On March 25, 2013, the Supreme Court will hear oral arguments in Federal Trade Commission v. Watson Pharmaceuticals, Inc., a case concerning reverse payment settlements of patent litigation. The court granted cert on the following issue:
Whether reverse-payment agreements are per se lawful unless the underlying patent litigation was a sham or the patent was obtained by fraud (as the court below held), or instead are presumptively anticompetitive and unlawful (as the Third Circuit has held).
In this brief post, I suggest a way to decide the issue in a manner that resolves the apparent tensions between the Hatch-Waxman Act, the Patent Act, and the Sherman Act. To my knowledge, the argument I make does not appear explicitly in the briefs, although Scott Hemphill made a related argument in his 2006 NYU Law Review article, Paying for Delay: Pharmaceutical Patent Settlement as a Regulatory Design Problem.
Hatch-Waxman should be given substantial priority in the analytical framework that courts employ when resolving antitrust claims about reverse payment settlements of patent litigation. Here is why. Both antitrust law and patent law are general-purpose, industry-agnostic legal regimes. Antitrust law regulates competition generally. It aims to sustain competition and constrain anticompetitive practices, and it does so with very general legal prescriptions that courts must apply in a wide range of different contexts. Patent law aims to encourage innovation by giving inventors the right to exclude others from a patented invention. Patent law also consists of very general legal prescriptions that the PTO and courts must apply in a wide range of different contexts. In both antitrust and patent, sector-specific, industry-specific, or even context-specific rules do arise over time in the courts or agencies. But the statutory law enacted by Congress is general-purpose.
Hatch-Waxman is special-purpose and industry-specific, and it also happens to be last-in-time. Congress enacted Hatch-Waxman to accomplish specific ends through specific means. Of course, Hatch-Waxman is a complex regulatory regime, and there are various tradeoffs reflected in the law that may have been necessary to get it passed. But Hatch-Waxman primarily aimed to induce competition in drug markets when such competition is feasible, and one of the central means for accomplishing this end is litigation over patent validity.1 Thus, Hatch-Waxman envisioned two particular types of competition—first, competition in courts between owners of drug patents and generic drug companies, and second, competition in drug markets between brand firms and generics. Reverse payment settlements stifle both types of competition.
Antitrust scrutiny of reverse payment settlements of patent litigation need not get bogged down in discussions of patent law or judicial economy. Congress has spoken clearly and specifically and chosen to use patent litigation as a means to induce competition. Reverse payment settlements of patent litigation are precisely the sort of agreements that antitrust law directly regulates, usually through a rule that says such agreements are per se unlawful. An agreement not to compete in the forum specified by Hatch-Waxman is no different than competitors expressly agreeing not to compete in any other market; it looks like various types of cases where per se illegality is generally accepted as a legitimate rule (e.g., bid rigging, market division).
Accordingly, the Supreme Court could reasonably declare reverse payment settlements of Hatch-Waxman-based patent litigation per se unlawful. Alternatively, the Court could declare the settlements in question presumptively unlawful and then put the burden on the defendants to rebut the presumption.
Reverse payment settlements stifle both types of relevant competition noted above. Competition of the first type (competition in courts between owners of drug patents and generic drug companies) is always stifled. The same might be said about competition of the second type (competition in drug markets between brand firms and generics), although some argue that settlements sometimes may increase competition of the second type where a patent would be found valid (if actually litigated) because the settlement allows the generic company to enter the market earlier than otherwise would be the case. Presumably, the Court should choose between per se illegality and presumptive illegality based on its evaluation of this argument.
If the Court takes this latter route, the types of evidence and arguments relevant to rebutting the presumption should be limited substantially by Hatch-Waxman. As noted above, Hatch-Waxman specifies the types of relevant competition and if given the priority it deserves, it would preclude various generic arguments from being made.
FN1: As Scott Hemphill put it, "the Hatch-Waxman Act is a deliberate effort to promote consumer access through litigated challenges." See C. Scott Hemphill, Paying for Delay: Pharmaceutical Patent Settlement as a Regulatory Design Problem, 81 NYU L. Rev. 1553 (2006), available at http://ssrn.com/abstract=925919. He goes on: "Since litigation is the instrument by which the regulatory arrangement accomplishes its ends, it is difficult to argue that an end-run on the instrument is consistent with the scheme." Much of the argument I am making derives from ideas in Scott's article and conversations we have had over the years.