In its 2013 opinion in FTC v. Actavis, the Supreme Court ("the Court") instructed lower courts to apply antitrust law's rule of reason to so-called "reverse payment" cases. The Court offered limited guidance, preferring to "leave to the lower courts the structuring of the present rule of reason." Many commentators, beginning with the Actavis dissenting opinion itself, criticized the majority for leaving open so many questions. Eight months later, three district courts have tried to apply Actavis—and before even reaching the rule of reason analytical framework, they have reached conflicting conclusions regarding what constitutes a "reverse payment" in the first place.

Actavis resolved a split among the circuit courts on the correct way to analyze Hatch-Waxman reverse payment cases. In such cases, the patent-owning producer of a branded drug sues the generic producer for infringement, and settles the case by compensating the generic producer to delay its market entry to a date arguably later than if the patent were held to be invalid. The Federal Trade Commission (FTC) argued that reverse payments should be presumptively illegal under Section 5 of the Federal Trade Commission Act. The Eleventh Circuit, along with two others, had held such settlements to be per se lawful so long as the date of the generic's entry was not beyond the patent's expiration and the settlement was otherwise within the patent's scope. The Third Circuit, on the other hand, adopted the position of the FTC and held such settlements unlawful, either presumptively or under an abbreviated version of the rule of reason. Oncertiorari to the Eleventh Circuit, the Court rejected both approaches and held that such settlements must be judged under the full rule of reason.

The Court provided ambiguous guidance about the factors that would be important in such a rule of reason analysis. For instance, with respect to the ancillary need to assess the validity of the patent in suit that the settlement was designed to avoid, the Court stated that courts "may well be able" to avoid such a difficult task by instead employing the payment as a "workable surrogate":

"...the likelihood of a reverse payment bringing about anticompetitive effects depends upon it size, its scale in relation the payor's anticipated future litigation costs, its independence from other services for which it might represent payment, and the lack of any other convincing justification."

Yet the Court gave no further guidance as to how to measure or balance those "surrogates." The Court addressed a related concern identified by the Eleventh Circuit: a rule of reason case would prove to be unworkably large and complex. In somewhat surprising terms, the Court granted courts permission to exclude arguments posed by antitrust defendants:

"... trial courts can structure antitrust litigation so as to avoid ... consideration of every possible fact or theory irrespective of the minimal light it may shed on the ... presence of significant unjustified anticompetitive consequences."

How judges would decide which facts and theories would shed only "minimal light" was left for lower courts to determine.

The first court to struggle with this opinion was the District of New Jersey, when in September 2013, it evaluated both the branded defendant's motion to dismiss and the antitrust plaintiffs' motion to amend their complaint in In re Lipitor Antitrust Litigation. The branded producer, Pfizer, and the generic producer, Ranbaxy, had settled patent litigation regarding Lipitor® with Ranbaxy agreeing to hold off on generic sales in the U.S. until some, but not all, of Pfizer's Lipitor® patents had expired. In return, Pfizer agreed to forgive other monetary judgments owed by Ranbaxy and to allow Ranbaxy to sell its generic in certain non-U.S. markets. After the Court's Actavis ruling, the Lipitor plaintiffs sought to amend the complaint to clarify that a $1M payment by Ranbaxy to Pfizer to settle unrelated litigation was really a disguised reverse payment by Pfizer to hold the generic version of Lipitor® off the U.S. market. Pfizer claimed the amendment would be futile because Actavis applied only to large monetary payments by the branded producer to the generic. While not deciding if the amendment would survive a renewed motion to dismiss, the court granted the motion to amend and stated "nothing in Actavis strictly requires that the payment be in the form of money."

Only days later, the District of Massachusetts denied defendants' motions to dismiss in In re Nexium Antitrust Litigation. In this case, the branded producer, AstraZeneca, had settled infringement actions with three generic producers, all of whom agreed to refrain from selling generic versions of Nexium® until some but not all of the patents had expired. In return, AstraZeneca forgave contingent liabilities for two of the generics from their production of other products that potentially infringed other patents. For the third generic producer, AstraZeneca agreed not to market an authorized generic version of its own Nexium® for six months and paid it $1B to be a manufacturer of Nexium®. The generic defendants that did not receive any cash urged the court to read Actavis to apply only to monetary payments. The court declined, saying nowhere did the Court "explicitly require some sort of monetary transaction to take place for an agreement between a brand and generic manufacturer to constitute a reverse payment." The court quickly found no relevant procompetitive justification for the agreements, citing Actavis for the proposition that "[t]he lone conceivable benefit of reverse payment agreements—namely, the settlement of patent disputes—cannot overcome the anticompetitive consequences" of the agreements. As a result, the defendant's motion to dismiss was denied.

Finally, another judge in the District of New Jersey, in January 2014, dismissed similar claims in In re Lamictal Direct Purchaser Antitrust Litigation. Here, the branded (GlaxoSmithKline (GSK)) and generic (Teva) producers entered an agreement that settled the infringement action, allowed certain generic forms of Lamictal® to enter the U.S. market before all patent claims had expired and prohibited GSK from producing an authorized generic for several months. This court interpreted Actavis as imposing a three part test: 1) Is there a reverse payment?; 2) If so, is it large and unjustified?; and, if so, 3) Are any anticompetitive consequences otherwise justified? In seeming contrast to the rulings of Lipitor and Nexium, the court held that application of Actavis did require a monetary payment in settlement, which was not present in this case. The court quoted liberally from both the Actavis majority and dissent to conclude that they "reek with discussion of payment of money" to require a literal reading of the term. The court distinguished Lipitor as merely "more like a request for further briefing than a decision" on a question that was effectively tabled. It distinguished Nexium on the basis that the language not requiring a monetary payment was dictum because there, unlike this case, the branded manufacturer did pay $1B to the generic producer. Further, Nexium met the Court's second step because the payments were "outsized" and "disconnected" from settlement of the patent dispute. While not necessary, the court went on to determine that the (non-monetary) consideration exchanged between GSK and Teva was reasonably related to the litigation risk extinguished and "the potential for adverse effects on competition is minimal."

Conclusion

Development of the contours of a rule of reason analysis usually evolves over a long time and throughout many cases. Still, it appears that the confusion raised by the Court's Actavis opinion might take even longer than expected to dispel, given that there remains debate even about the definition of the term "reverse payment" and how trial courts exercise their discretion on limiting the introduction of defendants' evidence. The only consistent message from the post-Actavis decisions seems to be that any agreement to delay market entry of a generic likely will lead to further antitrust scrutiny. Clients looking to enter into—or to challenge or defend—such settlement agreements should consult with their trusted advisers so that a full evaluation of the facts can be made.