Reverse Payments: Federal Courts Playing “Words with Friends”

It seems the only certainty in the long-running legal battle over generic pay-to-delay (aka reverse-payment) arrangements is … more litigation.
Opponents of the settlements were cheered two years ago when the Supreme Court ruled in FTC v Actavis that such arrangements could run afoul of anti-trust laws. The practice of patent holders giving incentives to Paragraph IV challengers in exchange for dropping patent challenges or delaying market entry had long been in the sights of consumer activists, members of Congress, and more notably the Federal Trade Commission. They argued that the deals amount to protecting monopoly prices by preventing competition, thus violating the Sherman Anti-Trust Act.
However, the actual decision was not nearly the death-knell for reverse payments that headlines at the time would lead most to believe. In a partial victory for patent-holders, the Supreme Court left quite a bit of gray area in their decision, which serves more as guidance to the judiciary than a bright-line ruling. For one, the court did not outright say the arrangements are unlawful, but rather that judges could allow for that possibility when deciding whether to allow cases to go to trial. Second, it stated that “large” and “unjustified” payments to patent challengers are the red flags that may indicate anti-competitive behavior. Broad terms indeed.
Most importantly, the court did not define what a “payment” is, leading to much speculation in the legal community and a flurry of court briefs. Many district courts have taken an extremely narrow view of the term, saying FTC v Actavis only applies when a cash transaction has taken place. Others have relied on the common English definition of “payment,” which covers both money and things of value. The result has been uncertainty (and yet more litigation) for companies engaging in patent challenge settlements, especially when looking for creative, non-cash incentives.
Some clarity may be on the way in the form of a higher court decision last month regarding a settlement between GSK and Teva over the blockbuster anti-seizure drug Lamictal. Teva, the first filer, agreed to drop its patent challenges after winning the first of two in court. In exchange, GSK granted Teva early entry into the chewable-form market and a guarantee not to offer an authorized generic of the tablet form during Teva’s 180-day exclusivity period after patent expiry. A lower court dismissed an anti-trust suit brought by two direct purchasers on the grounds that, since no cash had exchanged hands, the Actavis standards did not apply.
However, the Appeals Court for the Third Circuit has now reversed that ruling, saying that the settlement amounts to a “transfer of considerable value from the patentee to the alleged infringer and may therefore give rise to the inference that it is a payment to eliminate the risk of competition.” In essence, the court found that Teva’s profits from having 180 days of the generic market all to itself is the same as an outright cash payment from GSK.
While the Third Circuit ruling does add weight to arguments claiming the term “payment” covers all things of value, other courts are not bound by it. The eventual result may be a circuit-split (two or more Appeals Courts issuing contradictory rulings), which could trigger another Supreme Court review to ensure consistency in every jurisdiction. Ironically, this is exactly the sort of situation a decision from the nation’s highest court is supposed to settle, not create.
That means, for now, companies entering into patent settlements involving any kind of incentives to delay generic competition can add large litigation fees to the cost, as the validity of Sherman Act suits may depend on which precedent and/or dictionary a judge decides to follow.

Donald Clark
Donald Clark

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