U.S. Supreme Court Holds That Reverse Payment Settlements Are Not Presumptively Unlawful But Are Subject to the Rule of Reason

On June 17, 2013, in F.T.C. v. Actavis, 133 S.Ct. 2223 (2013), the U.S. Supreme Court handed down its long-anticipated ruling on “reverse payment” agreements in the context of pharmaceutical patent infringement cases, holding that that such agreements—while not presumptively illegal—may be challenged by the government and private parties for violating the antitrust laws.

When brand-name pharmaceutical companies are embroiled in patent infringement litigation with generic manufacturers under the Hatch-Waxman Act, the litigation can be resolved with an agreement whereby the plaintiff brand name drug patent holder pays the defendant generic a substantial sum of money to defer entry into the market. These so-called “reverse payment” settlements have been criticized and challenged by private litigants and the Federal Trade Commission as illegal agreements between competitors to extend and then divide between them the monopoly sales period granted by a potentially invalid patent.

For a decade, the FTC has argued—almost uniformly, without success—that such deals violate Section 5 of the Federal Trade Commission Act. Several courts of appeals, with the exception of the 3rd Circuit, have held that so long as the anticompetitive effects of a reverse payment settlement fall within the scope of the patent’s exclusionary period, the settlement is immune from antitrust attack.

In a 5-3 ruling, the Supreme Court determined that these reverse payments are not, in fact, immunized from antitrust scrutiny. Writing for the majority, Justice Stephen Breyer held that “[a] reverse payment, where large and unjustified, can bring with it the risk of significant anticompetitive effects.” The Court, however, stopped short of adopting the FTC’s view that all such agreements should be deemed to be anticompetitive. Instead, the Court held that reverse payment settlements should be evaluated under the “rule of reason” test, noting that “there is always something of a sliding scale in appraising reasonableness” and that “the quality of the proof required should vary with the circumstances.” Thus, although the Court’s opinion provides some clarity on an issue that has divided both the federal courts and antitrust enforcement agencies for more than a decade, the heavily fact-dependent inquiry described by the Court in analyzing these agreements assures that it has not been put to rest. The Court’s opinion can be accessed here.