Nearly two years after the U.S. Supreme Court’s decision in Federal Trade Commission v. Actavis, 133 S. Ct. 2223 (2013), “reverse payment” settlements in patent litigation between brand-name drug manufacturers and potential generic entrants remain a hot topic in the antitrust world. At the American Bar Association’s Antitrust Law Spring Meeting, held in Washington, D.C., last month, reverse payments were discussed at numerous sessions, including one session devoted exclusively to the topic.
Reverse payments are payments made in connection with the settlement of patent litigation between the manufacturer of a brand-name drug and a competitor seeking to market a generic version of that drug. They are called reverse payments because they flow in the opposite direction from that expected in a litigation settlement. They are payments from the brand-name manufacturer plaintiff (the party claiming patent infringement) to the generic competitor defendant (the party accused of patent infringement).
The phenomenon of reverse payments is a product of the Hatch-Waxman Act, the statutory scheme that governs U.S. Food and Drug Administration approval for generic versions of approved brand-name drugs. Under the Hatch-Waxman scheme, a brand-name drug company must list in the FDA’s “Orange Book” all patents that the company contends would be infringed by a generic version of its approved product, as well as their expiration dates. A company seeking FDA approval to market a generic version of that brand-name product before expiration of those patents must submit an application to the FDA, including a “Paragraph IV” certification, as to each Orange Book-listed patent, stating that the patent is invalid, unenforceable or will not be infringed by the proposed generic product. The brand-name company then has 45 days to sue the generic applicant for patent infringement; if it does so, the FDA may not approve the generic application for at least 30 months—unless the patent litigation is settled or the generic applicant prevails. Importantly, the first generic application to file a Paragraph IV certification with respect to a drug, or the “first filer,” will receive 180 days of exclusivity, as the only generic on the market, following its eventual FDA approval.
Given this statutory framework, settlement of Hatch-Waxman litigation has historically involved a payment from the brand-name company to the generic applicant and an agreement by the generic applicant that it will not launch its product until some agreed-upon future date. Such a reverse payment raises antitrust concerns because of the potential that it masks an agreement not to compete, in which the brand-name company agrees to share its monopoly profits with a would-be generic competitor in exchange for that competitor’s promise to stay out of the market.
In 2013, the Supreme Court decided Actavis, in which the majority held that a “large and unjustified” reverse payment sometimes will raise antitrust concerns because it suggests that the brand-name patentee has doubts about the validity of its patent and is therefore paying the generic entrant to abandon its challenge. Accordingly, the court held that reverse-payment settlements were neither immune from antitrust scrutiny, as the defendants had contended, nor presumptively anti-competitive, as the FTC had contended. Instead, they would be subject to “rule of reason” analysis, in which a court weighs the purported anti-competitive effects and pro-competitive justifications to determine whether, on balance, the settlement is reasonable.
‘Side Deals’ Under ‘Actavis’
A full session at the spring meeting was devoted to the question of how to settle a Hatch-Waxman suit in light of Actavis. A representative of the FTC’s health care division, Bradley Albert, offered some insight regarding the factors that the FTC considers when reviewing Hatch-Waxman settlements in light of Actavis.
Albert noted that reverse payments now take numerous forms, and often do not involve a straightforward cash payment. For example, settlements may consist of an agreement regarding the generic entry date, with no payment, plus a “side deal” between the parties. The side deal is an ostensibly separate business transaction entered into at the same time as the settlement, such as a manufacturing, distribution or co-promotion agreement. In reviewing these side-deal settlements, the FTC is concerned with whether the deal price reflects fair value, or instead serves as an inducement to the generic company to stay out of the market. Albert seemed skeptical of the claim, often made, that the parties merely recognized a mutually beneficial business opportunity during the course of their settlement negotiations. In assessing whether these side deals raise antitrust concerns, the FTC also considers whether the side deal is truly independent of the settlement. A side deal that is entered into at the same time as the settlement or is contingent on the settlement raises concerns that the deal is in fact an inducement to the generic company to delay its entry. From the FTC’s perspective, if a deal truly makes business sense to the parties, it would not be necessary to tie it to the settlement. Other factors relevant to the analysis include whether the parties were already seeking this type of business opportunity and whether the financial terms are consistent with comparable deals. To this end, a company’s internal documents are likely to be very important in addressing the FTC’s concerns, as they may indicate that the party had discussed or explored similar opportunities with other companies and that the financial terms were consistent with those agreed upon in the side deal.
Of course, as other panelists presenting the industry’s perspective pointed out, nothing in Actavis suggests that parties may not enter into contemporaneous business transactions when settling Hatch-Waxman litigation. It is not unreasonable to imagine that parties engaged in settlement negotiations, especially when trying to avoid cash payments that are most obviously problematic under Actavis, might uncover business opportunities, regardless of whether the parties were already in the market for these services. Further, valuation of side deals to determine whether they reflect fair value involves a great deal of uncertainty. Presumably, in many transactions, both parties believe they have gotten the better deal, simply because the parties will value the transaction independently and differently. A generic company might have relied upon more accurate information, used a better valuation methodology, or simply have better negotiators who struck a favorable deal at their competitor’s expense. In such a situation, the antitrust laws should not penalize a company that is able to profit at the expense of a less competent competitor. Finally, the possibility that a comparable deal might have been available with another party at a better price does not mean that there were not legitimate business reasons for the deal that was chosen. For example, there may have been nonfinancial terms that were crucial or doubts about another party’s ability to perform. In short, truly comparable deals may not exist and a comparison with similar deals may or may not yield useful information into whether a side deal reflects fair market value as opposed to a payment for delayed entry.
Authorized Generics Under ‘Actavis’
Another fairly common non-cash component of Hatch-Waxman settlements is a no-authorized generic, or no-AG, agreement. A no-AG agreement, in its simplest form, is an agreement by the brand-name company not to launch its own authorized generic product following the approval of the competitor defendant’s generic product. Since an authorized generic can be marketed even during the first filer’s 180-day exclusivity period, a no-AG commitment may be very valuable to a first filer. According to the FTC’s statistics, competition from an authorized generic reduces a first filer’s profits by 40 to 50 percent during that 180-day period. Though two district courts last year held that a no-AG agreement is not a reverse payment under Actavis (the question is currently before the U.S. Court of Appeals for the Third Circuit in a case that was argued last November), Albert indicated that the FTC believes a no-AG agreement is a form of reverse payment and that a settlement including such a provision will draw the agency’s attention.
The district courts that have held that no-AG agreements are not reverse payments interpreted Actavis as applying only to cash payments and not to other forms of consideration, no matter their value. From an economic perspective, these decisions are on shaky footing. Indeed, other district courts have reached the opposite conclusion. Notably, none of the panelists at the ABA session on this topic were willing to defend this reading of Actavis. While the district courts may have split on this question, the FTC’s position is clear. Until there is more clarity from the courts, parties would be advised to avoid no-AG agreements to avoid FTC scrutiny.
Can Parties Settle Without Ending Up in Court?
For parties trying to settle Hatch-Waxman litigation in the post-Actavis world, there remains the question of how to do so without winding up in protracted litigation. Unfortunately, recent court decisions provide little guidance, since district courts do not even agree on the fundamental question of whether Actavis even applies to non-cash components of these settlements. Of course, Actavis expressly states that a settlement may provide for generic entry on any date prior to patent expiration as long as no reverse payment is involved. The majority recognized that “parties may have reasons to prefer settlements that include reverse payments,” but asked the question, “What are those reasons?” This suggests that any settlement including a reverse payment may warrant scrutiny under Actavis.
In light of the majority’s focus on payments that are “large and unjustified,” one panelist proposed that safe harbors should be recognized for justified payments that do reflect avoided litigation costs and side deals that are profitable to the brand-name company. While this proposal seems consistent with the majority’s analysis, it is not clear that these safe harbors would considerably lessen the burdens on defendants in reverse-payment litigation. It would be relatively easy for a plaintiff to plead that the safe harbors did not apply, in order to survive a motion to dismiss. Similarly, a plaintiff could likely offer its own analysis indicating that a payment amount exceeded litigation costs or that a side deal was not profitable to the brand-name manufacturer. In such a case, the availability of these safe harbors would be an issue for trial.
Another suggestion was that courts should only be concerned with payments that significantly exceed any reasonable estimate of litigation costs or fair market value of services provided, and only these payments would be subject to rule-of-reason analysis. This approach, which could be tied to the “large” requirement in “large and unjustified,” might be of greater benefit to litigants. It would recognize the uncertainty involved in attempting to value non-cash components of a settlement. Accordingly, it could reduce the expense involved in defending payments that are not grossly disproportionate to “legitimate settlement considerations,” while ensuring that settlements with a high degree of anti-competitive potential are given close attention.
As indicated by the continued focus on reverse payments at this year’s spring meeting, there remain many unanswered questions about the meaning of Actavis. As the circuit courts begin to weigh in, things may or may not become clearer. Stay tuned.
Reprinted with permission from the May 4, 2015 issue of The Legal Intelligencer. Copyright 2015. ALM Media Properties, LLC. Further duplication without permission is prohibited. All rights reserved.