Do Reverse Payment Settlements Violate the Antitrust Laws?

Article excerpt

Abstract

The term "reverse payment" has been used as shorthand to characterize a variety of diverse agreements between patent owners and alleged infringers that involve a transfer of consideration from the patent owner to the alleged infringer. Reverse payment settlements are particularly associated with drug patent challenges mounted by generic drug companies under the Hatch-Waxman Act. Many, including the Federal Trade Commission, would characterize these agreements as antitrust violations. However, courts have generally declined to find these agreements in violation of the antitrust laws based solely on the presence of a reverse payment.

This article begins in Section II with an overview of the diverse array of patent settlement agreements that have been classified within the general taxonomy of "reverse payment settlements." Section III discusses a variety of specific factors that have led to a natural proliferation of reverse payments patent settlements between branded and generic drug companies. Section IV traces the development of the FTC's position, which would find most reverse payment settlements presumptively illegal, focusing in particular on its recent ill-fated enforcement action against Schering-Plough. Section V reviews the courts' response to antitrust challenges against reverse payment settlements, and identifies an emerging consensus position that will find a violation of the antitrust laws only in cases where the challenged agreement contains restrictions on competition that exceed the exclusionary potential of the patent. The article concludes in Sections VI and VII with a discussion of the future prospects for the antitrust treatment of reverse payments settlements, including a suggestion that in evaluating the anticompetitive implications of these agreements more explicit consideration be paid to barriers to market entry facing potential third party generic competitors.

TABLE OF CONTENTS

I. INTRODUCTION
II. REVERSE PAYMENT SETTLEMENT DEFINED
III. SPECIFIC FACTORS PROVIDING INCENTIVES FOR
   REVERSE PAYMENT SETTLEMENTS IN THE DRUG
   INDUSTRY
   A. Innovative Drugs Have Intrinsically High Social Utility
   B. Barriers to Generic Market Entry
IV. THE FTC AND REVERSE PAYMENT SETTLEMENTS
   A. The FTC Originally Focused on Settlement Agreements
      That Parked Generic Exclusivity or Covered Noninfringing
      Products
   B. The FTC's Attention Has Shifted to Reverse Payments
   C. Schering-Plough Exemplifies This Shift in FTC Focus
V. REVERSE PAYMENT SETTLEMENTS IN THE COURTS
   A. The Consensus Test of the Eleventh and Second Circuits
   B. Courts Generally Favor Settlement
   C. Reallocation of Litigation Risk and Upside Potential
   D. Courts Find Little Meaningful Distinction Between Reverse
      Payment Settlements and Other Patent Settlements
   E. Courts Will Not Infer a Weak Patent Case from Reverse
      Payments
   F. Courts Have Rejected the FTC's Theories of Antitrust
      Liability
   G. The FTC and Courts Agree That the Antitrust Analysis
      Should Generally Not Involve an Assessment of the Merits
      of the Underlying Patent Case
   H. Barriers to Third Party Generic Entry Are Relevant in
      Assessing Potential Anticompetitive Effect
VI. THE FUTURE OF REVERSE PAYMENT SETTLEMENTS
   A. Supreme Court Intervention Is Unlikely to Occur Soon
   B. Congress May Act to Ban Reverse Payment Settlements
VII. CONCLUSION

I. INTRODUCTION

On June 26, 2006, U.S. consumers suffered a severe setback when the Supreme Court denied a petition for writ of certiorari in the case of FTC v. Schering-Plough Corp. (1) At least that is the position taken by the Federal Trade Commission ("FTC"), which asserts that the Eleventh Circuit's holding in Schering-Plough opens the door to collusive and anticompetitive agreements between branded drug companies and their potential generic competitors that keep generic drugs off the market. …