On June 17, 2013, the U.S. Supreme Court issued its long-awaited ruling on so-called “pay-for-delay” settlements of patent litigation (also known as “reverse payment” settlements)[1]  that may give rise to antitrust concerns. The five-to-three decision in Fed. Trade Comm’n v. Actavis, Inc., No. 12-416, resolves complex issues at the crossroads of patent and antitrust law that have drawn impassioned arguments from nearly all quarters—brand-name pharmaceutical companies, their generic competitors, consumers and their watchdog agency (the Federal Trade Commission), the authors of the Hatch-Waxman Act (Senator Hatch and Congressman Waxman), and scholars and commentators. Accordingly, when settling patent matters, a patentee now needs to consider not only whether he or she is acting within the patent monopoly, but also whether the settlement is within the antitrust law “rule of reason.”

Vedder Price was privileged to contribute to this advocacy at the Supreme Court level by filing an amicus brief on behalf of the New York Intellectual Property Law Association (NYIPLA). The brief urged the Supreme Court to confirm that the “scope of the patent” rule protects pay-for-delay settlements of patent litigation between Big Pharma and its generic competitors from attack under the antitrust laws, so long as the underlying suit is not a sham and the terms of the settlement do not harm or impede competition outside the scope of the patent. Vedder Price Shareholder Thomas J. Kowalski was lead counsel on the brief and was joined by Shareholder John C. Cleary and Associate Marc B. Schlesinger, as well as David F. Ryan and Robert J. Rando, Co-Chair and Member, respectively, of the NYIPLA Amicus Briefs Committee.

Mr. Kowalski was on the team representing the NYIPLA urging the Supreme Court to take up In re K-Dur Antitrust Litig., 686 F.3d 197 (3d Cir. 2012). In the K-Dur case, the Third Circuit Court of Appeals had held that reverse payment settlements in patent cases are per se unlawful under the antitrust laws.

While the Supreme Court was considering whether to hear K-Dur, the Actavis case came before it, then named FTC v. Watson Pharm., Inc., 677 F.3d 1298 (11th Cir. 2012). Faced with an antitrust challenge by the FTC of a reverse payment settlement in a patent case, the Eleventh Circuit Court of Appeals had dismissed FTC v. Watson, holding that, because the reverse payment settlement had not gone beyond the monopoly granted by a patent, it was not unlawful under the antitrust laws. The Supreme Court granted a writ of certiorari. At the Supreme Court, the FTC had urged either the same result as in the Third Circuit’s K-Dur holding (i.e., that reverse payment settlements in patent cases are per se unlawful), or a holding that reverse payment settlements in patent cases should be subject to a “quick-look” approach, whereby the defendant—the patentee who made the settlement—would be under a burden to demonstrate the lawfulness of the settlement.

The Vedder Price amicus brief on behalf of the NYIPLA, which supported the defendants and opposed the FTC, urged the Supreme Court to affirm the Eleventh Circuit decision or, alternatively, to require that reverse payment settlements be analyzed under the three-pronged rule-of-reason antitrust standard:

1. What harm to competition results or may result from the activities?
2. What is the object the parties to the activities are trying to achieve, and is it a legitimate and significant one? In other words, what are the nature and magnitude of the “redeeming virtues” of the challenged activities?
3. Are there other and better ways by which the parties to the challenged activities might achieve their legitimate objectives with fewer harms to competition? That is, are there “less restrictive alternatives” to the challenged activities?

The five-vote Opinion of the Court (Justice Breyer, joined by Justices Kennedy, Ginsburg, Sotomayor and Kagan) holds that reverse payment settlements in patent cases are not per se unlawful, nor are they to be analyzed solely as to whether the settlement goes beyond the monopoly power of the patent or under a quick-look approach. Rather, reverse payment settlements in patent cases are to be analyzed under the rule-of-reason doctrine of antitrust law, with the lower courts left to flesh out the particulars of the rule-of-reason analysis as to reverse payment settlements in patent cases.

Justice Roberts (joined by Justices Scalia and Thomas) dissented, with some cautionary notes for bench and bar in future cases:

[W]e have long recognized that the settlement of patent litigation does not by itself violate the antitrust laws…The key, of course, is that the patent holder—when doing anything, including settling—must act within the scope of the patent. If its actions go beyond the monopoly powers conferred by the patent, we have held that such actions are subject to antitrust scrutiny….If its actions are within the scope of the patent, they are not subject to antitrust scrutiny, with two exceptions…(1) when the parties settle sham litigation…and (2) when the litigation involves a patent obtained through fraud on the Patent and Trademark Office….Today, however, the Court announces a new rule. It is willing to accept that [the patentee’s] actions did not exceed the scope of the patent…But it does not agree that this is enough to “immunize the agreement from antitrust attack….” According to the majority, if a patent holder settles litigation by paying an alleged infringer a “large and unjustified” payment, in exchange for having the alleged infringer honor the patent, a court should employ the antitrust rule of reason to determine whether the settlement violates antitrust law….The majority today departs from the settled approach separating patent and antitrust law, weakens the protections afforded to innovators by patents, frustrates the public policy in favor of settling, and likely undermines the very policy it seeks to promote by forcing generics who step into the litigation ring to do so without the prospect of cash settlements.

For more information on the Actavis case or the settlement of a patent matter implicating antitrust issues, please contact Thomas J. Kowalski or another member of the Vedder Price Intellectual Property group.

Mr. Kowalski is a Shareholder in the New York office of Vedder Price, a member of the firm’s Intellectual Property group and a member of the NYIPLA Amicus Briefs Committee.

Mr. Cleary is a member of the Litigation and Intellectual Property groups at Vedder Price and a member of the NYIPLA Amicus Briefs Committee.