FTC v. ACTAVIS INC.
In 2000, Solvay Pharmaceuticals successfully patented AndroGel, a topical gel medication. Shortly after the FDA approved the medication, generic drug manufacturers Watson Pharmaceuticals and Paddock Laboratories began developing generic versions of the gel. Solvay filed a patent infringement suit against Watson and Paddock, but the manufacturers counter-claimed that Solvay’s patent was invalid to begin with. As the infringement suit progressed, Solvay feared that it would lose its monopoly on AndroGel. To prevent this, Solvay entered into a reverse payment agreement with the two manufacturers. In return for dropping the suit and maintaining exclusivity, Solvay agreed to pay the manufacturers a sizeable fee. The agreement allowed Solvay to maintain its monopoly, despite the possible invalidity of the patent, in exchange for sharing some of the profits with its potential competitors.
Shortly after entering the agreement, the Federal Trade Commission (“FTC”) filed a complaint against the pharmaceutical companies. The FTC claimed that Solvay was unlikely to win the patent infringement suit; therefore the settlement unfairly protected an invalid patent monopoly. By limiting competition in the AndroGel market, the manufacturers were restraining trade in violation of antitrust laws. The manufacturers argued that the FTC failed to state a valid claim because the agreement merely protected Solvay’s already existing patent rights. The United States District Court for the Northern District of Georgia agreed with the manufacturers and dismissed the case. The FTC appealed to the United States Court of Appeals for the Eleventh Circuit, which affirmed the lower court’s decision. The appellate court explained that the manufacturers’ reverse payment settlement is lawful as long as it restrains competition in the same way that patent protection typically restrains competition.
Are reverse payment agreements per se lawful, rather than presumptively anticompetitive?
Legal provision: Drug Price Competition and Patent Term Restoration Act of 1984
No. Justice Stephen G. Breyer delivered the opinion for the 5-3 majority. The Court held that reverse payment settlements are not presumptively unlawful and that the FTC’s lawsuit should have been allowed to proceed. Although patent-based settlement agreements can sometimes violate anti-trust laws, the Court declined to apply an all-or-nothing rule regarding these agreements. Instead, the Court stated that there are five considerations that should have allowed the consideration of FTC’s case. These considerations are: 1) that specific restraints in the settlement agreement had the potential to adversely effect competition; 2) that certain anti-trust consequences will sometimes prove unjustified; 3) that if a reverse payment settlement can cause anticompetitive harm, the patent-holder likely has the power to bring about that harm as well; 4) an anti-trust claim may be more administratively feasible than the lower court believed; and 5) the fact that a large, unjustified reverse payment settlement risks anti-trust liability does not prevent litigating parties from settling their lawsuits. The Court held that these considerations outweighed the lower court’s decision to provide anti-trust immunity to reverse payment settlements.
Chief Justice John Roberts wrote a dissent in which he argued that the majority’s decision discourages generic pharmaceutical companies from challenging patents because it eliminates the possibility of meaningful settlements. He argued that this decision instead forces generic companies into costly litigation that could be more efficiently handled through settlement negotiations. Justice Antonin Scalia and Justice Clarence Thomas joined in the dissent.
NOTICE: This opinion is subject to formal revision before publication in the preliminary print of the United States Reports. Readers are requested to notify the Reporter of Decisions, Supreme Court of the United States, Washington, D. C. 20543, of any typographical or other formal errors, in order that corrections may be made before the preliminary print goes to press.
SUPREME COURT OF THE UNITED STATES
FEDERAL TRADE COMMISSION, PETITIONER v. ACTAVIS, INC., et al.
on writ of certiorari to the united states court of appeals for the eleventh circuit
[June 17, 2013]
Justice Breyer delivered the opinion of the Court.
Company A sues Company B for patent infringement. The two companies settle under terms that require (1) Company B, the claimed infringer, not to produce the pat-ented product until the patent’s term expires, and (2) Company A, the patentee, to pay B many millions of dollars. Because the settlement requires the patentee to pay the alleged infringer, rather than the other way around, this kind of settlement agreement is often called a “reverse payment” settlement agreement. And the basic question here is whether such an agreement can sometimes unreasonably diminish competition in violation of the antitrust laws. See, e.g., 15 U. S. C. §1 (Sherman Act prohibition of “restraint[s] of trade or commerce”). Cf. Palmer v. BRG of Ga., Inc., 498 U. S. 46 (1990) (per curiam) (invalidating agreement not to compete).
In this case, the Eleventh Circuit dismissed a Federal Trade Commission (FTC) complaint claiming that a particular reverse payment settlement agreement violated the antitrust laws. In doing so, the Circuit stated that a reverse payment settlement agreement generally is “immune from antitrust attack so long as its anticompetitive effects fall within the scope of the exclusionary potential of the patent.” FTC v. Watson Pharmaceuticals, Inc., 677 F. 3d 1298, 1312 (2012). And since the alleged infringer’s promise not to enter the patentee’s market expired before the patent’s term ended, the Circuit found the agreement legal and dismissed the FTC complaint. Id., at 1315. In our view, however, reverse payment settlements such as the agreement alleged in the complaint before us can some-times violate the antitrust laws. We consequently hold that the Eleventh Circuit should have allowed the FTC’s lawsuit to proceed.I A
Apparently most if not all reverse payment settlement agreements arise in the context of pharmaceutical drug regulation, and specifically in the context of suits brought under statutory provisions allowing a generic drug manufacturer (seeking speedy marketing approval) to challenge the validity of a patent owned by an already-approved brand-name drug owner. See Brief for Petitioner 29; 12 P. Areeda & H. Hovenkamp, Antitrust Law ¶2046, p. 338 (3d ed. 2012) (hereinafter Areeda); Hovenkamp, Sensible Antitrust Rules for Pharmaceutical Competition, 39 U. S. F. L. Rev. 11, 24 (2004). We consequently describe four key features of the relevant drug-regulatory framework established by the Drug Price Competition and Patent Term Restoration Act of 1984, 98Stat. 1585, as amended. That Act is commonly known as the Hatch-Waxman Act.
First, a drug manufacturer, wishing to market a new prescription drug, must submit a New Drug Application to the federal Food and Drug Administration (FDA) and undergo a long, comprehensive, and costly testing process, after which, if successful, the manufacturer will receive marketing approval from the FDA. See 21 U. S. C. §355(b)(1) (requiring, among other things, “full reports of investigations” into safety and effectiveness; “a full list of the articles used as components”; and a “full description” of how the drug is manufactured, processed, and packed).
Second, once the FDA has approved a brand-name drug for marketing, a manufacturer of a generic drug can obtain similar marketing approval through use of abbrevi-ated procedures. The Hatch-Waxman Act permits a generic manufacturer to file an Abbreviated New Drug Appli-cation specifying that the generic has the “same active ingredients as,” and is “biologically equivalent” to, the al-ready-approved brand-name drug. Caraco Pharmaceutical Laboratories, Ltd. v. Novo Nordisk A/S, 566 U. S. ___, ___ (2012) (slip op., at 2) (citing 21 U. S. C. §§355(j)(2)(A)(ii), (iv)). In this way the generic manufacturer can obtain approval while avoiding the “costly and time-consuming studies” needed to obtain approval “for a pioneer drug.” See Eli Lilly & Co. v. Medtronic, Inc., 496 U. S. 661, 676 (1990) . The Hatch-Waxman process, by allowing the generic to piggy-back on the pioneer’s approval efforts, “speed[s] the introduction of low-cost generic drugs to market,” Caraco, supra, at ___ (slip op., at 2), thereby furthering drug competition.
Third, the Hatch-Waxman Act sets forth special pro-cedures for identifying, and resolving, related patent dis-putes. It requires the pioneer brand-name manufacturer to list in its New Drug Application the “number and the expiration date” of any relevant patent. See 21 U. S. C. §355(b)(1). And it requires the generic manufacturer in its Abbreviated New Drug Application to “assure the FDA” that the generic “will not infringe” the brand-name’s patents. See Caraco, supra, at___ (slip op., at 3).
The generic can provide this assurance in one of several ways. See 21 U. S. C. §355(j)(2)(A)(vii). It can certify that the brand-name manufacturer has not listed any relevant patents. It can certify that any relevant patents have expired. It can request approval to market beginning when any still-in-force patents expire. Or, it can certify that any listed, relevant patent “is invalid or will not be infringed by the manufacture, use, or sale” of the drug described in the Abbreviated New Drug Application. See §355(j)(2)(A)(vii)(IV). Taking this last-mentioned route (called the “paragraph IV” route), automatically counts as patent infringement, see 35 U. S. C. §271(e)(2)(A) (2006 ed., Supp. V), and often “means provoking litigation.” Caraco, supra, at___ (slip op., at 5). If the brand-name patentee brings an infringement suit within 45 days, the FDA then must withhold approving the generic, usually for a 30-month period, while the parties litigate patent validity (or infringement) in court. If the courts decide the matter within that period, the FDA follows that determination; if they do not, the FDA may go forward and give approval to market the generic product. See 21 U. S. C. §355(j)(5)(B)(iii).
Fourth, Hatch-Waxman provides a special incentive for a generic to be the first to file an Abbreviated New Drug Application taking the paragraph IV route. That applicant will enjoy a period of 180 days of exclusivity (from the first commercial marketing of its drug). See §355(j)(5)(B)(iv) (establishing exclusivity period). During that period of exclusivity no other generic can compete with the brand-name drug. If the first-to-file generic manufacturer can overcome any patent obstacle and bring the generic to market, this 180-day period of exclusivity can prove valuable, possibly “worth several hundred million dollars.” Hemphill, Paying for Delay: Pharmaceutical Patent Settlement as a Regulatory Design Problem, 81 N. Y. U. L. Rev. 1553, 1579 (2006). Indeed, the Generic Pharmaceutical Association said in 2006 that the “ ‘vast majority of potential profits for a generic drug manufacturer materialize during the 180-day exclusivity period.’ ” Brief for Petitioner 6 (quoting statement). The 180-day exclusivity period, however, can belong only to the first generic to file. Should that first-to-file generic forfeit the exclusivity right in one of the ways specified by statute, no other generic can obtain it. See §355(j)(5)(D).B 1
In 1999, Solvay Pharmaceuticals, a respondent here, filed a New Drug Application for a brand-name drug called AndroGel. The FDA approved the application in 2000. In 2003, Solvay obtained a relevant patent and disclosed that fact to the FDA, 677 F. 3d, at 1308, as Hatch-Waxman requires. See §355(c)(2) (requiring, in addition, that FDA must publish new patent information upon submission).
Later the same year another respondent, Actavis, Inc. (then known as Watson Pharmaceuticals), filed an Abbreviated New Drug Application for a generic drug modeled after AndroGel. Subsequently, Paddock Laboratories, also a respondent, separately filed an Abbreviated New Drug Application for its own generic product. Both Actavis and Paddock certified under paragraph IV that Solvay’s listed patent was invalid and their drugs did not infringe it. A fourth manufacturer, Par Pharmaceutical, likewise a respondent, did not file an application of its own but joined forces with Paddock, agreeing to share the patent litigation costs in return for a share of profits if Paddock obtained approval for its generic drug.
Solvay initiated paragraph IV patent litigation against Actavis and Paddock. Thirty months later the FDA approved Actavis’ first-to-file generic product, but, in 2006, the patent-litigation parties all settled. Under the terms of the settlement Actavis agreed that it would not bring its generic to market until August 31, 2015, 65 months before Solvay’s patent expired (unless someone else marketed a generic sooner). Actavis also agreed to promote AndroGel to urologists. The other generic manufacturers made roughly similar promises. And Solvay agreed to pay millions of dollars to each generic—$12 million in total to Paddock; $60 million in total to Par; and an estimated $19–$30 million annually, for nine years, to Actavis. See App. 46, 49–50, Complaint ¶¶66, 77. The companies described these payments as compensation for other services the generics promised to perform, but the FTC contends the other services had little value. According to the FTC the true point of the payments was to compensate the generics for agreeing not to compete against AndroGel until 2015. See id., at 50–53, Complaint ¶¶81–85.2
On January 29, 2009, the FTC filed this lawsuit against all the settling parties, namely, Solvay, Actavis, Paddock, and Par. The FTC’s complaint (as since amended) alleged that respondents violated §5 of the Federal Trade Commission Act, 15 U. S. C. §45, by unlawfully agreeing “to share in Solvay’s monopoly profits, abandon their patent challenges, and refrain from launching their low-cost generic products to compete with AndroGel for nine years.” App. 29, Complaint ¶5. See generally FTC v. Indiana Federation of Dentists, 476 U. S. 447, 454 (1986) (Section 5 “encompass[es] . . . practices that violate the Sherman Act and the other antitrust laws”). The District Court held that these allegations did not set forth an antitrust law violation. In re Androgel Antitrust Litigation (No. II), 687 F. Supp. 2d 1371, 1379 (ND Ga. 2010). It accordingly dismissed the FTC’s complaint. The FTC appealed.
The Court of Appeals for the Eleventh Circuit affirmed the District Court. It wrote that “absent sham litigation or fraud in obtaining the patent, a reverse payment settlement is immune from antitrust attack so long as its anticompetitive effects fall within the scope of the exclusionary potential of the patent.” 677 F. 3d, at 1312. The court recognized that “antitrust laws typically prohibit agreements where one company pays a potential competitor not to enter the market.” Id., at 1307 (citing Valley Drug Co. v. Geneva Pharmaceuticals, Inc., 344 F. 3d 1294, 1304 (CA11 2003)). See also Palmer, 498 U. S., at 50 (agreement to divide territorial markets held “unlawful on its face”). But, the court found that “reverse payment settlements of patent litigation presen[t] atypical cases because one of the parties owns a patent.” 677 F. 3d, at 1307 (internal quotation marks and second alteration omitted). Patent holders have a “lawful right to exclude others from the market,” ibid. (internal quotation marks omitted); thus a patent “conveys the right to cripple competition.” Id., at 1310 (internal quotation marks omitted). The court recognized that, if the parties to this sort of case do not settle, a court might declare the patent invalid. Id., at 1305. But, in light of the public policy favoring settlement of disputes (among other considerations) it held that the courts could not require the parties to continue to litigate in order to avoid antitrust liability. Id., at 1313–1314.
The FTC sought certiorari. Because different courts have reached different conclusions about the application of the antitrust laws to Hatch-Waxman-related patent settlements, we granted the FTC’s petition. Compare, e.g., id., at 1312 (case below) (settlements generally “immune from antitrust attack”); In re Ciprofloxacin Hydrochloride Antitrust Litigation, 544 F. 3d 1323, 1332–1337 (CA Fed. 2008) (similar); In re Tamoxifen Citrate Antitrust Litigation, 466 F. 3d 187, 212–213 (CA2 2006) (similar), with In re K-Dur Antitrust Litigation, 686 F. 3d 197, 214–218 (CA3 2012) (settlements presumptively unlawful).II A
Solvay’s patent, if valid and infringed, might have permitted it to charge drug prices sufficient to recoup the reverse settlement payments it agreed to make to its potential generic competitors. And we are willing to take this fact as evidence that the agreement’s “anticompetitive effects fall within the scope of the exclusionary potential of the patent.” 677 F. 3d, at 1312. But we do not agree that that fact, or characterization, can immunize the agreement from antitrust attack.
For one thing, to refer, as the Circuit referred, simply to what the holder of a valid patent could do does not by itself answer the antitrust question. The patent here may or may not be valid, and may or may not be infringed. “[A] valid patent excludes all except its owner from the use of the protected process or product,” United States v. Line Material Co., 333 U. S. 287, 308 (1948) (emphasis added). And that exclusion may permit the patent owner to charge a higher-than-competitive price for the patented product. But an invalidated patent carries with it no such right. And even a valid patent confers no right to exclude products or processes that do not actually infringe. The paragraph IV litigation in this case put the patent’s validity at issue, as well as its actual preclusive scope. The parties’ settlement ended that litigation. The FTC alleges that in substance, the plaintiff agreed to pay the defendants many millions of dollars to stay out of its market, even though the defendants did not have any claim that the plaintiff was liable to them for damages. That form of settlement is unusual. And, for reasons discussed in Part II–B, infra, there is reason for concern that settlements taking this form tend to have significant adverse effects on competition.
Given these factors, it would be incongruous to determine antitrust legality by measuring the settlement’s anticompetitive effects solely against patent law policy, rather than by measuring them against procompetitive antitrust policies as well. And indeed, contrary to the Circuit’s view that the only pertinent question is whether “the settlement agreement . . . fall[s] within” the legitimate “scope” of the patent’s “exclusionary potential,” 677 F. 3d, at 1309, 1312, this Court has indicated that patent and antitrust policies are both relevant in determining the “scope of the patent monopoly”—and consequently antitrust law immunity—that is conferred by a patent.
Thus, the Court in Line Material explained that “the improper use of [a patent] monopoly,” is “invalid” under the antitrust laws and resolved the antitrust question in that case by seeking an accommodation “between the lawful restraint on trade of the patent monopoly and the illegal restraint prohibited broadly by the Sherman Act.” 333 U. S., at 310. To strike that balance, the Court asked questions such as whether “the patent statute specifically gives a right” to restrain competition in the manner challenged; and whether “competition is impeded to a greater degree” by the restraint at issue than other restraints previously approved as reasonable. Id., at 311. See also United States v. United States Gypsum Co., 333 U. S. 364 –391 (1948) (courts must “balance the privileges of [the patent holder] and its licensees under the patent grants with the prohibitions of the Sherman Act against combinations and attempts to monopolize”); Walker Process Equipment, Inc. v. Food Machinery & Chemical Corp., 382 U. S. 172, 174 (1965) (“[E]nforcement of a patent procured by fraud” may violate the Sherman Act). In short, rather than measure the length or amount of a restriction solely against the length of the patent’s term or its earning potential, as the Court of Appeals apparently did here, this Court answered the antitrust question by considering traditional antitrust factors such as likely anticompetitive effects, redeeming virtues, market power, and potentially offsetting legal considerations present in the circumstances, such as here those related to patents. See Part II–B, infra. Whether a particular restraint lies “beyond the limits of the patent monopoly” is a conclusion that flows from that analysis and not, as The Chief Justice suggests, its starting point. Post, at 3, 8 (dissenting opinion).
For another thing, this Court’s precedents make clear that patent-related settlement agreements can sometimes violate the antitrust laws. In United States v. Singer Mfg. Co., 374 U. S. 174 (1963) , for example, two sewing machine companies possessed competing patent claims; a third company sought a patent under circumstances where doing so might lead to the disclosure of information that would invalidate the other two firms’ patents. All three firms settled their patent-related disagreements while assigning the broadest claims to the firm best able to enforce the patent against yet other potential competitors. Id., at 190–192. The Court did not examine whether, on the assumption that all three patents were valid, patent law would have allowed the patents’ holders to do the same. Rather, emphasizing that the Sherman Act “imposes strict limitations on the concerted activities in which patent owners may lawfully engage,” id., at 197, it held that the agreements, although settling patent disputes, violated the antitrust laws. Id., at 195, 197. And that, in important part, was because “the public interest in granting patent monopolies” exists only to the extent that “the public is given a novel and useful invention” in “consideration for its grant.” Id., at 199 (White, J., concurring). See also United States v. New Wrinkle, Inc., 342 U. S. 371, 378 (1952) (applying antitrust scrutiny to patent settlement); Standard Oil Co. (Indiana) v. United States, 283 U. S. 163 (1931) (same).
Similarly, both within the settlement context and without, the Court has struck down overly restrictive patent licensing agreements—irrespective of whether those agreements produced supra-patent-permitted revenues. We concede that in United States v. General Elec. Co., 272 U. S. 476, 489 (1926) , the Court permitted a single patentee to grant to a single licensee a license containing a minimum resale price requirement. But in Line Material, supra, at 308, 310–311, the Court held that the antitrust laws forbid a group of patentees, each owning one or more patents, to cross-license each other, and, in doing so, to insist that each licensee maintain retail prices set collectively by the patent holders. The Court was willing to presume that the single-patentee practice approved in General Electric was a “reasonable restraint” that “accords with the patent monopoly granted by the patent law,” 333 U. S., at 312, but declined to extend that conclusion to multiple-patentee agreements: “As the Sherman Act prohibits agreements to fix prices, any arrangement between patentees runs afoul of that prohibition and is outside the patent monopoly.” Ibid. In New Wrinkle, 342 U. S., at 378, the Court held roughly the same, this time in respect to a similar arrangement in settlement of a litigation between two patentees, each of which contended that its own patent gave it the exclusive right to control production. That one or the other company (we may presume) was right about its patent did not lead the Court to confer antitrust immunity. Far from it, the agreement was found to violate the Sherman Act. Id., at 380.
Finally in Standard Oil Co. (Indiana), the Court upheld cross-licensing agreements among patentees that settled actual and impending patent litigation, 283 U. S., at 168, which agreements set royalty rates to be charged third parties for a license to practice all the patents at issue (and which divided resulting revenues). But, in doing so, Justice Brandeis, writing for the Court, warned that such an arrangement would have violated the Sherman Act had the patent holders thereby “dominate[d]” the industry and “curtail[ed] the manufacture and supply of an unpatented product.” Id., at 174. These cases do not simply ask whether a hypothetically valid patent’s holder would be able to charge, e.g., the high prices that the challenged patent-related term allowed. Rather, they seek to ac-commodate patent and antitrust policies, finding challenged terms and conditions unlawful unless patent law policy offsets the antitrust law policy strongly favoring competition.
Thus, contrary to the dissent’s suggestion, post, at 4–6, there is nothing novel about our approach. What does appear novel are the dissent’s suggestions that a patent holder may simply “pa[y] a competitor to respect its patent” and quit its patent invalidity or noninfringement claim without any antitrust scrutiny whatever, post, at 3, and that “such settlements . . . are a well-known feature of intellectual property litigation,” post, at 10. Closer examination casts doubt on these claims. The dissent does not identify any patent statute that it understands to grant such a right to a patentee, whether expressly or by fair implication. It would be difficult to reconcile the proposed right with 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.” Lear, Inc. v. Adkins, 395 U. S. 653, 670 (1969) . And the authorities cited for this proposition (none from this Court, and none an antitrust case) are not on point. Some of them say that when Company A sues Company B for patent infringement and demands, say, $100 million in damages, it is not uncommon for B (the defendant) to pay A (the plaintiff) some amount less than the full demand as part of the settlement—$40 million, for example. See Schildkraut, Patent-Splitting Settlements and the Reverse Payment Fallacy, 71 Antitrust L. J. 1033, 1046 (2004) (suggesting that this hypothetical settlement includes “an implicit net payment” from A to B of $60 million—i.e., the amount of the settlement discount). The cited authorities also indicate that if B has a counterclaim for damages against A, the original infringement plaintiff, A might end up paying B to settle B’s counterclaim. Cf. Metro-Goldwyn Mayer, Inc. v. 007 Safety Prods., Inc., 183 F. 3d 10, 13 (CA1 1999) (describing trademark dispute and settlement). Insofar as the dissent urges that settlements taking these commonplace forms have not been thought for that reason alone subject to antitrust liability, we agree, and do not intend to alter that understanding. But the dissent appears also to suggest that reverse payment settlements—e.g., in which A, the plaintiff, pays money to defendant B purely so B will give up the patent fight—should be viewed for antitrust purposes in the same light as these familiar settlement forms. See post, at 9–10. We cannot agree. In the traditional examples cited above, a party with a claim (or counterclaim) for damages receives a sum equal to or less than the value of its claim. In reverse payment settlements, in contrast, a party with no claim for damages (something that is usually true of a paragraph IV litigation defendant) walks away with money simply so it will stay away from the patentee’s market. That, we think, is something quite different. Cf. Verizon Communications, Inc. v. Law Offices of Curtis V. Trinko, LLP, 540 U. S. 398, 408 (2004) (“[C]ollusion” is “the supreme evil of antitrust”).
Finally, the Hatch-Waxman Act itself does not embody a statutory policy that supports the Eleventh Circuit’s view. Rather, the general procompetitive thrust of the statute, its specific provisions facilitating challenges to a patent’s validity, see Part I–A, supra, and its later-added provisions requiring parties to a patent dispute triggered by a paragraph IV filing to report settlement terms to the FTC and the Antitrust Division of the Department of Justice, all suggest the contrary. See §§1112–1113, 117Stat. 2461–2462. Those interested in legislative history may also wish to examine the statements of individual Members of Congress condemning reverse payment settlements in advance of the 2003 amendments. See, e.g., 148 Cong. Rec. 14437 (2002) (remarks of Sen. Hatch) (“It was and is very clear that the [Hatch-Waxman Act] was not designed to allow deals between brand and generic companies to delay competition”); 146 Cong. Rec. 18774 (2000) (remarks of Rep. Waxman) (introducing bill to deter companies from “strik[ing] collusive agreements to trade multimillion dollar payoffs by the brand company for delays in the introduction of lower cost, generic alternatives”).B
The Eleventh Circuit’s conclusion finds some degree of support in a general legal policy favoring the settlement of disputes. 677 F. 3d, at 1313–1314. See also Schering-Plough Corp. v. FTC, 402 F. 3d 1056, 1074–1075 (2005) (same); In re Tamoxifen Citrate, 466 F. 3d, at 202 (noting public’s “ ‘strong interest in settlement’ ” of complex and expensive cases). The Circuit’s related underlying practical concern consists of its fear that antitrust scrutiny of a reverse payment agreement would require the parties to litigate the validity of the patent in order to demonstrate what would have happened to competition in the absence of the settlement. Any such litigation will prove time consuming, complex, and expensive. The antitrust game, the Circuit may believe, would not be worth that litigation candle.
We recognize the value of settlements and the patent litigation problem. But we nonetheless conclude that this patent-related factor should not determine the result here. Rather, five sets of considerations lead us to conclude that the FTC should have been given the opportunity to prove its antitrust claim.
First, the specific restraint at issue has the “potential for genuine adverse effects on competition.” Indiana Federation of Dentists, 476 U. S., at 460–461 (citing 7 Areeda ¶1511, at 429 (1986)). The payment in effect amounts to a purchase by the patentee of the exclusive right to sell its product, a right it already claims but would lose if the patent litigation were to continue and the patent were held invalid or not infringed by the generic product. Suppose, for example, that the exclusive right to sell produces $50 million in supracompetitive profits per year for the patentee. And suppose further that the patent has 10 more years to run. Continued litigation, if it results in patent invalidation or a finding of noninfringement, could cost the patentee $500 million in lost revenues, a sum that then would flow in large part to consumers in the form of lower prices.
We concede that settlement on terms permitting the patent challenger to enter the market before the patent expires would also bring about competition, again to the consumer’s benefit. But 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. Indeed, there are indications that patentees sometimes pay a generic challenger a sum even larger than what the generic would gain in profits if it won the paragraph IV litigation and entered the market. See Hemphill, 81 N. Y. U. L. Rev., at 1581. See also Brief for 118 Law, Economics, and Business Professors et al. as Amici Curiae 25 (estimating that this is true of the settlement challenged here). The rationale behind a payment of this size cannot in every case be supported by traditional settlement considerations. The payment may instead provide strong evidence that the patentee seeks to induce the generic challenger to abandon its claim with a share of its monopoly profits that would otherwise be lost in the competitive market.
But, one might ask, as a practical matter would the parties be able to enter into such an anticompetitive agreement? Would not a high reverse payment signal to other potential challengers that the patentee lacks confidence in its patent, thereby provoking additional challenges, perhaps too many for the patentee to “buy off?” Two special features of Hatch-Waxman mean that the answer to this question is “not necessarily so.” First, under Hatch-Waxman only the first challenger gains the special advantage of 180 days of an exclusive right to sell a generic version of the brand-name product. See Part I–A, supra. And as noted, that right has proved valuable—indeed, it can be worth several hundred million dollars. See Hemphill, supra, at 1579; Brief for Petitioner 6. Subsequent challengers cannot secure that exclusivity period, and thus stand to win significantly less than the first if they bring a successful paragraph IV challenge. That is, if subsequent litigation results in invalidation of the patent, or a ruling that the patent is not infringed, that litigation victory will free not just the challenger to compete, but all other potential competitors too (once they obtain FDA approval). The potential reward available to a subsequent challenger being significantly less, the patentee’s payment to the initial challenger (in return for not pressing the patent challenge) will not necessarily provoke subsequent challenges. Second, a generic that files a paragraph IV after learning that the first filer has settled will (if sued by the brand-name) have to wait out a stay period of (roughly) 30 months before the FDA may approve its application, just as the first filer did. See 21 U. S. C. §355(j)(5)(B)(iii). These features together mean that a reverse payment settlement with the first filer (or, as in this case, all of the initial filers) “removes from consideration the most motivated challenger, and the one closest to introducing competition.” Hemphill, supra, at 1586. The dissent may doubt these provisions matter, post, at 15–17, but scholars in the field tell us that “where only one party owns a patent, it is virtually unheard of outside of pharmaceuticals for that party to pay an accused infringer to settle the lawsuit.” 1 H. Hovenkamp, M. Janis, M. Lemley, & C. Leslie, IP and Antitrust §15.3, p. 15–45, n. 161 (2d ed. Supp. 2011). It may well be that Hatch-Waxman’s unique regulatory framework, including the special advantage that the 180-day exclusivity period gives to first filers, does much to explain why in this context, but not others, the patentee’s ordinary incentives to resist paying off challengers (i.e., the fear of provoking myriad other challengers) appear to be more frequently overcome. See 12 Areeda ¶2046, at 341 (3d ed. 2010) (noting that these provisions, no doubt unintentionally, have created special incentives for collusion).
Second, these anticompetitive consequences will at least sometimes prove unjustified. See 7 id., ¶1504, at 410–415 (3d ed. 2010); California Dental Assn. v. FTC, 526 U. S., 756, 786–787 (1999) (Breyer, J., concurring in part and dissenting in part). As the FTC admits, offsetting or redeeming virtues are sometimes present. Brief for Petitioner 37–39. The reverse payment, for example, may amount to no more than a rough approximation of the litigation expenses saved through the settlement. That payment may reflect compensation for other services that the generic has promised to perform—such as distributing the patented item or helping to develop a market for that item. There may be other justifications. Where a reverse payment reflects traditional settlement considerations, such as avoided litigation costs or fair value for services, there is not the same concern that a patentee is using its monopoly profits to avoid the risk of patent invalidation or a finding of noninfringement. In such cases, the parties may have provided for a reverse payment without having sought or brought about the anticompetitive consequences we mentioned above. But that possibility does not justify dismissing the FTC’s complaint. An antitrust defendant may show in the antitrust proceeding that legitimate justifications are present, thereby explaining the presence of the challenged term and showing the lawfulness of that term under the rule of reason. See, e.g., Indiana Federation of Dentists, supra, at 459; 7 Areeda ¶¶1504a–1504b, at 401–404 (3d ed. 2010).
Third, where a reverse payment threatens to work unjustified anticompetitive harm, the patentee likely possesses the power to bring that harm about in practice. See id., ¶1503, at 392–393. At least, the “size of the payment from a branded drug manufacturer to a prospective generic is itself a strong indicator of power”—namely, the power to charge prices higher than the competitive level. 12 id., ¶2046, at 351. An important patent itself helps to assure such power. Neither is a firm without that power likely to pay “large sums” to induce “others to stay out of its market.” Ibid. In any event, the Commission has referred to studies showing that reverse payment agreements are associated with the presence of higher-than-competitive profits—a strong indication of market power. See Brief for Petitioner 45.
Fourth, an antitrust action is likely to prove more feasible administratively than the Eleventh Circuit believed. The Circuit’s holding does avoid the need to litigate the patent’s validity (and also, any question of infringement). But to do so, it throws the baby out with the bath water, and there is no need to take that drastic step. That is because it is normally not necessary to litigate patent validity to answer the antitrust question (unless, perhaps, to determine whether the patent litigation is a sham, see 677 F. 3d, at 1312). An unexplained large reverse payment itself would normally suggest that the patentee has serious doubts about the patent’s survival. And that fact, in turn, suggests that the payment’s objective is to maintain supracompetitive prices to be shared among the patentee and the challenger rather than face what might have been a competitive market—the very anticompetitive consequence that underlies the claim of antitrust unlawfulness. The owner of a particularly valuable patent might contend, of course, that even a small risk of invalidity justifies a large payment. But, be that as it may, the payment (if otherwise unexplained) likely seeks to prevent the risk of competition. And, as we have said, that consequence constitutes the relevant anticompetitive harm. In a word, the size of the unexplained reverse payment can provide a workable surrogate for a patent’s weakness, all without forcing a court to conduct a detailed exploration of the validity of the patent itself. 12 Areeda ¶2046, at 350–352.
Fifth, the fact that a large, unjustified reverse payment risks antitrust liability does not prevent litigating parties from settling their lawsuit. They may, as in other industries, settle in other ways, for example, by allowing the generic manufacturer to enter the patentee’s market prior to the patent’s expiration, without the patentee paying the challenger to stay out prior to that point. Although the parties may have reasons to prefer settlements that include reverse payments, the relevant antitrust question is: What are those reasons? If the basic reason is a desire to maintain and to share patent-generated monopoly profits, then, in the absence of some other justification, the antitrust laws are likely to forbid the arrangement.
In sum, a reverse payment, where large and unjustified, can bring with it the risk of significant anticompetitive effects; one who makes such a payment may be unable to explain and to justify it; such a firm or individual may well possess market power derived from the patent; a court, by examining the size of the payment, may well be able to assess its likely anticompetitive effects along with its potential justifications without litigating the validity of the patent; and parties may well find ways to settle patent disputes without the use of reverse payments. In our view, these considerations, taken together, outweigh the single strong consideration—the desirability of settlements—that led the Eleventh Circuit to provide near-automatic antitrust immunity to reverse payment settlements.III
The FTC urges us to hold that reverse payment settlement agreements are presumptively unlawful and that courts reviewing such agreements should proceed via a “quick look” approach, rather than applying a “rule of reason.” See California Dental, 526 U. S., at 775, n. 12 (“Quick-look analysis in effect” shifts to “a defendant the burden to show empirical evidence of procompetitive effects”); 7 Areeda ¶1508, at 435–440 (3d ed. 2010). We decline to do so. In California Dental, we held (unanimously) that abandonment of the “rule of reason” in favor of presumptive rules (or a “quick-look” approach) is appropriate only where “an observer with even a rudimentary understanding of economics could conclude that the arrangements in question would have an anticompetitive effect on customers and markets.” 526 U. S., at 770; id., at 781 (Breyer, J., concurring in part and dissenting in part). We do not believe that reverse payment settlements, in the context we here discuss, meet this criterion.
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. 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.
To say this is not to require the courts to insist, contrary to what we have said, that the Commission need litigate the patent’s validity, empirically demonstrate the virtues or vices of the patent system, present every possible supporting fact or refute every possible pro-defense theory. As a leading antitrust scholar has pointed out, “ ‘[t]here is always something of a sliding scale in appraising reason-ableness,’ ” and as such “ ‘the quality of proof required should vary with the circumstances.’ ” California Dental, supra, at 780 (quoting with approval 7 Areeda ¶1507, at 402 (1986)).
As in other areas of law, trial courts can structure antitrust litigation so as to avoid, on the one hand, the use of antitrust theories too abbreviated to permit proper analysis, and, on the other, consideration of every possible fact or theory irrespective of the minimal light it may shed on the basic question—that of the presence of sig-nificant unjustified anticompetitive consequences. See 7 id., ¶1508c, at 438–440. We therefore leave to the lower courts the structuring of the present rule-of-reason antitrust litigation. We reverse the judgment of the Eleventh Circuit. And we remand the case for further proceedings consistent with this opinion.
It is so ordered.
Justice Alito took no part in the consideration or decision of this case.
SUPREME COURT OF THE UNITED STATES
FEDERAL TRADE COMMISSION, PETITIONER v. ACTAVIS, INC., et al.
on writ of certiorari to the united states court of appeals for the eleventh circuit
[June 17, 2013]
Chief Justice Roberts, with whom Justice Scalia and Justice Thomas join, dissenting.
Solvay Pharmaceuticals holds a patent. It sued two generic drug manufacturers that it alleged were infringing that patent. Those companies counterclaimed, contending the patent was invalid and that, in any event, their products did not infringe. The parties litigated for three years before settling on these terms: Solvay agreed to pay the generics millions of dollars and to allow them into the market five years before the patent was set to expire; in exchange, the generics agreed to provide certain services (help with marketing and manufacturing) and to honor Solvay’s patent. The Federal Trade Commission alleges that such a settlement violates the antitrust laws. The question is how to assess that claim.
A patent carves out an exception to the applicability of antitrust laws. The correct approach should therefore be to ask whether the settlement gives Solvay monopoly power beyond what the patent already gave it. The Court, however, departs from this approach, and would instead use antitrust law’s amorphous rule of reason to inquire into the anticompetitive effects of such settlements. This novel approach is without support in any statute, and will discourage the settlement of patent litigation. I respectfully dissent.I
The point of antitrust law is to encourage competitive markets to promote consumer welfare. The point of patent law is to grant limited monopolies as a way of encouraging innovation. Thus, a patent grants “the right to exclude others from profiting by the patented invention.” Dawson Chemical Co. v. Rohm & Haas Co., 448 U. S. 176, 215 (1980) . In doing so it provides an exception to antitrust law, and the scope of the patent—i.e., the rights conferred by the patent—forms the zone within which the patent holder may operate without facing antitrust liability.
This should go without saying, in part because we’ve said it so many times. Walker Process Equipment, Inc. v. Food Machinery & Chemical Corp., 382 U. S. 172, 177 (1965) (“ ‘A patent . . . is an exception to the general rule against monopolies’ ”); United States v. Line Material Co., 333 U. S. 287, 300 (1948) (“[T]he precise terms of the grant define the limits of a patentee’s monopoly and the area in which the patentee is freed from competition”); United States v. General Elec. Co., 272 U. S. 476, 485 (1926) (“It is only when . . . [the patentee] steps out of the scope of his patent rights” that he comes within the operation of the Sherman Act); Simpson v. Union Oil Co. of Cal., 377 U. S. 13, 24 (1964) (similar). Thus, although it is per se unlawful to fix prices under antitrust law, we have long recognized that a patent holder is entitled to license a competitor to sell its product on the condition that the competitor charge a certain, fixed price. See, e.g., General Elec. Co., supra, at 488–490.
We have never held that it violates antitrust law for a competitor to refrain from challenging a patent. And by extension, we have long recognized that the settlement of patent litigation does not by itself violate the antitrust laws. Standard Oil Co. (Indiana) v. United States, 283 U. S. 163, 171 (1931) (“Where there are legitimately conflicting claims or threatened interferences, a settlement by agreement, rather than litigation, is not precluded by the [Sherman] Act”). Like most litigation, patent litigation is settled all the time, and such settlements—which can include agreements that clearly violate antitrust law, such as licenses that fix prices, or agreements among competitors to divide territory—do not ordinarily subject the litigants to antitrust liability. See 1 H. Hovenkamp, M. Janis, M. Lemley, & C. Leslie, IP and Antitrust §7.3, pp. 7–13 to 7–15 (2d ed. 2003) (hereinafter Hovenkamp).
The key, of course, is that the patent holder—when doing anything, including settling—must act within the scope of the patent. If its actions go beyond the monopoly powers conferred by the patent, we have held that such actions are subject to antitrust scrutiny. See, e.g., United States v. Singer Mfg. Co., 374 U. S. 174 –197 (1963). If its actions are within the scope of the patent, they are not subject to antitrust scrutiny, with two exceptions concededly not applicable here: (1) when the parties settle sham litigation, cf. Professional Real Estate Investors, Inc. v. Columbia Pictures Industries, Inc., 508 U. S. 49 –61 (1993); and (2) when the litigation involves a patent obtained through fraud on the Patent and Trademark Office. Walker Process Equipment, supra, at 177.
Thus, under our precedent, this is a fairly straight-forward case. Solvay paid a competitor to respect its patent—conduct which did not exceed the scope of its patent. No one alleges that there was sham litigation, or that Solvay’s patent was obtained through fraud on the PTO. As in any settlement, Solvay gave its competitors something of value (money) and, in exchange, its competitors gave it something of value (dropping their legal claims). In doing so, they put an end to litigation that had been dragging on for three years. Ordinarily, we would think this a good thing.II
Today, however, the Court announces a new rule. It is willing to accept that Solvay’s actions did not exceed the scope of its patent. Ante, at 8. But it does not agree that this is enough to “immunize the agreement from antitrust attack.” Ibid. According to the majority, if a patent holder settles litigation by paying an alleged infringer a “large and unjustified” payment, in exchange for having the alleged infringer honor the patent, a court should employ the antitrust rule of reason to determine whether the settlement violates antitrust law. Ante, at 19.
The Court’s justifications for this holding are unpersuasive. First, the majority explains that “the patent here may or may not be valid, and may or may not be infringed.” Ante, at 8. Because there is “uncertainty” about whether the patent is actually valid, the Court says that any questions regarding the legality of the settlement should be “measur[ed]” by “procompetitive antitrust policies,” rather than “patent law policy.” Ante, at 9. This simply states the conclusion. The difficulty with such an approach is that a patent holder 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. But again, that’s the whole point of a patent: to confer a limited monopoly. The problem, as the Court correctly recognizes, is that we’re not quite certain if the patent is actually valid, or if the competitor is infringing it. But that is always the case, and is plainly a question of patent law.
The majority, however, would assess those patent law issues according to “antitrust policies.” According to the majority, this is what the Court did in Line Material—i.e., it “accommodat[ed]” antitrust principles and struck a “balance” between patent and antitrust law. Ante, at 9. But the Court in Line Material did no such thing. Rather, it explained that it is “well settled that the possession of a valid patent or patents does not give the patentee any exemption from the provisions of the Sherman Act beyond the limits of the patent monopoly.” 333 U. S., at 308 (emphasis added). It then, in the very next sentence, stated that “[b]y aggregating patents in one control, the holder of the patents cannot escape the prohibitions of the Sherman Act.” Ibid. That second sentence follows only if such conduct—the aggregation of multiple patents—goes “beyond the limits of the patent monopoly,” which is precisely what the Court concluded. See id., at 312 (“There is no suggestion in the patent statutes of authority to combine with other patent owners to fix prices on articles covered by the respective patents” (emphasis added)). The Court stressed, over and over, that a patent holder does not violate the antitrust laws when it acts within the scope of its patent. See id., at 305 (“Within the limits of the patentee’s rights under his patent, monopoly of the process or product by him is authorized by the patent statutes”); id., at 310 (“price limitations on patented devices beyond the limits of a patent monopoly violate the Sherman Act” (emphasis added)).
The majority suggests that “[w]hether a particular restraint lies ‘beyond the limits of the patent monopoly’ is a conclusion that flows from” applying traditional antitrust principles. Ante, at 10. It seems to have in mind a regime where courts ignore the patent, and simply conduct an antitrust analysis of the settlement without regard to the validity of the patent. But a patent holder acting within the scope of its patent does not engage in any unlawful anticompetitive behavior; it is simply exercising the monopoly rights granted to it by the Government. Its behavior would be unlawful only if its patent were invalid or not infringed. And the scope of the patent—i.e., what rights are conferred by the patent—should be determined by reference to patent law. While it is conceivable to set up a legal system where you assess the validity of patents or questions of infringement by bringing an antitrust suit, neither the majority nor the Government suggests that Congress has done so.
Second, the majority contends that “this Court’s precedents make clear that patent-related settlement agreements can sometimes violate the antitrust laws.” Ante, at 10. For this carefully worded proposition, it cites Singer Manufacturing Co., United States v. New Wrinkle, Inc., 342 U. S. 371 (1952) , and Standard Oil Co. (Indiana). But each of those cases stands for the same, uncontroversial point: that when a patent holder acts outside the scope of its patent, it is no longer protected from antitrust scrutiny by the patent.
To begin, the majority’s description of Singer is inaccurate. In Singer, several patent holders with competing claims entered into a settlement agreement in which they cross-licensed their patents to each other, and did so in order to disadvantage Japanese competition. See 374 U. S., at 194–195 (finding that the agreement had “a common purpose to suppress the Japanese machine competition in the United States” (footnote omitted)). According to the majority, the Court in Singer “did not examine whether, on the assumption that all three patents were valid, patent law would have allowed the patents’ holders to do the same.” Ante, at 10. Rather, the majority contends, Singer held that this agreement violated the anti-trust laws because “in important part . . . ‘the public interest in granting patent monopolies’ exists only to the extent that ‘the public is given a novel and useful invention’ in ‘consideration for its grant.’ ” Ibid. (quoting Singer, 374 U. S., at 199 (White, J., concurring)). But the majority in Singer certainly did ask whether patent law permitted such an arrangement, concluding that it did not. See id., at 196–197 (reiterating that it “is equally well settled that the possession of a valid patent or patents does not give the patentee any exemption from the provisions of the Sherman Act beyond the limits of the patent monopoly” and holding that “those limitations have been exceeded in this case” (emphasis added; internal quotation marks omitted)); see also Hovenkamp §7.2b, at 7–8, n. 15 (citing Singer as a quintessential case in which patent holders were subject to antitrust liability because their settlement agreement went beyond the scope of their patents and thus conferred monopoly power beyond what the patent lawfully authorized). Even Justice White’s concurrence, on which the majority relies, emphasized that the conduct at issue in Singer—collusion between patent holders to exclude Japanese competition and to prevent disclosure of prior art—was not authorized by the patent laws. 374 U. S., at 197, 200.
New Wrinkle is to the same effect. There, the Court explained that because “[p]rice control through cross-licensing [is] barred as beyond the patent monopoly,” an “arrangement . . . made between patent holders to pool their patents and fix prices on the products for themselves and their licensees . . . plainly violate[s] the Sherman Act.” 342 U. S., at 379, 380 (emphasis added). As the Court further explained, a patent holder may not, “ ‘acting in concert with all members of an industry . . . issue substantially identical licenses to all members of the industry under the terms of which the industry is completely regimented, the production of competitive unpatented products suppressed, a class of distributors squeezed out, and prices on unpatented products stabilized.’ ” Id., at 379–380 (quoting United States v. United States Gypsum Co., 333 U. S. 364, 400 (1948) ). The majority here, however, ignores this discussion, and instead categorizes the case as “applying antitrust scrutiny to [a] patent settlement.” Ante, at 10.
Again, in Standard Oil Co. (Indiana), the parties settled claims regarding “competing patented processes for manufacturing an unpatented product,” which threatened to create a monopoly over the unpatented product. 283 U. S., at 175. The Court explained that “an exchange of licenses for the purpose of curtailing the . . . supply of an unpatented product, is beyond the privileges conferred by the patents.” Id., at 174.
The majority is therefore right to suggest that these “precedents make clear that patent-related settlement agreements can sometimes violate the antitrust laws.” Ante, at 10 (emphasis added). The key word is sometimes. And those some times are spelled out in our precedents. Those cases have made very clear that patent settlements—and for that matter, any agreements relating to patents—are subject to antitrust scrutiny if they confer benefits beyond the scope of the patent. This makes sense. A patent exempts its holder from the antitrust laws only insofar as the holder operates within the scope of the patent. When the holder steps outside the scope of the patent, he can no longer use the patent as his defense. The majority points to no case where a patent settlement was subject to antitrust scrutiny merely because the validity of the patent was uncertain. Not one. It is remarkable, and surely worth something, that in the 123 years since the Sherman Act was passed, we have never let antitrust law cross that Rubicon.
Next, the majority points to the “general procompetitive thrust” of the Hatch-Waxman Act, the fact that Hatch-Waxman “facilitat[es] challenges to a patent’s validity,” and its “provisions requiring parties to [such] patent dispute[s] . . . to report settlement terms to the FTC and the Antitrust Division of the Department of Justice.” Ante, at 13. The Hatch-Waxman Act surely seeks to encourage competition in the drug market. And, like every law, it accomplishes its ends through specific provisions. These provisions, for example, allow generic manufacturers to enter the market without undergoing a duplicative application process; they also grant a 180-day monopoly to the first qualifying generic to commercially market a competing product. See 21 U. S. C. §§355(j)(2)(A)(ii), (iv), 355(j)(5)(B)(iv). So yes, the point of these provisions is to encourage competition. But it should by now be trite—and unnecessary—to say that “no legislation pursues its purposes at all costs” and that “it frustrates rather than effectuates legislative intent simplistically to assume that whatever furthers the statute’s primary objective must be the law.” Rodriguez v. United States, 480 U. S. 522 –526 (1987) (per curiam). It is especially disturbing here, where the Court discerns from specific provisions a very broad policy—a “general procompetitive thrust,” in its words—and uses that policy to unsettle the established relationship between patent and antitrust law. Ante, at 13. Indeed, for whatever it may be worth, Congress has repeatedly declined to enact legislation addressing the issue the Court takes on today. See Brief for Actavis, Inc. 57 (citing 11 such bills introduced in the House or Senate since 2006).
In addition, it is of no consequence that settlement terms must be reported to the FTC and the Department of Justice. Such a requirement does not increase the role of antitrust law in scrutinizing patent settlements. Rather, it ensures that such terms are scrutinized consistent with existing antitrust law. In other words, it ensures that the FTC and Antitrust Division can review the settlements to make sure that they do not confer monopoly power beyond the scope of the patent.
The majority suggests that “[a]pparently most if not all reverse payment settlement agreements arise in the context of pharmaceutical drug regulation.” Ante, at 2. This claim is not supported empirically by anything the majority cites, and seems unlikely. The term “reverse payment agreement”—coined to create the impression that such settlements are unique—simply highlights the fact that the party suing ends up paying. But this is no anomaly, nor is it evidence of a nefarious plot; it simply results from the fact that the patent holder plaintiff is a defendant against an invalidity counterclaim—not a rare situation in intellectual property litigation. Whatever one might call them, such settlements—paying an alleged infringer to drop its invalidity claim—are a well-known feature of intellectual property litigation, and reflect an intuitive way to settle such disputes. See Metro-Goldwyn Mayer, Inc. v. 007 Safety Prods., Inc., 183 F. 3d 10, 13 (CA1 1999); see also Schildkraut, Patent-Splitting Settlements and the Reverse Payment Fallacy, 71 Antitrust L. J. 1033, 1033, 1046–1049 (2004); Brief for Actavis 54, n. 20 (citing examples). To the extent there are not scores and scores of these settlements to point to, this is because such settlements—outside the context of Hatch-Waxman—are private agreements that for obvious reasons are generally not appealed, nor publicly available.
The majority suggests that reverse-payment agreements are distinct because “a party with no claim for damages . . . walks away with money simply so it will stay away from the patentee’s market.” Ante, at 13. Again a distinction without a difference. While the alleged infringer may not be suing for the patent holder’s money, it is suing for the right to use and market the (intellectual) property, which is worth money.
Finally, the majority complains that nothing in “any patent statute” gives patent-holders the right to settle when faced with allegations of invalidity. Ante, at 12. But the right to settle generally accompanies the right to litigate in the first place; no one contends that drivers in an automobile accident may not settle their competing claims merely because no statute grants them that authority. The majority suggests that such a right makes it harder to “eliminat[e] unwarranted patent grants.” Ibid. That may be so, but such a result—true of all patent settlements—is no reason to adjudicate questions of patent law under antitrust principles. Our cases establish that antitrust law has no business prying into a patent settlement so long as that settlement confers to the patent holder no monopoly power beyond what the patent itself conferred—unless, of course, the patent was invalid, but that again is a question of patent law, not antitrust law.
In sum, none of the Court’s reasons supports its conclusion that a patent holder, when settling a claim that its patent is invalid, is not immunized by the fact that it is acting within the scope of its patent. And I fear the Court’s attempt to limit its holding to the context of patent settlements under Hatch-Waxman will not long hold.III
The majority’s 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. 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. As one treatise noted, “[t]he median patent case that goes to trial costs each side $1.5 million in legal fees” alone. Hovenkamp §7.1c, at 7–5, n. 6. One study found that the cost of litigation in this specific context—a generic challenging a brand name pharmaceutical patent—was about $10 million per suit. See Herman, Note, The Stay Dilemma: Examining Brand and Generic Incentives for Delaying the Resolution of Pharmaceutical Patent Litigation, 111 Colum. L. Rev. 1788, 1795, n. 41 (2011) (citing M. Goodman, G. Nachman, & L. Chen, Morgan Stanley Equity Research, Quantifying the Impact from Authorized Generics 9 (2004)).
The Court acknowledges these problems but nonetheless offers “five sets of considerations” that it tells us overcome these concerns: (1) sometimes patent settlements will have “ ‘genuine adverse effects on competition’ ”; (2) “these anticompetitive consequences will at least sometimes prove unjustified”; (3) “where a reverse payment threatens to work unjustified anticompetitive harm, the patentee likely possesses the power to bring that harm about in practice”; (4) “it is normally not necessary to litigate patent validity to answer the antitrust question” because “[a]n unexplained large reverse payment itself would normally suggest that the patentee has serious doubts about the patent’s survival,” and using a “payment . . . to prevent the risk of competition . . . constitutes the relevant anticompetitive harm”; and (5) parties may still “settle in other ways” such as “by allowing the generic manufacturer to enter the patentee’s market prior to the patent’s expiration, without the patentee paying the challenger to stay out prior to that point.” Ante, at 14–19 (emphasis added).
Almost all of these are unresponsive to the basic problem that settling a patent claim cannot possibly impose unlawful anticompetitive harm if the patent holder is acting within the scope of a valid patent and therefore permitted to do precisely what the antitrust suit claims is unlawful. This means that in any such antitrust suit, the defendant (patent holder) will want to use the validity of his patent as a defense—in other words, he’ll want to say “I can do this because I have a valid patent that lets me do this.” I therefore don’t see how the majority can conclude that it won’t normally be “necessary to litigate patent validity to answer the antitrust question,” ante, at 18, unless it means to suggest that the defendant (patent holder) cannot raise his patent as a defense in an antitrust suit. But depriving him of such a defense—if that’s what the majority means to do—defeats the point of the patent, which is to confer a lawful monopoly on its holder.
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. See ante, at 18–19 (“payment . . . to prevent the risk of competition . . . constitutes the relevant anticompetitive harm” (emphasis added)). This is flawed for several reasons.
First, a patent is either valid or invalid. The parties of course don’t know the answer with certainty at the outset of litigation; hence the litigation. But the same is true of any hard legal question that is yet to be adjudicated. Just because people don’t know the answer doesn’t mean there is no answer until a court declares one. Yet the majority would impose antitrust liability based on the parties’ subjective uncertainty about that legal conclusion.
The Court does so on the assumption that offering a “large” sum is reliable evidence that the patent holder has serious doubts about the patent. Not true. A patent holder may be 95% sure about the validity of its patent, but particularly risk averse or litigation averse, and willing to pay a good deal of money to rid itself of the 5% chance of a finding of invalidity. What is actually motivating a patent holder is apparently a question district courts will have to resolve on a case-by-case basis. The task of trying to discern whether a patent holder is motivated by uncertainty about its patent, or other legitimate factors like risk aversion, will be made all the more difficult by the fact that much of the evidence about the party’s motivation may be embedded in legal advice from its attorney, which would presumably be shielded from discovery.
Second, the majority’s position leads to absurd results. Let’s say in 2005, a patent holder sues a competitor for infringement and faces a counterclaim that its patent is invalid. The patent holder determines that the risk of losing on the question of validity is low, but after a year of litigating, grows increasingly risk averse, tired of litigation, and concerned about the company’s image, so it pays the competitor a “large” payment, ante, at 18, in exchange for having the competitor honor its patent. Then let’s say in 2006, a different competitor, inspired by the first competitor’s success, sues the patent holder and seeks a similar payment. The patent holder, recognizing that this dynamic is unsustainable, litigates this suit to conclusion, all the way to the Supreme Court, which unanimously decides the patent was valid. According to the majority, the first settlement would violate the antitrust laws even though the patent was ultimately declared valid, because that first settlement took away some chance that the patent would be invalidated in the first go around. Under this approach, a patent holder may be found liable under antitrust law for doing what its perfectly valid patent allowed it to do in the first place; its sin was to settle, rather than prove the correctness of its position by litigating until the bitter end.
Third, this logic—that taking away any chance that a patent will be invalidated is itself an antitrust problem—cannot possibly be limited to reverse-payment agreements, or those that are “large.” Ibid. The Government’s brief acknowledges as much, suggesting that if antitrust scru-tiny is invited for such cash payments, it may also be required for “other consideration” and “alternative arrange-ments.” Brief for Petitioner 36, n. 7. For example, when a patent holder licenses its product to a licensee at a fixed monopoly price, surely it takes away some chance that its patent will be challenged by that licensee. According to the majority’s reasoning, that’s an antitrust problem that must be analyzed under the rule of reason. But see General Elec. Co., 272 U. S., at 488 (holding that a patent holder may license its invention at a fixed price). Indeed, the Court’s own solution—that patent holders should negotiate to allow generics into the market sooner, rather than paying them money—also takes away some chance that the generic would have litigated until the patent was invalidated.
Thus, although the question posed by this case is fundamentally a question of patent law—i.e., whether Solvay’s patent was valid and therefore permitted Solvay to pay competitors to honor the scope of its patent—the majority declares that such questions should henceforth be scrutinized by antitrust law’s unruly rule of reason. 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.” Ante, at 9–10; but see Pacific Bell Telephone Co. v. linkLine Communications, Inc., 555 U. S. 438, 452 (2009) (“We have repeatedly emphasized the importance of clear rules in antitrust law”).IV
The majority invokes “procompetitive antitrust policies,” ante, at 9, but misses the basic point that patent laws promote consumer interests in a different way, by pro-viding protection against competition. As one treatise explains:
“The purpose of the rule of reason is to determine whether, on balance, a practice is reasonably likely to be anticompetitive or competitively harmless—that is, whether it yields lower or higher marketwide output. By contrast, patent policy encompasses a set of judgments about the proper tradeoff between competition and the incentive to innovate over the long run. Antitrust’s rule of reason was not designed for such judgments and is not adept at making them.” Hovenkamp §7.3, at 7–13 (footnote omitted).
The majority recognizes that “a high reverse payment” may “signal to other potential challengers that the patentee lacks confidence in its patent, thereby provoking addi-tional challenges.” Ante, at 16. It brushes this off, how-ever, because of two features of Hatch-Waxman that make it “ ‘not necessarily so.’ ” Ibid. First, it points out that the first challenger gets a 180-day exclusive period to market a generic version of the brand name drug, and that subsequent challengers cannot secure that exclusivity period—meaning when the patent holder buys off the first challenger, it has bought off its most motivated competitor. There are two problems with this argument. First, according to the Food and Drug Administration, all manufacturers who file on the first day are considered “first applicants” who share the exclusivity period. Thus, if ten generics file an application to market a generic drug on the first day, all will be considered “first applicants.” See 21 U. S. C. §355(j)(5)(B)(iv)(II)(bb); see also FDA, Guidance for Industry: 180-Day Exclusivity When Multiple ANDAs Are Submitted on the Same Day 4 (July 2003). This is not an unusual occurrence. See Brief for Generic Pharmaceutical Association as Amicus Curiae 23–24 (citing FTC data indicating that some drugs “have been subject to as many as sixteen first-day” generic applications; that in 2005, the average number of first-day applications per drug was 11; and that between 2002 and 2008, the yearly average never dropped below three first-day applications per drug).
Second, and more fundamentally, the 180 days of exclusivity simply provides more incentive for generic challenges. Even if a subsequent generic would not be entitled to this additional incentive, it will have as much or nearly as much incentive to challenge the patent as a potential challenger would in any other context outside of Hatch-Waxman, where there is no 180-day exclusivity period. And a patent holder who gives away notably large sums of money because it is, as the majority surmises, concerned about the strength of its patent, would be putting blood in water where sharks are always near.
The majority also points to the fact that, under Hatch-Waxman, the FDA is enjoined from approving a generic’s application to market a drug for 30 months if the brand name sues the generic for patent infringement within 45 days of that application being filed. Ante, at 16 (citing 21 U. S. C. §355(j)(5)(B)(iii)). According to the majority, this provision will chill subsequent generics from challenging the patent (because they will have to wait 30 months before receiving FDA approval to market their drug). But this overlooks an important feature of the law: the FDA may approve the application before the 30 months are up “if before the expiration of [the 30 months,] the district court decides that the patent is invalid or not infringed.” §355(j)(5)(B)(iii)(I). And even if the FDA did not have to wait 30 months, it is far from clear that a generic would want to market a drug prior to obtaining a judgment of invalidity or noninfringement. Doing so may expose it to ruinous liability for infringement.
The irony of all this is that the majority’s decision may very well discourage generics from challenging pharmaceutical patents in the first place. Patent litigation is costly, time consuming, and uncertain. See Cybor Corp. v. FAS Techs., Inc., 138 F. 3d 1448, 1476, n. 4 (CA Fed. 1998) (opinion of Rader, J.) (en banc) (discussing study showing that the Federal Circuit wholly or partially reversed in almost 40 percent of claim construction appeals in a 30-month period); Brief for Generic Pharmaceutical Association as Amicus Curiae 16 (citing a 2010 study analyzing the prior decade’s cases and showing that generics prevailed in 82 cases and lost in 89 cases). Generics “enter this risky terrain only after careful analysis of the potential gains if they prevail and the potential exposure if they lose.” Id., at 19. Taking the prospect of settlements off the table—or limiting settlements to an earlier entry date for the generic, which may still be many years in the future—puts a damper on the generic’s expected value going into litigation, and decreases its incentive to sue in the first place. The majority assures us, with no support, that everything will be okay because the parties can settle by simply negotiating an earlier entry date for the generic drug manufacturer, rather than settling with money. Ante, at 17. But it’s a matter of common sense, confirmed by experience, that parties are more likely to settle when they have a broader set of valuable things to trade. See Brief for Mediation and Negotiation Professionals as Amici Curiae 6–8.V
The majority today departs from the settled approach separating patent and antitrust law, weakens the protections afforded to innovators by patents, frustrates the public policy in favor of settling, and likely undermines the very policy it seeks to promote by forcing generics who step into the litigation ring to do so without the prospect of cash settlements. I would keep things as they were and not subject basic questions of patent law to an unbounded inquiry under antitrust law, with its treble damages and famously burdensome discovery. See 15 U. S. C. §15; Bell Atlantic Corp. v. Twombly, 550 U. S. 544 –559 (2007). I respectfully dissent.
ORAL ARGUMENT OF MALCOLM L. STEWART ON BEHALF OF THE PETITIONER
Chief Justice John G. Roberts: We'll hear argument next this morning in Case 12-416, the Federal Trade Commission v. Actavis.
Malcolm L. Stewart: Mr. Chief Justice, and may it please the Court:
As a general matter, a payment from one business to another in exchange for the recipient's agreement not to compete is an paradigmatic antitrust trust violation.
The question presented here is whether such a payment should be treated as lawful when it is encompassed within the settlement of a patent infringement suit.
The answer to that question is no.
Reverse payments to settle Hatch-Waxman suits are objectionable for the same reasons that payments not to compete are generally objectionable.
They subvert the competitive process by giving generic manufacturers an incentive to accept a share of their rival's monopoly profits as a substitute for actual competition in the--
Justice Antonin Scalia: Why -- why are payments not to compete different from, let's say, dividing a market?
I mean, suppose there's a lawsuit, somebody challenging the validity of the patent, and the patentee agrees to allow the person challenging the patent to have exclusive -- exclusive rights to sell in a particular area.
Does that violate the antitrust laws?
Malcolm L. Stewart: --I mean, there are really two differences between that -- that scenario and the one presented here.
The first is that an exclusive license is expressly authorized by the Patent Act, in Section 261 of Title 35, but -- but the second thing is--
Justice Antonin Scalia: That -- that doesn't impress me.
What's your second point?
Malcolm L. Stewart: --The second thing is that an exclusive license doesn't give the -- the infringement defendant anything that it couldn't hope to achieve by prevailing in the lawsuit.
That is, if the -- at least any right to compete that it wouldn't get by prevailing in the lawsuit.
If the infringement defendant won, it would be able to sell wherever it wanted to.
Now, there may be some--
Justice Antonin Scalia: In order to make money.
I mean, that's -- that's what it wants is money.
Malcolm L. Stewart: --But the point of--
Justice Antonin Scalia: So instead of giving them a license to compete -- you know, we'll short-circuit the whole thing, here's the money.
Malcolm L. Stewart: --But the point here is that the money is being given as a substitute for earning profits in a competitive marketplace.
That is, in -- in the Hatch-Waxman settlement context, by definition, we have a disagreement by parties as to the relative merits of the infringement and -- and/or invalidity questions as to the patent infringement suit.
The brand name is saying its patent is valid and infringed.
The generic is saying either that the patent is invalid or that its own conduct won't be infringing or both.
And if the generic wins, it will be able to enter the market immediately.
If the brand name wins, it will be able to keep the generic off until the patent expires.
And so in that circumstance, a logical subject of compromise would be to agree upon an entry date in between those two end points, just as the parties to a damages action would be expected to settle the case by the defendant agreeing to pay a portion of the money it would have to pay if it lost.
That's an actual subject of compromise and we don't have a problem with that.
Justice Antonin Scalia: Mr. Stewart, do you have a case in which the patentee acting within the scope of the patent has nonetheless been held liable under the antitrust laws--
Malcolm L. Stewart: Yes.
Justice Antonin Scalia: --for something that it's done acting within the scope of the patent?
Malcolm L. Stewart: Yes, if you adopt Respondent's conception of what it means to act within the scope of the patent.
And let me explain.
When the Respondents say that the restrictions at issue here are within the scope of the patent, what they mean is that the goods that are being restricted are arguably encompassed by the patent and the restriction doesn't extend past the date when the patent expires.
That's all they mean.
And if that were the exclusive test, the defendants in Masonite, in New Wrinkle Inline Material, they would all have been off the hook, because all of those cases involved restrictions on trade in patented goods during the period that the patent was in effect, and yet, the Court found antitrust liability in each of these.
Now, the way that Respondent tries to explain Masonite, for example, Masonite involved a resale price maintenance agreement in which the patentholder sold goods and then attempted to control the price at which they would be resold, and the Court said that under the rule of patent exhaustion, the patentholder didn't have the right to do that and therefore the patent laws provided no shield and the agreement was held to be a violation of the antitrust laws.
Now, Respondents say, well, that's consistent with their theory because the restriction imposed went beyond the scope of the patent because the right to control resale is not one of the rights that the Patent Act confers.
But if that's the test for whether a restriction is within the scope of the patent, then we would say that it's not met here, because there's nothing in the Patent Act that says you can pay your competitor not to engage in conduct that you believe to be infringing.
And really that's the thrust of their position, that if you have -- if a patentholder has a non-sham allegation that a particular mode of competition would be an infringement of its patent, the patentholder can pay the competitor not to engage in that competition.
Again, we are not talking about conduct in which there has been any judicial determination that infringement has occurred.
We are just talking about cases in which the patentholder has a non-sham allegation that infringement would occur.
Justice Ruth Bader Ginsburg: Mr. Stewart, does this represent a change in the government's position?
I got the idea from the briefs that at the time of this Schering-Plough case, that was also before the Eleventh Circuit, that the government was not taking that position it's now taking.
Malcolm L. Stewart: Well, the FTC has consistently taken this position.
The Department of Justice, up until 2009, we didn't endorse the scope of the patent test.
Indeed, in our invitation brief in Joblove we specifically said that the scope-of-the-patent test was -- didn't provide for enough scrutiny of these settlements.
But what we advocated, what the Department of Justice advocated, instead was a test that would focus on the strength and scope of the patent.
That is, the likelihood that the brand name would ultimately have prevailed if the suit had been litigated to judgment.
And in 2009 for the first time in an amicus brief filed in the Second Circuit, we took essentially the position that we're taking here, that is that agreements of this sort should be treated as presumptively unlawful with the presumption able to be rebutted in various ways.
Justice Anthony Kennedy: And one way is to assess the validity or the strength of the infringement case?
Malcolm L. Stewart: We would say that that's not a way, that--
Justice Anthony Kennedy: That's my concern, is your test is the same for a very weak patent as a very strong patent.
That doesn't make a lot of sense.
Malcolm L. Stewart: --Well, the test is whether there has been a payment that would tend to skew the parties' choice of an entry date, that would tend to provide an incentive for the parties to -- for the generic to agree to an entry date later than the one that it would otherwise insist on.
Now, it probably is the case that our test would have greater practical import in cases where the parties perceive the patent to be--
Justice Anthony Kennedy: Why wouldn't that determination itself reflect the strength or weakness of the patent so that the market forces take that into account?
Malcolm L. Stewart: --Well, I think in the kind of settlement that we would regard as legitimate, where the parties simply agree to a compromise date of generic entry, then the parties would certainly take into account their own assessment of what would likely happen at the end of the suit.
And so if the parties believe that the brand name was likely to prevail, then if the brand name agreed to early generic entry at all, it would presumably be for a fairly small amount of time.
Conversely, if the parties collectively believe that the generic -- that the brand name had a weak case and the generic was likely to prevail, then they would negotiate for an earlier date.
And the problem with the reverse payment is that it gives the generic an incentive to accept something other than competition as a means of earning money.
I mean, to take another--
Justice Antonin Scalia: This -- this was not a problem, I gather, until the Hatch-Waxman amendments?
Malcolm L. Stewart: --These suits -- these types of payments appear to be essentially unknown in other lawsuits and other patent infringement cases.
Justice Antonin Scalia: Yes, and so -- and so do suits against this kind of payment.
And I have -- I have the feeling that what happened is that Hatch-Waxman made a mistake.
It did not foresee that it would produce this kind of -- this kind of payment.
And in order to rectify the mistake the FTC comes in and brings in a new interpretation of antitrust law that did not exist before, just to make up for the mistake that Hatch-Waxman made, even though Congress has tried to cover its tracks in later amendments, right, which -- which deter these, these -- these payments?
Malcolm L. Stewart: Congress has tried to reduce the incentives for these payments to be made.
Justice Antonin Scalia: So, why should we overturn understood antitrust laws just to -- just to patch up a mistake that Hatch-Waxman made?
Malcolm L. Stewart: Well, a couple things I would say.
First, I don't think we're -- we're not asking you to overturn established antitrust laws.
To take along analogy, for example, if Watson instead of developing a generic equivalent to AndroGel, had developed an entirely new drug that it believed would be better than AndroGel for the same conditions and if Solvay had paid Watson not to seek FDA approval and not to seek to market the drug, I think everyone would agree that that was a per se antitrust violation, even though Watson's ultimate ability to market the new drug would depend on FDA approval that might or might not be granted.
And so when we say it's unlawful to buy off uncertain competition, it's unlawful to buy out competition even when the competition might have been prevented by other means, we are just enforcing standard antitrust principles.
To focus on the distinction between Hatch-Waxman and other patent litigation, Professor Hovenkamp's conclusion is that the reason that you don't see payments like this in the normal patent infringement suit is that in the typical market if a patentholder were known to have paid a large sum of money to a competitor who had been making a challenge to the patent, if other competitors knew that that had happened, then they would perceive that to be a sign that the patent was weak and that they would leap in.
But he says Hatch-Waxman makes it more difficult for that to be done, because Hatch-Waxman gives unique incentives to the first paragraph 4 filer.
Justice Anthony Kennedy: Is that the 18 -- the 18-month rule primarily?
Malcolm L. Stewart: It's a 180-day period of exclusivity.
Justice Anthony Kennedy: Right.
I mean 180 days, yes.
Malcolm L. Stewart: Yes, and the way it works is that the exclusivity period is not good in and of itself for consumers.
That is, during the period when one generic is on the market and the others are not yet allowed to compete, you have essentially duopoly conditions, the price of the drug drops but only by a little bit.
Congress granted the 180-day exclusivity period because it wanted generics to have ample incentives to challenge patents that were perceived to be weak.
And if the first filer is able essentially to be bought off, is able to set settle for something other than early entry into the marketplace, then other potential competitors face barriers to entry that they -- similarly situated competitors wouldn't face in other industries.
Justice Stephen G. Breyer: Well, that doesn't mean that -- that's rather thin.
I don't know how -- I don't have the ability to assess that, the significance of it, empirically.
The thing I wonder, therefore, you said it's common in antitrust?
I'm -- I'm not up to everything in the field, but I know there's an existence of something called the per se rule, let's price fix it.
I know there's a rule of reason, and I know there's a sort of vague area that sometimes in some cases that Justice Souter mentioned in California Dental, there is something slightly in between, which as I saw those cases, they're very much like price fixing or -- or agreements not to enter.
And what they seem to say is, Judge, pay attention to the department when it says that these are very often can be anticompetitive, and ask the defendant why he's doing it.
I mean, is that what you want us to say?
It didn't seem in your briefs as if you were.
If you were asking us to produce some kind of structure -- I don't mean to be pejorative, but it's rigid -- a whole set of complex per se burden of proof rules that I have never seen in other antitrust cases, I -- my question is, when I say I've never seen anything like this before in terms of procedure, I want you to refer me to a case that will show, oh, no, I'm out of date.
Malcolm L. Stewart: Well, the -- the Court has recognized such a thing as the quick look approach, but I think even though the case didn't use the term “ quick look ”, I don't believe it did, NCAA v. Regents of University of Oklahoma is probably the best example, where the--
Justice Stephen G. Breyer: And are there others?
Malcolm L. Stewart: --Well, that's the -- that's the one I'm most familiar with.
Justice Stephen G. Breyer: Is there any other?
Are you familiar with any other?
Because I want to be sure I read all of them.
Malcolm L. Stewart: I'll need to look back and see what--
Justice Stephen G. Breyer: Well, if there are few or none, then I would say why isn't the government satisfied with an opinion of this Court that says, yes, there can be serious anticompetitive effects; yes, sometimes there are business justifications; so, Judge, keep that in mind.
Ask him why he has this agreement; ask him what his justification is, and see if there's a less restrictive alternative.
In other words, it's up to the district court, as in many complex cases, to structure their case with advice from the attorneys.
Malcolm L. Stewart: --I think that would leave courts without guidance as to--
Justice Stephen G. Breyer: It's got guidance.
Malcolm L. Stewart: --without guidance as to what factors would be appropriate--
Justice Stephen G. Breyer: The same thing is appropriate as is appropriate in any antitrust case.
Are there anticompetitive effects?
I have 32 briefs here that explain very clearly what you said in a sentence.
It may be that they're simply dividing the monopoly profit.
I understand that -- you know, I can take that in and so can every judge in the country.
And what's complicated about that?
And then I have some very nice dark green briefs that clearly say, four instances, maybe five, where there would be offsetting justifications.
I think they can get that, too.
Malcolm L. Stewart: --Well, certainly our proposed approach accounts for that.
It provides -- it provides really two different forms of rebuttal.
First our approach says, this is on its face an agreement not to compete, the generic has agreed to stay out of the market for a defined period of time, and the payment gives rise to an inference that the agree -- that the delay that the generic has agreed to is longer than the period that would otherwise reflect its best assessment of its likelihood of -- of success in the lawsuit.
But then we say, there are basically two different types of ways in which the presumption could be rebutted.
First, the parties can show that the payment was not in consideration for delay, that there was some other commensurate value transferred, and the payment -- and that arrangement would have been entered into even without the larger settlement.
And then second, we're at least accepting the possibility that brand names and generics could come in and say, even though our payment was for delay, even though we can't identify anything else that the payment could have been consideration for, it's still, quote, “ competitive ” under--
Justice Stephen G. Breyer: And they mention at least two others.
The first one they mention is because the person's already in the market thinks that the next year or two or three years is worth $100 million a year, and the person who's suing thinks it's worth 30 million a year.
And so he says, hey, I have a great idea, I'll give him the 30 million and keep the 70.
And -- and that, I don't see why that's anticompetitive if that's what's going on.
And the second instance they bring up is that it's very hard to break into a market.
So for the new generic to come in, he's thinking, giving me two years isn't worth much, because I'll spend a lot of money, it's very hard for me to do it.
But the defendant -- the defendant who wants this patent kept intact says, I will not only let -- I'll let you in a year earlier and I'll give you enough money so that you can start up a distribution system.
The second seems procompetitive; the first, neutral.
The problem of deciding whether other matters are or are not really payments for something else, a true nightmare when you start talking about five drugs and different distribution systems, and the matter of whether you're paying for litigation costs, a matter of great debate for the judge.
That's the arguments that they make.
Malcolm L. Stewart: --Let me say a couple of things about the administrative nightmare.
The first is that to the extent that these inquiries are difficult, they're difficult only by -- because the brand names and the generics have made them difficult by tacking on additional transactions to their settlement proposal.
And to take an analogy, there are government ethics rules that say that -- what are called prohibited sources.
Basically, people who have business before the department can't give me gifts as a government employee.
Now, obviously, it would be absurd to have a rule that said a prohibited source couldn't give me a Rolex watch, but could sell me a Rolex watch for a dollar.
And so the ethics rules treat as a gift an exchange for value in which fair market value is not paid.
And everybody understands that once you go down that route, occasionally, you will have hard cases in which people could legitimately agree, was this a legitimate arm's length exchange or was it a concealed gift?
But the prospect of those difficult cases doesn't mean that we get rid of a gift ban altogether.
And certainly, Federal employees couldn't bring the -- the ethics office to its knees by engaging in such a proliferation of these side deals that the ethics office decided it's not worth it.
The second thing is that Respondent's approach would apply even when there are no hard questions.
Respondents would say that even if the agreement provides for delayed generic entry until the date the patent expires, and even if the only other term of the agreement is the brand name pays the generic a lot of money, that that would be a legitimate agreement, because the restriction would apply to arguably patented drugs and it wouldn't extend beyond the date of patent expiration.
I guess the -- the other thing I would say about the way in which these payments can facilitate settlement really shows their anticompetitive potential.
That is, suppose the parties were negotiating for a compromise date of entry, but they couldn't agree; the -- the brand name said beginning of 2017 is the earliest we'll let you in and the generic said beginning of 2015 is the latest date that we would accept.
Now, the Respondents use the term “ bridge the gap ”, but there's obviously no way that a payment from the brand name to the generic could enable the parties to agree on an entry date between 2015 and 2017.
The brand name is never going to say, well, I would insist on holding out until 2017, but if I'm going to pay you a whole lot of money, then I'll let you earlier and accept a -- a diminution of your profits.
The brand name is going to say, if I pay you money, I'm going to insist on deferring entry even later than the 2017 date that would otherwise be my preferred compromise.
So the natural effect of these payments is not to facilitate a -- a bridging the gap in the sense of a picking of a point between the dates that the parties would otherwise insist on.
It is going -- it is very likely to cause the parties to agree to an entry date that's even later than the one the brand name would otherwise find acceptable.
Justice Sonia Sotomayor: Mr. Stewart, can we go back to Justice Breyer's question, initial question.
It's rare that we find a per se antitrust violation.
Most situations we put it into rule of reason.
You seem to be arguing that this is price fixing, a reverse payment like price fixing so that it has to fall into something greater than the rule of reason.
Malcolm L. Stewart: Not -- not price fixing, but it's -- it's an agreement not to compete.
That is, the parties are not agreeing as to the prices they will charge.
The generic is agreeing to stay off the market first.
But that would be treated as per se--
Justice Sonia Sotomayor: But why is the rule of reason so bad?
As an -- and that's really my bottom line, because you're creating all -- I think that's what Justice Breyer was saying.
I mean, for -- for example, I have difficulty understanding why the mere existence of a reverse payment is presumptively gives -- changes the burden from the Plaintiff.
It would seem to me that you have to bear the burden -- the burden of proving that the payment for services or the value given was too high.
I don't know why it has to shift to the other side.
Malcolm L. Stewart: --Now, if you wanted to tweak the theory in that way and to say that in cases where there is not just a payment and an agreement on the date of market entry, but there is additional consideration exchanged beside, if you wanted to say that the Plaintiff would bear the burden of showing that this was not a fair exchange for value, that -- that's not something we would agree with, but that would be a fairly minor tweak to our theory.
Justice Sonia Sotomayor: So answer the more fundamental question: Why is the rule of reason so bad?
Malcolm L. Stewart: The rule -- I mean, it's bad for reasons both of administrability and it's bad conceptually.
The reason it's bad for reasons of administrability is that -- at least I take what you are proposing to be that the antitrust court would consider all the factors that might bear on the assessment of the agreement, that those would include presumably a strength of the patent claim, the subjective--
Justice Stephen G. Breyer: No.
I mean, Professor Areeda, who is at least in my mind a minor deity in the matter, in this area, if not major, he explains it.
He says don't try for more precision than you can give.
The quality of proof required should vary with the circumstances.
Do you know how long it took -- I mean, and I -- of course, I -- I know a little bit of antitrust.
But I mean, I think -- do you know how long it takes to take in your basic argument that these sometimes can be a division of profit, monopoly profit?
It takes probably 3 minutes or less.
And judges can do that.
So you say to the judge: Judge, this is what's relevant here.
And there's a rule of evidence: Don't waste the jury's time.
So -- so you shape the case as -- and this is what goes -- used to go on for 40 years.
You shape the case in light of the considerations that are actually relevant, useful and provable in respect to that case.
And district judges, that's their job.
So -- so what -- I'm not saying you'd lose the case.
They didn't side with the Eleventh Circuit.
They said there's no violation, okay?
I've got your point on that.
But -- but I'm worried about creating some kind of administrative monster.
Malcolm L. Stewart: --It's not atypical -- I mean -- and the Court did this in NCAA, for example, where it said that the agreement it was looking at, which dealt with the allocation of -- of -- allocation of rights to televised football games -- was essentially a limitation on output, and the Court said those are presumptively unlawful.
Long experience in the market has shown that they are suspect.
The Court didn't say there was long experience in the market for television rights to football.
It just said output limitations have been established as disfavored.
Nevertheless, because competitive sports by nature require a degree of cooperation between the people who compete against each other -- to establish the rules of the game and so forth -- we will look to see whether the parties have identified -- whether the defendants have identified anything about their specific industry that would justify our decision not to apply the usual presumption, and it concluded that there was nothing there.
And we're really asking the Court to take the same approach here.
We're saying payments not to compete are generally disfavored.
The parties can -- when you have a Hatch-Waxman settlement in which money is passing from the brand name to the generic, it's an unusual settlement to begin with, because there's no way that the suit could have culminated in the generic receiving a money judgment.
And therefore, we'll -- we'll look upon this with suspicion, be we'll give the parties adequate opportunities to -- to rebut.
If I may, I'd like to reserve the balance of my time.
Chief Justice John G. Roberts: Thank you, Mr. Stewart.
ORAL ARGUMENT OF JEFFREY I. WEINBERGER ON BEHALF OF THE RESPONDENTS
Jeffrey I. Weinberger: Mr. Chief Justice, and may it please the Court:
I'd like to first respond to a question that was asked of my friend by Justice Scalia a few minutes ago.
He was asked if there were any cases in which the Court has ever found a restraint outside the scope of the patent to be unlawful, and the answer to that question is no, that -- all of the cases that have found violations of the antitrust laws based on a patent-based restraint do so because the object of the agreement, the restraint that's being achieved in the agreement, is beyond the scope that could be legitimately achieved with a patent.
For example, it's an attempt to control downstream the resale prices of -- of products that you cannot do simply by exercising your patent.
Or it's an attempt to control the sale of unpatented products that go beyond what a patent can protect.
Every -- every case in which--
Justice Sonia Sotomayor: Why isn't this then?
Meaning there is no presumption of infringement.
There's no presumption that the item that someone else is going to sell necessarily infringes.
Jeffrey I. Weinberger: --That's correct.
Justice Sonia Sotomayor: So what you're arguing is that in fact a settlement of an infringement action is now creating that presumption.
Jeffrey I. Weinberger: No, Justice Sotomayor, I'm not arguing that.
But -- but I do want to say that I think our patent system depends upon the notion that you don't evaluate from the perspective of the antitrust laws a patent restraint based upon whether you could have proved in a litigation that that patent -- that the patent was infringed.
Justice Sonia Sotomayor: I don't know, but I don't know why we would be required to accept that there has or would be infringement by the product that has voluntarily decided not to pursue its rights.
Jeffrey I. Weinberger: I think you're not -- you're not accepting infringement.
What you're doing is recognizing there's a reasonable basis to assert the patent, a bona fide reasonable dispute, and the parties have the ability to settle the dispute.
Just as if the party -- if someone was entering into a license agreement with -- with someone who had a product that they claimed did not infringe the patent, they sat down, negotiated a license and resolved it--
Justice Sonia Sotomayor: But there, you'd know that they're not sharing the profits.
Jeffrey I. Weinberger: --Yes.
Justice Sonia Sotomayor: Meaning there you know that a -- a product's been licensed and the -- that's normal.
The infringer is now paying the other side money to sell that product.
Jeffrey I. Weinberger: But Justice Sotomayor, many other--
Justice Sonia Sotomayor: A reverse payment suggests something different, that they're sharing profits.
I don't know what else you can conclude.
Jeffrey I. Weinberger: --Many license -- I don't think that's correct, and that's because many license disputes are in fact resolved by the -- the alleged infringer exiting the market for a period of time, or agreeing to stay off until a certain time.
And then the license--
Justice Sonia Sotomayor: But not many for reverse payments.
Jeffrey I. Weinberger: --Yes, they are, because -- because, for example, it could be a license agreement where the infringer agrees to stay off the market for X number of years, and when it comes on it pays a certain royalty.
Now, anybody could argue that that royalty, if it were higher, could result in an earlier entry.
There's always an argument to be made with any delayed entry situation that monopoly profits are shared.
That's just -- just inherent in the nature of it.
And if you take the FTC's argument to its full force, it would mean that any situation where anyone is agreeing to a delayed entry, and there's any other value that's being exchanged in that situation, that in effect in economic terms is a payment for delayed entry.
There's no difference.
Justice Stephen G. Breyer: Yes.
But there, it's not -- their point is not it's per se unlawful.
What they want is they want to cut some kind of line between a per se rule and the kitchen sink.
And if you look at the brief supporting you, it is the kitchen sink.
You have economists attacking the patent system or praising it, da, da, da, and here and there and the other.
They don't want the kitchen sink.
Now, suppose I don't want the kitchen sink, but I have a hard time saying what the per se rule is.
So what's your argument?
Jeffrey I. Weinberger: I -- I've obviously given a lot of thought to whether there is any kind of an intermediary test that works, and I don't believe there is.
Let me explain why.
First, you can't really measure whether there were any anticompetitive effects from such a settlement agreement without determining what would have happened if the case hadn't settled and it would have been litigated.
And if the patentee had won the litigation, then there would be no anticompetitive effects.
That's what the Second Circuit and the Federal Circuit concluded in applying the rule of reason test, and saying the first condition of such a test has not been met, because there's no demonstration of anticompetitive effects.
And the cases -- both of those cases are very good illustrations of what I'm talking about.
Those were the Tamoxifen and Cipro cases, where the parties agreed to so-called reverse payment settlements that FTC would say are basically per se lawful.
Justice Anthony Kennedy: Would it -- would it help if you were -- were thinking about rules and caps, to consider not what the branding company would have -- would have made, but what the generic company would have lost, and -- and use the latter as the limit?
Jeffrey I. Weinberger: Well, you really don't know unless you can assume when they could have entered--
Justice Anthony Kennedy: Well, you -- you have to make an extrapolation, yes.
Jeffrey I. Weinberger: --Well, because it all depends on what would have happened in the patent litigation.
So that you can't really tell whether there's any anticompetitive effect.
I should also say with respect to the generic losing, there's really no risk to the generic here, which is one of the reasons you see these settlements, that in this industry--
Justice Anthony Kennedy: Well, if the generic wins, though, its -- everybody's profits are lower.
And you can gear it to just what the -- what the generic would have made.
Jeffrey I. Weinberger: --They're -- they're lower than they would be under some other situation, but -- but the patent gave the patentholder the legal right to exclude.
So unless there's a reason, there's some reason to believe that it couldn't reasonably assert that patent, it's entitled to monopoly profits for the whole duration of the patent.
Justice Elena Kagan: Mr. Weinberger, can I just understand what you're saying, and maybe do it through a hypothetical.
Jeffrey I. Weinberger: Certainly.
Justice Elena Kagan: Suppose you had a -- a lawsuit and the generic sends the brand name manufacturer an e-mail and the e-mail says, we have this lawsuit, I think I have about a 50 percent chance of winning.
If I win, I take your -- your monopoly profits down from 100 million to $10 million.
Wouldn't it be a good thing if you just gave me 25 million?
And then the brand name sends an e-mail back, says -- you know, that seems like a pretty good idea, so I'll give you 25 million.
Now, as I understand it, your argument is, I mean, that's just fine.
That's hunky dory.
Jeffrey I. Weinberger: Well, what I'm saying is that in -- in any given situation--
Justice Elena Kagan: Is that fine?
Jeffrey I. Weinberger: --I -- I think that if the -- if it's a single situation and the evidence is that there's a reasonable basis to assert that patent and in truth, the patent has, which you say, has a 50/50 chance of prevailing, then I think that there could be a settlement like that, if it's in good faith.
Justice Elena Kagan: Even though -- but what if it isn't in good faith?
It's clear what's going on here is that they're splitting monopoly profits and the person who's going to be injured are all the consumers out there.
Jeffrey I. Weinberger: Any -- any situation in which there's any -- in any patent dispute in which there's a tradeoff, like the examples I mentioned before, time for value, could -- that argument could be made.
And, in fact, if that was true, if it was true that the natural inference and the motivations of the people were simply to divide these profits with no other consideration, then what you'd expect to see is that every single patent dispute, especially in Hatch-Waxman would result in a settlement that just pays the generic until the end of the patent, because after all, the market would be--
Justice Elena Kagan: Well, Mr. Weinberger, I think if we give you the rule that you're suggesting we give you, that is going to be the outcome, because this is going to be the incentive of both the generic and the brand name manufacturer in every single case is to split monopoly profits in this way to the detriment of all consumers.
Jeffrey I. Weinberger: --Let me address that, Your Honor.
I don't think that's realistic at all, because -- and let's take this industry specifically.
That the ability to challenge a patent in this industry is lower than any industry that I can think of, and that's because a generic is given the right to certify against the patent and then basically challenge the patent without having actually developed the product, gotten a marketing force, gotten a factory, putting the product on sale and taking the risk that everyone else who challenges a patent has to take.
All they have to do is -- is file an NDA, which is roughly 300,000 to $1 million for these size drugs, that's not a lot, and certify it.
And the FTC's own studies have shown that it takes a very small chance of winning, something like 4 percent for a drug over $130 billion to justify a generic suing a brand name company.
And what -- so what happens in these cases--
Justice Sonia Sotomayor: Is that in all cases or just Hatch-Waxman cases?
Jeffrey I. Weinberger: --It's Hatch-Waxman cases.
It's because of--
Justice Sonia Sotomayor: Because it does skew the dynamics a lot.
Jeffrey I. Weinberger: --Yes.
Justice Sonia Sotomayor: You know, the Second Circuit recognized, even though it accepted your scope of the patent, that there was a troubling dynamic in what you're arguing, which is that the less sound the patent, the more you're going to hurt consumers, because those are the cases where the payoff, the sharing of profits is the greatest inducement for the patentholder.
Jeffrey I. Weinberger: The Second Circuit recognized that, but then they said further -- upon further reflection, further consideration of this, we are not troubled by it.
One of the reasons they were not troubled, it's what I was trying to answer Justice Kagan about, is because the reality of the situation is with so many potential challengers to the patent, all they have to do is file an NDA, there are 200 generic companies in this industry, that if you try to adopt that strategy of paying the profits of a generic, there's going to be a long line of--
Justice Stephen G. Breyer: Okay.
Justice Elena Kagan: Well, I don't think that that's true, Mr. Weinberger, and it's because of something that Justice Scalia suggested, that there's a kind of glitch in Hatch-Waxman, and the glitch is that the 180 days goes to the first filer.
And once the 180-day first filer is bought off, nobody else has the incentive to do this.
Jeffrey I. Weinberger: --That's clearly not correct either by logic or by reference to actual experience.
It's true that the first filer is given a greater incentive, but these products can last for 20 or 25 years.
Justice Elena Kagan: But the -- the huge percentage of the profits is done in the exclusivity period.
I mean, it's true that it can go on for a long time, but you're making dribs and drabs of money for a long time.
Where you're really making your money is in the 180 days.
Jeffrey I. Weinberger: Experience doesn't show that, because if you look at Hatch-Waxman litigation, we've cited in -- in the red brief and it's been discussed by the antitrust economists and the Generic Pharmaceutical Association in their amicus brief, that many of these Hatch-Waxman cases involve multiple filers.
You have five, 10, as many as 16 companies challenging these patents, all of -- one of whom are not the first filer.
So there -- there must be an incentive for them to do this, and -- and they are.
So I think experience says that that kind of extreme view of incentives is not really true.
Justice Anthony Kennedy: What -- what do we look at to verify what you say?
Is that -- is that all in the briefs?
Jeffrey I. Weinberger: Yes, it's in the -- in the Solvay brief and other briefs.
Justice Anthony Kennedy: Because I had thought, as Justice Kagan's question might indicate, that the 180 days is crucial, it allows you to go to the doctors, to give them the name of your generic equivalent, et cetera, and that that's a big advantage.
Jeffrey I. Weinberger: It's a big advantage--
Justice Anthony Kennedy: And now, you're -- now, you're indicating that it isn't.
Jeffrey I. Weinberger: --It's a big advantage.
It's an incentive for the first six months, I don't debate that, but after that, the market opens up.
Justice Stephen G. Breyer: --Okay.
Suppose -- this sounds like an argument, a discussion that you have in the district court, so -- so why -- what's your reaction to this: Say A, sometimes these settlements can be very anticompetitive, dividing monopoly profit.
In deciding whether anticompetitive outweighs business practices without less restrictive alternatives, judge, you may take that into account; 2, do not take into account the strength of a patent; 3, do not try to relitigate the patent.
4, there are several possible justifications, ones I listed before out of the briefs, litigation costs -- the other products, different assessments of -- of value.
5, there could be, in fact, no anticompetitive effect here because of what you just said now in response to Justice Kennedy and Justice Kagan, but there could be.
We don't know.
So, start with where we were.
Could be anticompetitive.
Give the defense a chance to go through five, 1 through 5, and if they convince you there is a 6, we're not saying there isn't, but we can't think of one on the briefs, let them have the 6th, too.
Now, judge, weigh and decide.
That's what we do.
So we've structured it somewhat to keep the kitchen sink out on the basis of the briefs given to us.
What's wrong with that?
Jeffrey I. Weinberger: Well, I think the first problem with it is that it's -- it's very unpredictable.
It's really hard to figure out how that all gets sorted out, and the parties who are sitting down to do a settlement need, I feel, much clearer guidance.
Justice Antonin Scalia: You can't -- you can't possibly figure it out, can you, without assessing the strength of the patent?
Jeffrey I. Weinberger: That's right.
Justice Antonin Scalia: Isn't that crucial to -- to the conclusion?
Jeffrey I. Weinberger: I -- I believe that the only thing that brought--
Justice Antonin Scalia: And to say you can consider every other factor other than the strength of the patent is -- is to leave -- leave out the -- the elephant in the room.
Jeffrey I. Weinberger: --I agree with that, Justice Scalia.
I don't think that an alternative test -- the only alternative test that could be fashioned that would -- that would make sense is one based on strength of the patent.
But there are so many reasons that that is an undesirable result that I -- I don't think it's the way this Court should go.
Justice Sonia Sotomayor: For whom?
And -- and -- you know, the government is basically saying, we really don't want reverse payments, period.
We want people to settle this the way they should settle it, which is on the strength of the patent.
And that means settling it simply by either paying a royalty for use or settling as most cases do, on an early entry alone, so there's no sharing of -- of -- of profits.
What's so bad about that?
I mean, it doesn't deprive either side of the ability to finish the litigation if they want to.
Jeffrey I. Weinberger: Let's say -- I wouldn't concede that most cases settle like that.
But let's -- let's accept that and take the case of a -- of a strong patent or a patent with a long term.
Let's say it has -- you evaluate the strength of the patent and you conclude that it has 10 or 15 good years remaining.
Now, you have a generic who is -- or many generics who have sued with no risk or minimal risk in Hatch-Waxman, and their response is, why would I -- why would I drop this lawsuit to get an entry date in 2025 or 2028?
That doesn't meet my business needs, I have shareholders, I have investors, I have to run a business, and I'm going to keep on litigating unless you give me something of value.
So that's what these agreements are about.
They're saying, well, what other -- remember, this is not just a cash payment.
There are all--
Justice Sonia Sotomayor: Well, in the normal course, if the patent's really strong, if you get a year or two earlier entry, that has an inherent value, and that's what you'll pay for is what the government is saying.
That will be the determination the two parties will make, which is at what point is earlier entry worth it--
Jeffrey I. Weinberger: --Well, first of all--
Justice Sonia Sotomayor: --for the very strong patentholder.
Jeffrey I. Weinberger: --First of all, parties often don't agree on the merits.
Parties tend to be overconfident.
They both think they are going to win.
So it's sometimes very hard to come to a consensus where entry date is the only bargaining chip available.
Justice Sonia Sotomayor: Well, they pointed to most settlements and say that is the vast majority.
Jeffrey I. Weinberger: I don't know where the evidence would be for that.
I don't think--
Justice Sonia Sotomayor: Well, we do know that these reverse payments, except for recent times when people figured out they were so valuable, were the exception, not the rule.
Jeffrey I. Weinberger: --Actually, we have ten years of experience since the circuit courts first began applying scope-of-the-patent tests to these settlements since 2003.
So we have a pretty good window as to what would happen.
Justice Sonia Sotomayor: They have been increasing in number, not decreasing.
Jeffrey I. Weinberger: No, I think they have been actually very steady.
They are roughly between 25 and 30 percent, pretty much constant and you don't really see any huge blips depending on what a particular court is ruling.
If the FTC's kind of the-sky-is-going-to-fall approach is right, that everybody's going to run out and do this, you would have thought that after the first Eleventh Circuit ruling, after the Federal Circuit ruling, after the Second Circuit ruling, after second Eleventh Circuit ruling, that there would be huge increases in this, but we haven't seen that.
Some of the numbers increased last year, but as a percentage of the total settlements they are very steady.
They are pretty much the same.
Justice Ruth Bader Ginsburg: What about the consideration that seems to be driving the government?
That is, the generic is getting an offer that they would never get on the street.
I mean, they have been paid much more than they would get if they won the patent infringement suit.
If they won the patent infringement suit then they can sell their generic in competition with the brand, but under this agreement they get more than they would get by winning the lawsuit.
Jeffrey I. Weinberger: Justice Ginsburg, first of all, every settlement agreement involving one of these cases must be filed with the FTC.
They have hundreds of them.
And they haven't pointed to a single example where that's the case.
Justice Elena Kagan: But it's just an economic--
Justice Anthony Kennedy: Well, suppose -- suppose that hypothetical is correct.
That's was my concerns, too.
What the brand company can lose is much greater than what the generic can make.
So why don't you just put a cap on what the generic can make and then we won't have a real concern with the restraint of trade, or we'll have a lesser concern.
I think that's the thrust of Justice Ginsburg's question and it's my concern as well.
Jeffrey I. Weinberger: Yes, and I want to make clear that I don't think that could happen, because if a brand name company adopted that as a strategy to protect its patent, it would -- it would be held up.
It would be held up by the many generic companies that could easily challenge these patents without actually having a manufactured product, without putting it on sale, etcetera.
So I think that the antitrust rule should not be fashioned to deal with a case on the extreme, which hasn't been shown to happen, which logically from an economic point of view is highly unlikely to happen.
And if for some reason that starts happening empirically, then Congress -- and it is a loophole in Hatch-Waxman that is causing that, and there is really no evidence that that extreme example has happened -- then Congress can deal with it, just as it dealt with the exclusivity provision.
Justice Ruth Bader Ginsburg: I thought the government was telling us that that's this case, that the -- what the generic is being offered in the way of sharing the monopoly profits is more than it could ever make if it wanted to and sold its drug.
Jeffrey I. Weinberger: Well, I don't see any examples of that cited in their brief.
It's a theory, it's a hypothetical theory, but there is no data.
We have had years of experience with this case.
Justice Anthony Kennedy: Well, but it's not hypothetical that if the generic wins everybody -- the brand companies profits are going to go way, way down right away and generic profits are not going to be that great.
Jeffrey I. Weinberger: Of course.
I think that's true in many -- many patent litigations.
Justice Anthony Kennedy: Well, but so then the question still holds.
If you -- if you key your payment to what the brand company will make, it's just a much higher figure, and a greater danger of unreasonable restraint.
Jeffrey I. Weinberger: There is that hypothetical risk.
What I'm -- I am trying to make the point that it's not -- with the number of challenges you have here, which is basically unlimited, that if you put a sign around your neck that says, paying off all generic companies their profits, whoever wants to challenge my patent come do it, there is going to be a long line of people, of companies, doing it.
Justice Anthony Kennedy: Okay, I will grant you that point that the 180 days is not that big a difference, and that there are many generics out there.
But isn't that true in every industry?
You said at the outset: Oh, well, now in the drug industry there are a lot of people ready to pounce in.
Isn't that true in any industry?
Jeffrey I. Weinberger: It is true and that's why it doesn't happen.
It's -- it's more true here because it's much easier to challenge a patent.
So in any other industry a potential challenger has to make a major investment in a product, has to get it manufactured, has to put it on sale, and then litigate.
And if they lose, they are going to be liable for enormous damages.
That's not the case under Hatch-Waxman.
All they need to do is file an ANDA.
They have nothing at risk.
If they lose, they haven't lost any damages.
They just walk away.
So there is an enormous difference in the risks between Hatch-Waxman and other cases that explains the particular form of some of these settlements and why they happen.
Justice Sonia Sotomayor: I see that as an argument that there is an economic reality in Hatch-Waxman that would require us not to apply any rule we choose or accept here to other situations; only here.
That's the argument that you're creating for me, that there's a different economic reality here that requires a different rule.
Jeffrey I. Weinberger: Justice Sotomayor, I think the economic reality cuts the other way.
It doesn't cut in favor of making a rule that makes these more difficult.
What I'm saying is that--
Justice Sonia Sotomayor: Oh, but it does, because in Hatch-Waxman Congress decided that there was a benefit for generics entering without suffering a potential loss to enter the market more quickly.
Jeffrey I. Weinberger: --Justice Sotomayor, I don't think the legislation--
Justice Sonia Sotomayor: And any settlement in these cases deprives consumers of the potential of having the benefit of an earlier entry.
Jeffrey I. Weinberger: --I don't think there is anything in Hatch-Waxman that supports the idea that the purpose was to provide for generic entry prior to patent expiration.
What the structure is designed to do is encourage challenges--
Justice Sonia Sotomayor: Exactly, and what you are doing with permitting settlements of this kind is not permitting the process to go to conclusion.
Jeffrey I. Weinberger: --I don't think there is anything in Hatch-Waxman that suggests in any way that settlements or -- should be discouraged or that cases should be mandated to proceed to judgment or that all have to be litigated.
Justice Sonia Sotomayor: It's encouraging infringement suits.
Jeffrey I. Weinberger: It's encouraging challenges and it has produced many challenges.
And can I say that with 10 years of the application of the scope-of-the-patent rule, there is no particular problem with Hatch-Waxman.
It's working very well.
The amount -- the number of drugs that have now gone generic from just 10 years ago to today has increased enormously.
Justice Stephen G. Breyer: So why does it help you to say, if the Court says or the FTC says when you get one of these suits you can settle it by letting them in, but you can't pay them money, that that will help to stop strike suits.
It costs them nothing to get in.
They have to really want to enter or they won't bring lawsuits.
So why does that hurt you?
Jeffrey I. Weinberger: Well, I actually think that you raise a point that the generic -- in some of the amicus briefs, some of the generic parties have talked about, which is that their ability to challenge these cases depends on their not having to litigate every one of them to conclusion.
And that's not bad, because most patent cases settle.
Most -- most of these disputes settle.
And if our system was one in which every case had to be litigated fully to judgment, we would be unable to cope with that.
So -- so what I think the statute mandates or contemplates is that generics should be able to challenge, and should have strong incentive to challenge, but that doesn't mean that they should be required to litigate to conclusion.
And if settlement is made more difficult so that different perceptions or different business objectives can't be bridged with some kind of a business settlement, that is going to mean that fewer generics are going to challenge these patents and that is contrary to the purpose of the Hatch-Waxman Act.
Justice Anthony Kennedy: I think it's correct that to develop a new drug sometimes you need not just scientists and attorneys, you need investment bankers.
And you then need marketers, because the cost of these drugs can be hundreds of millions.
Is there anything in the record that shows the development cost of this drug?
Jeffrey I. Weinberger: This particular drug, I don't know.
I mean, there are lots of studies of how much average drugs cost, and that figure is over a billion dollars.
Justice Anthony Kennedy: It can be a billion.
Jeffrey I. Weinberger: Easily a billion dollars.
Justice Anthony Kennedy: Anything in this case?
Jeffrey I. Weinberger: This particular drug--
Justice Anthony Kennedy: Anything in the record?
Jeffrey I. Weinberger: --No, because we are on a 12(b)(6) motion on a motion to dismiss, so none of that was ever developed, but--
Justice Elena Kagan: --I'm sorry, go ahead.
Jeffrey I. Weinberger: --But I was just going to say that the -- of course, any given drug development cost doesn't even begin to tell the picture, because for every drug that succeeds, there are at least 10 that fail, and all the costs that are involved in the drugs that fail have to be covered with the one drug that succeeds.
Justice Elena Kagan: Could I just make sure I understand the way the 180-day period worked?
The first filer gets it, if I buy off -- if I'm a brand name manufacturer and I buy off the first filer with one of these reverse payments, you're suggesting that that's not going to do me much good because they're all going to be -- there's going to be a long line.
And that long line of people, it's not just that they don't get the 180-day period, it's like even if one of those people wins, the person whom I've paid off is going to get the 180-day exclusivity period; isn't that right?
Jeffrey I. Weinberger: Not completely.
First of all, it depends on the -- the agreement.
For example, in this case, that 180-day exclusivity was waived.
Justice Elena Kagan: But if it's not waived by the parties, in other words, it's just like I don't get it so my incentives go down.
It's that my competitor gets it.
So why in the world am I standing in line to -- to challenge this if my competitor is going to get the exclusive period?
Jeffrey I. Weinberger: This was the exact problem that Congress addressed in 2003, when it amended Hatch-Waxman and changed the exclusivity requirements.
So the way the law now reads is that subsequent generics, subsequent filers can trigger that 180-day exclusivity by continuing to litigate.
So, if the first filer settles and these other folks are in line and they're litigating, they can force that period to start running and then they can come in right after.
So, it is not correct that you can tie up the first filer in settlement and prevent everybody else from entering.
And even before that amendment, the Eleventh Circuit, Federal circuit in the Second, applying the scope of the patent rule recognized that if the agreement creates a bottleneck to other filers that goes beyond what the statutory exclusivity provides, where they agree not to give up their exclusivity or agree to retain it, then that's beyond the scope of the patent, because you can't achieve that kind of a restraint simply -- with a patent, you -- you're using the agreement to expand upon your patent rights to block other filers.
So I think that problem's been addressed by Congress.
And if somebody feels that solution's not perfect and they want to make it even easier for subsequent filers to come in, then I submit that Congress can do that.
Justice Ruth Bader Ginsburg: Well, what was the change that was made?
Jeffrey I. Weinberger: --The change that was made, Justice Ginsburg, is that -- there were a number of changes, but the one that's relevant here is that if a -- if a subsequent filer -- strike that.
You can trigger the exclusivity beginning to run by getting the judgment.
So, in the past, if a first filer settled and they just didn't do anything -- may I finish the--
Chief Justice John G. Roberts: Yes, certainly.
Jeffrey I. Weinberger: --And they just didn't do anything, that would prevent other generics from coming to market.
But now anybody else who's litigating the patent, if they go ahead and win their case, then that -- that triggers the first filer's rights and if they don't exercise that -- those rights within 75 days, they're gone, they're forfeited.
So that's the change.
Chief Justice John G. Roberts: Thank you, counsel.
Jeffrey I. Weinberger: Thank you.
Chief Justice John G. Roberts: Mr. Stewart, you have five minutes remaining.
Jeffrey I. Weinberger: Thank you, Your Honor.
REBUTTAL ARGUMENT OF MALCOLM L. STEWART ON BEHALF OF THE PETITIONER
Malcolm L. Stewart: Thank you.
Mr. Weinberger argued that in order to determine whether a settlement of this sort has anticompetitive effects, we would have to know how the lawsuit would have turned out, but it's perhaps the most fundamental principle of antitrust law that particular conduct can be legal or illegal, depending on the deliberative process that led up to it.
And to put that in concrete terms, if a business charges a particular price for a particular product, because it's made the assessment that this will maximize profits in a competitive environment, that decision is almost immune from antitrust scrutiny.
But if the business charges the same price for the same product in the same market because it's agreed with its competitor that it will charge that price, that's a per se antitrust violation.
So it's not at all anomalous to say that this type of agreement can be deemed anticompetitive, even though the same result, namely, exclusion of the generic from the market might have been able to be obtained by other means.
The second thing is, Mr. Weinberger said there are instances in which second and successive filers will attempt to challenge the brand name even after the first filer has been bought off.
I think we -- we disagree that it's as easy as he would say it is, but we'll concede it happens occasionally.
But the fact that particular anticompetitive conduct doesn't always work doesn't make it lawful.
It could often happen that two firms were thinking about entering into a price-fixing agreement, for instance, but thought to themselves, if we do that, there's a third competitor in the market who will be able to undersell us, and this would make our agreement unprofitable.
And it might happen sometimes that two firms try to proceed with a price-fixing conspiracy, but they're thwarted because of the unexpected competition from a third firm.
Chief Justice John G. Roberts: Well, I thought that Mr. Weinberger's point was that this is always going to happen, because it's very easy -- as he said, you put a sign on your neck saying, generics line up to get your payment.
That seems quite different than saying there's another firm out there in the abstract that -- that might want to enter into a similar market sharing arrangement.
This is a very different system.
Malcolm L. Stewart: I mean, first, there certainly is no evidence suggesting that it has happened often, although there is evidence that it has happened.
But if the brand name perceived on a systemic basis that the likely result of paying off one competitor was that another competitor would step in and couldn't be bought off would litigate the suit to judgment, there would be no incentive to make the reverse payment in the first place.
That is, in making the reverse payment, what the -- the brand name is attempting to purchase is protection from the possibility that it will have its patent invalidated, and it will suffer a large competitive advantage.
If a brand name thinks in a particular instance there is somebody else who's going to expose it to -- me to that risk, the -- the payment wouldn't be expected to be made.
So at least--
Justice Elena Kagan: And what's your understanding of why there would not be a long line in some cases or in many cases?
Malcolm L. Stewart: --I think for the reasons that -- that your question suggested, that there is the 180-day exclusivity period and leaving aside the cases in which that is waived, subsequent manufacturers would realize not only that they wouldn't get that period of heightened profits themselves, but they would have to wait in line for others, and they might focus their attention on other patents that were perceived to be weak as to which they could hope to -- to get the 180-day exclusivity contract.
Justice Elena Kagan: And is there anything to show what I think Justice Kennedy asked -- you know, how much of one's profits comes from the 180-day period as opposed to what happens after that?
Malcolm L. Stewart: I know it is the great majority, I don't have a percentage figure.
And the reason, as I indicated earlier, was that during the 180-day exclusivity period, you have only two competitors.
Basically, a biopoly arrangement.
And my understanding is that the generics would usually charge around 80 to 85 percent of the brand name's price during that period.
And after there is full competition, the price would drop to a fraction of that.
The next thing I would say is that our system encourages settlement, but not to the nth degree.
And so, for instance, if you had two -- two firms fighting over a million dollars and each firm decided internally, 600,000 is the least I will accept.
If they stuck to their guns, the case couldn't be settled.
Now, if the public could be made to kick in an additional 200,000, then each of the firms could get its 600,000 and walk away content.
But we don't pursue the policy in favor of settlement to that degree.
But that's essentially what's happening here.
The -- the way these payments facilitate settlement is by inducing the generics to agree to a later entry date by increasing the total pool of profits that are available to the two firms combined and thereby maximizing the likelihood that each firm will find its own share of the profit satisfactory.
And the last thing I would say is I think everyone who comes to this issue recognized that there is a conundrum.
Our natural instinct is to compare the settlement to the expected outcome of litigation.
But everyone also recognizes that it just isn't feasible to try the patent suit.
And, therefore, our approach focuses on whether the competitive process has been preserved.
Chief Justice John G. Roberts: Thank you, counsel, counsel.
The case is submitted.
Chief Justice John G. Roberts: Justice Breyer has our opinion this morning, case 12-416, The Federal Trade Commission versus Activist.
Justice Stephen G. Breyer: This is a pretty complex antitrust patent case and it's about what's called the reverse payment settlement.
A drug company that has government approval to sell its drug called AndroGel sues for patent infringement generic drug makers who want government approval to sell their chemically similar drugs in competition with AndroGel.
The company is all settled and the terms in effect the generics pharmacies will stay out of the market for a certain period of time and the patent owner, AndroGel's maker in return pays them many millions of dollars.
The Federal Trade Commission sued the settling party claiming that this reverse payment, it's called a reverse payment because normally, if you sue an infringer, you would expect maybe the infringer would pay something to the guy who's suing you, but this versus the other way, it's the patent holder, you can skip that.
In any case, the Federal Trade Commission sued the settling parties claiming that this reverse payment settlement agreement violates the antitrust laws.
Now, the Court of Appeals held that the settlement agreement couldn't violate the antitrust laws because it falls within the scope of the patent.
That is the patent allowed the maker of the drug to monopolize the market anyway and the settlement agreement didn't really do anymore than that.
Now, we do not agree with the circuit.
We find that the party's contested behavior does not fall within the scope of the patent.
A valid patent of course would've permitted the patent holder to keep everybody else namely the generics out of the market, but an invalid patent would have not permitted the patent holder to do that.
And here, the validity of the patent is not -- made -- is being challenged.
You don't know.
It could be the one, it could be the other.
So, as our precedent suggests in order to analyze this case correctly we have to go beyond the statement it's within the scope of the patent and we have to look at the competing aims of patent law and antitrust law and determine here which predominate.
Doing that, we first conclude that the reverse payments settlements at least sometimes pose a risk of adverse effects on competition.
They threaten to allow patent holders and potential competitors to split and thereby maintain super competitive patent related profits even where the patent would end up being held invalid or would it be infringed or the generic to enter the market.
Suppose, for example, the patent has ten years to run and earns its holder $50 million dollars per year of extra profits because the patent gives that holder an exclusive right to make him sell the drug, a finding of invalidity or entry by a generic might reduce that 500 million, maybe all the way to zero, but a settlement agreement removes that threat in return for a payment of say $100 million, keeps out of the marketplace for that hundred million, the patent challenging generic and the consumer pays more than if the generic have not received the $100 million payment and had consequently continued it's efforts to enter or maybe it's settled in other ways and it ended up by entering thereby producing a more competitive marketplace.
Second and on the other hand, we concede that a reverse payment of this type may sometimes prove justified.
Suppose it simply reflects savings in litigation costs or the fair value paid for other services that the generic promises to perform, but then there are other times the reverse payment may serve no such purpose.
It may simply lead the generic to agree it will not enter the market.
Delayed market entry considered in and off itself alone is an antitrust law and typically, not justified or it could be.
Third, the patent holder might have power perhaps conferred by the patent itself to charge prices above the competitive level, so the agreement could have a significant anticompetitive effect.
Fourth, the Court should be able to administer this kind of antitrust case normally without too much difficulty.
Suppose the payment is large and it serves no legitimate purpose, at that point a Court may well be able to assume without getting into the complex business of trying to relitigate the patent's validity.
It may simply assume because it has no reason to think the contrary that the patentee is worried about the strength of the patent, maybe it's too weak, and though he is seeking to split and thereby to maintain the super competitive profits in order to avoid that new competition.
And finally, the patent -- the parties, of course, remain free to settle their patent litigation in other ways that do not pose similar risks of significant unjustified anticompetitive harm, say, by agreeing that the generic can just enter earlier, then it otherwise would seem to be able to enter under the patent.
So, we consequently conclude that the Eleventh Circuit's near automatic rule of antitrust immunity is incorrect.
We also reject the FTC's claim that reverse payment settlements are near automatically unlawful.
Rather we conclude that the FTC should apply a rule of reason as we describe it and it may proceed with the case on that basis.
We discuss these matters further in our opinion.
The Chief Justice has filed the dissenting opinion in which he is joined by Justice Scalia and Justice Thomas.
Justice Alito took no part in the consideration or decision of this case.