Supreme Court’s Request for Views of the United States on Cert. Petition in Lamictal “Reverse-Payment” Case Flags Potential Issues for Practitioners

On Monday, June 7, the Supreme Court requested the views of the Solicitor General in connection with a petition for certiorari filed by the U.S. subsidiary of GlaxoSmithKline plc (“GSK”) in SmithKline Beecham Corp. v. King Drug Co. of Florence, No. 15-1055.  The Supreme Court’s request seems less directed to rethinking its seminal ruling in FTC v. Actavis on the lawfulness of “reverse-payment” settlements of Hatch-Waxman cases than to a concern that, in some specific ways, its decision may have created some unintended consequences.

King Drug involved the settlement of patent infringement litigation over a brand-name drug used to treat epilepsy and bipolar disorder, Lamictal®, brought by GSK against Teva Pharmaceuticals under the framework of the Hatch-Waxman Act.  Among other features, the settlement gave Teva a license under GSK’s patent and NDA for Lamictal® to enter the market prior to expiration of the patent in suit, and GSK agreed not to authorize another generic entrant during the period in which Teva would not face competition from any other FDA-approved generics.  Patent- and NDA-licensed generic entrants are referred to as “authorized generics” (“AGs”), as compared with generics that enter via the ANDA approval process.  The settlement term in which GSK agreed not to license its NDA to another generic manufacturer is colloquially referred to as a “No-AG agreement.”  While estimates varied and issues of causation remained, there was no dispute that an additional Lamictal® AG would earn GSK some marginal revenue and reduce both Teva’s volume of sales and the prevailing market price.

In its 2013 decision in FTC v. Actavis, the Supreme Court held that certain “reverse-payment” settlements of Hatch-Waxman patent infringement cases could violate the antitrust laws, and were subject to review under the rule of reason.  As most relevant here, the Court concluded that antitrust concerns could be raised where the branded drug’s manufacturer settled the case by providing the generic’s manufacturer a “large and unexplained payment” tied to a delay in entry from the date of settlement.  The Court’s concern was that the payment might be an improper agreement to delay entry and split the proceeds of an otherwise unjustified agreement to maintain the patent monopoly in a situation where there is an invalid, or arguably invalid, patent.

In 2015, a panel of the Third Circuit found the GSK-Teva settlement potentially to constitute a “large and unexplained payment,” reversing the district court’s dismissal of the case on grounds that the non-cash No-AG agreement could not be within the scope of Actavis.  The court of appeals did not dispute GSK’s right to license its patent for Lamictal® as such, just its possible use as a means to eliminate a challenge to the patent: “[T]he fact that the Patent Act expressly authorizes licensing does not necessarily mean it also authorizes reverse payments to prevent generic competition.”

At first blush, the decision does not appear controversial, as courts other than the district court below had uniformly found that the “payment” required by Actavis need not be in cash (although a number of courts, including the First Circuit in Loestrin, have required that a complaint provide a basis for quantifying the non-cash compensation allegedly transferred).  And, specifically, no court had found No-AG agreements outside the scope of Actavis.  Nor is there a conflict on this point between the two courts of appeals to have construed Actavis.  All that said, what motivated the Supreme Court to seek the views of the Solicitor General?  We can think of a few possible explanations.

First, the Lamictal case might be a good and much-needed vehicle for addressing the limitations of Actavis.  That opinion was rife with references to factors that would cause a reverse-payment settlement not to implicate antitrust law—including the definition of a “payment,” the meaning of a “large” payment, what explanations can support all or some of an otherwise “large” reverse payment, and the range of pro-competitive effects that would be relevant in a rule of reason analysis.  But the Court explained almost none of them further, and expressly left the lower courts to fill in the blanks.  The Federal Trade Commission, for its part, through litigation and amicus briefs has been busy trying to push back virtually any suggestion of limits at all.  More than a dozen Hatch-Waxman settlements have been in litigation since Actavis was decided, and defining the scope of the Supreme Court’s decision has been a struggle.  No-AG Agreements test a number of those limits.  Notably, they do not involve a direct transfer of compensation from Brand to Generic—although they can be seen both as a decision to forego income from an authorized generic and to permit the Generic to earn more in the marketplace.  Still, we doubt the fact of confusion and uncertainty, standing alone, would warrant an inquiry as to the views of the United States.

A more likely reason is another limit that the Court suggested but did not flesh out—that the antitrust laws not be applied so as to render unlawful “commonplace,” “familiar,” or “traditional” means of settling patent infringement cases.  GSK and Teva argued that one such form is the grant of an exclusive patent license (here, a semi-exclusive one because the Brand retains a right to use the patent).  Indeed, the National Association of Manufacturers filed an amicus brief to underscore the point that the Third Circuit had read Actavis so as to permit virtually any antitrust challenge to a settlement incorporating an exclusive license to survive a motion to dismiss, no matter what industry was involved.

A related point made by those favoring Supreme Court review was that a patentholder’s right to license its patent is specifically authorized by  35 U.S.C. § 261.  Beyond the argument that the antitrust laws should not be read to circumscribe so closely a specific statutory grant, the Court in Actavis itself distinguished the dissent as having failed to “identify any patent statute that it understands to grant [a right to enter into reverse-payment settlements] to a patentee.”  A similar point was made by counsel for the FTC at oral argument in Actavis, who distinguished “reverse payment” settlements from licenses “expressly authorized by the Patent Act.”

Another interesting issue is that the 180-day exclusivity period is a financial incentive that Congress intended to encourage companies like Teva to challenge the patents of branded drugs (or to design around the patents).  In the early days of discussion about authorized generics, some (including some at the FTC) argued that Congress intended the 180-day exclusivity period to reward such patent challengers with six months of freedom from generic competition of any kind, including from AGs.  To the extent the purpose of the statutory exclusivity period is viewed in this way, an interesting argument can be made that the No-AG agreement merely preserves in place a benefit that Congress intended the generic manufacturer receive, and thus cannot be an element of an antitrust violation.  Not many cases discuss the point, but some hold that governmentally-enacted financial benefits (such as tariffs or subsidies by foreign governments) do not make the competitive playing field any less level even though they may permit certain companies to price at levels that others cannot profitably match.  See, e.g., Outboard Marine Corp. v. Pezetel, 461 F. Supp. 384, 400 (D. Del. 1978) (“The antitrust laws were not intended as a sanctuary for those who cannot compete against lower prices be they the result of simple efficiency, economies of scale, cheap labor, technological expertise or anything other than commercially mischievous conduct. Thus, although plaintiff is injured by defendant’s capability to offer lower prices as a result of foreign government subsidies to [plaintiff’s competitor], the Court concludes that the antitrust laws do not provide a remedy for such loss.”).

It seems to us that the Supreme Court might well want to know whether the Solicitor General believes that the Third Circuit’s ruling will put a cloud over patent infringement settlements via exclusive or semi-exclusive license, and whether 35 U.S.C. § 261 provides some sort of safe harbor for No-AG agreements.  The FTC recently brought its first action based on the presence of a No-AG agreement in the Endo case, and that may suggest the Solicitor General will be unlikely to view the Third Circuit’s decision with alarm and go out of his or her way to seek further review.

The SG’s response is unlikely to arrive before the Fall, so a ruling on the petition will not likely occur until well into the Court’s new term.