California’s $69 million Teva Settlement Bad Law

The Attorney General of California reported last week that Teva and two other drug companies paid the State of California $69 million to settle an antitrust case. California had sued Teva over a settlement the drug company made in earlier litigation with a generic drug maker over the validity of Teva’s patents. The patents legally precluded sale of the generic version. The patent settlement entailed Teva paying its adversary a lot of money, in exchange for delaying the marketing of the generic drug for several years.

California maintained that Teva illegally extended its monopoly. California contended that Teva bribed the manufacturer of the generic drug not to compete and to allow Teva to accumulate monopoly profits. Teva settled but maintained its innocence. In effect, Teva explained its capitulation as a result of having weighed its chances of success against the cost of litigation and finding it cheaper to pay the state. Nothing remarkable here, except that the fact that Teva settled and California agreed proves that Supreme Justice Stephen Breyer’s opinion in a 2013 case, FTC v. Actavis, 570 US 136, allowing such suits got it wrong.

During the Carter Administration, Michael Pertshuck, the Chairman of the Federal Trade Commission, floated the theory that the holder of a patent whose validity a competitor challenged engaged in monopolistic practices when settling the litigation by paying the challenger cash, in exchange for keeping the product off the market.  On the surface, that looks bad for consumers, who must pay higher prices for the product under patent. Justice Breyer, in Actavis, bought into the notion — though characteristically, not entirely.

As a detail-oriented judge, Breyer avoided Pertschuck’s doctrinaire oversimplification. A patent holder does not just pay a competitor to go away, as the Federal Trade Commission would have it. Rather, a generic drug maker seeking to sell its medicine has to break the patent of the brand-name manufacturer.  The new kid on the block engages in litigation to invalidate the patent. It involves going through administrative proceedings and appeals in the federal courts or court proceedings from start to finish. Sometimes, the patent holder sues for patent infringement.

In any case, all this takes time and costs money.  From the time of the Mishnah onward, the authorities have encouraged settlement and compromise of disputes, for societal and, increasingly, economic reasons.  Federal courts, such as the United States Court of Appeals for the Second Circuit in New York, (where I practiced) screen cases to send to mediation. The Supreme Court itself in recent years has forced all kinds of disputes out of courts and into arbitration.  Why should patent cases differ?

Justice Breyer’s opinion acknowledged these considerations. However, he saw complexity where none exists. In his view, holding competitive products off the market violates antitrust law and hurts consumers. He articulated as well the idea that a monopolist would pay a large sum in order to earn an even larger return. How could courts tell the difference?  For Justice Breyer it required an exhaustive analysis in each case Did the patent holder pay too much? Could the brand-name drug manufacturer have settled without having to pay? Does the payment operate to extend the patent and its accompanying monopoly, which harms consumers?

Chief Justice John Roberts dissented. How does anyone know whether the settlement involved an excessive payment?  In addition, he said that settling a case — with cash or something else — accomplishes the same economic result. Besides, I would add, that second-guessing how the parties could have settled the case leads to rank speculation.  Finally, he reasoned, correctly, that patent settlements cannot extend the life of a patent. Once the patent expires, the generic drug may enter the market. Rather, the “extension” occurs only if the patent lacks validity. Therefore, to determine whether the payment extends the life of the patent, one must determine the validity of the patent. The  end result, Chief Justice Roberts concluded, would require parties to throw out money and spend years to litigate difficult patent cases to the end.

Better, he held, to assume that parties weigh costs and benefits and select on the cheapest resolution when they settle cases.  Indeed, the result in Teva’s settlement with California proves Roberts’s point. The state extracted less than it would have had it succeeded in court because California decided that less money better served its interest than gambling on a final resolution of the merits.  Teva paid a “large sum” to avoid paying even more to get the sate off its back. These same considerations applied in the underlying litigation. The original settlement should have passed legal challenge. Teva paid the state needlessly.