Jessica M. Karmasek Jun. 19, 2013, 6:10pm

WASHINGTON (Legal Newsline) -- The U.S. Supreme Court, in a ruling Monday, upheld the Federal Trade Commission's power to challenge so-called "pay-to-delay" agreements in which drug companies pay settlements to generic manufacturers that would challenge their patents.

At issue in FTC v. Activis is the Drug Price Competition and Patent Term Restoration Act of 1984, also referred to as the Hatch-Waxman Act.

The act creates special procedures for identifying and resolving patent disputes between brand-name and generic drug manufacturers, one of which requires a prospective generic manufacturer to assure the Food and Drug Administration that it will not infringe the brand-name's patents.

One way to provide such assurance is by certifying that any listed, relevant patent "is invalid or will not be infringed by the manufacture, use or sale" of the generic drug.

In Activis, Solvay Pharmaceuticals obtained a patent for its approved brand-name drug AndroGel.

Subsequently, Actavis and Paddock filed applications for generic drugs modeled after AndroGel and certified, under the act, that Solvay's patent was invalid and that their drugs did not infringe it.

Solvay sued Actavis and Paddock, claiming patent infringement.

The FDA eventually approved Actavis' generic product, but instead of bringing its drug to market, Actavis entered into a "reverse payment" settlement agreement with Solvay, agreeing not to bring its generic to market for a specified number of years and agreeing to promote AndroGel to doctors in exchange for millions of dollars.

Paddock made a similar agreement with Solvay, as did Par, another manufacturer aligned in the patent litigation with Paddock.

The Federal Trade Commission then filed suit, alleging that the companies violated the Federal Trade Commission Act by unlawfully agreeing to abandon their patent challenges, to refrain from launching their low-cost generic drugs, and to share in Solvay's monopoly profits.

A federal district court dismissed the complaint.

The U.S. Court of Appeals for the Eleventh Circuit concluded that as long as the anticompetitive effects of a settlement fall within the scope of the patent's exclusionary potential, the settlement is immune from antitrust attack.

Noting that the FTC had not alleged that the challenged agreements excluded competition to a greater extent than would the patent, if valid, it affirmed the complaint's dismissal.

The Eleventh Circuit further recognized that if parties to this sort of case do not settle, a court might declare a patent invalid. But since public policy favors the settlement of disputes, it held that courts could not require parties to continue to litigate in order to avoid antitrust liability.

A majority of the Supreme Court ruled that the Eleventh Circuit erred in affirming the dismissal of the FTC's complaint.

Justice Stephen Breyer authored the majority opinion. Justices Anthony Kennedy, Ruth Bader Ginsburg, Sonia Sotomayor and Elena Kagan joined.

Chief Justice John Roberts filed a dissent, in which Justices Antonin Scalia and Clarence Thomas joined.

Justice Samuel Alito took no part in the consideration or decision of the case.

"The FTC should have been given the opportunity to prove its antitrust claim," Breyer wrote in the majority's 21-page opinion.

"Settlement on the terms said by the FTC to be at issue here -- payment in return for stay­ing out of the market -- simply keeps prices at patentee-set levels, potentially producing the full patent-related $500 million monopoly return while dividing that return be­tween the challenged patentee and the patent challenger.

"The patentee and the challenger gain; the consumer loses."

However, the majority would not go as far as to rule that such reverse payment settlement agreements are "presumptively unlawful."

"That is because the likelihood of a reverse payment bringing about anticompetitive effects 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," Breyer wrote. "The existence and degree of any anticompetitive consequence may also vary as among industries.

"These complexities lead us to conclude that the FTC must prove its case as in other rule-of-reason cases."

Roberts argues that the majority's "new rule" will discourage settlement of patent litigation.

"Simply put, there would be no incentive to settle if, immediately after settling, the parties would have to litigate the same issue -- the question of patent validity -- as part of a defense against an antitrust suit," the chief justice wrote in his 18-page dissent. "In that suit, the alleged infringer would be in the especially awkward position of being for the patent after being against it.

"This is unfortunate because patent litigation is particularly complex, and particularly costly."

Roberts called the majority's reasoning "flawed."

"The majority seems to think that even if the patent is valid, a patent holder violates the antitrust laws merely because the settlement took away some chance that his patent would be declared invalid by a court," he wrote.

"Good luck to the district courts that must, when faced with a patent settlement, weigh the 'likely anticompetitive effects, redeeming virtues, market power and potentially offsetting legal considerations present in the circumstances.'"

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