July 01, 2014

FTC v. Actavis: The New Patent–Antitrust Intersection

Michael Childers

Despite what every child is taught in grade school, the United States is not a true free-market economy. The government grants subsidies and credits, regulates product development and release, blocks mergers, and breaks up companies. The free market in the United States is not constructed according to blind trust in Adam Smith’s invisible hand, but is, instead, subject to government intervention intended to ensure competition.

However, the United States has also endeavored to encourage private innovation in the marketplace and has created a robust system of rights that protect the fruits of those innovations. This is the fundamental tension that underlies the intersection of the patent regime and antitrust law: how do we encourage innovation and protect the proprietary interests of innovators while also encouraging free and open competition in the marketplace?

Pursuant to Article I of the Constitution, Congress has enacted multiple statutes designed to regulate patent rights in the United States. In scrutinizing patent influenced markets, courts have traditionally taken an incredibly deferential approach. Patent holders have been allowed to engage in cooperative conduct refused to others, to include contractual terms invalidated in most non-patent contracts, and have enjoyed protections not extended to normal litigants. However, the special treatment for patent holders has come under fire by both the courts and the Federal Trade Commission (FTC) in recent years.

It was within this environment of regulatory uncertainty, that the Supreme Court considered FTC v. Actavis, Inc., which involved reverse patent settlements between name brand drug manufacturers and prospective generic drug manufacturers. These generic drug manufacturers were attempting to enter the market using the amended pathway created by the Hatch-Waxman Act, which was introduced to encourage drug manufacturers to introduce generic drugs into a market consisting, almost exclusively, of name brand drugs. The statute creates this incentive in two ways:

  • when filing an abbreviated New Drug Application, the generic manufacturer may incorporate the safety/effectiveness data submitted by the original pioneer drug manufacturer and simply add its own bioequivalence studies;
  • generic manufacturers may develop and test the generic drug without worrying about the patent holder filing an infringement action.

This both saves generic manufacturers from having to expend millions on conducting their own human trials and also insulates them from potential liability connected with a patent infringement suit. In addition to lowering the cost and risk of entry, paragraph IV of the act also creates a mechanism for generic manufacturers to challenge the validity of pioneer manufacturer’s patents, whereby the generic applicant, upon attempt to enter the market, can assert either that their drug does not infringe on the pioneer patent or that the original patent is invalid. After receiving notice, the patent holder can then file suit for infringement, which delays approval of the generic drug for 30 months.

The specific facts of the Actavis decision are fairly straightforward. Solvay Pharmaceuticals filed for and received a patent for AndroGel, an approved brand-name drug, which delivers testosterone through continuous transdermal delivery. Actavis and Paddock each filed generic drug applications for drugs modeled after AndroGel and challenged Solvay’s patent under paragraph IV of Hatch-Waxman. Solvay responded by filing suit against the two generic manufacturers claiming patent infringement. The Food and Drug Administration approved Actavis’ generic drug application; however, rather than introducing its drug to the market, Actavis entered into a settlement agreement with Solvay. The agreement stipulated that Actavis would not bring its drug to market until August 31, 2015—65 months before Solvay’s patent expired—and would promote AndroGel to doctors in exchange for Solvay making payments to Actavis annually for nine years.

Writing for a five-judge majority, Justice Stephen Breyer authored an opinion focusing on Congress’ intent behind allowing paragraph IV challenges, which calls into question both the validity and the scope of the patent. He noted that the reverse flow of payments in this case creates a concern that settlements of this form may tend to have an adverse effect on competition, and, for that reason, settlements must be judged according antitrust scrutiny under a full rule of reason analysis in light of “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” rather than a “quick look” analysis. Subsequent lower courts have followed this approach and almost universally denied patent holders’ motions to dismiss on grounds that patents do not completely insulate actors from antitrust scrutiny.

The two areas in which this new patent-antitrust balance stands to affect the most change are in the areas of multiple-patentee agreements and conduct by patent holders who are part of trade associations. The FTC has stated in consent decrees that it will pursue litigation against companies whose licensing behavior appears designed to lessen competition under section 5 of its enabling statute. Furthermore, Justice Breyer makes clear that in situations involving patentees who hold market power, multi-patentee agreements have and will continue to be struck down by federal courts. The consumer impact of such a regime is that cross-licensing agreements or patent-pooling agreements, which aim to improve products available on the market, will be found invalid if the parties involved hold sufficient market power to allow them to act in an anticompetitive manner, whether or not they actually are currently.

Michael Childers

Mike Childers will be starting as an associate with Littler Mendelson P.C. in Washington, DC in August 2014. He may be reached at mchilders@littler.com.