FTC v. Actavis: Where We Stand After 5 Years

What has happened in these five years? For starters, the number of “pay for delay” settlements (involving payment and delayed entry) has declined.

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It has been five years since FTC v. Actavis. In that landmark ruling, the Supreme Court held that settlements by which brand-name drug companies pay generics to settle patent litigation and delay entering the market could have “significant anticompetitive effects” and violate the antitrust laws. What has happened in these five years?

For starters, the number of “pay for delay” settlements (involving payment and delayed entry) has declined. From 2012 to 2015, the total number of settlements increased from 140 to 145 to 160 to 170, but the number of potential pay-for-delay settlements decreased from 40 to 29 to 21 to 14. Increased judicial scrutiny seems to have reduced the frequency of this conduct.

In the courts, the issue that has received the most attention is whether “payment” encompasses cash only or other forms of consideration. The two appellate courts that have examined the issue have concluded that payment extends beyond cash. In King Drug Company of Florence v. Smithkline Beecham, the Third Circuit explained that “[t]he anticompetitive consequences” of agreements by which brands promise not to introduce their own generics that would compete with “true” generics “may be as harmful as those resulting from reverse payments [so-called because the payment atypically flows from patentees to alleged infringers] of cash.” Similarly, the First Circuit in In re Loestrin Antitrust Litigationobserved that “a narrow construction of Actavis [would] give drug manufacturers carte blanche to negotiate anticompetitive settlements so long as they involve non-cash reverse payments.” The combination of these two decisions, numerous district court rulings that similarly held that payment includes noncash conveyances, and the Supreme Court’s denial of certiorariin King Drug appears to have resolved this issue.

Once payment is understood to extend beyond cash, the next issue implicates the pleading rules a plaintiff must satisfy. In In re Lipitor Antitrust Litigation, the Third Circuit reversed two district courts that had applied extremely high standards, requiring plaintiffs to convert a non-monetary payment to “a concrete, tangible or defined amount which yields a reliable estimate of a monetary payment.” The court overturned a “heightened pleading standard” that was “contrary” to foundational pleading cases that require only plausibility (“not akin to a probability requirement”) and do not mandate that plaintiffs “set out in detail the facts” upon which they base their claim.

Once the analysis proceeds to the merits, an issue (of keen interest to IP Watchdog readers!) arises as to the role played by the patent in the analysis. By way of background, brands and generics are able to settle patent litigation by selecting an entry date based on the strength of the patent. If, for example, there are 10 years remaining in the patent term and the parties agree there is a 60 percent chance a court would uphold the patent’s validity and find that it is infringed, the mean probable date of entry under litigation is 6 years. It is widely understood that a settlement providing for entry at this time would not present antitrust issues. On the other hand, if the brand pays the generic $100 million to delay entry an additional 3 years, until the 9thyear, that would present antitrust concern because the patentee is obtaining exclusion based not on the patent but the payment.

The question then is whether the settling parties are permitted to introduce evidence of the patent merits in arguing that a payment is justified by the strength of the patent. A hurdle to introducing such evidence is Actavis itself, where the Court made clear that “it is normally not necessary to litigate patent validity to answer the antitrust question” and that a payment’s size “provide[s] a workable surrogate for a patent’s weakness, all without forcing a court to conduct a detailed exploration of the validity of the patent itself.” Such a finding also applies to “particularly valuable” patents, as the concern is that “the payment (if otherwise unexplained) likely seeks to prevent the risk of competition” and “that consequence constitutes the relevant anticompetitive harm.”

Subsequent court decisions support analysis that does not rely on the patent merits. The court in Time Insurance v. AstraZeneca denied a motion to dismiss because “without reaching the ultimate question of the validity of the patents, the risk that the generic manufacturers might enter the marketplace and demonstrate a reasonable likelihood of success in voiding the patents has an economic consequence which plaintiffs contend was blunted by unlawful agreements preventing that form of competition.” Similarly, the court in FTC v. Cephalon ruled that a brand firm could not introduce evidence related to a patent’s “potential validity, enforceability, or infringement” when the court had earlier found that the company had engaged in inequitable conduct.

More generally, courts must determine the type of antitrust analysis to apply. The ActavisCourt anticipated that lower courts would play a crucial role in “structuring . . . the . . . rule-of-reason antitrust litigation.” Such a framework was to “consider traditional antitrust factors such as likely anticompetitive effects, redeeming virtues, market power, and potentially offsetting legal considerations.”

In fleshing out this framework, post-Actaviscourts have followed a burden-shifting analysis. First, a plaintiff must show a large payment. Although the issue is not free from doubt, most of the courts confronting the question have found this threshold to be satisfied by a payment greater than litigation costs. Second, the defendant must justify the payment, typically by showing that it is for unrelated services. And third, the court balances the agreement’s anticompetitive and procompetitive effects.

The final issue that has received attention involves causation. In the only trial proceeding to verdict since Actavis, a jury found that the plaintiffs did not show that the settlement caused their injuries. Even though the jury concluded that the settlement included a “large and unjustified payment” and was “unreasonably anticompetitive,” it found that the brand firm would not have agreed with the generic that it could launch before the settlement date and that the FDA was not likely to grant approval before that date. In contrast, the court in In re Niaspan Antitrust Litigationfound that the plaintiffs demonstrated causation through a large and unexplained payment, the generic’s expenditure of $2 million in research and due diligence concerning patent invalidity and infringement, and the generic’s willingness to launch at risk.

In short, five years after Actavis, the number of pay-for-delay settlements has decreased but courts are still developing the appropriate antitrust analysis. Over the next five years, these trends are likely to continue.


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Join the Discussion

4 comments so far.

  • [Avatar for Paul Morgan]
    Paul Morgan
    June 19, 2018 01:40 pm

    Xtian, the law allows the DOJ or FTC to review IPR settlement agreements, just as it does for interference:
    35 USC 317(b): “Agreements in Writing- Any agreement or understanding between the patent owner and a petitioner, including any collateral agreements referred to in such agreement or understanding, made in connection with, or in contemplation of, the termination of an inter partes review under this section shall be in writing and a true copy of such agreement or understanding shall be filed in the Office before the termination of the inter partes review as between the parties. At the request of a party to the proceeding, the agreement or understanding shall be treated as business confidential information, shall be kept separate from the file of the involved patents, and shall be made available only to Federal Government agencies on written request, or to any person on a showing of good cause.”

  • [Avatar for xtian]
    June 19, 2018 11:35 am

    Another thing to ponder – Will IPR settlement agreements be reviewed by the FTC?

  • [Avatar for Paul Morgan]
    Paul Morgan
    June 19, 2018 09:56 am

    Has the availability of IPRs in this same time frame made a difference in settlements with generics or settlement values that also needs to be factored in? How many generics have filed IPRs against patented commercial drugs?

  • [Avatar for Kevin E Noonan]
    Kevin E Noonan
    June 18, 2018 06:34 pm

    True as far as it goes. Instead of money parties have, with varying levels of success, used authorized generics, negotiated market entry dates, and avoided litigation costs as a substitute. In addition, because district courts are short on manpower there is a concerted effort by magistrate judges to get the parties to settle. This can involve the magistrate giving her blessing to the settlement agreement, sanctioned by the district court, which makes it harder for antitrust plaintiffs to make the case that the agreement is anti-competitive. All in all not sure there is enough evidence that reducing “traditional” reverse payment settlement agreements has made a difference in generic market entry.

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