Last Monday, the Supreme Court held in FTC v. Actavis that “reverse payment” settlements in patent infringement cases—more colorfully known as “pay for delay” settlements—may sometimes violate the Sherman Act.

Pay for delay settlements come up most often when an upstart company (usually a generic manufacturer in the pharmaceutical industry) begins producing a product that infringes another company’s patent.  The patent owner sues the newcomer, who in turn claims that the patent is invalid.  The parties then settle, with the newcomer agreeing to delay the introduction of its product in exchange for the patent owner paying lots of money.  The patent owner preserves its patent and picks off a potential competitor; the newcomer makes some money. And the consumer loses.

If it sounds monopolistic, it is.  Patents are, after all, government-approved monopolies.  So the validity of the patent is central:  If the patent is valid, the settlement does not limit competition any more than usual.  If the patent is invalid, on the other hand, any payoff designed to avoid a validity challenge may very well run afoul of the Sherman Act.

So should courts allow further litigation on the validity of the patent when evaluating an antitrust challenge to the settlement—a settlement that was intended to end litigation on precisely that issue?  The Eleventh, Second, and Federal Circuits each held that such settlements were presumptively lawful. (The Eleventh Circuit derided the resulting patent-case-within-an-antitrust-case as a “turducken task”).  The Third Circuit said differently, holding such agreements were generally unlawful.

Enter the Supreme Court.  The Court took the middle road, holding that courts should employ a “rule of reason” analysis in deciding whether the reverse payment settlements are illegally anticompetitive.  But the Court gave little guidance to help litigants craft lawful settlements. The Court instructed trial courts that, rather than examining the validity of the patent, they should look to other factors on a sliding scale.  In particular, the Supreme Court noted that the size of the settlement payout was a “workable surrogate” for the patent’s weakness.  In the eyes of the Supreme Court, big settlements usually hide bad patents.  And agreements to protect bad patents can be illegal. 

Click here for a more detailed review of this application of the Sherman Act and the uncertainty it creates for patent owners.