Reverse Settlements Under the Hatch Waxman Act
by Shaukat A. Karjeker
In a 5-4 decision, the Supreme Court reversed an 11th Circuit decision, which held that “a reverse-settlement agreement” in which defendant generic drug manufacturers agreed to accept payments not to compete with a patented drug, was lawful because the plaintiff patent owner could have excluded others from the market under its exclusive patent rights. The Court declined to hold reverse-settlement agreements presumptively unlawful. Instead, the Court remanded with instructions that the lower courts apply a set of five considerations to assess the effects on competition of reverse-settlement agreements involving patents under the Hatch Waxman Act (Act).
The Court explained four pertinent sections of the Act. First, to market a new prescription drug, a drug manufacturer must submit a New Drug Application (NDA) to the US Food and Drug Administration (FDA) and undergo the testing protocol required for marketing approval. Second, once approved, a manufacturer of a generic drug can file an Abbreviated New Drug Application (ANDA). In the ANDA, the generic applicant can make assertions about drug similarity to avoid the testing protocol that the original drug manufacturer underwent. Third, the Act allows the pioneer manufacturer to list any patents it might have in its NDA. Further, any generic applicant has to certify a right to market, for example by certifying that any listed patents of the pioneer are expired, invalid or not infringed.
Solvay filed an NDA with the FDA for “Androgel” and received approval in 2000. In 2003, Solvay obtained a patent covering the drug. In that same year Actavis filed an ANDA. Actavis certified that the Solvay patent was invalid and that its generic drug did not infringe the patent. This led to patent litigation between Solvay, Actavis, and two other generic manufacturer applicants, Paddock and Par. In 2006, the parties entered into a settlement agreement and submitted the agreement to the FTC. The FTC regarded the terms of this reverse-settlement agreement as anti-competitive, and filed suit to challenge the settlement.
Under the reverse-settlement agreement Actavis agreed not to enter the market until August 31, 2015, unless another party entered the market earlier. Actavis also agreed to promote Androgel to urologists. Solvay promised to pay about $19 to $30 million annually to Actavis for nine years, $60 million in total to Par, and $12 million total to Paddock. The FTC contended that these payments were compensation for not competing against Androgel.
The FTC Complaint asserted that the parties unlawfully agreed to share in Solvay’s monopoly profits, abandoned challenges to the patent, and refrained from competing with Androgel. The District Court dismissed the Complaint on grounds that the allegations did not state an antitrust violation. On appeal, the Eleventh Circuit Court of Appeals affirmed and held that absent fraud or sham litigation, a reverse-settlement agreement is immune from antitrust attack, as long as the exclusionary effect is within the scope of the exclusionary patent rights. While the court recognized that the antitrust laws typically prohibit paying a competitor not to enter the market, the court found that reverse-settlement agreements are “atypical” because one party owns a patent and can lawfully exclude others. The court also recognized that the patentee avoided the risk of patent invalidation if it settled. But, public policy favoring settlements, the courts could not compel parties to litigate to avoid antitrust liability.
The Supreme Court acknowledged the value of settlements and the patent-related factor, but concluded that exclusive patent rights should not determine the outcome. The Court presented five sets of considerations to support its conclusion that the FTC should have been allowed to make its case. First, the reverse payment in effect amounted to purchasing the exclusive right to sell the product and to maintaining prices at patentee-set limits. Second, concerns about anticompetitive consequences may sometimes prove unjustified. The payments may reflect no more than a rough approximation of saved litigation expenses and might not reflect payments to avoid the risk of patent invalidation or non-infringement. An antitrust defendant may explain a term of the agreement under the “rule of reason.” Third, where the payment threatens a risk of anticompetitive harm, the patentee likely has the power to cause the harm. Fourth, the size of the payment is an indicator of power, and an unexplained large payment casts doubts on the patent’s validity. Fifth, the fact that a large unjustified reverse payment risks antitrust liability does not prevent settlement. The parties can settle on other terms.
Shaukat A. Karjeker is a partner at Carstens & Cahoon LLP. He can be reached at email@example.com.