 Although the active ingredient patent provided protection (and successfully prevented generic entry on this compound past patent expiration in 2001), the formulation patent, issued after the active ingredient patent, appeared to be an easy target to design around.2 The four generic companies planned to enter the market in June 2006.3 To avoid the litigation threat posed by the generic companies, Cephalon settled by paying them a total of more than $200 million combined.4 In exchange the generic manufacturers agreed to delay entry into the market until April 2012.5 The Cephalon CEO stated that this deal provided “six more years of patent protection. That's $4 billion in sales that no one expected.”6 Settlements such as the agreement described above are known as either “reverse payment settlements” (“RPS”) or “pay-for-delay settlements.”7 These settlements establish a pecuniary relationship between brand-name and generic manufacturers in which the brand-name company pays the generic firm to delay entry into the market until a specific date.8 Reverse payment settlements may take several forms and in some cases may include
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terms with other legitimate uses, not related to the delay of generic entry.9
However, such settlements have been extensively litigated in the courts on
antitrust grounds because they may allow invalid patents to restrict
competition unfairly.10 By restricting competition, reverse payment
settlements may often significantly increase consumer prices for
pharmaceutical drugs.11
In June 2013, the Supreme Court decided Federal Trade Commission v.
Actavis, Inc., holding that under the Hatch-Waxman statutory framework, the
parties entering into reverse payment settlements may have antitrust liability
if the payments are designed to delay competition between a brand-name and
a generic pharmaceutical manufacturer.12 Under this ruling, the Supreme
Court ordered lower courts to apply a modified antitrust rule-of-reason
standard to reverse payment settlements, independent of examinations of the
validity of the relevant patents.13 Although reverse payment settlements are
not presumptively unlawful under Actavis, “the likelihood of a reverse
payment bringing about anticompetitive effects depends upon its size, its
scale in relation to the payor’s anticipated future litigation costs, its
independence from other services for which it might represent payment, and
the lack of any other convincing justification.”14
In essence, the ruling mandates that lower courts should apply the
modified rule-of-reason standard rationale of Actavis, independent of patent
validity examinations in situations when a reverse payment settlement is
challenged.15 The Court asserts that patent validity is “normally not necessary
to litigate” antitrust liability,16 but the validity of a patent does seem to have
some relevance to the antitrust question if secondary,17 potentially weaker
patents are less likely to be valid and thus more likely to be challenged in a
patent litigation action.18
Although this ruling provides some guidelines to lower courts,
brandname pharmaceutical companies, and generic pharmaceutical companies in
terms of the potential presence of antitrust liability, the holding of this case is
limited and does not provide a concrete legal standard. It is thus likely that
district courts and courts of appeal will interpret the holding of Actavis in
different ways, producing another circuit split. As litigation regarding
payfor-delay settlements took nearly fifteen years to reach the Supreme Court,19
it may take a similarly long time for this potential inconsistency to be
resolved across jurisdictions. However, the ruling provides restrictions on
unfair competition concerning brand-name and generic pharmaceutical
manufacturers. These restrictions may benefit consumers by addressing
situations where reverse payment settlements actually do hinder competition,
as not every settlement may be anticompetitive. On the other hand, analyzing
the net competitive effects of a particular settlement also requires
consideration of the benefits of avoiding litigation.
This Note reviews the relevant background relating to the
HatchWaxman Act and antitrust liability in the context of the Actavis decision
itself.20 Accordingly, Section I.A reviews the Hatch-Waxman Act, as well as
policy rationales for (...truncated)