FTC v. Actavis: Reverse Payments Under the Rule of Reason

In FTC v. Actavis, Inc., decided June 17, 2013, the Supreme Court ruled 5–3 that “reverse payment” settlements, in which a brand-name drug company pays a generic competitor to delay launching a cheaper version, are not automatically immune from antitrust law simply because the delay falls within the patent’s remaining life. Writing for the majority, Justice Breyer held that these agreements must be evaluated under the antitrust rule of reason, weighing their anticompetitive harms against any legitimate justifications.¹

The AndroGel Settlement That Started the Case

Solvay Pharmaceuticals held the patent on AndroGel, a prescription testosterone replacement product. Actavis and Paddock Laboratories filed abbreviated new drug applications for generic versions and certified under the Hatch-Waxman Act that Solvay’s patent was either invalid or would not be infringed by their products. Solvay sued for patent infringement.¹

Before any court decided whether the patent was actually valid, the parties settled. Solvay agreed to pay the generic manufacturers substantial sums, and in exchange the generic companies agreed to drop their patent challenges and hold their cheaper products off the market. The Federal Trade Commission sued, alleging that the arrangement violated Section 5 of the FTC Act by keeping low-cost generics off pharmacy shelves.²

Why a “Reverse” Payment Raises Antitrust Concerns

In typical patent litigation, if the parties settle, money flows from the alleged infringer to the patent holder, usually through a licensing arrangement. A reverse payment inverts that flow: the patent holder pays the challenger. The brand-name manufacturer is effectively buying the generic company’s agreement not to compete.

The size and direction of the payment prompt an obvious question. If the brand-name company genuinely believed its patent would survive a court challenge, why pay the challenger to walk away? Under the Hatch-Waxman framework, the first generic manufacturer to file a Paragraph IV certification is entitled to a 180-day exclusivity period once it enters the market, which means buying off that single filer can effectively block broader generic competition, not just one rival. The FTC has estimated that these deals cost American consumers and taxpayers roughly $3.5 billion per year in inflated drug prices.³

The Two Positions the Court Rejected

The district court dismissed the FTC’s complaint, and the Eleventh Circuit affirmed. The appeals court applied the “scope of the patent” test: as long as any generic entry delay ended by the patent’s expiration date, the settlement was presumptively lawful. The reasoning was that the patent itself authorized the exclusion, so an agreement preserving it could not violate antitrust law.²

The FTC pressed the opposite view, urging the Court to treat reverse payments as presumptively illegal, subject only to a quick look for any obvious justification. The Supreme Court rejected both. Neither blanket immunity nor a presumption of illegality captured what these deals actually do.¹

The Majority’s Reasoning

Justice Breyer’s opinion was joined by Justices Kennedy, Ginsburg, Sotomayor, and Kagan. Justice Alito did not participate.⁴ The majority set out five reasons that reverse payment settlements can violate antitrust law and belong under the rule of reason.

First, these settlements carry a genuine potential for anticompetitive harm. Paying a rival to stay out of the market maintains prices at the patent holder’s monopoly level and splits the resulting profits between brand and generic while consumers pay the difference. Because Hatch-Waxman gives the first Paragraph IV filer 180-day exclusivity and the ability to trigger a 30-month FDA stay against other generics, paying off that one challenger removes the competitor most likely to enter quickly.⁵

Second, those anticompetitive consequences will sometimes prove unjustified. Legitimate reasons may exist, but the mere possibility of a legitimate reason is not grounds to dismiss the complaint before examining it.

Third, where a reverse payment threatens unjustified harm, the patent holder likely has the market power to inflict it. The size of the payment itself signals that power.

Fourth, antitrust review is more workable than the lower court believed. A court does not need to fully litigate the underlying patent’s validity to answer the antitrust question. A large, unexplained reverse payment functions as a workable proxy for the patent’s weakness, sparing the antitrust case from a mini patent trial.⁵

Fifth, antitrust scrutiny does not shut down settlements. Parties can still resolve patent disputes in other ways, such as agreeing on an early generic entry date without a payment for delay.

How the Rule of Reason Applies

The rule of reason is the standard framework for evaluating agreements that might restrain competition but could also have legitimate business purposes. It runs as a burden-shifting analysis.

A plaintiff, typically the FTC or a class of drug purchasers, must first show that the settlement caused anticompetitive harm. In the reverse payment context, the most telling indicator is the payment’s size. A payment that is both large and unexplained by other factors is, in the Court’s phrase, a workable surrogate for the patent’s weakness. A company confident in its patent has little reason to pay a challenger to stop fighting it; the bigger the payment relative to what continued litigation would have cost, the more the deal looks like a division of monopoly profits.⁵

If the plaintiff establishes anticompetitive effects, the defendants must offer procompetitive justifications. Legitimate reasons might include avoiding the substantial cost of continued patent litigation, giving the generic manufacturer a certain entry date rather than years of uncertainty, or paying fair value for genuine business arrangements such as ingredient supply or research services. A court then asks whether the restraint was reasonably necessary to achieve those benefits, or whether a less restrictive path, such as an agreed entry date without a cash payment, would have worked.

Side Deals and Fair Value

A recurring question is how to evaluate non-cash consideration bundled into settlements. Brand-name and generic companies frequently pair a delayed-entry agreement with side deals in which the generic supplies active ingredients, conducts research, or licenses patents to the brand. Courts examine whether payments for those services reflect actual market value or whether they are inflated to disguise a reverse payment. Amounts significantly exceeding fair value suggest the excess bought market exclusion.

An Opinion Deliberately Left Open

The Court left the details of the analysis to lower courts, and more than a decade later, consensus remains limited. Only a handful of reverse payment cases have reached appellate courts, and only three have gone to a jury verdict. None has returned to the Supreme Court. Courts have noted that the Actavis opinion was “deliberately opaque” about precisely what counts as a large and unjustified payment.

The Dissent

Chief Justice Roberts, joined by Justices Scalia and Thomas, dissented.⁴ Patent holders, they argued, have a legal right to exclude competitors, and a settlement that stays within the patent’s remaining term simply exercises that right. The scope-of-the-patent test applied by the Eleventh Circuit, in the dissent’s view, was the correct framework.

The dissent warned that the majority’s approach would chill settlements by making them expensive and risky to defend. Generic manufacturers might decline reasonable deals rather than face years of antitrust litigation over any payment received. The dissent also questioned whether the rule of reason was workable here, arguing that it would push courts to evaluate patent validity through the back door, the very inquiry the majority claimed to avoid.

How Settlements Have Changed Since Actavis

Explicit cash payments beyond amounts reasonably attributed to litigation costs have become considerably less common. The industry adapted rather than retreated. Companies moved toward more complex settlement terms that may function as disguised compensation without carrying the traditional reverse payment label.⁶

The FTC has identified several categories of what it calls “possible compensation,” including quantity restrictions that cap how much product the generic can sell, agreements by the brand not to launch its own authorized generic for a set period, royalty structures that decline if the brand launches an authorized generic, and licensing arrangements that give the generic a much earlier entry date in foreign markets than in the United States. Between fiscal years 2018 and 2021, 23 agreements covering 8 different drugs included quantity restrictions.⁶

Congress addressed part of the gap in 2018 by amending the Medicare Modernization Act’s reporting requirements to require pharmaceutical companies to file any side agreements entered within 30 days of a patent settlement, so related deals no longer escape FTC review.⁶

The Actavis framework applies whenever value flows from the brand to the generic in exchange for delayed competition, regardless of the form that value takes. Identifying and quantifying non-cash consideration is harder than adding up dollar figures, and courts are still working out how to apply the rule of reason to the increasingly creative arrangements that have replaced the simple cash-for-delay deal at issue in 2013.

1
Supreme Court of the United States. FTC v. Actavis, Inc. Syllabus
2
Federal Trade Commission. Watson Pharmaceuticals, Inc., et al. (FTC v. Actavis)
3
Federal Trade Commission. Pay for Delay
4
Justia Law. FTC v. Actavis, Inc., 570 U.S. 136 (2013)
5
Federal Trade Commission. FTC v. Actavis, Inc. Opinion of the Court
6
Federal Trade Commission. Reverse Payments: From Cash to Quantity Restrictions and Other Possibilities