Pay-for-delay patent settlements: FTC v. Actavis and its implications

We've covered pay-for-delay patent settlements extensively (go here, here, here, and here) and reported on the Supreme Court's June 17, 2013 decision in FTC v. Actavis. In a pay-for-delay settlement, a brand-name drug company pays a generic company that has challenged the brand-name company's patent to stay out of the market. Some early antitrust challenges to these settlements succeeded, but most later court of appeals' rulings gave them a green light. The FTC's view was that these settlements were virtually per se invalid under the antitrust laws, while settlement proponents (and the majority of lower courts) said that they were valid as long as the settlement was within the scope of the patent. The Supreme Court took a middle ground position (still a big win for the challengers) that pay-for-delay settlements are subject to "rule of reason" analysis under the antitrust laws (though not virtually per se invalid).

Now, law professor Herbert Hovenkamp has penned this article, which analyzes Actavis in detail and explains why, in his view, Actavis has broad implications beyond pay-for-delay settlements. Perhaps the most interesting part of the article is Hovekamp's claim that Actavis requires only a truncated "rule of reason" showing for attacks on pay-for-delay settlements. Here is the abstract:

In FTC v. Actavis the Supreme Court held that settlement of a patent infringement suit in which the patentee of a branded pharmaceutical drug pays a generic infringer to stay out of the market could be illegal under the antitrust laws. Justice Breyer's majority opinion was surprisingly broad, in two critical senses. First, he spoke with a generality that reached far beyond the pharmaceutical generic drug disputes that have provoked numerous pay-for-delay settlements.

Second was the aggressive approach that the Court chose. The obvious alternatives were the rule that prevailed in most Circuits, that any settlement is immune from antitrust attack if it is facially "within the scope of the patent." Under this approach the court may not second guess the settlement by inquiring into the validity of the patent; the settlement itself shields this query from the court. A second alternative concludes that a very large settlement payment is a sign that something is wrong with the patent, inviting the court to look more closely at the underlying patent to determine whether the settlement is really a good faith attempt to manage litigation and business risk. A third approach is that a large settlement exclusion payment disproportionate to litigation risk can be unlawful under antitrust's rule of reason, without inquiry into whether the patent is actually invalid, and even if the settlement agreement does not go "beyond the scope" of the patent's nominal coverage. Finally, the court might apply a "quick look," or truncated, antitrust analysis in which the plaintiff can enjoy presumptions about market power or anticompetitive effect. The Supreme Court chose the third, or rule of reason, option, but it made clear that the plaintiff need not make a long form rule of reason showing and suggested important shortcuts.

Payments whose size correlates with risk are essential to entrepreneurial decision making, but entrepreneurial risk is usually private in the sense that the firm risks the resources of its own shareholders. In the pharmaceutical pay-for-delay setting, however, what is being placed at risk is both the investment of the pioneer and the welfare of consumers, interests that pull in opposite directions. Consumers represent an important externality. They are not participants in this dispute, but they stand to lose the benefits of competition that would otherwise have occurred.

While the Court did not discuss private consumer challenges, its substantial revision of the law applies equally to private actions and it is reasonable to expect that several will emerge. Purchasers seeking antitrust overcharge damages from an anticompetitive pay-for-delay settlement should be able to proceed without proving patent invalidity, although they would be subject to the same rule-of-reason constraints that the Court created for the FTC.

Finally, the breadth of the Activis opinion makes it relevant for many situations outside of the Hatch-Waxman context. For example, the Court's dicta severely limited its 1926 GE decision permitting price fixing among a patent and its licensees, and implicitly overruled decisions such as Bement, which permitted product price fixing among the members of a patent pool. A central question was whether the Patent Act, either explicitly or by reasonable implication, authorized the challenged conduct. If the answer is no, ordinary antitrust analysis can proceed.