FTC v. Actavis Argument Recap

I attended the Supreme Court argument in FTC v. Actavis today (as I noted in my earlier post previewing the case), which involves when a brand name pharmaceutical company may make a "reverse payment" to a generic company as part of a settlement that delays the generic's market entry. The Court expressed skepticism toward both the pharmaceutical companies' desired hands-off approach (which would find such payments to almost always be within the "scope of the patent") and the FTC's "quick look" approach (which would find such payments to presumptively be antitrust violations). The Court might find middle ground by holding that such settlements, like most antitrust issues, are subject to the "rule of reason."

Justice Scalia appeared to favor the "scope of the patent" approach, asking why these payments are any different from dividing a market and that if there is a problem, it is Congress's job to fix: "Why should we overturn understood antitrust laws just to—just to patch up a mistake that Hatch-Waxman made?" Chief Justice Roberts was quiet until the very end, where he suggested that these deals are not really anticompetitive price fixing because if they were, having another generic step in and demand a similar payment "is always going to happen, because it's very easy"—the brand-name company "put[s] a sign on [its] neck saying, generics line up to get your payment." Justice Thomas was characteristically silent, but has sided with Roberts and Scalia in contested antitrust cases such as Leegin and Pacific Bell. But even if all three of these Justices would affirm, there were not two more clear votes for this approach. (Note that Justice Alito is recused.)

The other Justices all expressed some concern that these agreements could be anticompetitive. Justice Ginsburg mentioned twice that the generic has "been paid much more than they would get if they won the patent infringement suit," and Justice Kagan said that under Actavis's rule, it "is going to be the incentive of both the generic and the brand name manufacturer in every single case ... to split monopoly profits in this way to the detriment of all consumers." Other generics won't get in line to share profits, she said, because "there's a kind of glitch in Hatch-Waxman, and the glitch is that the 180 days goes to the first filer," so a second generic has less incentive to challenge the patent (and thus less leverage to extract a settlement).

Justice Kennedy also had thought that "the 180 days is critical," and wanted to know "what do we look at to verify" that other generics still have an incentive to challenge the patents? (I was surprised that neither side had ready statistics about the percentage of profits that generics make from the first 180 days.) But he thought the FTC's test "doesn't make a lot of sense" because it didn't consider patent strength. He wondered if it would "help ... to consider not what the branding company ... would have made, but what the generic company would have lost ... and use the latter as the limit?" And he followed up on this idea later: "So why don't you just put a cap on what the generic can make and then we won't have a real concern with the restraint of trade?"

Justice Breyer and Justice Sotomayor seemed to support a rule-of-reason approach. Justice Breyer said this should be treated like "any antitrust case": there can clearly be anticompetitive effects ("they're simply dividing the monopoly profit") but there can also be "offsetting justifications," and that weighing these factors should be up to district judges—"that's their job." He also suggested that the inquiry could be structured to make it less of a "kitchen sink." Justice Sotomayor agreed, noting reverse payments raise a "troubling dynamic" but that "it's rare that we find a per se antitrust violation." She asked, "Why is the rule of reason so bad?" (Though she also noted, in response to Actavis's argument about the ease of challenging patents under Hatch-Waxman, that "the argument that you're creating for me [is] that there's a different economic reality here that requires a different rule." Congress wanted "a benefit for generics entering without suffering a potential loss to enter the market more quickly.")

My favorite exchange of the day, however, came from the earlier argument in Oxford Health. After Justice Breyer spent a while describing a hypothetical arbitrator who makes decisions by consulting a Magic 8 Ball, Justice Scalia asked, "What's a Magic 8 Ball? I don't know what you are talking about." After much laughter, Justice Breyer responded, "A Magic 8 Ball is you have—that's a little thing, it's the—it's a non-sportsman's equivalent of throwing darts."