Reverse Settlements: Finding a Balance Between Doing Business and Monopolizing the Market

Photo by Thought Catalog on Unsplash

Ali Kassym, Associate Member, University of Cincinnati Law Review

Pay-for-delay transactions are a recent, concerning practice in the pharmaceutical industry. In a pay-for-delay transaction, a patent holder pays an alleged patent infringer to delay the production of a generic drug.[1] This type of pay-for-delay transactions seem counterintuitive because the party bringing an infringement claim ends up paying the alleged infringer instead of pursuing litigation or demanding a compensation. The practice’s unintuitive nature earned it a name—reverse settlement—alongside dozens of allegations of unfair competition and antitrust laws.[2] In 2013, the Supreme Court examined whether reverse settlements unreasonably prevent competition.[3] The Court concluded that reverse settlements are not presumptively unlawful, but are often illegal depending on the facts surrounding the settlement.[4] Today, many lawyers question whether government enforcement is effective at deterring reverse settlements.[5] According to the Federal Trade Commission, there were 30 explicit reverse settlements in 2016 alone, with 14 more settlements categorized as potentially containing features similar to a classic pay-for-delay transaction.[6] In light of increased attention reverse settlements have received, this article will analyze the status of reverse settlements today and briefly evaluate the effectiveness of efforts aimed at preventing pharmaceutical companies from manipulating market competition with pay-for-delay transactions.

I. Generic Drugs Approval Process under the Hatch-Waxman Act

In 1984, the Drug Price Competition and Patent Term Restoration Act (“Hatch-Waxman Act”) introduced a new approval pathway for generic drug products—filing an Abbreviated New Drug Application (“ANDA”).[7] Greatly simplified, to be approved under the Act a generic drug manufacturer only needs to demonstrate that the new generic drug is safe, effective, and does not infringe on patent rights.[8] Most importantly, the first-to-file ANDA applicant for a generic drug gets a 180-day marketing exclusivity.[9] Since the ANDA process does not shield generic drug applicants from patent infringement liability, the approved, patent-owning brand-name drug manufacturers can, and often do allege patent infringement against the challenging ANDA applicants. [10] During the patent litigation, patent-holding manufacturers will sometimes prefer to pay off the generic drug ANDA applicant to stop, or at least, delay the drug from getting to consumers.[11] Reverse settlements like this have come under increased scrutiny, and the legality of revere settlement came to head in the Supreme Court case, FTC v. Actavis.[12]

II. The Supreme Court’s Decision in FTC v. Actavis

In Actavis, the Federal Trade Commission (“FTC”) claimed that a settlement between Solvay Pharmaceuticals (“Solvay”), Actavis, and Paddock Laboratories violated the Federal Trade Commission Act alleging that it was an unlawful, anti-competitive practice.[13] Solvay obtained ANDA for a brand-name drug called AndroGel in 1999.[14] Later that year, Actavis filed ANDA for a generic drug imitating AndroGel.[15] Separately from Actavis, Paddock also filed ANDA for their product, another generic imitation of AndroGel.[16] Solvay commenced patent litigation against both of the generic drug applicants which endured for several years.[17] However, the Food and Drug Administration eventually approved Actavis’ first-to-file generic drug Solvay and the generic manufacturers settled in 2006.[18] Per the settlement agreement, Actavis agreed to: (1) delay the release of its generic product to the market until 2015 (thereby surrendering the lucrative 180-day exclusivity) and (2) promote AndroGel to urologists.[19] In return, Solvay agreed to make annual payments of $19-30 million for nine years.[20] Solvay maintained that the payments to generic manufacturers were for their services rather than an anti-competitive pay-off.[21] The Eleventh Circuit ruled that reverse settlements were immune from antitrust attacks where the anticompetitive effects of the settlement are in accord with the exclusionary potential of the patent.[22] In other words, the circuit court asserted that the right to “cripple competition” was inherently vested in patent holders, even if there was an option to negate the patent monopoly by challenging the validity of a patent in litigation.[23]

The Supreme Court reversed the Eleventh Circuit’s decision in a 5-3 holding.[24] The Court disagreed that the potential involvement of patent monopoly could shield an agreement from antitrust investigation because there is a chance a patent can be invalidated through litigation.[25] Moreover, the Court’s precedents indicated that patent settlements could be in violation of antitrust laws.[26] The majority also deemed reverse settlements to be an unusual practice that could potentially have a “significant adverse effect on competition.”[27] While the Court recognized the value of encouraging settlements over patent litigation, the opinion cited five competing considerations that counterbalance the policy favoring settlements.[28] Lastly, the Court refused to hold that reverse settlements were presumptively unlawful.[29] The majority opinion found that the unlawful nature of pay-for-delay settlements would often depend on the factors such as size, scale, potential litigation costs, inclusion of other services, and lack of justifications.[30] The need to explore the facts surrounding a settlement thus barred the presumption against legitimacy of the reverse settlements.[31]

III. The Status of Reverse Settlements Today

The Supreme Court was hesitant to do away with reverse settlements in Actavis. Nonetheless, the Court also declined to extend antitrust immunity for patents to generic drug settlements. Instead, the majority advised federal courts to determine the legitimacy of each reverse settlement based on the underlying facts noting that some settlements will likely have an anti-competitive effect on the market. This holding theoretically provides parties in reverse settlement with room for defending the agreement from antitrust attacks while also upholding traditional goals of anti-trust law. But where exactly is the line between doing business and creating a monopoly? The Court offered some guiding factors such as the size and scale of a settlement, which implies that settlements larger in value pose a higher risk of disrupting competition. Perhaps the Court was justified to not draw a clear line, as evidenced by the fact that FTC cannot always readily determine whether a settlement with generic manufacturers even contains an unlawful form of compensation.[32]

IV. Efforts Against the Pay-for-Delay Settlements: A Promise of Effectiveness?

Since reverse settlements are not always unlawful, a legislator tasked with combating them is faced with a need to thread a fragile balance between endorsing speedy resolution through legitimate settlements and preventing the anti-competitive effects of pay-for-delay transactions. California is the first U.S. state to ban pay-for-delay agreements between pharmaceutical companies.[33] Approved by the Governor of the state on October 7th, 2019,[34] the aim of the Assembly Bill No. 824 (“California Bill”) is to preserve access to affordable drugs by banning reverse settlements and thereby promoting market competition.[35]

The California bill provides that an agreement resolving a patent infringement in relation to the sale of pharmaceutical product is presumed to have an anti-competitive effect if: (1) a nonreference drug filer[36] receives anything of value from a brand company alleging patent infringement, including a promise from a brand company to not launch a generic version of its drug, or (2) the nonreference drug filer agrees to abandon the “research, development, manufacturing marketing, or sales” of the nonreference drug filer’s product for any amount of time.[37] The bill further clarifies that usual settlement terms—such as covenants not to sue on a claim that the nonreference drug product infringes a U.S. patent, or compensation for avoiding future litigation—are not included within the meaning of “value” and thus will not trigger the presumption of unlawfulness.[38] However, the bill contains a few provisions aimed at preventing drug manufacturers from masking a litigation-avoidance payment as a compensation, such as the requirement of documentary proof of saved litigation expenses dating at least six months before the settlement and flexible cap on the amount of compensation.[39] Notably, the legislation allows the accused pharmaceutical companies to demonstrate compliance with the law via several exceptions.[40] Lastly, the bill imposes significant fiscal penalties—a violation of the bill could result in the payout of the greater amount between the three times the value received, or twenty million dollars.[41] Importantly, the bill contains the provision exposing violating parties to remedies and injunctions under the various state anti-trust statutes.[42]

A similar measure was introduced by Senators Klobuchar and Grassley in 2018.[43] The bill, named “Preserve Access to Affordable Generics and Biosimilars Act (“Generics Act”), intends to prohibit pay-for-delay settlements.[44] Per the Generics Act, Congress found generic drugs to be 80-85% cheaper than brand name drugs, which is why the settling drug manufacturers find splitting the profits from the monopoly created by reverse settlements to be more profitable than market competition.[45] The language of the Act draws significant parallels with the California Bill, as the Act utilizes similar language to describe what makes a settlement unlawful, the participating parties, available justifications and exceptions (including reasonable litigation fees up to $7.5 million).[46] The Generics Act also imposes civil penalty sufficient to “deter violations of this sections” but no greater than 3 times the value of the reverse settlement.[47] Similarly to the California Bill, the Act incorporates additional remedies provided by Federal law.[48]

Both of the legislative examples above are built to deter and punish reverse settlements. The bills also attempt to preserve the legitimate status of lawful patent infringement settlements by allowing settling parties to justify their terms of the agreement. At first glance, the structure of the Generics Act is quite similar to that of the California Bill. While language of the bills is fairly broad, the bills are still in accord with the Supreme Court’s ruling in Actavis as they incentivize the government to examine the underlying facts rather than to presume the illegality of every settlement between a patent owner and a generic drug applicant. Therefore, the effectiveness of the bills will be directly tied to the scrutiny and investigation of the state government.

Perhaps the biggest obstacle at dealing with reverse settlements through the proposed bills is proper deterrence. While both the California Bill and the Generics Act impose triple value penalties—with an option of flat $20 million in California Bill—the civil payouts may have little effect in deterring the reverse settlements among large corporations. For example, in 2015 Teva entered into a $1.2 billion settlement with FTC for engaging in a pay-for-delay settlement in connection to their drug Provigil.[49] While the sum is, without a doubt, substantial even for a corporation worth over $50 billion,[50] the settlement was an equivalent relative to Provigil’s annual revenue.[51] There are more examples of disproportionate and seemingly ineffective deterrence by the government.[52]

 The Supreme Court in Actavis hinted that settlements involving high value transactions would be more likely to violate anti-trust laws.[53] However, some multi-billion dollar corporations—the most exposed group of defendants under Actavis—can simply pay the civil penalty and continue to monopolize the market via pay-for-delay settlements. Instead of lump-sum penalties, the government should prioritize injunctions. Injunctions, such as corporate integrity agreements,[54] are often more effective at restraining healthcare providers.[55] Both the California Bill and the Generics Act contain provisions enabling injunctions and other remedies from applicable anti-trust legislation to be implemented in a reverse settlement. Thus, the lack of proper deterrence is addressed by the injunctions. Nevertheless, the imposition of the injunctive penalty is not required by either statute and is at the discretion of the regulating government agencies.

The shifting nature of reverse settlements is also a cause for concern. As evidenced by the FTC’s report for the 2016 fiscal year, the number of final settlement between brand drug manufacturers and generic ANDA filers has increased since 2013, but the number of settlements excluding litigation fees has dropped significantly.[56] Looking at this trend, one may assume that the parties involved in a reverse settlement will often mask the compensation for the delay of a generic drug as a cost of avoiding litigation. Both the California Bill and the Generics Act presume unreasonable litigation fees to be a part of the reverse settlement, with the California statute even requiring litigation documentation predating the settlement.

However, there are other methods of hiding the true purpose of a patent settlement. For example, a reverse settlement is not so easy to identify when something of value is substituted for a dollar payment. For example, parties to a settlement may strike a deal to not compete with each other by making a licensing agreement instead of direct payment.[57] In such situations, the value of the deal is not readily available, thus complicating the government’s task of identifying and punishing pay-for-delay transactions.

V. Conclusion

The reverse settlements are an effective tool that allows some pharmaceutical companies to manipulate the drugs market at the expense of consumers. The recent attempts at combating the anti-competitive practice seem to be generally well equipped to deal with reverse settlements. Nevertheless, the bills may need to be expanded to account for insufficient penalties and masked transactions. Still, the bills are a step in the right direction and provide specific jurisdictional and legislative starting points for government regulation of the pharmaceutical market.


[1] FTC v. Actavis, Inc., 570 U.S. 136, 140 (2013).

[2] See Id.

[3] See Id.

[4] Id. at  137-138.

[5]Valerie Bauman, Pharma Pay-for-Delay Deals Called ‘Cost of Doing Business’, Bloomberg Law (Feb. 10, 2020), https://www.bloomberglaw.com/product/blaw/document/X1L4FOKC000000?bna_news_filter=health-law-and-business&jcsearch=BNA%25200000016ff2ddd064a96ff2dd1cb70001#jcite.

[6] Fed. Trade Comm’n, Agreements Filed with the Federal Trade Commission under the Medicare Prescription Drug, Improvement, and Modernization Act of 2003: Overview of Agreements Filed in FY 2016: A Report by the Bureau of Competition (2019).

[7] U.S. Food & Drug Admin., Hatch Waxman Letters (2018).

[8] 21 U.S.C.S. § 355(b)(1) (2020).

[9] 21 U.S.C.S. § 355(j)(5)(B)(iv) (2020).

[10] “It shall be an act of infringement to submit…an application under section 505(j) of the Federal Drug, and Cosmetic Act…for a drug claimed in a patent or the use of which is claimed in a patent.” 35 U.S.C.S. § 271(e)(2)(A) (2020);  FTC v. Actavis, Inc., 570 U.S. 136, 141 (2013).

[11] See Actavis, 570 U.S. 136, 141 (2013).

[12] See Id.

[13] Id. at 144-145.

[14] Id.

[15] Id. at 144.

[16] Id.

[17] Id.

[18] Id. at 145.

[19] Id.

[20] Id.

[21] Id.

[22] Id. at 146.

[23] Id.

[24] Id. at 139.

[25] Id. at 147.

[26] Id. 149.

[27] Id. at 148-149.

[28] The Court cited the following considerations: (1) reverse settlements can have a genuine anti-competitive effect; (2) anti-competitive consequences can be proved to be justified; (3) in the context of unjustified reverse settlements, the patent owner often has the power to harm the market; (4) it is not always necessary to litigate patent validity to resolve an antitrust issue; (5) allowing antitrust attacks on reverse settlements will not preclude the parties from settling their interests by other means. Id. at 154-158.

[29] Id. at 159.

[30] Id. at 159.

[31] Id. at 159-160.

[32] See FTC report 2016 (stating that 14 agreements in 2016 could potentially contain some form of compensation, but it is not clear from the face of the agreement whether certain provisions of the settlement act as a form of compensation to the generic manufacturer).

[33] Laura Mahoney, ‘Pay to Delay’ Generic Drug Arrangements Banned in California (1), Bloomberg Law (Oct. 7 2019),https://www.bloomberglaw.com/product/blaw/document/X756F6VK000000?bna_news_filter=true&jcsearch=BNA%25200000016d7481d551affdfcefe1a70001#jcite.

[34] The bill came in effect on January 1st of 2020. Id.  

[35] See generally A.B. 824, 2019-2020 Reg. Sess. (Cal. 2019)

[36] Nonreference drug filer is either :1) an ANDA filer or a 2) biosimilar biological application filer. Id. at (g)(1-2).

[37] Id. at 134002(a)(1)(A-B).

[38] Id. at 134002(a)(2)(B-C).

[39] Id. at 134002(a)(2)(C)(ii)(I-II).

[40] Parties to the settlement are not in violation if they can demonstrate the following by the preponderance of evidence: 1) the value received in compensation is a fair value for goods and services the nonreference drug filer agreed to provide, or 2) the agreement generated pro-competitive effect. Id. at 134002(a)(3)(A-B).

[41] Id. at (e)(1)(A)(i).

[42] “Each party that violates or assists in the violation of this section shall be liable for any damages, penalties, costs, fees, injunctions, or other … under the Cartwright Act … the Unfair Practices Act … or the unfair competition law … as applicable.” Id. at (e)(2).

[43] Preserve Access to Affordable Generics and Biosimilars Act, S.3792, 115th Cong. (2018).

[44] Id.

[45] Id. at (a)(6)(B)(i-ii)(C).

[46] See generally Id.

[47] Id. at (f)(1).

[48] Id. at (f)(4).

[49] Bauman, supra note 5.

[50] Teva was worth between $48-61 billion in 2015. Teva Pharmaceutical Industries Net Worth 2006-2019 | TEVA, Macrotrends.

[51] Bauman, supra note 5.

[52] See Id.

[53] See Actavis, 570 U.S. 136, 158-159 (2013).

[54] The government negotiates corporate integrity agreements with health care providers as a part of settlements. Under the agreement, providers and entities agree to obligations in exchange for participation in Federal health care programs. Corporate Integrity Agreements, U.S. Department of Health and Human Services Office of Inspector General, https://oig.hhs.gov/compliance/corporate-integrity-agreements/index.asp.

[55] Bauman, supra note 5.

[56] Fed. Trade Comm’n, supra note 6.

[57] Bauman, supra note 5.

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