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Keith Hylton, Jul 15, 2015
For the last decade or so, the FTC has had a bee in its bonnet over “reverse payment settlements.” Such a settlement occurs when a pioneer pharmaceutical firm terminates a patent infringement lawsuit against a generic drug maker by forming an agreement under which the generic enters the market at some later date (still before expiration of the patent) in exchange for a payment from the pioneer.
In theory, reverse payment settlements could be observed in any area of litigation. One famous nuisance dispute, Spur Industries v. Del E. Webb Development Co.,resulted in a reverse payment remedy, and probably many such disputes have been settled under similar terms. But reverse payment settlements have been especially noticed in pharmaceutical patent litigation—and not just because they must be reported by law.
The U.S. Federal Trade Commissionargues that these settlements are designed to unduly protect a patent-based monopoly and to share the profits from the monopoly between pioneer and generic. Without such settlements, says the FTC, generics would prevail in the infringement lawsuits brought by pioneer firms, and drug markets would be opened to generic competition earlier. From this it follows that reverse payment settlements should be deemed to violate the antitrust laws, because they harm consumers.
This argument was somewhat persuasive to a majority of the Supreme Court in FTC v. Actavis, decided in 2013, which changed the law on patent infringement settlements from a rule favoring such settlements to a searching “rule of reason” inquiry that attempts to balance the pro-competitive and anticompetitive effects of a reverse payment settlement. The Court didn’t give much guidance to lower courts on how to conduct the balancing test other than to say that a large reverse payment may be taken as evidence that the underlying patent is weak.
For the past year, lower courts have been struggling mightily to figure out how to apply the Actavis balancing test.
Unfortunately for the courts, and for consumers as well, much of the reasoning behind the FTC’s decade-long attack on reverse payment settlements is flawed. The rash of reverse payment settlements observed in recent years, and similar deals transferring resources from pioneer to generic firms, may have benefitted consumers over the long term, and almost certainly left consumers better off than under the new FTC-created legal environment that obstructs such settlements.