A close look at these decisions makes clear that robust analyses of the consideration exchanged, the business objectives of the parties, and other indicators of the fairness and competitive effects of these settlements are critical components in determining their legality. Such analyses will likely require expertise in financial valuation, intellectual property licensing, and patent infringement liability and damages. To satisfy these needs, an old tool, commonly used in other areas of the law, may find a new use. When used appropriately, this tool, the fairness opinion, may help brand and generic pharmaceutical firms justify the “pay” apart from the “delay” in reverse payment settlements, thereby addressing the concerns of the courts at trial or even preempting litigation altogether.

Actavis and the Rule of Reason

Actavis provided guidance by applying a rule-of-reason approach to reverse payment settlements.² The rule-of-reason approach considers relevant facts to determine whether a practice promotes or suppresses competition.³ However, the Supreme Court left many of the details concerning the approach to be determined by the lower courts in future cases.⁴

In setting the backdrop for its opinion, the Supreme Court began with an illustration of its understanding of the typical reverse payment settlement:

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 patented 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.⁵

Prior to Actavis, various courts were in disagreement regarding the answer to this question.⁶

For example, in Actavis, the Supreme Court reviewed the Eleventh Circuit Court of Appeals’ affirmance of the dismissal of an FTC complaint. The Eleventh Circuit “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.’”⁷

Conversely, the FTC urged the Supreme Court “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.’”⁸ The Supreme Court pointed out that a “‘[q]uick-look analysis in effect’ shifts to ‘a defendant the burden to show empirical evidence of procompetitive effects.’”⁹

In rejecting the Eleventh Circuit’s “scope of the patent” approach, the Supreme Court explained:

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.¹⁰

However, the Court was also unconvinced by the FTC’s “quick look” approach, which called for a presumption of anticompetitive effects, stating:

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.¹¹

The Supreme Court declined to provide a complete framework for applying a rule-of-reason approach to reverse payment settlements, but did not require the FTC to “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.”¹² Rather, the Court expressed its belief that trial courts could “structure antitrust litigation so as to avoid . . . the use of antitrust theories too abbreviated” or too expansive, while focusing “on the basic question—that of the presence of significant unjustified anticompetitive consequences.”¹³

District Court Interpretations of Actavis

Following the Supreme Court’s decision in Actavis, various district courts attempted to apply its holding.¹⁴ Several courts considered, as an initial matter, whether Actavis requires the reverse payment to be in the form of money before applying antitrust scrutiny, with courts coming to differing conclusions.¹⁵ Beyond this initial hurdle, however, many district courts have begun to shape the structure of their rule-of-reason analyses and to indicate the types of evidence that courts will view as most probative.

Nexium

In Nexium, the court explained its legal framework for analyzing reverse payment settlements, stating that “[t]he initial burden of proof lies with the Plaintiffs, who must present evidence . . . to show that the accused brand manufacturer made a payment to a generic manufacturer that exceeded anticipated future litigation costs, exceeded the costs of other services, and lacked ‘any other convincing justification.’”¹⁶ If the plaintiffs are able to make this showing, the burden shifts to the defendants to show that a challenged payment was justified by some precompetitive objective. For example, “[w]here 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.”¹⁷

Then, “[i]f the Defendants can demonstrate a precompetitive justification, the burden shifts back to the Plaintiffs to establish, under the rule of reason, that the settlement is nevertheless anticompetitive on balance.”¹⁸

In its analysis, the court noted:

The Actavis opinion makes it clear that evidence of a fair value exchange can “redeem[]” an otherwise suspicious reverse payment. The Court understands this to mean that establishing fair market value is just one of many possible defenses available to a Defendant seeking to demonstrate procompetitive justifications for a reverse payment.¹⁹

However, the court further explained that “[n]owhere in Actavis does the Supreme Court suggest that fair market value is a silver bullet against antitrust scrutiny. Neither does the opinion place the initial burden on the Plaintiffs to prove, in their prima facie case, that a transaction was for something other than fair market value.”²⁰

Lipitor

In Lipitor, the court focused on four factors that it drew from Actavis:

(1) there must be a “payment”; (2) it must be a “reverse” payment, i.e., the payment must be from the alleged patentee to the alleged infringer; (3) it must be “large” which to the Supreme Court is a “surrogate for a patent’s weakness” and a “strong indicator of power”—namely, “the power to charge prices higher than the competitive level”; and (4) the large reverse payment is “unexplained.”²¹

The court further explained, “[r]egarding the fourth factor, valid explanations include the cost of litigation, payments for other services promised to be rendered by the generic challenger and ‘any other convincing justification.’”²²

Under the “payment” factor, the court imposed a burden on the plaintiffs to show in the pleading “some reliable foundation for estimating the alleged reverse payment,” stating that “the non-monetary payment must be converted to a reliable estimate of its monetary value so that it may be analyzed against the Actavis factors such as whether it is ‘large’ once the subtraction of legal fees and other services provided by generics occurs.”²³

Regarding the “reverse” factor, the court explained that “a reverse payment occurs when a net positive payment flows from the patentee to the alleged infringer.”²⁴ However, to determine if the payment is “reverse,” the court stated that the generic firm’s prior litigation costs and any services provided by the generic firm should be “deducted to determine whether there is a net positive payment flowing from the patentee to the alleged infringer.”²⁵

While the court did not completely define the “large” factor, it noted that “[o]ne way to measure the ‘largeness’ of a reverse payment is to assess whether the amount is larger than what the generic would gain in profits if it won the Paragraph IV litigation and entered the market.”²⁶ However, the court stated that regardless of the definition of “large” used, a court is unable to perform the analysis where the “Plaintiffs failed to plausibly allege an estimate of the monetary value of the non-monetary payment.”²⁷

Finally, the court stated that it “must look at the Settlement Agreement as a whole and cannot extricate individual provisions.”²⁸

Effexor

Effexor echoed the framework and concerns of Lipitor, both of which New Jersey District Court Judge Peter G. Sheridan decided. Once again, the court focused on the four factors of a “large,” “unexplained,” “reverse” “payment.”²⁹ The court also reiterated that “the non-monetary payment must be converted to a reliable estimate of its monetary value so that it may be analyzed against the Actavis factors.”³⁰

Although Effexor largely repeated the framework of Lipitor, the court provided some additional detail regarding the “large” factor. The court stated:

Perhaps, at the extreme, a “large” payment is “a sum even larger than what the generic would gain in profits if it won the paragraph IV litigation and entered the market.” At the other extreme, perhaps a “large” payment is anything more than the value of the avoided litigation costs, when there are no other services provided from the generic to the brand manufacturer.³¹

United Food & Commercial Workers

As in Lipitor and Effexor, the court in United Food & Commercial Workers explained that “for a term to raise antitrust concerns: (i) the term must be a ‘payment’; (ii) the payment must be ‘reverse’; (iii) the reverse payment must be ‘large’; and (iv) the large reverse payment must be unexplained.’”³² The court went on to explain that “[m]ost district courts read Actavis to hold that it is the ‘large and unjustified reverse payment’ that creates the anticompetitive concerns, and only after finding such a payment in the settlement may courts engage in the traditional rule of reason analysis.”³³ The court also agreed that “to determine if a term is a large and unjustified payment, as Actavis requires, courts must be able to calculate its value.”³⁴

The court, like the court in Effexor, noted that a “large” payment could be “a sum even larger than what the generic would gain in profits if it won the paragraph IV litigation and entered the market” at one extreme and “anything more than the value of the avoided litigation costs plus any other services provided from the generic to the brand manufacturer” at the other extreme.³⁵

King Drug

Most recently, in King Drug, the court laid out the following framework:

[A] plaintiff challenging a reverse-payment settlement as anticompetitive under Actavis must demonstrate anticompetitive effects, including a large reverse payment, under the first step of the rule of reason. The defendant then bears the burden of explaining or justifying the payment as procompetitive. If the plaintiff presents evidence to raise a factual dispute as to defendant’s proffered justifications, the fact-finder will weigh all relevant information and determine whether the settlement was, on balance, unreasonable, as in other rule of reason cases.³⁶

In defining a plaintiff’s initial burden of showing a large reverse payment, the court stated that “a reverse payment is sufficiently large if it exceeds saved litigation costs and a reasonable jury could find that the payment was significant enough to induce a generic challenger to abandon its patent claim.”³⁷ The court further clarified that “the relevant inquiry is what would induce the generic to stay off of the market,” and that a “reasonable jury could find that a reverse payment to a generic manufacturer that comes close to or exceeds the expected profits to be earned by prevailing in the patent litigation could induce a generic manufacturer to forfeit its claim.”³⁸

The court explained that “the entirety of the reverse payment should be considered in determining whether the payment is large under Actavis.”³⁹ Additionally, the court specified that “Defendants, not Plaintiffs, bear the burden of explaining the payments,” stating that “[w]hether or not the payment constitutes ‘fair value for services’ or some other legitimate justification will be in contention in nearly every case, with plaintiffs arguing that most, if it not all, of the payment is mere pretext for a payment for delay.”⁴⁰

Lessons from Actavis and Its Progeny

Unfortunately for brand and generic pharmaceutical companies seeking to enter into agreements that courts could potentially interpret as reverse payment settlements, Actavis and its progeny stopped well short of creating a “safe harbor.” These cases also left unanswered many questions as to how lower courts should apply the Supreme Court’s holding and what evidence will be most probative. These questions will likely only be resolved through many trials followed by refinement on appeal. Yet even so, they offer a wealth of guidance as to the types of analyses courts will look to in future litigation.

Although the decisions seem to differ in certain respects as to which party bears which evidentiary burdens, it is clear that litigants will seek to prove or refute that a reverse payment settlement with a generic pharmaceutical firm was large and unjustified. In determining whether there was a large, unjustified reverse payment, the courts have looked for evidence of fair value exchange, reliable estimates of the monetary value of consideration changing hands, calculations of incurred and avoided litigation costs, appraisal of services provided by the generic firm, valuation of the profits the generic firm would have made from launching its product, further evidence as to whether the settlement induced the generic to stay off of the market, and evidence of any other convincing justifications for the settlement.

Following this guidance from the courts, an expert constructing a fairness opinion could review the financial evidence, value the consideration exchanged (separate from any delay), and determine whether there was any net payment to the generic. In cases of a fair value exchange, there may be no residual consideration flowing to the generic for any delay, after balancing consideration given and received. In other cases, courts may need to compare any residual payment to the profits given up and the litigation costs avoided by the generic firm as a result of the settlement. Where appropriate, a fairness opinion might also analyze the independence of the settlement from any side agreements, the business rationales for any side agreements, and the likelihood that the generic firm would have launched “at-risk” in the absence of a settlement.

In the event of litigation, commissioning a fairness opinion to address these concerns would be a valuable use of the time and resources of brand and generic firms. While a fairness opinion is useful to disprove an antitrust allegation, such an analysis of the settlement terms is also worthwhile before finalizing the settlement, to ensure exchange of fair value apart from any potential delay of generic entry. With the repeated calls from the courts for evidence of a “convincing justification” and a “fair value” exchange, pharmaceutical firms would be wise to seriously and diligently undertake this assessment as early as possible, as it could prevent reverse payment settlements that raise the specter of antitrust scrutiny while also serving as a useful contemporaneous indicator of the business justifications and fairness of any reverse payment settlements that are ultimately executed.

As courts continue to refine this intersection of patent and antitrust law, the precise contours of the analytical framework will likely further change and solidify. However, analysis of the consideration exchanged by the parties, the justifications for that exchange, the relevant financial context for the settlement, and other indicators of fairness and procompetitive effects will be foundational aspects of the antitrust scrutiny of reverse payment settlements. Evidence valuing and balancing the consideration exchanged by the parties to separate the “pay” from any “delay” will be particularly probative. Pharmaceutical firms that engage in an early and robust analysis of these considerations, such as in the context of a fairness opinion, will be well positioned going forward, however the law evolves.

Endnotes

1. FTC v. Actavis, Inc., 133 S. Ct. 2223 (2013).

2. Id. at 2237.

3. Am. Needle, Inc. v. Nat’l Football League, 130 S. Ct. 2201, 2217 (2010).

4. Actavis, 133 S. Ct. at 2238 (“We therefore leave to the lower courts the structuring of the present rule-of-reason antitrust litigation.”).

5. Id. at 2227.

6. See In re K-Dur Antitrust Litig., 686 F.3d 197, 209 (3d Cir. 2012) (applying a “quick look” approach to a reverse payment settlement); In re Ciprofloxacin Hydrochloride Antitrust Litig., 544 F.3d 1323, 1336 (Fed. Cir. 2008) (applying a “scope of the patent” approach to a reverse payment settlement); In re Cardizem CD Antitrust Litig., 332 F.3d 896, 909 (6th Cir. 2003) (applying a “per se” antitrust violation approach to a reverse payment settlement).

7. Actavis, 133 S. Ct. at 2230 (quoting FTC v. Watson Pharm., Inc., 677 F.3d 1298, 1312 (11th Cir. 2012)).

8. Id. at 2237.

9. Id. (quoting Cal. Dental Ass’n v. FTC, 526 U.S. 756, 775 n.12 (1999)).

10. Id.

11. Id.

12. Id.

13. Id. at 2238.

14. See, e.g., King Drug Co. of Florence, Inc. v. Cephalon, Inc., No. 6-CV-1797, 2015 WL 356913 (E.D. Pa. Jan. 28, 2015); United Food & Commercial Workers Local 1776 & Participating Emp’rs Health & Welfare Fund v. Teikoku Pharma USA, Inc., No. 14-MD-2521 WHO, 2014 WL 6465235 (N.D. Cal. Nov. 17, 2014); In re Effexor XR Antitrust Litig., No. 11-CV-5479 PGS, 2014 WL 4988410 (D.N.J. Oct. 6, 2014); In re Loestrin 24 FE Antitrust Litig., 45 F. Supp. 3d 180 (D.R.I. 2014); In re Lipitor Antitrust Litig., 46 F. Supp. 3d 523 (D.N.J. 2014); In re Nexium (Esomeprazole) Antitrust Litig., 42 F. Supp. 3d 231 (D. Mass. 2014); In re Lamictal Direct Purchaser Antitrust Litig., 18 F. Supp. 3d 560 (D.N.J. 2014); In re Lipitor Antitrust Litig., No. 12-CV-2389 PGS, 2013 WL 4780496 (D.N.J. Sept. 5, 2013).

15. See, e.g., Loestrin, 45 F. Supp. 3d at 189, 195 (explaining its understanding of Actavis, stating, “‘In Step One, a district court must ask, is there a reverse payment? . . . In Step Two, a district court must ask, is that reverse payment large and unjustified? . . . Step Three is the rule of reason.’ The first inquiry, then, is whether the consideration paid by the patent holder to the generic competitor constitutes a ‘reverse payment’ at all. If it does not, the Court does not reach steps two or three”; and further concluding that “Actavis requires cash consideration in order to trigger rule of reason scrutiny” (citation omitted)); Nexium, 42 F. Supp. 3d at 262 (stating that “unlawful reverse payments are not limited to monetary payments”); Lamictal, 18 F. Supp. 3d at 567–69 (concluding that “[f]inding that a settlement contains a reverse payment is a necessary prerequisite to undertaking the broader Actavis rule of reason analysis,” that such a reverse payment must be in the form of money, and the facts “[t]hat Teva was allowed early entry, that there was no payment of money and that the duration of the No–AG Agreement was relatively brief all serve to persuade this Court that the settlement was reasonable and not of the sort that requires Actavis scrutiny”); Lipitor, 2013 WL 4780496, at *26–27 (granting a motion for leave to amend the complaint and stating its belief that “nothing in Actavis strictly requires that the payment be in the form of money”).

16. Nexium, 42 F. Supp. 3d at 262 (quoting Actavis, 133 S. Ct. at 2237).

17. Id. (quoting Actavis, 133 S. Ct. at 2236).

18. Id. at 262–63.

19. Id. at 263 (alteration in original) (citation omitted) (quoting Actavis, 133 S. Ct. at 2236).

20. Id. at 263–64.

21. In re Lipitor Antitrust Litig., 46 F. Supp. 3d 523, 537 (D.N.J. 2014) (quoting Actavis, 133 S. Ct. at 2236–37).

22. Id.

23. Id. at 543.

24. Id. at 546.

25. Id. (citing Actavis, 133 S. Ct. at 2236).

26. Id. at 547 (citing Actavis, 133 S. Ct. at 2235).

27. Id.

28. Id. at 549.

29. In re Effexor XR Antitrust Litig., No. 11-CV-5479 PGS, 2014 WL 4988410, at *18 (D.N.J. Oct. 6, 2014).

30. Id. at *20.

31. Id. at *23 (citation omitted) (quoting Actavis, 133 S. Ct. at 2235).

32. United Food & Commercial Workers Local 1776 & Participating Emp’rs Health & Welfare Fund v. Teikoku Pharma USA, Inc., No. 14-MD-2521 WHO, 2014 WL 6465235, at *7 (quoting Actavis, 133 S. Ct. at 2237).

33. Id. at *8.

34. Id. at *11.

35. Id. at *13.

36. King Drug Co. of Florence, Inc. v. Cephalon, Inc., No. 6-CV-1797, 2015 WL 356913, at *17 (E.D. Pa. Jan. 28, 2015).

37. Id. at *12.

38. Id. at *13.

39. Id. at *14.

40. Id.