New Jersey District Court Limits Actavis To Cash Payments

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Donald Falk, Christopher Kelly, Apr 29, 2014

As with patent infringement litigation in many industries, innovator pharmaceutical companies frequently settle their patent infringement litigation against would-be generic challengers by licensing the alleged infringer to market its generic version of the patented drug before patent expiration. But because generic entry costs an innovator firm far more than it profits the entrant, a license giving a generic challenger a business opportunity consistent with its valuation of its litigation prospects could pose a loss wildly out of line with the innovator’s own valuation.

Consequently, settling some pharmaceutical patent infringement suits requires conveying some value to the generic aside from the license itself, a superficially counterintuitive phenomenon that antitrust plaintiffs have called a “reverse payment” that pays the generic to delay its entry. Over the last 15 years, appellate courts’ antitrust reviews of these settlements have ranged from extreme deference to a presumption of competitive harm. Meanwhile, as litigants awaited guidance from the Supreme Court, the nature of the gap-bridging value generics arguably received evolved away from cash payments towards business opportunities.

Finally, in FTC v Actavis, the Court held last year that reverse-payment settlements are subject to antitrust analysis (contrary to the majority rule), but must be evaluated under the rule of reason, not (as antitrust plaintiffs had argued) subject to a presumption of anticompetitive harm. Evaluating a settlement that, according to the FTC, had paid two generic firms more than the value of the business services they provided the innovator firm pursuant to the settlement, the Court reasoned that “the likelihood of a reverse payment bringing about anticompetitive effects [is not presumed, but] depends upon its size, its scale in relation to 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.”

Actavis thus gives courts and litigants some guidance on how “reverse payment” settlements will be analyzed. But there remains a fundamental question: exactly what constitutes a reverse payment? When a settlement provides for value to the generic beyond the grant of a license for the accused generic product, but not for any cash, does Actavis even apply?