Causation in Reverse Payment Antitrust Claims.

• Author: Soter, Kevin B.
• Position: NOTE

Introduction I. Actavis and Private Party Standing A. Nature of the Anticompetitive Harm That Flows from a Reverse Payment Settlement 1. The problem addressed in Actavis 2. An inherently probabilistic inquiry 3. Rejection of the "scope of the patent" test's black-and-white inquiry B. The Causation Requirement for Private Plaintiffs II. An Emerging Split in Approaches to Private Plaintiff Recovery A. A Narrow Approach 1. Uncertainty about patent validity can be fatal to private plaintiffs proceeding on at-risk launch or litigation-to-invalidity theories 2. Plaintiffs proceeding on a zero-payment alternative settlement theory must produce evidence that such a settlement would have actually occurred B. A Broader Approach 1. By proving an antitrust violation, plaintiffs have proved an agreement to delay entry beyond the patent's "expected life had enforcement been sought" 2. Plaintiffs need not produce proof of patent validity or of the likelihood a zero-payment settlement could have been reached C. A Genuine Conflict . III. Why the Broader Approach to Private Recovery Is Correct A. The Narrow Approach Misunderstands Actavis 1. The problems of proving patent invalidity in a private plaintiff antitrust suit 2. Rewarding defendants for their own intransigence: the consequences of requiring proof of the feasibility of a zero-payment alternative settlement B. The Nexus Between the Actavis Inference and Causation Conclusion Introduction

In a landmark 2013 decision, the Supreme Court settled an important issue at the forefront of the intersection between intellectual property and antitrust law. Resolving a question that had split the circuits, the Court held in FTC v. Actavis, Inc. that one particular way of settling a patent dispute--which had been used primarily within the pharmaceutical industry--could, under some circumstances, violate the antitrust laws. (1) As Justice Breyer explained in his opinion for the Court, the antitrust claim is based on the following series of events:

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. (2) The Court answered this question in the affirmative, instructing lower courts that the agreements could be illegal and that courts must apply the antitrust "rule of reason" to determine whether any particular agreement is in fact illegal. (3) This holding constituted a middle ground: The defendants had argued that these agreements should essentially be treated as per se legal, while the Federal Trade Commission (FTC) had pushed the Court to treat them as presumptively unlawful (4)--something the "rule of reason" stops short of doing.

This Note identifies a split in approaches that has arisen in the years since Actavis with respect to private antitrust challenges to these agreements (that is, cases brought by private individuals, not by a government agency like the FTC). This Note demonstrates why one such approach is more faithful to Actavis and to the policy goals underlying antitrust enforcement in this area. One reason courts have had this room to diverge from each other is that private antitrust cases require the plaintiff to show not only that there was an antitrust violation--which was the focus of the Actavis decision because the FTC need only show a violation to prevail--but also that the plaintiff has suffered a remediable injury. (5) To understand the split and why it matters, it's necessary to understand a bit more about the antitrust violation the Court assessed in Actavis.

The problem with reverse payment settlement agreements is that they may (but need not always) amount to "pay-for-delay." (6) Unlike a typical settlement, the payment in this type of settlement flows in reverse: The patent plaintiff, which stands to lose only its own litigation expenses by proceeding to trial, is paying a large sum of money to a company it claims infringes its patent, as a condition of dismissing its own lawsuit. (7) What the plaintiff gets in exchange is a promise that the alleged infringer will drop any counterclaims and wait to enter the market until sometime between the time of settlement and the expiration of the patent--a promise that a valid, infringed patent would give it the right to extract in the first place. (8) The problem is that had the lawsuit not been settled in this fashion, the patent might have been shown to be invalid or not infringed, the alleged infringer might have entered the market "at risk" without a final adjudication on validity, or the parties might have reached a different settlement that did not restrain competition--all of which would have allowed the alleged infringer to enter the market sooner and introduce a competing product. (9) That shift from a market potentially monopolized by the patentee to one competitors can freely enter could drastically lower consumer prices. (10) And one of the primary concerns of antitrust law is stamping out any agreement between competitors the likely result of which is an increase in consumer prices. (11)

As a result of the Food and Drug Administration (FDA) regulatory regime, "[apparently most if not all reverse payment settlement agreements arise in the context of pharmaceuticals] ..., 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." (12) Indeed, there are good reasons to suspect that such agreements occur almost exclusively in this context. (13) Here, a pay-for-delay antitrust claim translates into the allegation that a brand-name drug owner has illegally reached an agreement with its potential generic competitor to delay generic entry into the market. (14) The cost to consumers of such a delay can be massive: The FTC estimated in one study that consumers save an average of 77% on drug costs after a generic market matures and that pay-for-delay agreements wind up costing U.S. consumers a total of S3.5 billion per year. (15)

By holding in Actavis only that reverse payment settlement agreements may, under some circumstances, amount to illegal agreements in restraint of trade, the Supreme Court kicked the can down the road on many issues that arise in determining whether an agreement actually violates the antitrust laws. Issues that have received attention from courts and scholars include, for example, whether certain noncash provisions in a settlement agreement should count as reverse payments. (16) One set of questions that has come up several times in courts but to which little scholarship has been devoted, however, is how to approach the unique issues that arise when a claim is brought by a private party--as many are. (17) These issues warrant particularly close attention as courts begin to decide not only whether a private plaintiff has even stated a claim that survives a motion to dismiss--something several courts have already done in the wake of Actavis--but also what a plaintiff will ultimately need to show to win at trial.

Government agencies like the FTC can win an antitrust case by demonstrating that the defendants have violated some antitrust law (18)--here, the Sherman Act's "prohibition of restraint[s] of trade or commerce.'" (19) As the leading antitrust treatise explains, private parties need to show (1) such a violation plus (2) that they have "antitrust standing" to recover as a result of the violation. (20) Private party claims brought by drug purchasers (such as pharmacies, insurance companies, and end users) in the wake of Actavis therefore raise some issues unique to the private enforcement context; as this Note explains in more detail, these issues are best understood as falling under the causation requirement for antitrust standing.

Courts have diverged in their approaches to assessing causation for reverse payment settlement claims since Actavis. One approach subjects private plaintiffs to substantial requirements the government does not face, including the type of "patent analysis and litigation" the Court held unnecessary for proving an antitrust violation in Actavis. (21) Decisions of the First and Third Circuits have endorsed this narrow approach, as has a federal district judge's decision to bifurcate a trial in a case that was ultimately settled midway through the presentation of evidence. (22) But courts in another camp have imposed less onerous requirements on private plaintiffs. This broader approach has been adopted by the California Supreme Court and three federal district judges, (23) and it gains additional support from a Second Circuit decision. (24)

After identifying and describing the arguments advanced by each of these two camps, this Note takes the position that the latter has the better argument. Unlike two prior commentaries that address this issue, (25) this Note takes a comprehensive look at the arguments and court decisions in support of both sides. It then argues that the causation requirement should not generally be fatal to private plaintiff recovery for reverse payment claims--something the narrow approach all but guarantees. While there are indeed certain pieces of proof these plaintiffs will need to amass that the FTC would not, this Note argues that courts adopting the narrow approach are requiring far more of plaintiffs than they should.

This Note proceeds in three Parts. Part I provides background on the two...