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.
