Supreme Court Rules Patent “Pay for Delay” Settlements Can Be Challenged Under Anti-Trust Rules

In Federal Trade Commission v. Actavis, Inc., the U.S. Supreme Court weighed in on the legality of so-called “pay for delay” agreements. These agreements are most common in the pharmaceutical industry where brand name drug makers agree to resolve patent infringement suits against generic drug makers by paying them large financial settlements to refrain from selling the competing drugs for a specified number of years.

By a vote of 5-3, the majority held that pay for delay agreements could violate anti-trust laws. According to the Court, although the anticompetitive effects of the reverse settlement agreement might fall within the scope of the exclusionary potential of the patent, this does not immunize the agreement from antitrust attack.

“It would be incongruous to determine antitrust legality by measuring the settlement’s anticompetitive effects solely against patent law policy, and not against procompetitive antitrust policies as well. Both are relevant in determining the scope of monopoly and antitrust immunity conferred by a patent and the antitrust question should be answered by considering traditional antitrust factors,” the majority opinion states.

While the Court acknowledged the general legal policy favoring the settlement of disputes, it rejected the Eleventh Circuit Court’s of Appeals’ conclusion that antitrust scrutiny of a reverse payment agreement would require the parties to engage in “time-consuming, complex, and expensive litigation to demonstrate what would have happened to competition absent the settlement.”

Rather, the Court concluded the FTC should have been given the opportunity to prove its anti-trust claim. The majority cited a number of factors in favor such scrutiny, including concerns over the adverse impact of reverse payment agreements on competition, particularly given that the settlements end litigation prior to any infringement or validity determination.

While the Court agreed that legal challenges of pay for delay agreements should be allowed to proceed, it declined to hold that the agreements are presumptively unlawful. Rather, it held that courts reviewing pay for delay agreements should proceed by applying the “rule of reason,” rather than under a “quick look” approach, which shifts the burden to the defendant to show empirical evidence of procompetitive effects.

In the end, the Supreme Court walked a fine line between patent and anti-trust law. While it did not expressly condone pay for delay agreements, it did not outright prohibit them either. Going forward, litigation will likely focus on how to analyze a reverse payment settlement under the anti-trust rule of reason standard.

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