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Patent and antitrust laws have the potential to work harmoniously in achieving the goal of encouraging innovation and while promoting commerce. However, there is also a natural tension between patent and antitrust laws, particularly when a patent holder attempts to exceed his exclusionary rights, thereby negatively affecting competition. This tension is underscored in the recent rash of “reverse payment settlements,” also known as “pay-to-delay settlements.” In patent infringement suits initiated out of a generic drug manufacturer’s participation in the Hatch-Waxman drug approval scheme, the innovator drug manufacturer (the patent holder) sues the generic manufacturer for patent infringement. However, unlike in traditional infringement suits, the plaintiff innovator pays the defendant infringer a large payment in settlement of the suit. This counterintuitive payment scheme arises from a reversal of litigation incentives as a consequence of the Hatch-Waxman Act. (For a more detailed discussion on the Hatch-Waxman Act and its terms and consequences, read Scott Hemphill, Paying for Delay: Pharmaceutical Patent Settlement as a Regulatory Design Problem, 81 NYU L. REV. 1553 (2006).)
Naturally, such payments have come under antitrust scrutiny, particularly because such payments defy the well-established antitrust principle that a firm may not pay its competitors to stop competing. Generally, an agreement between competitors not to compete in a specific markets constitutes a per se violation of Sherman Act § 1. The issue is complicated, though, because a patent grants its holder the legal right to exclude all others from participating in a particular product market, essentially allowing the holder to enforce a legal monopoly. However, that market is extremely narrow, encompassing only that particular product and direct equivalents, which often prevents the holder from exercising an economic monopoly. But, pharmaceutical patent holders are generally able to exercise some form of economic monopoly power because of the extraordinary costs of innovation and regulation in this particular market, creating an environment with heightened incentives to incur antitrust violations.
Generally, a patent holder enforces his right to exclude by challenging an alleged infringer in court. What is less clear is whether a patent holder may exclude others by any other means other than an infringement suit, including payments to such competitors to remain out of the market via litigation settlements. Payments from the plaintiff to the defendant in infringement settlements may be perfectly sensible (and thus benign in the antitrust sense) if the payment amounts reflect the plaintiff’s desire to avoid the costs of litigation and the parties’ aversion to risks associated with trial. However, these payments almost always exceed by leaps and bounds any reasonable estimation of litigation costs and other risks associated with trial. This begs the question: what is the innovator really paying for?
On Monday, March 25, the Supreme Court will address the legality of reverse payment settlements in patent infringement suits in what is certain to become a landmark case in both patent and antitrust law in Federal Trade Commission v. Actavis. The reverse payment controversy has created a major circuit split amongst the federal circuit courts, which leaves the Court with a myriad of approaches from which to develop a definitive legal doctrine that best upholds both patent and antitrust doctrines. The following are three potential legal treatments that the Court may choose to adopt:
- Reverse payment settlements are per se illegal. One approach that the Court may adopt is to treat reverse payment settlements as per se illegal restraint on trade. If the payments are strictly construed to be payments to a competitor to stop competing, then such payments may be per se illegal horizontal collusion or market allocation.
- Reverse payment settlements are subject to the scope of the patent test. This test would effectively make reverse payment settlements per se legal, except in very rare circumstances (where the terms of the agreement creates a restraint on products outside of the scope of the patent, where the underlying patent infringement suit is a sham litigation, or patent fraud). The test states that as long as the agreement is within the scope of the patent’s exclusionary potential, there can be no antitrust violation.
- Reverse payment settlements are subject to a rebuttable presumption of illegality. This approach, adopted by the Third Circuit in In re K-Dur Antitrust Litigation, employs “a quick look rule of reason analysis based on the economic realities of reverse payment settlement rather than the labels applied by the settling parties.” Under this approach, “the finder of fact must treat any payment from a patent holder to a generic patent challenger who agrees to delay entry into the market as prima facie evidence of an unreasonable restraint of trade, which could be rebutted by showing that the payment (1) was for a purpose other than delayed entry or (2) offers some procompetitive benefit.
Which approach do you think the Court should adopt? Should patent law trump antitrust convention, or vice versa?