On June 26, the Third Circuit ruled that so-called “reverse payment” settlement agreements of patent infringement litigation between branded and generic pharmaceutical companies can face antitrust scrutiny under the Supreme Court’s decision in FTC v. Actavis, even when the “payment” at issue is an agreement by the branded company not to market an authorized generic product for a period of time. King Drug Co. of Florence, Inc. v. Smithkline Beecham Corp., __ F.3d __, 2015 WL 3967112 (3d Cir. 2015).
Under Actavis, when these settlement agreements include unexplained, large payments from the patent holder to the potential generic challenger, the agreements “may sometimes violate the antitrust laws.” 133 S. Ct. 2223, 2227 (2013). The district court in King Drug held that such payments could only be challenged if the payments were made in cash. The Third Circuit, however, held that Actavis was not limited only to cash payments, but also allowed for antitrust challenges of patent settlements involving other types of consideration.
The plaintiffs in the case, King Drug Co. of Florence Inc. and Louisiana Wholesale Drug Co. Inc., challenged a patent settlement between a branded pharmaceutical manufacturer and a generic pharmaceutical manufacturer in which the generic agreed to withdraw its challenge to the validity of the branded manufacturer’s patent for the epilepsy drug Lamictal. In exchange, the branded manufacturer agreed to allow the generic manufacturer to begin selling its generic version of the drug at approximately the same time as the patent was scheduled to expire and agreed not to launch its own authorized generic in competition with the generic manufacturer’s version during the 180-day exclusivity window that a first-filed generic enjoys under the Hatch-Waxman Act, which precludes other generics from entering the market during that time period. The settling companies defended the suit on multiple grounds, including the argument that the lack of a cash payment in the settlement exempted it from antitrust scrutiny.
The Third Circuit disagreed, ruling that that cash payments are not the deciding factor for determining whether a patent settlement between pharmaceutical companies deserves antitrust scrutiny:
“We believe this no-[Authorized Generic] agreement falls under Actavis’ rule because it may represent an unusual, unexplained reverse transfer of considerable value from the patentee to the alleged infringer and may therefore give rise to the inference that it is a payment to eliminate the risk of competition.”
The court noted that Actavis recognized that 180-day window can be worth hundreds of millions of dollars to a first-filing generic and further pointed out a brand’s commitment not to produce an authorized generic “means that it must give up the valuable right to capture profits in the new two-tiered market.”
Although the Third Circuit’s decision is disappointing to those who had hoped that the Actavis holding would be cabined to monetary payments, there are nonetheless several key points that should give hope to pharmaceutical companies who rightly would like to see greater clarity as to the antitrust rules that govern patent settlements. In particular:
- Like Actavis, the court emphasized that not all settlements are subject to antitrust scrutiny; only “unusual, unexplained reverse transfer[s] of considerable value” can be the basis for an antitrust claim.
- The court distinguished settlements in which the only benefit the generic manufacturer receives is a right to enter the market earlier than the patent would otherwise have allowed, noting that such settlements are more likely to “reflect their assessment of the strength of the patent.”
- In holding that the plaintiff had stated a claim that survived a motion to dismiss, the court noted several factual allegations that may prove difficult for plaintiffs in other cases to match, including the allegation that the generic manufacturer had a history of launching products “at risk” before infringement litigation was resolved and the fact that the main claim of the patent at issue had already been invalidated at the time of the settlement.
- The court adopted a theory of competitive harm that may make it challenging for plaintiffs to establish damages. According to the court, “the anticompetitive harm is not certain consumer loss through higher prices, but rather the patentee’s ‘avoid[ance of] the risk of patent invalidation or a finding of noninfringement’—that is, ‘prevent[ion of] the risk of competition,’ beyond what the patent’s strength would otherwise allow—and, thus, consumer harm.” This may suggest that a valid damages model must account for the strength of the patent, and limit damages only to the delta between the actual settlement value and the hypothetical settlement value based only on the patent’s strength.
- The court expressly did not consider whether private direct purchaser plaintiffs can allege antitrust injury in these cases, leaving that to the district court to consider on remand.
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