Pharmaceutical companies, the Federal Trade Commission, and antitrust and intellectual property attorneys waited with bated breath for the Supreme Court’s monumental decision on the legality of reverse-payment settlements, announced in FTC v. Actavis. On June 17, 2013, everyone got their answer… or did they?

What happened?

In March, this blog outlined the reverse-payment settlements issue in detail and provided some idea of the issue, the circuit split, and the potential holdings of the Court. In short: On one hand, the Court could have chosen to reject the application of antitrust principles to patent law and uphold the “scope of the patent” test espoused by at least three different federal circuits. On the other hand, the Court could have determined that, because such agreement are so clearly anticompetitive, they are per se illegal, or at least merit quick-look treatment.

But that’s not what happened here. Interestingly, in a 5-3 decision [PDF] (Justice Alito recused himself), the Court ruled that reverse-payment settlement would be neither barred nor approved. Instead, the Court held that courts should apply the traditional “rule of reason” analysis to determine whether any particular reverse payment settlement is anticompetitive, and therefore prohibited by the Sherman Act. The Court was predictably split between the traditionally conservative and traditionally liberal justices, with Justice Kennedy wielding the all-powerful deciding vote. This may also partly explain why the Court did not come down harder on pharmaceutical companies: to obtain the necessary fifth vote, the majority may have backed down from espousing the quick-look analysis to the rule of reason analysis.

The majority rejected the contention that reverse-payment settlements fall within the scope of the exclusionary potential of the patent, but it also rejected the FTC’s contention that such payments should begin with a presumption of illegality. Instead, they adopted the often cumbersome rule of reason test, which requires a court to balance the benefits and anticompetitive results of the action in question to determine its legality.

What does this mean?

This means that the FTC and private-party enforcers can continue to bring antitrust actions against pharmaceutical companies (or any other type of company) for engaging in reverse-payment settlements. However, rather than having the advantage of presumed illegality, the complaining party must be prepared to prove its case. Moreover, it is important to note that the Actavis Court did not hold that the settlement in question was illegal. Rather, the Court held that lower courts must apply a more intensive and fact-specific test before concluding whether or not the settlement is anticompetitive.

The Court left the door open for lower courts to review reverse-payment settlements for antitrust violations. But because the Court required a full-blown rule of reason analysis, challenges to these settlements will be both costly to bring and costly to defend. Parties on both sides of the issue face increased risk. The results, then, may be two-fold: plaintiffs may be hesitant to challenge a settlement that involves a more moderate reverse payment, and defendants may be quicker to settle with the FTC if and when it does bring an action. The ruling also has the potential to curb the outrageous settlement values that the parties have negotiated to date.

More important, though, is the unpredictability that has historically followed the so-called “rule of reason.” In theory, this rule allows courts maximum flexibility in deciding whether a particular act is anticompetitive. But because the Court did not provide explicit factors that lower courts must review, it is reasonable to expect that decisions across circuits and districts will cause yet another rift that may require Supreme Court review at a later date. Only next time, given the many directions a court may take in applying rule of reason, the Court would be forced to deal with a more tangled jurisprudence.

–Shannon Han

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One Response to FTC v. Actavis: An Uncertain Settlement of the Reverse-Payment Settlement Issue

  1. Kate Haywood says:

    This decision seems disappointing on several levels. Firstly is the uncertainty it creates – not only was there a circuit split concerning these settlements in the first place, now there will be a Supreme Court-sanctioned circuit split. I am curious to see how long it takes this issue to return to the Supreme Court. It is hard for me to see how these reverse-payment settlements are not anti-competitive, when the motives of patent holders are fairly evident. However, I’m sure clever litigating was engaged in by both sides, so much so that even the Supreme Court “decided” to leave it to the lower courts to figure out. Not even any factors for guidance??? The Supreme Court is starting to resemble Congress in its decision-making capabilities.