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For over 20 years, purportedly anticompetitive patent-litigation settlement agreements between rival branded and generic pharmaceutical manufacturers—so-called “reverse payment” or “pay for delay” settlements—have generated numerous private lawsuits and ranked as one of the Federal Trade Commission’s top enforcement priorities, with private plaintiffs and the FTC alike claiming such agreements have cost consumers millions of dollars by keeping generic drugs off the market. In 2013, the U.S. Supreme Court finally addressed reverse-payment settlements in FTC v. Actavis, 570 U.S. 136. In the five years since Actavis, federal courts in the U.S. Court of Appeals for the Third Circuit have continued to wrestle with a disproportionate share of reverse-payment lawsuits. Those cases have generated a series of rulings by the Third Circuit addressing some of the significant questions left open by Actavis.

Actavis highlighted a situation that readily arises in pharmaceutical markets under the Hatch-Waxman Act. A branded drug manufacturer will have gone through a long and costly vetting by the Food and Drug Administration before reaching the market, and, as part of the FDA approval process, must publicly disclose any relevant patent. It then enjoys lawful monopoly profits by virtue of that presumptively valid patent. By contrast, Hatch-Waxman gives generic manufacturers access to an abbreviated FDA approval process. As part of that process, however, a generic manufacturer must explain why its generic drug will not infringe the branded manufacturer’s disclosed patent. One way to do so is to certify that the patent is invalid or will not be infringed by the manufacture, use, or sale of the generic. By statute, submitting such a certification to the FDA constitutes actionable patent infringement. Through that legal fiction, Congress encouraged the accelerated weeding-out of invalid or weak drug patents. Hatch-Waxman also incentivizes a generic manufacturer to be the first challenger in a given market by conferring a—potentially highly profitable—180-day exclusivity period against other generic manufacturers.

Hatch-Waxman can create incentives for anticompetitive collusion where the branded drug maker recognizes a risk that its patent may be invalidated by a generic challenger. In the FTC’s paradigm, a branded manufacturer may choose to avoid that risk by sharing its monopoly profits with the first-filing generic manufacturer, securing the generic manufacturer’s agreement to delay market entry, and settling its patent infringement litigation against the generic manufacturer on that basis. Thus, instead of the alleged infringer making a payment to settle the branded manufacturer’s claim, the party claiming infringement makes a “reverse payment” to the alleged infringer. The branded manufacturer preserves some of its patent-based monopoly profits, the first-filing generic shares in those profits, and both parties eliminate their respective risks of losing the patent infringement litigation. Other potential generic manufacturers lose out, the FTC and private plaintiffs have argued, because they are excluded from that drug market during the remaining life of the patent. But the biggest losers, in the FTC’s and plaintiffs’ view, are purchasers of the branded drug, who must pay higher prices because the relevant producers have essentially agreed not to compete.

The Rule of Reason Applies to Reverse-Payment Settlements

Actavis clarified the legal standard for analyzing potentially anticompetitive reverse-payment settlements. Several federal courts of appeals had adopted the “scope of the patent” test, which tended to insulate settlements from antitrust scrutiny by holding that a patent holder’s preservation of its lawful monopoly—including by entering into a reverse-payment settlement with a generic challenger—is presumptively legal even if it has some anticompetitive effect. The Third Circuit rejected that test in In re K‑Dur Antitrust Litigation, 686 F.3d 197 (2012) (Sloviter, J.) and held that reverse-payment settlements merited a “quick look” antitrust analysis, with any payment by a patent holder to a generic challenger deemed to be prima facie (but rebuttable) evidence of an unreasonable restraint of trade. The resulting circuit split led the Supreme Court to finally take up the issue in Actavis.

Although the FTC, as plaintiff-appellant, urged the Supreme Court to adopt the Third Circuit’s “quick look” analysis, the majority held—in an opinion by Justice Stephen Breyer, with a spirited dissent by Chief Justice John Roberts defending the scope-of-the-patent test—that reverse-payment settlements are not intrinsically anticompetitive and that the FTC had to prove its case under the standard rule-of-reason antitrust analysis. In other words, a plaintiff must prove that a reverse-payment settlement harms competition and that its anticompetitive effects are not outweighed by procompetitive justifications. In particular, the Supreme Court held that a “large, unjustified” reverse payment could signal an unlawful agreement, absent countervailing procompetitive benefits. Given the fact-sensitive nature of the rule-of-reason standard, Actavis provided only a general outline of the required analysis, leaving it to the lower courts to work out its application in specific cases. Much of that work, so far, has been done in the Third Circuit —a court that some, including the FTC, have viewed as friendly to reverse-payment plaintiffs in light of its pre-Actavis decision in K-Dur.

Noncash Settlements Can Be Reverse Payments

The settlement at issue in Actavis involved a reverse payment in cash, so litigants in other cases immediately began to debate whether non-cash transfers of value were subject to the same analysis. The Third Circuit answered that question in the affirmative in King Drug of Florence v. Smithkline Beecham, 791 F.3d 388 (2015) (Scirica, J.) (reversing the district court’s order granting a motion to dismiss). Specifically, the court held that so-called “no-authorized generic” (or “no-AG”) agreements between branded and generic manufacturers should be analyzed under the rule of reason just like any other reverse payment. Under Hatch-Waxman, although a first-filing generic obtains 180 days of exclusivity against other generic manufacturers, it must still compete with the brand-name manufacturer. The brand-name manufacturer may try to recapture some lost sales by introducing its own “authorized” generic product to compete on price. By agreeing not to do this, the branded manufacturer can permit the generic manufacturer to extract maximum profit from the 180-day exclusivity period—potentially a valuable concession. In holding such agreements to the Actavis standard, the Third Circuit has signaled that it will give more weight to economic analysis than to formalistic labels like “cash” in reverse-payment cases.

Requirements for Pleading a ‘Large’ and ‘Unjustified’ Payment

Given the vagueness inherent in the concept of a “large” and “unjustified” payment, the Third Circuit soon found itself called upon to clarify what must be pleaded to satisfy the Twombly pleading standard and defeat a motion to dismiss. In In re Lipitor Antitrust Litigation/In re Effexor Antitrust Litigation, 868 F.3d 231 (2017) (Smith, C.J.), the court reversed the district court’s orders granting motions to dismiss and provided some pleading guidelines for practitioners and district judges. First, the court held that for pleading purposes, a plaintiff does not need to precisely quantify or provide a detailed economic analysis to support the value of the alleged reverse payment. In particular, a plaintiff is not obliged to plead a specific valuation of a no-AG agreement. Instead, a plaintiff need only plead facts capable of supporting a plausible inference that the payment is “large”—for example, by alleging that the rights given up by the branded manufacturer were worth “hundreds of millions of dollars.”

As for pleading that a payment was “unjustified,” the court made it clear in In re Lipitor/In re Effexor that a plaintiff, to survive a motion to dismiss, is not required to anticipate and expressly rebut all possible justifications for a reverse payment that can be conjured up by defendants or by the court. If a plaintiff plausibly alleges the absence of a justification, that is sufficient. In the Third Circuit’s view, Actavis places the burden of articulating affirmative justifications for a reverse payment squarely on the defendants. With these holdings, the Third Circuit reaffirmed that reverse-payment plaintiffs, like other antitrust plaintiffs, are not subject to a more demanding threshold standard than Twombly plausibility at the pleading stage. Instead, such issues are better reserved for summary judgment after full discovery—or for trial, if there are still materials disputes of fact or expert opinion.

Establishing Antitrust Standing

A private plaintiff in an antitrust case generally must prove that it has suffered harm of the type the antitrust laws were intended to prevent. Otherwise, its claim will fail for lack of antitrust standing. This requirement applies equally to reverse payment cases, where a private plaintiff will typically allege that it paid a supracompetitive price for the relevant drug because of the generic manufacturer’s agreement not to compete in exchange for the reverse payment from the branded manufacturer. In In re Wellbutrin XL Antitrust Litigation, 868 F.3d 132 (2017) (Jordan, J.), the Third Circuit held that the plaintiffs had failed to demonstrate antitrust standing where there was an independent, superseding reason, entirely separate from the alleged reverse payment, that prevented generic manufacturers from entering the relevant market.

In Wellbutrin, although the plaintiffs had presented evidence of a large and unjustified reverse payment to resolve infringement litigation over a particular patent, the Third Circuit found that evidence was trumped by the fact that an entirely different patent continued to block lawful generic entry into the same drug market. Because the blocking patent broke the chain of causation between the alleged reverse payment and the price of the drug, the court affirmed summary judgment for the defendant. The holding in Wellbutrin means, in effect, that private plaintiffs must be able to rule out superseding causes of later generic entry to avoid summary judgment based on lack of antitrust standing. (The same argument, however, would not apply to the Federal Trade Commission as a plaintiff in federal court, as the FTC is not required to prove antitrust standing to pursue an antitrust-type claim under Section 5 of the FTC Act.)

Many Important Questions Remain

Although the Third Circuit has answered some additional one-off questions under Actavis, it has not yet had occasion to address some of the major substantive issues left inchoate by the Supreme Court. For example, the court held in In re Lipitor/In re Effexor that the mere submission of a reverse-payment settlement agreement to the FTC, coupled with the FTC’s inaction in response to that submission, does not immunize the settlement from later antitrust scrutiny in a private lawsuit. And the court earlier rebuffed a defendant’s attempt to transfer those same appeals to the Federal Circuit, holding that transfer was not required merely because the appeals implicated some aspects of substantive patent law. But the Third Circuit has not yet decided any appeal that has required it to reach the merits of a district court’s application of the rule of reason to a summary judgment or trial record in a reverse-payment case. Nor has the court been called upon to consider what kinds of procompetitive benefits a defendant is entitled to balance against any anticompetitive effects of a reverse-payment settlement. With more reverse-payment cases brought by private plaintiffs and the FTC working their way through the district courts, the Third Circuit is bound to make its often strong antitrust voice heard over the next few years on these and other unresolved aspects of the Actavis framework. Stay tuned.

Carl W. Hittinger is a senior partner in Baker & Hostetler’s antitrust group and litigation group coordinator for the firm’s Philadelphia office. He concentrates his practice on complex commercial and civil rights trial and appellate litigation, with a particular emphasis on antitrust and unfair competition matters, including class actions.  His experience also includes a judicial clerkship with Chief Judge Emeritus Louis C. Bechtle of the U.S. District Court for the Eastern District of Pennsylvania. He can be reached at 215-564-2898 or chittinger@bakerlaw.com.

Jeffry W. Duffy is a partner in the firm’s litigation group in Philadelphia. He concentrates his practice on antitrust and unfair competition matters, complex commercial disputes, insurance and reinsurance coverage, and civil rights litigation. He previously served as a U.S. diplomat in Japan, Singapore and Haiti. He can be reached at 215-564-2916 or jduffy@bakerlaw.com.