A reverse-payment agreement, also known as a “pay-for-delay” agreement, is a type of patent settlement in which a brand-name drug manufacturer pays a prospective generic manufacturer not to challenge the brand-name manufacturer’s patent. These settlements are relatively common,1 but they are also controversial because they can enable the brand-name manufacturer to maintain monopoly power over an invalid patent, which leaves consumers paying too-high prices for too-small quantities of the drug. In the 2013 case FTC v Actavis, Inc,2 the Supreme Court held that these settlements are subject to antitrust scrutiny because of their potential to artificially extend the monopoly power conferred by a patent.3 This Comment explores whether and how federal settlement privilege—which, in several jurisdictions, shields from discovery in future lawsuits any communications that parties make in the course of reaching a settlement—applies in antitrust litigation concerning reverse-payment agreements.
Because Actavis held that the anticompetitive harm of reverse payments stems from the settling parties’ attempts “to prevent the risk of competition,”4 courts hearing reverse-payment cases must examine parties’ reasons for settling to determine liability: “If the basic reason is a desire to maintain and to share patent-generated monopoly profits, then, in the absence of some other justification, the antitrust laws are likely to forbid the arrangement.”5 But if settlement is motivated by “traditional [ ] considerations,” such as a desire to avoid litigation costs or to compensate the generic manufacturer for services that it has agreed to perform, the settlement will not be found anticompetitive.6
Now that courts presiding over reverse-payment cases must consider the motivations of the manufacturers who entered the settlement agreement, it is crucial to know whether and to what extent communications made in furtherance of reverse-payment settlements are protected by settlement privilege. This Comment proposes an answer to that question.
Part I of this Comment explains the origins of reverse payments and why these agreements are uniquely attractive to drug manufacturers. It concludes by discussing the Actavis opinion and the current legal status of reverse-payment agreements, paying special attention to the implications that Actavis has for those courts that recognize settlement privilege. Part II explains what settlement privilege is and why some federal courts—but not others—have decided to recognize the privilege. Part III examines the evidentiary dilemma faced by courts that must scrutinize reverse payments under the constraints of settlement privilege. Most importantly, Part III suggests two ways in which courts that recognize settlement privilege can reconcile that privilege with the mandate of Actavis. Part III.A explores how the crime-fraud doctrine, according to which no privilege attaches to communications undertaken in furtherance of crime or fraud, could provide a work-around to settlement privilege in many reverse-payment cases, but also describes the difficulties inherent in such an approach. Part III.B then offers an alternative solution: instead of relying on the complex, obstacle-laden crime-fraud doctrine, courts can invoke the common-law “necessity exception” to confine settlement privilege so that it does not apply in lawsuits, such as reverse-payment suits, in which the legality of the settlement itself is at issue. Careful application of either the crime-fraud doctrine or, more promisingly, the necessity exception would allow courts to adjudicate reverse-payment cases without abandoning settlement privilege altogether.
- 1. In fiscal year 2014 (the most recent year for which data is available), American pharmaceutical companies entered into twenty-one reverse-payment settlements, which accounted for 13 percent of all patent settlements between brand-name and generic manufacturers. The combined value of these settlements exceeded $6 billion. See Agreements Filed with the Federal Trade Commission under the Medicare Prescription Drug, Improvement, and Modernization Act of 2003: Overview of Agreements Filed in FY 2014; A Report by the Bureau of Competition *1, 4, archived at http://perma.cc/BP8K-AB3N.
- 2. 133 S Ct 2223 (2013).
- 3. Id at 2227.
- 4. Id at 2236.
- 5. Id at 2237.
- 6. Actavis, 133 S Ct at 2236.