Splitting the Difference Between Antitrust and Intellectual Property: FTC v Actavis

The dividing line between intellectual property and antitrust laws was further clarified last week when the Supreme Court of the United States (SCOTUS) settled a debate on the illegality of Reverse Payment Agreements (RPAs) in Federal Trade Commission (FTC) v Actavis. In so doing, the Court split the difference between the FTC’s assertion that RPAs are “presumptively illegal” and the “Brand-name” position that RPAs should be “immune from antitrust scrutiny” if formed under a valid patent.

What is a Reverse Payment Agreement (RPA)?

As has previously been discussed on this blog, an RPA is a settlement agreement that has come to be known as a “pay-for-delay deal”.  In such an agreement, a patent holder pays the allegedly infringing generic drug company to delay entering the market until a particular date, thus delaying litigation on the patent. The payment is “reverse” because the money flows in the opposite direction from a typical exchange between licensee and patent holder.

In some ways, RPAs make economic sense for all companies involved. “Brand-names” can maintain market exclusivity, while “Generics” potentially generate more revenue than if they had released the product into the market.  Consumers, however, are arguably short-changed because the prices of pharmaceuticals remain high as a result of this delayed competition.

The AndroGel “Reverse Payment”

In 2000, Solvay’s patent for a formulation of testosterone – AndroGel – was approved.  In 2003, Watson and Paddock filed their intent to manufacture generic versions of AndroGel with the FDA, alleging that Solvay’s patent was invalid.  In response, Solvay sued for patent infringement.  Instead of allowing litigation to determine the validity of the patent, the parties settled. The settlement involved a payment from Solvay to Watson of $19-30 million annually until 2015.  During that time, Watson would not sell its version (unless another generic entered the market) and would assist Solvay in marketing AndroGel to urologists.

The FTC Argument: RPAs Illegally Allow “Brand-Name” Manufacturers to Extend Patent Monopolies

The FTC argued that these agreements had little actual value to Solvay, and that the real purpose of the settlement was to protect Solvay’s patent from being challenged and delay generic entry into the market. As a result, the FTC believed that Solvay had unlawfully extended its monopoly on AndroGel through payments to its competitors.  This sort of agreement is a prima facie violation of US antitrust laws, because the agreement between Solvay and the generic manufacturers resembled a horizontal agreement to suppress competition and extend a monopoly.  Thus, the FTC argued that settlements involving RPAs should be made presumptively illegal.

The “Brand-Name” Response: A Valid Patent Should Immunize RPAs from Antitrust Scrutiny

In response, the pharmaceutical companies argued that the existence of a valid patent should immunize settlements involving RPAs from antitrust scrutiny.  Since the settlement agreement allowed Watson to enter the market 65 months before Solvay’s patent ended, and since patents are legitimate exercises of market exclusivity, the “Brand-names” argued that RPAs are a legitimate exercise of their patent rights and there should be no concern about abuse of monopoly power.

They further argued that unless the companies took action outside the “scope of the patent” (for example, by extending market exclusivity past the patent expiration date or expanding the scope of the exclusivity beyond the patent claims), the fact that Solvay held a valid patent should allow it to choose to exclude others from the marketplace at its discretion, including by settling cases with potential competitors using RPAs.

The Supreme Court’s Decision in FTC v Actavis: The FTC Has the Right to Prove Antitrust Claim

Writing for the majority in a 5-3 decision, Justice Stephen Breyer held that a broad allowance of all RPAs under a registered patent was an improper outcome given that the patent itself may be invalid.  At the same time, Justice Breyer did not find RPAs to be so unjustifiable that they should be evaluated under the “presumptively illegal” framework proposed by the FTC.  Instead, Breyer J struck a balance and held that the FTC has the right to be given an opportunity to “prove its antitrust claim.”

The Dissent

In a dissenting opinion, Chief Justice John Roberts supported the “Brand-name” position.  He argued that so long as the parties held a valid patent, the patent itself gave the owner the right to choose who could use their property.  This right includes the use of reverse payments to settle litigation.  While Chief Justice Roberts acknowledged that antitrust laws are intended to encourage competition, he worried that the majority opinion would discourage settlements in patent litigation.  He wondered whether the costs of protracted litigation would lead fewer “Generics” to challenge “Brand-name” patents in the first place.

The Impact of the Decision

While the majority decision seems to strike a balance between two extreme positions, one wonders if SCOTUS has not opened a new can of worms with this decision. By allowing the FTC to make an antitrust case against RPAs, courts are now faced with the difficult task of deciding which agreements are anti-competitive. Justice Breyer does provide some guidance on this assessment by stating that the anti-competitive nature of an RPA would be based on “its size, its scale in relation to the payor’s anticipated future litigation costs, its independence from other services for which it might represent payment, and the lack of any other convincing justification.” He also warned against “large and unjustified” RPAs. It is worth noting, however, that the merits of the patent were not part of Breyer’s consideration.

Only time will tell if this decision will prevent truly anti-competitive practices or if it will prevent legitimate agreements that would have allowed innovators of beneficial drugs to recoup their costs.


Beatrice Sze is an IPilogue Editor and a JD Candidate at Osgoode Hall Law School.
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