Reverse Payments: Life after Actavis

Posted by Social Science Research Network

Reverse Payments: Life after Actavis by Daryl Lim (The John Marshall Law School)

ABSTRACT: On its face, the United States Supreme Court’s opinion in Federal Trade Commission (FTC) v. Actavis seemed to contain the elements of a straightforward antitrust indictment: a dominant drug company paid potential rivals millions of dollars not to compete at the cost of public access to cheaper medicine. The interests of these rivals, once aligned with those of the public, have been twisted to align with its former rival and current paymaster. According to an FTC report, these settlements cost consumers $3.5 billion a year.

The Court likened these settlements to cases involving market division arrangements, hardcore offenses normally weeded out under a per se standard of illegality. However, it ultimately opted for a rule of reason approach. Lower courts were to balance benefits and anticompetitive harms, taking into consideration the size and scale of the payment in relation to the patent owner’s anticipated litigation costs and any auxiliary services it received from the generic drug company. Large and unexplained payments could be used as a proxy for market power and anticompetitive harm, sparing lower courts the need for complex, costly and time-consuming inquiries into issues of patent validity and infringement.While the Hatch-Waxman Act makes it lucrative for generic challenges to induce settlements, the fact that the European Union faces similar issues in cases such as Lundbeck, Les Laboratoires Servier and others even without similar legislation is evidence that reverse payments occur outside the setting of the Act.

Looking ahead, parties to a reverse payment will need to negotiate with a view that their agreement will be scrutinized by antitrust agencies and courts. Since at least 2005, settlements have evolved beyond cash payments to include other forms of consideration. Courts must now articulate how cross-licensing, service agreements and offers to delay authorized generic launches are to be assessed. Carelessly applied, Actavis could open litigation floodgates, dampening R&D by current and prospective patent owners. With the prospect and payoffs of settlement now tightened, generics could also be less willing to develop cheaper alternatives or challenge patents to bring such alternatives to market. In the United States where patent litigation is considerably higher than in Europe, these risks are more real and the consequences more dire.

Beyond reverse payments, Actavis provides a rare and precious opportunity to move the dialogue on the interface between the patent and antitrust laws beyond mere platitudes. Most patent and antitrust stakeholders agree that both regimes seek to promote competition and innovation. An enduring disagreement remains, however, as to how these goals should be operationalized. The fierce rift between the majority and dissent vividly illustrates this: should we give primacy to visible marketplace rivalry or allow more latitude for private ordering between the settling parties?

The true legacy of Actavis lies in the promise of catalyzing those from the patent and antitrust spheres into moving towards a realistic compromise on how the rules that affect them both should look like and function. Through debate, experimentation and refinement innate in the common law, future cases can craft pieces that will form a coherent analytical framework for the interface between patent and antitrust laws. The effort must be supported by constituents clear-headed enough to look beyond traditional prejudices, who are able to translate economic insights into workable legal rules, and who recognize that failure would mean that law at the interface will look a lot like the current state of American politics – divided, dysfunctional and a hotbed for empty rhetoric.