Are Bright-Line Rules The Right Prescription For Reverse-Payment Cases?

By Jeffrey I. Shinder and Ankur Kapoor

As antitrust law evolves to address new problems posed by ever-shifting dynamics in industries both old and new, two schools of thought are vying for control of challenges to reverse-payment settlement agreements that resolve patent infringement litigation brought by pharmaceutical manufacturers against potential generic competition.

One school favors the establishment of bright-line rules to give firms and courts predictability in the law.  The Supreme Court’s still controversial Illinois Brick decision, which generally limits damages recoverable under federal antitrust law to direct purchasers, is one example of this approach.  (Expressing the contrary view on whether indirect purchasers should have standing to recover their damages are the many state antitrust laws allowing indirect-purchaser recovery and the Supreme Court of Canada’s rejection of the Illinois Brick doctrine.)

Another school of thought emphasizes that, in antitrust law, substance and economic reality should trump form because rigid, bright-line rules inevitably encounter cases in which application of a rigid rule leads to undesirable results, or, worse, give firms with market power a roadmap on how to exclude competition without fear of antitrust scrutiny.  This school of thought is grounded in the recognition that, because restraints often arise in factual and legal contexts as complex as the industries in which they arise, they cannot properly be evaluated without assessing and balancing their anticompetitive and procompetitive effects.   While this inquiry can sometimes be taxing, it is often necessary to reach a result that promotes unrestrained competition and markets – which generally are valued by all schools of thought.  The Supreme Court reaffirmed this principle in 2010 with its decision in American Needle v. NFL, which held that the National Football League could be considered a “combination” or “conspiracy” subject to Section 1 of the Sherman Act, depending on the specific factual and economic circumstances of the NFL’s member football teams’ conduct at issue.

The tension between these two philosophies is on display in In re Lamictal Direct Purchaser Antitrust Litigation, a decision by the U.S. District Court for the District of New Jersey that creates a new bright-line rule governing settlements of Hatch-Waxman pharmaceutical patent-infringement litigation.  The Supreme Court first addressed the antitrust treatment of these settlements in its recent landmark decision in FTC v. Actavis, and Lamictal is one of the first post-Actavis district court decisions.

In Actavis, the Supreme Court dealt with the question of whether the antitrust laws prohibit reverse-payment settlement agreements, which are settlements that require a patentee to pay the alleged infringer rather than the other way around.  The Court held that courts should judge the legality of reverse-payment settlements under the rule-of-reason standard, reasoning that such a settlement could harm competition if the patent holder has market power and the size of the payment indicates that the settlement is a veiled agreement not to compete instead of a reasonable settlement of a patent dispute.  Notably, the Court explicitly rejected the bright-line “quick-look” rule for which the FTC argued and which would give a rebuttable presumption of anticompetitive effect to reverse payments greater than the patent holder’s anticipated costs of continued litigation.  In directing application of a full rule-of-reason analysis, which requires courts to balance the anticompetitive and procompetitive effects of the settlement, the Supreme Court made clear that courts should not apply bright-line rules in evaluating these settlements.

The Lamictal court took the opposite approach.  Lamictal involved a settlement between GlaxoSmithKline (“GSK”), which owned the patent for Lamictal tablets and chewables for the treatment of epilepsy and bipolar disorders, and the generic manufacturer Teva Pharmaceuticals (“Teva”) which sought to offer generic versions of these drugs.  After GSK sued Teva for patent infringement, the court declared the patent in question partially invalid, and shortly thereafter the parties asked the court to refrain from any further rulings because they were in settlement negotiations.   The ensuing settlement enabled early entry by Teva, with a generic chewable 37 months before patent expiration and a generic tablet six months before patent expiration.  As part of the settlement, GSK agreed not to offer its own “authorized” generic versions of Lamictal during Teva’s first-filer FDA-exclusivity period – i.e., 180 days after Teva first marketed the generic version of the drug – an extremely valuable period for generic manufacturers.

Several direct purchasers of the drug challenged this settlement under Section 1 of the Sherman Act.  Prior to Actavis, the district court dismissed the case as a matter of law, holding that because the settlement did not involve the transfer of money from the patent holder to the generic entrant, it “[was] not subject to antitrust scrutiny.”  The plaintiffs moved to reconsider after Actavis, and the court held that Actavis did not alter the conclusion that the complaint failed as a matter of law because the settlement included no transfer of money.   In reaching this conclusion, the Lamictal court engaged in no analysis of the competitive effects of the settlement and further ignored the historical precedent cited by the Supreme Court in Actavis that holds patent settlements subject to antitrust scrutiny even if they do not involve a transfer of money.  See 133 S. Ct. at 2232-33.  While the presence of a reverse payment is certainly a relevant factor in the analysis, treating it as dispositive ignores the Supreme Court’s mandate in Actavis of a full rule-of-reason analysis for patent-related settlement agreements.

The settlement at issue in Lamictal highlights why such settlements are better analyzed under the rule of reason rather than bright-line rules.  While the Lamictal settlement facilitated entry instead of merely transferring monopoly rents, there had already been a judicial determination that the patent was partially invalid.  Therefore, the settlement may have delayed Teva’s impending entry and may have been nothing more than a veiled market-allocation scheme in which Teva gave GSK additional time without generic competition in return for GSK’s agreement not to disturb Teva’s 180-day generic marketing exclusivity once it began.  Because these undisputed facts certainly support a plausible case of anticompetitive effect, the competitive merits of the Lamictal settlement should have been evaluated and adjudicated based on the evidence adduced in discovery, including the evidence of the strength of the patent, and GSK and Teva’s reasons for settling the case after the court partially invalidated the patent.  Instead, this decision creates a bright-line rule that could be exploited by patent holders to unlawfully maintain their market power when faced with a disappearing patent.

Actavis empowered and directed the courts to evaluate patent-related settlement agreements according to their anticompetitive and procompetitive effects.  Given the public health issues at stake in access to both innovative and affordable pharmaceutical products, we hope for no less from the courts in the future.

Jeffrey I. Shinder is a Managing Partner at Constantine Cannon.  Ankur Kapoor is a Partner at Constantine Cannon and recently assisted Lloyd Constantine as a consultant to the court in In re Modafinil Antitrust Litigation, a multi-district reverse-payment litigation pending in the U.S. District Court for the Eastern District of Pennsylvania.

— Edited by Gary J. Malone