Here are three true statements:
(1) Monopolies are generally illegal.
(2) Like baseball, patents make monopoly laws get a little funky.
(3) Courts really really really like to encourage settlements.
So, when two companies get together, and work out a settlement that makes a whole patent infringement lawsuit go away, and the only objection is that pesky Federal Trade Commission complaining that the settlement is anticompetitive, you can understand why a federal court could meditate on points (2) and (3) and dismiss that FTC complaint.
Yet, in FTC v. Actavis, the Supreme Court yesterday made it harder to settle some patent infringement suits, saying that sometimes a settlement of a lawsuit can be an antitrust problem.
Imagine you’re a pharmaceutical company. You have a patent on a drug — call it Drug A. You spent a ton of money to develop that drug and get it approved by the FDA. You’re excited about charging outrageous sums to sick people.
Yet the FDA allows a generic drug maker, if they’d like, to come in and say that they want to make something with the same active ingredients as Drug A, and biologically equivalent to Drug A, and ride on your development and approval coattails. But they can only do it if they say that they’re going to take a swing at your patent on Drug A. They can do that by, for example, telling the FDA that your patent is invalid.
If the generic drug maker does this, then you get to sue them for patent infringement right then. If you win, you get to keep your patent — you’re the only company that can charge the outrageous sums to sick people.
But if you lose, then the generic gets to enter the market with its knock-off Drug A. And your sales for Drug A plummet.
Though the sick people pay less.
To sweeten the pot for a generic drug maker spoiling for a patent infringement lawsuit, the first generic, and only the first generic, to attack your patent gets a 180-day monopoly on the drug – no other generic drug maker can market a generic version of your drug for the first 180 days after the generic drug is allowed in the marketplace.
As you might imagine, there’s a lot of money to be made in 180 days of exclusivity with a drug. Enough to make lots of expensive patent litigation worth it.
If you’re trying to protect your patent on Drug A – your legal monopoly on making Drug A – what do you do?
One idea, of course, is to settle. You have a legal right to something and the generic is trying to take it away. Why not just buy them off?
One way to settle in a case like this is through a “reverse payment settlement agreement.” Basically, the holder of the patent for Drug A gives the generic a bunch of money. And the generic agrees that it can’t make Drug A (which it couldn’t to begin with) and not to go forward with the FDA process.
Many courts looking at that kind of settlement think, basically, thanks for settling and reducing our workload. The patent holder protects its patent and the generic gets bought off. Maybe everybody’s happy.
The FTC, though, noticed that perhaps the sick people stuck with exorbitantly high Drug A are not so happy. And it brought an antitrust action challenging this practice.
The Eleventh Circuit said that, because one of the parties owns a patent, and patent holders have a “lawful right to exclude others from the market,” there’s no antitrust problem here — we’re in that part of the antitrust world where the patent rules trump. The circuit courts split on the issue, with such settlements immune from antitrust in the Eleventh Circuit but presumptively unlawful in the Third Circuit.
The Supreme Court, yesterday, disagreed with the Eleventh Circuit. The trouble, according to the Court, is that only a valid patent gives a monopoly. And the way you determine validity is with a patent infringement lawsuit. And, with this FDA process, by buying off the first generic in the ring, you basically buy off the ability to challenge the patent.
That pops this inquiry out of the patent box and into the antitrust world. If the ability to meaningfully question the validity or scope of a patent is what’s being bought off — rather than just the normal transaction costs of litigation (which is, perhaps, the most elegant way to describe much of the legal profession) — that feels creepier. And “creepier” here is a technical term, meaning “potentially anticompetitive.”
Everyone likes a settlement. But “[i]f the basic reason [for the settlement] is a desire to maintain and to share patent-generated monopoly profits, then, in the absence of some other justification, the antitrust laws are likely to forbid the arrangement.”
This will be hard to figure out going forward — whether the settlement is anticompetitive will likely turn on how valid the patent is. If a valid patent isn’t subject to the antitrust law, then a reverse payment settlement should not be anticompetitive to the extent that the patent is valid. Though, on the flip side, it’s not clear why a drug maker would offer such a sweet settlement if the patent was demonstrably valid in the first place.
In any event, the FTC gets to proceed with its antitrust claim. Which, one suspects, will be harder to settle than the last bit of litigation this drug maker faced.
Matt Kaiser is a lawyer at The Kaiser Law Firm PLLC, which handles complex civil litigation, white collar investigations, and federal criminal cases. On his blog, The Federal Criminal Appeals Blog, he writes about published opinions in criminal cases in the federal circuits where the defendant wins. You can reach him by email at mattkaiser@thekaiserlawfirm, and you can follow him on Twitter: @mattkaiser.