Why Antitrust Must Play A Role in Analyzing Drug Patent Settlements

Michael A. Carrier, Distinguished Professor, Rutgers School of Law, MJLST Guest Blogger

Think back several years to, say, 2006 or 2008. The world of drug patent settlements, by which brand-name drug companies pay generics to delay entering the market, was a far different place. A string of appellate courts–the Second, Federal, and Eleventh Circuits–had essentially immunized these agreements by applying a toothless framework based on the “scope of the patent.” The test applied by these courts assumed that the patent was valid and infringed and that a payment for delayed entry could not violate the antitrust laws.

In the landmark case of FTC v. Actavis, 133 S. Ct. 2223 (2013), the Supreme Court rejected such a narrow view. Writing for a majority of five, Justice Stephen Breyer concluded that these settlements “tend to have significant adverse effects on competition” and could violate the antitrust laws. The Court also found that such agreements could demonstrate market power and that the parties had ways to settle other than with payment.

In contrast, writing for three Justices in dissent, Chief Justice John Roberts downplayed antitrust law in contending that “the scope of the patent–i.e., what rights are conferred by the patent–should be determined by reference to patent law.” The claimed reason is that “a patent holder acting within the scope of its patent does not engage in any unlawful anticompetitive behavior” but “simply exercis[es] the monopoly rights granted to it by the Government.”

Roberts combined his exclusive preference for patent law with the position that activity within the nominal scope of the patent is immune from the antitrust laws. A patentee “acting within the scope of its patent has an obvious defense to any antitrust suit: that its patent allows it to engage in conduct that would otherwise violate the antitrust laws.” And even though he viewed “the question posed” as “fundamentally a question of patent law,” he lamented that “the majority declares that such questions should henceforth be scrutinized by antitrust law’s unruly rule of reason.”

My short article in the Minnesota Journal of Law, Science & Technology highlights three significant flaws with Roberts’ opinion. First, Roberts ignored the patent-law policy of challenging and eliminating invalid patents. Second, he downplayed the role of antitrust law. And third, he neglected the importance of the Hatch-Waxman Act, Congress’s resolution of the patent-antitrust intersection in the pharmaceutical industry.

First is patent law. Empirical studies have consistently shown that at least 40% of patents issued by the U.S. Patent and Trademark Office (PTO) that are litigated to decision are invalid. For that reason, the Actavis Court recognized the “patent-related policy of eliminating unwarranted patent grants so the public will not ‘continually be required to pay tribute to would-be monopolists without need or justification.'” Roberts’ suggestion to decide the issue solely on the grounds of patent law does not include this important aspect of patent policy.

Second is antitrust law. As the majority in Actavis recognized, reverse-payment settlements “tend to have significant adverse effects on competition.” Of all the types of business activity subject to the antitrust laws, agreements by which competitors divide markets could be the most dangerous since market division restricts all competition between the parties on all grounds.

Reverse-payment settlements result in generics dropping patent challenges and, in exchange for millions of dollars, agreeing to delay entry into the market. Because the brand makes more by keeping the generic out of the market than the two parties would receive by competing in the market, the parties have an incentive to cede the market to the brand firm and split the monopoly profits.

Third is the regulatory regime. As the Supreme Court has made clear, it is appropriate for courts applying antitrust law to “be attuned to the particular structure and circumstances of the industry at issue.” Congress resolved the tension between the patent and antitrust laws in the pharmaceutical industry by enacting the Hatch-Waxman Act.

The Act had a central purpose of encouraging challenges to invalid or not infringed patents during the term of the patent to encourage early market entry. Reverse-payment settlements directly contravene this goal by allowing brands to pay generics for delayed market entry. In short, not only does such conduct flout the patent policy of testing invalid patents and present significant antitrust harm, but it also disregards the Hatch-Waxman Act and important public-policy goal of increasing the number of affordable generic medicines.

As courts begin to interpret drug patent settlements in the wake of Actavis, they should not follow the approach to patent and antitrust law articulated by Chief Justice Roberts. For in addition to being rejected by the Supreme Court, it (1) shortchanges patent law, which includes a policy goal of testing invalid patents to ensure they do not block competition; (2) downplays antitrust law’s role in monitoring behavior that resembles market division between potential rivals; and (3) ignores the Hatch-Waxman Act’s encouragement of challenges to patents that are invalid and not infringed.