Foundation Opposes Federal Trade Commission Proposed Per Se Rule Outlawing Patent Settlements

The Foundation filed a friend of the court brief in the United States Supreme Court in an important case at the intersection of antitrust law and patent law.

The Foundation filed an amicus brief on behalf of the National Association of Manufacturers in Federal Trade Commission v. Actavis, Inc., No. 12-416, in support of the respondents. The FTC is appealing an Eleventh Circuit decision affirming dismissal of a civil suit by the FTC alleging that the settlement of a patent litigation between the brand-name patent holder and two generic manufacturers of AndroGel ointment is anticompetitive and a violation of the Sherman Antitrust Act and the Federal Trade Commission Act, and inconsistent with the policy underlying the Drug Price Competition and Patent Term Restoration Act (known as the Hatch-Waxman amendments), which are designed to speed the introduction of low-cost generic drugs to market, while maintaining incentives for innovation in the patent laws.

The question before the Supreme Court is whether reverse-payment agreements are lawful unless the underlying patent litigation was a sham or the patent was obtained by fraud, or instead are presumptively anticompetitive and per se unlawful.

As is not uncommon in the industry, in this case the patent owner sued the generic manufacturers, both of whom had filed Abbreviated New Drug Applications for a generic equivalent. The litigation went through discovery and some motion practice, and was then settled, with the approval of the trial court, after motions for partial summary judgment were filed, but before they were decided.

The FTC alleges the settlement is an anticompetitive agreement because it involves a payment to the generic manufacturers to stay out of the market and gives patent holder a monopoly for a period of time. The district court dismissed the FTCs lawsuit and the Eleventh Circuit (agreeing with precedent in the Second and Federal Circuits) affirmed because it found that the underlying patent litigation was not a sham, and because the non-compete term of the settlement was no greater than the period during which the patent holder would have had exclusivity had its patent been upheld. However, the Third Circuit, in another case involving different patents and different parties, agreed with the FTCs position.

The FTC does not, however, claim that the underlying patent litigation was a sham, nor does the agreement at issue create a monopoly for a period beyond that granted by the patent; in fact, under the settlement the monopoly period is reduced by half. In other words, the settlement of the patent litigation split the baby. The generic manufacturers agreed not to market their AndroGel products for a period equal to approximately one-half of the remaining period of patent protection, and the patent holder agreed to pay the generic manufacturers fees for marketing assistance for the brand-name AndroGel during the remaining patent-protected period and for back up production capacity. These are referred to in the trade as reverse payments.

The FTC and the defendants urged the Supreme Court to take the case to resolve the circuit split. The Supreme Court granted certiorari and, apparently, is holding the certiorari petitions in the Third Circuit case in abeyance.

The reverse payment practice is quite common in the pharmaceutical industry, but it is also used in computer hardware (especially chip design and manufacturing) technology, computer software design, and chemicals and genetically modified crops, where patent cases are often settled by licensing or cross-licensing agreements. Similar issues arise in sophisticated computer controlled and other machine tool design and process design patents in other industries. Thus, the legal doctrine that emerges from this case will affect any industry that involves intellectual property, which should, in principle, touch most knowledge based sectors.

Most of the circuit courts which have addressed this issue have adopted a "scope-of-the-patent" test: if the terms of the settlement do not give the patent holder a monopoly that is longer or geographically broader that the existing patent, the license granted in the settlement, and the other terms that preserve the patentees monopoly, are not deemed anti-competitive for antitrust law analysis.

If the FTC were to prevail, it would put patent holders at risk every time they settled an infringement action in which the outcome is frequently in doubt by licensing the patent in exchange for a significant license fee or by entering into a "reverse payment" arrangement. It could also deter companies from undertaking lengthy and expensive R&D, which can be recouped only through a significant period of patent protection monopoly.

In our amicus brief we stressed that the FTC’s proposed rule is not limited to the generic pharmaceutical industry reverse payments, but, as its Question Presented is framed, applies to any patent litigation settlement where the patent holder grants a license to the patent challenger. The Foundation’s brief provided the Court with reliable statistics showing the central importance of intellectual property to the U.S. economy and its standing in the global economy. We argued that an essential characteristic of a patent is that it creates a legal monopoly, that such monopolies are property rights, and are essential to promoting innovation. We also argued that the scope-of-the-patent test creates bright lines, which provide readily discernible guidance for compliance with the law, but that the FTCs test is amorphous and subjective, and encourages litigation by the antitrust plaintiff’s bar. The FTCs proposed rule also discourages settlement of patent litigation, which can be drawn out, expensive, uncertain of outcome, and thus often settled by cross-licenses, rather than companies betting the ranch on the outcome.

We urged the Court to affirm the Eleventh Circuits ruling.

To view the Foundation’s brief, please click here.