Typically, a plaintiff and defendant settle an ongoing lawsuit on mutually acceptable terms. There are certain types of cases where a settlement must be approved by someone other than just the parties, and a classic example of that is a class action lawsuit where the plaintiff represents the class and the court must approve any settlement to make sure that the class is protected. The review of settlement agreements is also found in the generic drug context, where an abbreviated new drug application (ANDA) lawsuit settlement requires review by the Federal Trade Commission (FTC) and Department of Justice (DOJ). Importantly, a case in front of the Supreme Court is currently considering what are the appropriate limits for those settlements.
In a typical ANDA case – and this is a lot of my regular legal practice – the innovator is provided with notice of a pending ANDA concerning the innovator’s medicine and then has an opportunity to sue for patent infringement (if appropriate). The law provides that if the innovator brings that lawsuit within 45 days of receiving the ANDA notice then the Food & Drug Administration (FDA) may not approve the ANDA for 30 months unless the case is decided for the ANDA filer in that time period. (This 30-month stay is based upon the expected time for FDA review of the ANDA and was part of the quid pro quo embodied in 35 USC §271(e) for allowing the ANDA filer to do development work before patent expiration.) The issue then becomes what happens if the parties decide to settle a case once brought. Parties can settle for lots of reasons, including the likelihood that one party will prevail over the other or that the costs of ongoing litigation will exceed the value of the remaining patent life.
In a typical lawsuit, settlement can involve both a license allowing the purported infringer to practice the patented invention before the patent expires, the royalty rate for any license, and one party paying the other money. These are among the panoply of reasonable variables in any settlement agreement.
For ANDA cases, the FTC has taken the position that any delay of a generic drug is done at the expense of the consumer. Therefore, the FTC reasons, settlement is an agreement between competitors (the generic and the innovator) to keep prices higher (by delaying generic introduction). If the innovator pays the generic as part of that settlement, the argument goes, it must be per se anticompetitive. Most others, including several courts of appeals, have looked at the broader issue of settlement and said that we have a policy of encouraging settlement. It may be that settlement between an innovator and generic that allows earlier entry is better for the consumer than if the generic lost the case and had to wait until patent expiration; payment by the innovator to the generic may be appropriate such that it is not anticompetitive depending on the individual facts of a settlement.
One current case before the Supreme Court is considering the issue of an innovator compensating the generic for some lost sales based upon the generic agreeing to stay off the market. They argue that since a patent is presumptively valid, the generic must stay off the market entirely during the life of the patent, and that any settlement with the generic that gives it any benefit, even if that benefit is some portion of the innovator's profits, is a fair compromise. The FTC and others argue that these "reverse payments" are not compensation as part of the settlement but actually are payments to delay the generic’s market entry to keep prices higher at the expense of the consumer, since preventing generic introduction can lead to higher pharmaceutical prices. In other words, they argue, the innovator keeps the price high by agreeing to keep generic competition off the market and then splits some of the increased revenue with the generic company.
The law requires that the FTC and DOJ have an opportunity to review settlement agreements. The FTC, however, has always taken the position that any payment or compensation by the innovator for a generic settlement delaying generic introduction is a per se antitrust violation. Three courts of appeals, specifically the Second, Eleventh and Federal Circuits, have rejected the per se analysis and instead applied a "Scope for the Patent" rule to reverse payment ANDA settlements.
The essential question for a Scope of the Patent Rule analysis is whether what is being agreed to is a subset of what the patent actually limits. It has been used in other antitrust contexts before, such as pricing requirements, territorial restrictions, and restrictions on production output or sales as well as time limitations. Under this doctrine, the patentee has the right to insist on certain restraints under patent law so therefore those restraints are permitted under the antitrust laws as well, so long as they do not exceed the scope of the patent's exclusions. In other words, this rule provides that any license restrictions on sales are lawful unless they go beyond the limits of what the patent itself gave.
This, however, is in direct tension with the FTC's position.
The current Supreme Court case on my mind is Federal Trade Commission v. Actavis, Inc. (formerly known as Watson Pharmaceuticals), a reverse payment settlement. Once again in this instance, the FTC takes the position that the only settlement that is appropriate is one allowing generic competition before patent expiration, because the entry of a generic will reduce consumer cost. In doing so, however, it seems to me that the FTC is challenging the scope of the patent and more particularly the patent's constitutional mandate of exclusivity for a limited time – in effect, the FTC is presuming that the patent is invalid rather than applying the statutory presumption that all patents are valid and therefore entitled to exclude competition for the entire patent life.
AIPLA has filed in this case, taking the position adopted by its Board of Directors that the scope of the patent is the appropriate standard for consideration. Let a patent have its presumption of validity and allow the parties a reasonable opportunity to settle using those criteria.
This case is part of the pattern where it seems that the Supreme Court is taking a very active view of what's going on in the patent world. While many commentators have argued the Court should leave patents alone, I’m not so sure that the leave alone concept is an entirely healthy one – but the Court is going into territory it has not looked at in a long time and it's a bumpy ride. Much of the patent-related jurisprudence has been focused on treating patents just like other areas of law, and I hope that they do this for the FTC case too. Just like parties are able to settle cases using a lot of variables to reach the right settlement on their facts, similarly the Scope of the Patent Rule should allow lots of different standards for patent settlement.
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