FTC v. Actavis — Patents | Outside IP Counsel

The Supreme Court held that large, unexplained reverse-payment patent settlements can violate antitrust law and must be judged under the rule of reason, not shielded by the patent's scope.

For years, brand-name drug makers and generic challengers had settled patent fights with an unusual arrangement: the patent holder paid the accused infringer, sometimes tens of millions of dollars, and in return the generic agreed to stay off the market. In FTC v. Actavis, Inc., 570 U.S. 136 (2013), decided June 17, 2013, the Supreme Court refused to let the patent serve as an antitrust shield for those “reverse payment” deals. Writing for a 5-3 majority, Justice Stephen Breyer held that such settlements can sometimes violate the antitrust laws and must be evaluated under the rule of reason. The decision rejected both the lenient “scope of the patent” test that several circuits had embraced and the FTC’s call to treat the payments as presumptively unlawful.

At a glance

Case: Federal Trade Commission v. Actavis, Inc., No. 12-416, 570 U.S. 136 (June 17, 2013).
Court: Supreme Court of the United States; opinion by Justice Breyer, joined by Justices Kennedy, Ginsburg, Sotomayor, and Kagan. Chief Justice Roberts dissented, joined by Justices Scalia and Thomas. (Justice Alito did not participate.)
Posture: On certiorari to the Eleventh Circuit, which had dismissed the FTC’s complaint on the theory that reverse payments are immune from antitrust attack so long as they fall within the patent’s exclusionary scope.
Holding: Reverse-payment settlements are not immune from antitrust scrutiny; a large and otherwise unexplained payment can be an unlawful restraint of trade and must be analyzed under the rule of reason.
Significance: Opened pay-for-delay deals to antitrust challenge nationwide and reshaped how pharmaceutical patent litigation is settled.

How pay-for-delay deals arise

The case sits at the intersection of patent law and the Hatch-Waxman Act, which streamlines generic entry by letting a generic file an abbreviated new drug application and certify that the brand’s patent is invalid or not infringed. That certification triggers litigation, and the first generic to file earns a valuable 180-day exclusivity period against later generics. Those incentives, the Court observed, can produce a peculiar settlement: rather than competing, the brand pays the generic to abandon its challenge and delay entry, and the two then share the monopoly profits the brand keeps by avoiding competition.

The specific dispute involved AndroGel, a testosterone-replacement gel. Solvay Pharmaceuticals held a patent and sued generic applicants, including Watson Pharmaceuticals (later Actavis) and Paddock, after they sought approval. The parties settled: the generics agreed to delay market entry for years and to promote AndroGel, and Solvay agreed to pay them substantial sums. The FTC sued, alleging the payments were an unlawful agreement to abandon competition and split the resulting profits.

Rejecting the “scope of the patent” shield

The Eleventh Circuit had reasoned that because a valid patent confers a lawful right to exclude, any settlement keeping a competitor out within the patent’s scope and term cannot offend the antitrust laws. Justice Breyer rejected that reasoning. A patent does not automatically immunize the conduct around it, he wrote, and “patent and antitrust policies are both relevant in determining the scope of the patent monopoly.” The validity of the patent is itself uncertain until tested; a large reverse payment can be a way for the patentee to buy off a challenge it might lose, preserving a monopoly that a court might have dissolved.

The Court identified five reasons the antitrust laws should reach these deals: the settlements can cause genuine anticompetitive harm; that harm can sometimes be unjustified; a large payment can carry real power to do harm; antitrust suits are administrable here; and the parties can still settle in other ways. The upshot was that a reverse payment “may bring with it the risk of significant anticompetitive effects,” and courts should not assume away that risk simply because a patent is in the picture.

The rule of reason, and the role of payment size

Having opened the door to antitrust review, the Court declined to walk all the way through it. It rejected the FTC’s request for a presumption of illegality answered only by a “quick look,” reasoning that the competitive effects of these settlements are too varied for an abbreviated analysis. Instead, the rule of reason governs: courts must weigh the payment’s size, its scale relative to the patentee’s anticipated litigation costs and any services the generic provided, and whether legitimate justifications explain it.

Payment size, the Court suggested, is the key signal. A reverse payment that far exceeds saved litigation expenses and the value of any collateral products tends to show the patentee is paying to avoid the risk of competition, an inference of market power and a desire to maintain supracompetitive prices. The opinion left the precise contours of that analysis to the lower courts, ensuring years of follow-on litigation over how large and how unexplained a payment must be to draw antitrust liability.

Open questions

How large is “large”? Actavis makes payment size central but offers no threshold, leaving courts to decide when a payment is big enough to signal an anticompetitive purpose.
Do non-cash payments count? The decision focused on cash, but later courts have wrestled with whether deferred-entry concessions, “no-authorized-generic” promises, and side deals are reverse payments subject to the same scrutiny.
What justifications suffice? The rule of reason invites defendants to explain a payment by litigation savings or fair value for services, but how courts measure those justifications remains unsettled.

Implications

Patents are not antitrust immunity. A valid patent does not automatically insulate the settlements built around it; the conduct can still be an unlawful restraint of trade.
Structure settlements with care. Brand and generic parties must scrutinize any value flowing to the challenger and document legitimate, proportionate justifications to withstand rule-of-reason review.
Payment size is the flashpoint. Large, unexplained payments invite challenge; deals tethered to genuine litigation costs or fair value for real services are far safer.
Expect fact-intensive litigation. Because the rule of reason governs, pay-for-delay cases turn on detailed economic proof rather than bright-line rules, raising the cost and uncertainty of these settlements.
Regulators gained leverage. The FTC and private plaintiffs can now attack reverse payments directly, and several of the AndroGel defendants ultimately settled the agency’s underlying charges.

Frequently asked questions

What is a “reverse payment” or “pay-for-delay” settlement? It is a deal in which a brand-name drug patentee pays a generic challenger, often large sums, in exchange for the generic agreeing to drop its patent challenge and stay off the market until a later date. The payment flows backward, from the patent holder to the alleged infringer, which is why it is called a reverse payment.

Did Actavis make reverse-payment settlements illegal? No. The Court refused to treat them as presumptively unlawful and also rejected the view that they are automatically legal. Instead it held that such settlements are subject to antitrust scrutiny under the rule of reason, where courts weigh the payment’s size, justification, and anticompetitive effects.

Why didn’t the Court use a quick-look analysis? The majority found these settlements too complex for an abbreviated “quick look,” because their competitive effects depend on the size and purpose of the payment relative to litigation costs and other services. The full rule of reason gives courts room to assess justifications case by case.