Supreme Court Update: FTC v. Actavis, Inc. (12-416), Arizona v. Inter Tribal Council of Arizona, Inc. (12-71), Maracich v. Spears (12-25) and Order List

June 18, 2013 Supreme Court Update

Greetings, Court fans!

It looks like the Court is finally kicking into high gear, issuing five decisions yesterday with fourteen more to go by the end of next week. This Update will bring you FTC v. Actavis, Inc. (12-416), holding that reverse payment patent settlements are subject to antitrust scrutiny under the rule of reason, Arizona v. Inter Tribal Council of Arizona, Inc. (12-71), striking down Arizona's Voter-ID law as preempted by federal law, and Maracich v. Spears (12-25), analyzing the scope of the "litigation exception" to the Drivers' Privacy Protection Act.

Those who prefer bright line rules over muddy balancing tests will not be too pleased about the outcome in FTC v. Actavis (12-416), where a split Court held that reverse payment settlements of generic/brand name drug patent litigation are subject to antitrust scrutiny under the rule of reason.

Before we get to the Court's analysis, we need to review a few things about the unique setting prompting the majority of these settlements. The Drug Price Competition and Patent Term Restoration Act of 1984, a/k/a the "Hatch-Waxman Act," encourages generic drug manufacturers to enter the market by providing an expedited FDA approval process. While a pioneering brand name drug must undergo time-consuming and costly testing, a generic can obtain FDA approval simply by establishing that it has the "same active ingredients as" and is "biologically equivalent" to the brand name drug. The Hatch-Waxman Act also provides a mechanism for identifying and resolving patent disputes between brand name manufacturers and generic competitors. Under the Act, the brand name manufacturer must identify any relevant patent it holds. To be approved, the generic manufacturer must provide assurance that its drug does not infringe the brand name's patents by, for example, stating that there are no patents listed, that the patents are expired, or – relevant here – that the patent "is invalid or will not be infringed by the manufacture, use or sale" of the generic. Taking this last route permits the brand name patentee to sue for infringement. If it does so within 45 days, the FDA must withhold approval of the generic for a 30-month period while the parties litigate. If the case is decided within 30 months, the FDA must follow the court's decision. However, if the case is not decided that quickly, the FDA may permit marketing of the generic prior to resolution of patent's validity. The first generic to file for approval gains a substantial market advantage in that it receives a 180-day period as the exclusive generic manufacturer. (If more than one manufacturer files on the first possible date, each shares this advantage).

With this regulatory backdrop in mind, we turn to the facts of this case. Solvay Pharmaceuticals obtained FDA approval to market its drug AndroGel, on which it held a patent. Actavis and Paddock thereafter filed applications to market generic equivalents, claiming that Solvay's patent was invalid or not infringed by their products. Solvay sued them within the 45 days, but the litigation remained ongoing after 30 months and the FDA eventually approved Actavis's generic product, although the validity of Solvay's patent was not resolved. Instead of bringing its product to market, Actavis settled with Solvay, as did Paddock and a third would-be generic manufacturer that had helped to fund the litigation. Solvay paid out millions to these generic manufacturers in exchange for their agreement to delay bringing their products to market until 2015 (65 months before the patent would expire) and, in the interim, to promote Androgel. The FTC sued all the parties, claiming that they violated § 5 of the FTC Act by entering into an agreement to refrain from competing for nine years and to abandon their patent challenges in exchange for a share of Solvay's monopoly profits. The district court dismissed the FTC's suit. The Eleventh Circuit affirmed, holding that absent sham litigation or fraud in obtaining the patent, "a reverse payment settlement is immune from antitrust attack so long as its anticompetitive effects fall within the scope of the exclusionary potential of the patent."

The Court reversed, in an opinion by Justice Breyer. If the patent were in fact valid, the Eleventh Circuit's analysis would be correct because the patent provides a lawful monopoly to the patent holder. The problem is that no such rights are accorded if the patent is invalid and here, the validity of the patent was at play. By making the reverse payment, Solvay effectively immunized its potentially invalid patent from challenge, thus sustaining its monopoly power even if its drug was not properly patentable. The majority acknowledge that other generic manufactures could still challenge the patent's validity, but explained that they might not have sufficient incentive to do so since only the first filer(s) gets the right to a 180 day exclusivity period under the Hatch-Waxman Act. While there might be valid justifications for a settlement where money flows from the patent holder to the alleged infringer – i.e., for litigation costs or actual benefits to be provided by the infringer to the patentee – it is also the case that these reverse payment settlements can permit the brand name and generic manufacturers to share in super-competitive monopoly prices to the consumer's disadvantage, whereas invalidation of the patent would result in competition and lower prices to consumers. Accordingly, it is not enough to just assume that the patent is valid and permit these settlements so long as they fall within the scope of the assumed-valid patent. Instead, these agreements must be analyzed under the traditional antitrust rule of reason framework. The Court also explained that the rule of reason analysis, in many instances, may not require litigation of the patent's validity since a large otherwise unexplained payment may well yield the conclusion that there was substantial uncertainty regarding the validity of the patent and that the payment was made to eliminate the risk of competition and not for other valid reasons.

The Chief, joined by Justices Scalia and Thomas, dissented. (Justice Alito did not participate.) The whole point of patent law is to provide a lawful monopoly to the inventor, thus providing an incentive to invent. With that legitimate monopoly power, the patentee may do things that ordinarily are impermissible, such as charging higher than competitive prices or entering into a licensing agreement requiring that a fixed price be charged. So long as the agreement is within the scope of the exclusive rights provided by the patent, there should be no antitrust review. That is the case here because the settlement simply paid the generics to honor the terms of the patent and then permitted them to enter the market some years earlier than they otherwise would be permitted to do. Absent sham litigation or a fraud on the patent office, this should be the end of the analysis. Subjecting reverse patent settlements to antitrust review under the vague rule of reason is also unlikely to benefit society or competition in the long run since generics may be less likely to sue if the option of a monetary settlement is taken off the table. The dissenters also worried that the majority's reasoning was unlikely to remain limited to reverse payment settlements under the Hatch-Waxman Act framework for long, potentially opening up increased antitrust scrutiny of patent litigation settlements across the board.

Next, in Arizona v. Inter Tribal Council of Arizona, Inc. (12-71), the Court struck down Arizona's restrictive Voter-ID law, but not because it is discriminatory or otherwise unconstitutional. Rather, the Court, in a 7-2 decision authored by Justice Scalia, held that Arizona's requirement that county records clerks "reject any application for [voter] registration that is not accompanied by satisfactory evidence of United States citizenship" is preempted by the requirement of the National Voter Registration Act (NVRA) that States "accept and use" a uniform federal form to register voters for federal elections. Because the Federal Form does not require concrete proof of citizenship beyond mere affirmation, Arizona's requirement was found to be in conflict with federal law. The Court stressed, however, that Arizona can potentially institute the same proof-of-citizenship requirement by petitioning the Electoral Assistance Commission (EAC), which prescribes the contents of the Federal Form, and filing suit under the Administrative Procedure Act if the EAC refuses to include the requirement.

The case turned primarily on the meaning and import of the words "accept and use" in the NVRA. Justice Scalia acknowledged that, taken in isolation, the phrase could mean "receive willingly," as Arizona argued, but that "reading ‘accept' merely to denote willing receipt seems out of place in the context of an official mandate to accept and use something for a given purpose." In that context, the majority concluded, "accept and use" means to accept "as sufficient," meaning without additional requirements. Arizona's reading, Scalia argued, would be difficult to reconcile with neighboring provisions of the NVRA, which require States to ensure applicants are registered to vote if they mail the "valid voter registration form" by a certain date: "The statute empowers the EAC to create the Federal Form, requires the EAC to prescribe its contents within specified time limits, and requires States to ‘accept and use' it. It is improbable that the statute envisions a completed copy of the form it takes such pains to create as being anything less than ‘valid.'" Moreover, Arizona's reading would effectively eliminate the role of the Federal Form in relation to state-specific voter-registration forms, which can and do include requirements beyond those required on the Federal Form. In the majority's view, the two forms are meant to work in tandem: "States retain the flexibility to design and use their own registration forms, but the Federal Form provides a backstop: No matter what procedural hurdles a State's own form imposes, the Federal Form guarantees that a simple means of registering to vote in federal elections will be available." Arizona's reading would eliminate the "backstop" function of the Federal Form.

Perhaps the most interesting part of the majority opinion was the section rejecting the application of the so-called "presumption against pre-emption." That rule of construction, Justice Scalia wrote, rests on an assumption that Congress does not intend to preempt the historic police powers of the States unless it manifests a clear intent to do so. But "[t]he assumption that Congress is reluctant to pre-empt does not hold when Congress acts under" the Elections Clause of the Constitution, because the power conferred by that Clause "is none other than the power to pre-empt." Justice Kennedy refused to join this portion of the opinion, writing separately that "[t]here is no sound basis for the Court to rule, for the first time, that there exists a hierarchy of federal powers so that some statutes pre-empting state law must be interpreted by different rules than others, all depending upon which power Congress has exercised." Rather, he maintained that the presumption should apply except where Congress has made clear its express purpose to pre-empt. Because he believed that Congress had made clear its pre-emptive purpose in the NVRA, he concurred in the judgment.

The majority (with Kennedy back on board) took pains (and over five pages) to note that the result in the case might be different if federal law entirely prevented Arizona and other States "from obtaining the information necessary to enforce its voter qualifications." After all, the Court stated, "the Elections Clause empowers Congress to regulate how federal elections are held, but not who may vote in them." The majority found, however, that the NVRA does not completely preclude States from enforcing their own voter qualifications because States are permitted to request that the EAC alter the Federal Form to include information that they deem necessary to determine eligibility, including concrete proof of citizenship. Indeed, the EAC recently approved a similar request from Louisiana to include a state-specific instruction on the Federal Form. Justice Scalia brushed aside Arizona's concerns (echoed by Justice Alito in dissent) that the EAC had previously failed to act on such a request and now lacked a quorum. If Arizona renews its request and the EAC denies the request or fails to act, then the State may sue under the Administrative Procedure Act.

Justices Thomas and Alito each separately dissented. Justice Thomas seized on the majority's acknowledgment that it would likely be unconstitutional for the federal government to prevent States from regulating who may vote in federal elections. He didn't buy the majority's petition-the-EAC solution to this constitutional tangle, however. Rather, he would "construe the law as only requiring Arizona to accept and use the form as part of its voter registration process, leaving the State free to request whatever additional information it determines is necessary to ensure that voters meet the qualifications it has the constitutional authority to establish."

Justice Alito rejected the majority's reading of the ambiguous language "accept and use" as insensitive to the constitutional authority of the States and likely to produce "truly strange results." In particular, Justice Alito marveled at the Court's conclusion that, though Arizona can require applicants filling out its own application form to produce proof of citizenship, it cannot impose the same step on applicants who happen to fill out the Federal Form instead. Justice Alito compared the Federal Form to the Common Application that colleges and universities "accept and use" in their admissions processes. Just as colleges may require applicants to submit various additional forms and documents, States should be able to impose additional requirements on voter-registration applicants, so long as they "use[] the [federal] form as a meaningful part of the registration process."

At the end of the day, all nine justices agreed that it is the States, not Congress, that have the authority to establish voter qualifications in federal elections and to regulate voter registration. The Court has already held that States may require voters to show photo IDs as proof of citizenship. See Crawford v. Marion County Election Board, 533 U.S. 181 (2008). So, although the Court held that Arizona can't simply add requirements to the existing federal form, there appears to be no constitutional hurdle to the State's imposing the same requirements through the more circuitous route of petitioning the EAC and filing suit if the EAC fails or refuses to accede.

Maracich v. Spears (12-25) involved dueling lawsuits, lawyer solicitation practices, and the privacy rights of the nation's drivers. Congress passed the Drivers' Privacy Protection Act (DPPA) in 1994 out of concern about the release of personal information in state Department of Motor Vehicles records. The Act generally prohibits the release of such information unless one of several exceptions applies. Among these is one – dubbed the "litigation exception" – that allows a DMV to release information for use "in connection with" judicial and administrative proceedings, including "investigation in anticipation of litigation." After Respondent trial lawyers sued South Carolina car dealers on behalf of four recent car buyers who alleged violations of a state consumer protection law, they obtained the names and addresses of over 34,000 other auto purchasers from the South Carolina DMV and sent them solicitation letters in the hope of launching a class action lawsuit. The car dealers' lawyers responded with a class action suit of their own, brought on behalf of recent South Carolina car buyers who alleged that use of the DMV-provided personal information for bulk solicitation violated the DPPA. After the district court and the Fourth Circuit approved the use of the DMV information, the Court granted cert to determine whether the solicitation of clients is a permissible purpose for obtaining personal information from a state DMV under DPPA's litigation exception.

Justice Kennedy wrote for a majority that included the Chief and Justices Thomas, Breyer, and Alito. The opinion begins with the observation that the broad language of the DPPA's litigation exception – and particularly its "in connection with" language – taken to "its broadest reach," could permit the use of the information disclosed to the respondents by the South Carolina DMV. But the Court looked for "a limiting principle consistent with the structure of the statute and its other provisions." Exceptions, the Court explained, "ought not operate to the farthest reach of their linguistic possibilities if that result would contravene the statutory design." Grounded in the DPPA's general prohibition on disclosure and the special treatment of solicitation activities under ethical rules, the majority determined that solicitation is a distinct form of conduct, rather than conduct in connection with litigation, and thus is not a permitted use under the statute. Congress envisioned use "in connection with" litigation to include activities an attorney undertakes as an officer of the court to "ensure the integrity and efficiency of an existing or imminent legal proceeding," not measures she might take for her own business development purposes. Likewise, the Court did not buy the argument that the respondent's mass mailing – which sought information from car buyers about their experiences with dealers – was necessarily permissible under the DPPA as "investigation in anticipation of litigation." That portion of the litigation exception is meant, the Court determined, to allow for background research to determine the existence of a non-frivolous basis for filing a complaint, to identify defendants, or to locate witnesses. The majority also defended its reading of the statute as a matter of structure: a different exception – permitting disclosure of a more limited subset of personal information – applies specifically to disclosures for marketing and solicitation, and requires an express opt-in by individuals before their personal information may be disclosed. Because that solicitation exception "represents Congress' decision to target the problem of bulk solicitation with the requirement of express consent, other exceptions should not be construed to interfere with this statutory mechanism unless the text commands it." In the end, courts must look to the predominant purpose for the proposed use of personal information; if it is solicitation, the DPPA litigation exception does not allow it. Because the lower courts applied an improper standard, the Court remanded to allow the Fourth Circuit to determine whether the record shows a valid investigatory use of the information by the respondents, and, even if so, whether solicitation was nonetheless the predominant purpose and thus prohibited.

Justice Ginsburg penned a dissent, which Justices Scalia, Sotomayor and Kagan joined. As a matter of textual analysis, the dissenters would read the DPPA litigation exception consistently with its broad language to permit use of DMV information "tied to a specific, concrete proceeding, imminent or ongoing, with identified parties on both sides of the controversy" – a test they believed the use of information in this case passed. The letters sent to car buyers served an investigative purpose of gathering information about fees charged and identifying both prospective plaintiffs and prospective defendants who might have participated in an alleged conspiracy to overcharge auto purchasers. Nor did the dissent accept the majority's structural reasoning, which was grounded in the separate exception that applies specifically to marketing and solicitations; because the information could be obtained and used under the litigation exception, it was simply unnecessary to consider the solicitation exception. To the dissent, the Court's holding "is hard to grasp and will be difficult to apply," with a new "predominant purpose" test that "inspires little confidence."

Also on Monday, the Court granted cert in the following four cases:

Mount Holly, NJ v. Mt. Holly Gardens Citizens (11-1507), which asks whether disparate impact claims are cognizable under the Fair Housing Act;

Air Wisconsin Airlines Corp. v. Hoeper (12-315), in which the Court will consider whether immunity under the Aviation and Transportation Security Act immunity may be denied without a determination that an air carrier's disclosure was materially false;

Ray Haluch Gravel Co. v. Central Pension Fund (12-992), which will resolve a circuit split over whether a district court's decision on the merits that leaves unresolved a request for contractual attorney's fees is a "final decision" under 28 U.S.C. § 1291; and

Law v. Siegel (12-5196), which asks whether the Ninth Circuit erred when it permitted the Bankruptcy Court to surcharge a debtor's homestead property exemption.

Don't stray too far from your screen – we'll be back very soon with the remaining decisions from Monday.

Kim, Jenny & Julie

From the Appellate and Complex Legal Issues Practice Group at Wiggin and Dana. For more information, contact Kim Rinehart or any other member of the Practice Group at 203-498-4400