To paraphrase the old riddle, when is monopolistic behavior not monopolistic behavior? This question had been argued in federal courts often; yet, when confronted with this riddle, the federal judiciary had reached inconsistent results. In 2013, with its holding in FTC v. Actavis, 570 U.S. ____ (2013), the Supreme Court believed it laid out a test for standardizing the riddle’s resolution amongst lower courts. However, a recent Third Circuit decision, King Drug Co. v. GlaxoSmithKline, No. 14-1243 (3d. Cir. 2015) revealed flaws in the Supreme Court’s test, which likely will create future circuit splits and yet more argument before the nation’s highest court.

The court’s difficulty with this riddle stems from the conflicting statutory statements it must interpret: one from the United States Patent and Trademark Office, the other from the Federal Trade Commission. This conflict, at the heart of many antitrust cases, comes to a head when one regime abuts the other.

Both regimes have clear goals, but they are often in diametric conflict. The USPTO, with its Constitutional aim of promoting the useful arts and sciences, works to preserve an innovator’s right to exclude others from using a patented item in exchange for its public disclosure. This right could be leveraged in certain contexts as an economic bulwark against competitors, which may lead to higher prices—but only for the limited statutory period of control. The FTC, with a statutory grant tracing its roots to the Sherman Act, works to ensure a competitive marketplace, by policing monopolistic behavior in the hopes of creating lower consumer prices. As a result, the FTC will often punish economic bulwarks. What remains open-ended is how the FTC should treat patent holders using their government-granted right to exclude.

The Supreme Court, in 2012, took up this question specifically within the context of pharmaceutical drug manufacturers’ agreements with generic drug manufacturers, with the Actavis case. Actavis (an infringer) and Solvay Pharmaceuticals (the patent holder) had entered into a “reverse payment” settlement­—meaning Solvay would be paying the infringer to not compete with its patent until later in the patent period—after Actavis challenged the patent through the procedures of the Hatch-Waxman Act. The FTC sued, alleging the settlement violated antitrust law.

When dealing with “reverse payment” settlements prior to Actavis, lower courts were split: most held settlements fell within the scope of the holder’s patent and were exempt from antitrust scrutiny, but the Third Circuit held cash payments to be per se violations of antitrust law. The Court held the doctrinal “rule of reason” was the proper test to evaluate if Solway’s payments violated its patent, ignoring the lower courts’ approaches. Justice Breyer, after articulating the majority’s five factor test for future evaluations, further opined that the alleged “large” and “unjustified” cash payment at issue here could constitute anti-competitive behavior, but “decline[d] to hold that reverse payment settlement agreements are presumptively unlawful.”

Yet, rather than foreclose argument about the riddle posed by the patent-antitrust paradox, Justice Breyer’s opinion has led to greater confrontation over the behavior of patent holders. The latest skirmish—whether Actavis applies to just cash transfers or to those of “value”—ended on June 26, when the Third Circuit ruled that a settlement not involving cash payments, but otherwise similar to the one in Actavis, could possibly violate antitrust laws. Such a ruling seems to run contrary to the text of the Actavis decision, which only discussed, under the “rule of reason” analysis, cash payment as potentially violating antitrust law—and only then when they were “large” and “unjustified.” With similar cases percolating through the First and Ninth Circuit (which previously adopted the more conservative tests those of the Third Circuit), “reverse payment” settlements seem likely to keep the doors to the Supreme Court ajar.

Larry Crane-Moscowitz


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