Actavis and “large and unjustified” payments

Michael A. Carrier is a Distinguished Professor at Rutgers Law School.

In his blog post, Alan Morrison worries that the Supreme Court’s Actavis framework for analyzing “large and unjustified” brand payments to generics works better in theory than in reality. While I agree that courts will confront challenging issues, I am more optimistic that they will be able to determine whether these agreements violate the antitrust laws.

In recent years, one of the most concerning types of antitrust behavior involves agreements by which brand-name drug companies pay generics to delay entering the market. Because a patent is involved, most of the appellate courts that had analyzed the issue had assumed that there was no antitrust concern. After all, the argument went, if the patentee could exclude rivals under a valid and infringed patent, it could pay money to achieve the same effect.

The difficulty with this simplistic analysis, however, is that it assumes that the patent is valid and infringed. If the brand company pays a generic not to enter the market even though its patent is invalid or not infringed, the activity resembles market division, which is a per se violation of the antitrust laws.

The Supreme Court thus was correct to conclude that reverse-payment agreements can violate the antitrust laws. This important outcome promises to save consumers billions of dollars by allowing them to buy more affordable generic medicines. But rather than adopt the Federal Trade Commission’s (FTC’s) proposed framework that such settlements are presumptively illegal, Justice Breyer made clear that courts should evaluate the behavior using antitrust law’s “rule of reason.”

In this post, I explain why the Court’s focus on “large and unjustified payments” is easier to evaluate than Morrison believes. I also discuss why brands and generics will still be able to settle patent litigation, and how Congress can reduce the number of these concerning agreements.

“Large and unjustified” payments

Morrison laments that it will be difficult for future courts to determine if payments are “large and unjustified.” This is a reasonable concern. But while the Court never specifies an exact threshold that would trigger a “large” payment, and while it treats “large” and “unjustified” as separate concerns, the relationship between the two sheds light on the characterization.

The most recent figures show that patent litigation in which there is more than $1 million at risk costs $2.5 to $5 million on average. One study found that generics spent an average of $10 million for each challenge to a brand’s patent. If one justification for reverse payments above all others has been accepted in recent years, it is that payments less than litigation costs do not present anticompetitive harm. And the Court makes clear that avoided litigation costs present “traditional settlement considerations” that do not create the “concern that a patentee is using its monopoly profits to avoid the risk of patent invalidation or a finding of noninfringement.”

For that reason, any payment less than, say, $5 or $10 million is likely to be justified. And, continuing the analysis, any payment above that amount must be justified on other grounds, such as “fair value for services” the generic provides to the brand. But by the time we rise above the $5 to $10 million in litigation costs, we are, according to most commonsense definitions, in the category of “large” payments.

So the crucial question becomes whether the payment is “justified.” Settlements today do not involve naked transfers of cash from brands to generics to delay entering the market. Rather, brands pay generics for unrelated services. For example, brands have paid generics for patent licenses, supplying raw materials or finished products, and helping to promote products. The question is whether the payment really is for these services or instead is for the generic to delay entering the market.

Morrison is correct that this inquiry presents complex issues, and the settling parties surely will assert that the payment is for needed services. But factfinders can use common sense to determine if these payments pass the “smell test.” In many cases, these payments appear in settlements that restrain generic entry, but not in those that do not. And the product provided by the generic often is not even one that the brand had sought before the settlement.

The Actavis case itself offers a set of facts – at least as alleged by the FTC in its complaint – showing that a brand’s co-promotion deals with generics were not independent business transactions. The FTC explained that before entering into settlement discussions with the generics: (1) “Solvay [the brand firm] had not been looking for a co-promotion partner”; (2) the company’s business plan “assumed no co-promotion”; (3) “two prior AndroGel co-promotion efforts had been canceled because they had ‘no significant impact’ on sales trends”; and (4) an “analysis from a consulting firm had concluded that future AndroGel co-promotion offered ‘little revenue upside.’” In addition to the lack of interest in co-promotion, Solvay’s payments “far exceed[ed] the value of the services provided.” Solvay “projected that it would pay” the generics more than “$300 per sales call,” far more than a previous co-promotion deal that “involv[ed] projected payments of around $30-$45 per sales call” and even more than the $150 per call that a senior Watson (now Actavis) executive called “ridiculous.”

Nor was Solvay’s back-up manufacturing deal with generic Paddock an “independent business transaction.” The FTC alleged that: (1) the deal guarantees the generic “$2 million per year for six years” even if it does not “ever manufacture[] AndroGel or ever become[] FDA-qualified to manufacture AndroGel”; (2) before Solvay entered into settlement discussions with the generic, it “had considered and rejected several options for AndroGel back-up manufacturing” and “had concluded that the $10-12 million in capital expenditures required to qualify a back-up manufacturer could not be justified” in light of its already-existing “reliable source of supply”; and (3) before entering the deal, Solvay “conducted no diligence” on the generic’s manufacturing facilities (which led to “substantial and lengthy efforts to conform [the] facilities and processes to FDA-approved standards”).

In other words, while notions of “large” and “unjustified” payments may sound intractable in theory, the facts of cases may be clearer on whether brands can offer a legitimate reason for payments to generics.

Premature announcement of the death of settlements

Morrison worries that the Actavis case could cause a decline in settlements. Similarly, Chief Justice Roberts in his dissent lamented that the majority “frustrates the public policy in favor of settling” and “forc[es] generics who step into the litigation ring to do so without the prospect of cash settlements.” But both assertions downplay the availability of settlements that do not involve payment.

If there were any doubt about the viability of settlement in the absence of payment, it is dispelled by empirical evidence. In 2000, the FTC announced that it would challenge reverse-payment settlements. In the succeeding four years, between 2000 and 2004, not one of twenty reported agreements involved a brand paying a generic to delay entering the market. During this period, parties continued settling their disputes, but in ways less restrictive of competition, such as through licenses allowing early generic entry.

In 2005, however, after the appellate courts took a lenient view of these agreements, the reverse-payment floodgates opened. From 2005 to 2012, the percentage of final settlements between brands and generics that potentially involved payments for delayed entry ranged from 18 to 50% (averaging 27%).  And the number of such settlements increased each year from 3, 14, 14, 16, 19, 31, and 28, to 40.

Increased attention to reverse-payment settlements also has reduced their frequency in the European Union. The European Commission’s pharmaceutical sector inquiry in 2009 found that 22% of settlements from 2000 to 2008 involved payments from brands to generics to delay entry. But that percentage fell to 3% to 11% in subsequent years. And companies continued to settle cases, albeit in different, less concerning, forms. For example, one monitoring exercise after the inquiry found that 61% of settlements did not restrict generic entry, while 36% limited entry but did not involve payment.

Congressional action

Morrison suggests that Congress could “enact a statute that could create antitrust immunity” if a district court approved a settlement as “fair and reasonable.” While that would call for many of the same determinations involved in typical reverse-payment litigation, let me offer a friendly amendment to the role Congress could play here. The legislature is considering two pieces of settlement legislation that could advance the ball beyond Actavis.

First, Congress could enact S.214, the Preserve Access to Affordable Generics Act. The Act gives the FTC authority (under Section 5 of the FTC Act) to presume that settlements have anticompetitive effects if they involve the generic receiving “anything of value” in return for delay in entering the market. The legislation would allow the settling parties to rebut the presumption if they “demonstrate by clear and convincing evidence that the procompetitive benefits of the agreement outweigh the anticompetitive effects.” And in making this determination, it sets forth factors for courts to examine that emphasize the timing and amount of the payment.

Second, Congress could enact S. 504, the Fair and Immediate Release of Generic Drugs Act (“FAIR Generics Act”). One of the main reasons for reverse-payment settlements today is the 180-day exclusivity period reserved for the first generic to challenge the brand firm’s validity or claim noninfringement. Because this period does not begin to run until the settling generic enters the market, potentially years in the future, the brand is able to delay entry by other generics by paying the first-filer to delay entering the market.

S.504 would address this concern by treating as “first applicants” not only the first to challenge a patent, but also those who (among other categories) win a court decision finding the patent invalid or not infringed. And once the successful litigant entered the market, a first filer that had agreed to delay entry would be prevented from accelerating its entry date into the 180-day period.

Conclusion

At first glance, the Actavis Court’s embrace of a rule-of-reason analysis focused on “large and unjustified” payments sounds intractable. To be sure, it would have been administratively simpler to apply a more structured approach of presumptive illegality or (for those not concerned with the agreements) to avoid scrutiny by applying the nominal “scope of the patent” test. But closer examination reveals that courts will be able to make judgments about the size of payments and whether they are for needed generic services or are just a ruse for delayed generic entry.

[Disclosure:  Goldstein & Russell, P.C., whose attorneys work for or contribute to this blog in various capacities, also represented Louisiana Wholesale Drug Company et al. as an amicus in support of the petitioner in this case.]