In Federal Trade Commission v. Watson Pharmaceuticals, Inc., No. 133 S. Ct. 787 (2012), the Supreme Court held that reverse payments in pharmaceuticals patent settlement are not categorically immune from the antitrust laws even if such payments fall within the scope of the patent.
Often, reverse payments are made by a pioneer drug manufacturer to a generic drug manufacturer in settlement of a patent challenge. In exchange for the payment, the generic manufacturer agrees to refrain from selling a generic version of the drug for an agreed period of time.
In 1999, Solvay Pharmaceuticals filed a New Drug Application with the FDA for Androgel, testosterone gel. Subsequently, Watson Pharmaceuticals filed an Abbreviated New Drug Application (ANDA) with the FDA for a generic version of Androgel, alleging that the Solvay’s patent was invalid. Solvay initiated an infringement suit but the parties eventually settled in 2006 and Watson agreed not to enter the market until September, 2015. Three years later in 2009, the Federal Trade Commission filed suit against the settling parties for an antitrust violation alleging that such reverse payment settlements grant the brand-name manufacturer a monopoly that is practically unchallengeable. Further, by agreeing to settle, the generic drug manufacturer agreed to unlawfully share monopoly profits.
The Eleventh Circuit, on appeal, affirmed the district court’s decision that the settlement did not violate the antitrust law, reasoning that a reverse payment is “immune from antitrust attack as long as its anticompetitive effects fall within the scope of the exclusionary potential of the patent.” The FTC, on Certiorari, argued before the Supreme Court in May 2012 that the purpose of the Hatch-Waxman Amendments was to address the scope and validity of pharmaceutical patents and provide a better framework for generic entry, and that therefore reverse payments frustrate these Amendments by “short-circuiting” the framework.
In reviewing the Eleventh Circuit’s decision, the majority set forth five reasons why the FTC should be allowed to proceed with its challenge:
1. Reverse payments have the potential for genuine adverse effects on competition, particularly if the settlement term at issue is payment in return for a promise to stay out of the market.
2, The traditional justifications for settlement, such as avoiding litigation costs or fair value for services, did not outweigh the harm of consequential anti-competition.
3. In cases where a reverse payment poses a threat of unjustified anticompetitive harm, the patentee usually possesses the market power to charge supra-competitive prices.
4. Determining a patent’s validity does not necessarily consume an inordinate amount of judicial resources.
5. Parties to the Paragraph IV litigation could still pursue other legitimate means of settling.
Subsequently the Supreme Court reversed the Eleventh Circuit, holding that no categorical immunization for reverse payment exists and that the legality of a reverse payment must be analyzed under the Rule of Reason. In applying the Rule of Reason, the Court considered the likelihood of anticompetitive effects based on the size and scale in relation to the payer’s anticipated future litigation costs, its independence from other services for which it might represent payment, and the lack of any other convincing justification for the payment.
Although the Court stopped short of declaring reverse-payment arrangements presumptively illegal, the U.S. Department of Justice and the FTC will undoubtedly challenge more of them in the wake of Watson.
The future implication of Watson is still unknown. Some suspect that the case will generate increased uncertainty for the parties contemplating settlements and absorb judicial resources as courts struggle to balance pro-competitive justifications against the anti-competitive effects. Others believe that an antitrust determination made by the same court presiding over the infringement claim promotes judicial efficiency by bringing the patent and antitrust determinations into a single forum.
