A sues B for patent infringement for making a product that infringes on A’s patent. A and B settle the case with B promising not to produce product. Typically, if money is being transferred between the parties, B pays A money for past damages caused by B for past acts of patent infringement. In the following case, the patentee (A) paid B money not to bring the product into the marketplace. This practice is referred to as “reverse payments” and informally called a “pay for delay” settlement agreement.
All lawyers have taken an ethics class. I still remember my law school professor telling us that if something smells fishy, stop and investigate because it most likely is fishy. The same holds true here. Why would the patentee pay the infringer money to stop manufacturing and marketing competing products?
Reverse payments are a means by which the patentee does not have to defend validity and infringement which if the patentee does not win will not be able to sell products at patentee set levels. In the following case, the patent at issue dealt with a pharmaceutical. As such, if the patentee failed to successfully defend the patent on validity and infringement, the ramifications could be in the millions of dollars per day range. As such, the patentee had a monetary incentive toward certainty by settling with potential infringers and paying them to stop challenging validity or infringement than pursuing the alleged infringers in patent litigation which is unpredictable.
In FTC v. Actavis, the Federal Trade Commission sued all parties (Solvay (patentee) and Actavis (generic drug manufacturer) to a Pay for Delay settlement agreement for violating antitrust laws. The 11th Circuit dismissed the case since the Pay for Delay settlement agreement is within the scope of a patent’s exclusionary power and does not violate antitrust laws. Since there is a split in the way that the various courts handle this issue, the Supreme Court granted certiorari.
Patents are anti-competitive by nature but are permitted for the purposes of promoting the sciences. The Supreme Court recognized that “the basic question here is whether such an agreement can sometimes unreasonably diminish competition in violation of the antitrust laws.” The Supreme Court held that the FTC’s complaint should not have been dismissed but that the case should have been litigated since reverse payment settlements sometimes violate antitrust laws. The Supreme Court instructed the lower courts to review these types of agreements based on the traditional antitrust factors such as likely anticompetitive effects, redeeming virtues, market power, and potentially offsetting legal considerations present in the circumstances.
Other non-drug related cases have recognized that other types of settlement agreements involving a patent could be considered to violate antitrust laws. The Court raised three different cases. The first is related to sewing machines. The second is related to setting resale prices between cross licensees. The third is related to cross licensees that set a royalty rate. The court found antitrust violations in the first two cases even though the basis of the settlement is related to a patent. The court did not find any antitrust violation in the third case. In highlighting these cases, the Supreme Court is instructing the lower courts to allow litigation to proceed on reverse payments so that a body of law can be formed to distinguish the types of pay for delay settlement agreements that violate antitrust laws and those that do not.
Pharmaceutical related patents and cases are sometimes given super status since the profits for a particular drug or pharmaceutical could reach into the millions of dollars per day range. However, this FTC v. Actavis opinion is not limited to the pharmaceutical field of use but is related to any type of reverse payments or agreement where the patentee paying off the litigants to stop challenging the validity of a patent.
I invite you to contact me with your patent questions at (949) 433-0900 or [email protected] Please feel free to forward this article to your friends. As an Orange County Patent Attorney, I serve Orange County, Irvine, Los Angeles, San Diego and surrounding cities.