Clarity On Reverse Payments

Steptoe LLP


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The Second Circuit, for the first time, has addressed the scope of the Supreme Court's decision in FTC v. Actavis regarding the use of allegedly anticompetitive reverse payments by a brand drug manufacturer to settle patent infringement litigation ...
United States Antitrust/Competition Law
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The Second Circuit, for the first time, has addressed the scope of the Supreme Court's decision in FTC v. Actavis, 570 U.S. 136 (2013), regarding the use of allegedly anticompetitive reverse payments by a brand drug manufacturer to settle patent infringement litigation that it had brought against generic manufacturers. In In Re Bystolic Antitrust Litigation, No. 23-410, 2024 WL 2118248 (2d Cir. May 13, 2024), the Second Circuit indicated that "the 'relevant antitrust question' is why the reverse payment was made." The panel agreed with the district court that plaintiffs had failed to plausibly allege that the payments were unjustified and that the payments appeared to reflect "fair value" for goods and services obtained from the generic manufacturers.

In Actavis, the Supreme Court held that some "reverse payment" settlements from a brand to an allegedly infringing generic to stay out of the market in order to continue the brand's monopoly could be illegal. Under Actavis, reverse payment claims are analyzed under the rule of reason. To determine whether a reverse payment was illegal, a court evaluates whether the payment was "unjustified," "large," and could have adverse effects on competition.

Here, plaintiffs, who were purchasers of Bystolic, a high blood pressure medication, accused the brand, Forest Laboratories, of reaching anticompetitive settlements with seven generic drug manufacturers to preserve its monopoly by paying them to delay entry into the market until a few months before the expiration of Forest's patent. Each deal was unique, but generally involved (1) an agreement for the generic to supply nebivolol, the active ingredient in Bystolic, or a drug containing nebivolol to Forest; (2) Forest paying the generic for research into new drugs involving nebivolol; or (3) Forest paying the generic for patents involving nebivolol. The plaintiffs alleged these were pretextual reasons for what were really illegal reverse payments designed to stop the generics from challenging Forest's patent. The district court dismissed plaintiffs' complaint and later dismissed plaintiffs' amended complaint with prejudice.

The Second Circuit affirmed. It focused solely on the "unjustified" prong of Actavis, finding that each settlement agreement was justified by legitimate commercial concerns. The panel explained that the following "overarching" considerations applied to each deal between Forest and the generics:

  • The terms of the transactions reflect bona fide business considerations.
  • No facts were shown that demonstrated that the size of the payments was unusual for the types of agreements, which would have supported a finding that they were unjustified. (While related to the size of the payment, this factor was evaluated under the "unjustified" prong).
  • Forest's need for alternative supplies of active pharmaceutical ingredients or finished pharmaceutical products was consistent with what Forest previously disclosed to investors.
  • A lack of public disclosures about business plans or investments does not necessarily bear upon whether those ventures are truly legitimate or genuine.
  • It is sensible for counterparties to enter into condensed term sheets with the expectation of subsequently negotiating definitive agreements that are more detailed.
  • Payments for developmental or commercial milestones, or research-and-development expenses, suggest rational commercial incentives.
  • Provisions in the transactions that are designed to ensure price competition do not fit with Forest's alleged intention to funnel secret overpayments to the generics.
  • Agreements between Forest and other counterparties need not be identical to or even closely resemble Forest's agreements with the generics.
  • The agreements' provisions trump allegations of unsupported speculation about nefarious motives.

The Bystolic decision adds to the small body of appellate opinions on Actavis. The panel provided helpful insight on ways to shore-up settlements that may later be alleged to be anticompetitive reverse payments settlements and shows the relatively high bar for challenges by plaintiffs. Even the FTC's support as an amicus curiae failed to persuade the court. The FTC had argued that the district court should have placed the burden on Forest to justify the payments. Instead, in the FTC's view, the district court engaged in its own factfinding and erroneously faulted the plaintiffs for not producing evidence at the pleading stage. The Second Circuit had little room for this argument and did not substantively address the FTC's filing. Although many other reverse payment cases focus on the delayed entry and not payments for services rendered, the decision provides detailed standards on reverse payment settlements that will be useful in the Second Circuit and beyond.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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