The Supreme Court’s recent FTC v. Actavis, Inc. decision on reverse payment settlement agreements arising in Hatch-Waxman litigation sets the stage for federal district courts to navigate a still-uncertain landscape concerning these types of settlement agreements. This shifting landscape represents significant risk for innovator drug manufacturers unless and until the lower courts clarify the analytical framework.

The Supreme Court ultimately rejected the patent-friendly “scope of the patent” test, originally formulated by the 11th Circuit, which rendered reverse payments legal and immune from antitrust liability absent sham litigation or fraud. In its place, the Supreme Court adopted the “rule of reason,” rather than applying the more restrictive “quick look” approach urged by the Federal Trade Commission (FTC). However, the court left open the possibility that lower courts may not have to engage in a complete rule of reason analysis, particularly where there is a “large and unjustified” payment. Under those circumstances, according to the Supreme Court, the lower courts may be able to shorten their analysis and find an antitrust violation without analyzing the validity of the patent at issue. It is this removal of the patent from the antitrust analysis that presents the greatest risk for innovator companies that find themselves subject to antitrust allegations arising from a reverse payment settlement agreement. By their nature, these types of settlement agreements are usually concluded prior to a formal ruling by the district court regarding infringement and validity of the patent at issue, but the patent itself is naturally a prominent factor in the decision to settle ongoing litigation.

Counterbalancing the court’s willingness to remove the patent at issue from the analysis is the court’s acknowledgement that “offsetting or redeeming virtues are sometimes present” in reverse payment settlement agreements. In particular, the court identified at least three types of agreements that it suggested may not be anti-competitive. First, the court suggested that agreements to allow a generic manufacturer to enter the market prior to the patent’s expiration without payment would be allowable because it would increase competition to the benefit of the consumer. Second, the court suggested that payments representing “avoided litigation costs” would also be allowable. Third, the court suggested its approval of payments that amounted to “compensation for other services the generic has promised to perform, such as distributing the patented item or helping to develop a market for that item” (i.e., “fair value for services”). With respect to the second two scenarios, the court acknowledged that these types of payments “reflect traditional settlement considerations,” and further suggested that there may be “some other justification[s]” that would render other, unidentified circumstances permissible. The court’s opinion, however, does not attempt to elaborate on what these other justifications may be, leaving the remainder of the analysis to the district courts.

The dissenting opinion, written by Chief Justice Roberts, cited a study in which the typical Hatch-Waxman Act litigation cost $10 million per suit, and accused the majority of introducing a framework that would discourage settlement from these litigations. The dissent argues that the “scope of the patent” test should have been adopted. Unfortunately, by focusing on the anti-patent aspects of the majority opinion, rather than anywhere interpreting the majority opinion in a way favorable toward settlement, the dissent missed a potential opportunity to help smooth out the majority opinion and aid patent litigants.

The combination of the majority’s adoption of an ill-defined “rule of reason” analysis and the dissenting opinion’s recounting of the risks to that approach leave the district courts with little insight as to the proper boundaries for analyzing reverse payment settlement agreements. In the meantime, we would not be surprised to see the FTC continue its Ahab-like quest to eradicate these kinds of settlements.  Innovator drug manufacturers, therefore, need to continue proceeding with caution when considering settlement of Hatch-Waxman Act litigation and particularly settlements involving reverse payments. In light of the tremendous imbalance in risk and economics between innovator and generic drug manufacturers, and the expense of Hatch-Waxman litigation, settlements are likely to remain complicated to achieve. It will be important to watch the lower court’s interpretations of the Supreme Court’s ruling. Whether the Supreme Court’s ruling will ultimately benefit the consumer public remains to be seen.