The Proximate Cause Requirement in Private Reverse Payment Antitrust Litigation

• Publication year: 2018
• Author: By Sarah H. Trela and Kenneth R. O'Rourke

THE PROXIMATE CAUSE REQUIREMENT IN PRIVATE REVERSE PAYMENT ANTITRUST LITIGATION

By Sarah H. Trela and Kenneth R. O'Rourke¹

I. INTRODUCTION

An unlitigated patent is a bit like Schrodinger's cat:² until challenged and adjudicated, the patent arguably appears as though it is both valid and invalid.³ This ambiguity has led certain courts and legal scholars to observe that, at the time a reverse payment settlement is executed, the brand pharmaceutical company really owns a "probabilistic patent" that may or may not give it the right to exclude competition.⁴ In the context of private antitrust litigation involving reverse payment settlements, patent ambiguity has tempted some to substitute proxies or presumptions for actual proof of proximate cause. That will not do. Proximate causation is an element a private plaintiffs must prove in all cases; reverse payment settlements do not create an exception.

Following the Supreme Court's 2013 opinion in FTC v. Actavis, Inc.,⁵ a government enforcement case, courts have split in how they approach the proximate cause requirement in private reverse payment cases. Several recent appellate and district courts have properly required proof that the patent supposedly blocking a generic's entry is, in fact, invalid before finding that a reverse payment proximately caused any antitrust injury.⁶ Other courts have relied on a few select phrases in Actavis to eschew the causation element entirely, using the size of the reverse payment as a proxy for patent invalidity.⁷ But, Actavis was a Federal Trade Commission (FTC) enforcement action that did not require proof of actual causation.⁸ Thus, this latter approach is inapplicable in private antitrust cases because it imports the different and lighter standard from government enforcement actions into Clayton Act claims.

[Page 118]

Under the better approach to private reverse payment claims, the parties must open Schrodinger's box and determine the cat's welfare, rather than simply presuming the worst.

II. CAUSATION IN PRIVATE ANTITRUST LITIGATION

A. Proximate Causation Is an Essential Element

Private antitrust plaintiffs can maintain their damages claim under the Clayton Act only if they are injured "by reason of anything forbidden in the antitrust laws." 15 U.S.C. § 15(a) (emphasis added). Courts have interpreted this as a "proximate cause" requirement.⁹ In order to establish such a causal link between a reverse payment settlement and antitrust injury, a plaintiff must show that "if not for the challenged settlement agreement, there would have been earlier entry of generics into the market."¹⁰

This "but-for" world is necessary, because if a pharmaceutical manufacturer has a valid patent, it also has a protected legal right to exclude other market entrants throughout the patent term.¹¹ If a party with a valid, enforceable patent makes a reverse payment to a competitor in exchange for delayed entry before patent expiration, the reverse payment merely upholds that right and maintains the existing market conditions; it causes no further delay in generic entry or antitrust harm.¹² Thus, in order for a plaintiff to prove that the settlement caused delay that harmed competition, the plaintiff must establish the generic entrant could have and would have launched a competing product earlier without violating the brand's patent—in other words, that generic entry in the but-for world would have been early and would not have infringed on a valid patent. "After all, if the launch were stopped because it was illegal, then the [plaintiffs'] injury (if it could still be called that) would be caused not by the settlement but by the patent laws prohibiting the launch."¹³

[Page 119]

B. Proximate Causation Unnecessary in Government Actions

On the other hand, the government has the authority to enforce antitrust laws directly, without the need to "satisfy the additional burdens imposed by" Sections 4 and 16 of the Clayton Act.¹⁴ The FTC must prove an antitrust violation, but does not need to prove actual harm (i.e., proximate causation) or actual damages resulting from the alleged violation.¹⁵ Consequently, the government need only prove that a defendant's action is "likely to cause injury." 15 U.S.C. § 45(4)(A)(i) (emphasis added).¹⁶ This standard underlies the Supreme Court's reasoning in Actavis, where Justice Breyer explained that the size of a reverse payment can serve as a proxy for the strength of a patent in assessing whether there is an antitrust violation:

[A]n unexplained large reverse payment itself would normally suggest that the patentee has serious doubts about the patent 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 . . . [so] 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.¹⁷

[Page 120]

But even the Court in Actavis was not united: Chief Justice Roberts explained in dissent 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."¹⁸

C. Patent Validity Plays a Role in Analyzing Antitrust Causation

As Actavis indicates, the Court struggled with the fact that a patent's validity is not known until it is litigated.¹⁹ While a patent application goes through an examination process, an issued patent is not unassailable. The California Supreme Court has stressed that a patent is not "ironclad," but simply gives "holders a potential but not certain right to exclude. . . . A patent is, in effect, a right to ask the government to exercise its power to keep others from using an invention without consent."²⁰

Courts confront a similar issue in deciding the threshold question of whether there is an antitrust violation at all, let alone whether the added causation element is present. As the Supreme Court explained in Actavis, even a reverse payment settlement regarding a valid patent can potentially violate the antitrust laws.²¹ Thus, to determine whether a particular reverse payment settlement violates the antitrust laws,²² courts apply the "rule of reason," requiring that courts balance a reverse payment's anticompetitive effects against procompetitive benefits.²³ This includes, but is not limited to, an assessment of the patent. Notably, in Actavis the Court rejected the FTC's suggestion that "reverse payment settlement agreements are presumptively unlawful." ²⁴ By contrast, the Court held that such "presumptive rules" were not appropriate because reverse payment settlements are not the type of activity where a "rudimentary understanding of economics could conclude that the arrangements in question would have an anticompetitive effect on customers and markets."²⁵

[Page 121]

Courts have struggled to decide whether, under the rule of reason, it is appropriate to look beyond the day of the transaction in assessing these potential effects. As the court explained in Nexium, "[r]egardless of the absolute validity or invalidity of patents, business players make reverse payment decisions in an environment in which that validity has not yet been adjudicated. They take into account the risk of litigation and the possibility that patents may be adjudicated invalid or uninfringed."²⁶ Some find that the rule of reason analysis is restricted to the time of the settlement, and others assess the actual effect of the settlement as it played out in the market.²⁷

That debate relates to a separate issue that this article does not address: under what circumstances is a reverse payment settlement an antitrust violation at all (i.e., liability). Whether there is an antitrust violation does not speak to whether there is proximate causation—private antitrust plaintiffs must prove both.²⁸ Even courts that do not undertake an assessment of patent validity as part of the rule of reason to determine whether there has been an antitrust violation might take a different approach in assessing causation, applying a stricter standard that considers patent's validity.²⁹ For this reason, it is important to isolate the causation analysis from the antitrust violation analysis. This article addresses only the causation issue.

III. MOST COURTS ASSESS THE UNDERLYING PATENT'S VALIDITY

In applying proximate causation, a building majority of courts—including both the First and Third Circuits, along with district courts in the Second Circuit—closely examine the validity of the underlying patent in assessing proximate cause. These courts have held that for there to be a finding of causation, the court must first find that the brand manufacturer's "patent claims were invalid and the infringement actions against the Defendants would have failed."³⁰ These opinions properly distinguish between the private causation standard and the lower standard applicable in government enforcement actions.

[Page 122]

For instance, the Eastern District of Pennsylvania has stressed this point in both Wellbutrin and Apotex, stating that "although the Actavis Court stated that 'it is normally not necessary to litigate patent validity to answer the antitrust question,' that statement does not address a private plaintiff's causation requirement nor does it preclude examination of the validity of the patent where necessary."³¹ Comparing government and private actions, the court further emphasized that while "it is understandable that an analysis of patent validity may normally be unnecessary in actions brought under the FTC Act," "the Clayton Act does demand such an analysis, and nothing in Actavis altered the Clayton Act's causation requirement."³²

In Wellbutrin, the courts confronted claims by consumers who alleged that they paid inflated...