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Congress Considers Legislation to Limit “Reverse Payment” Settlements in Pharmaceutical Patent Litigation
Congress Considers Legislation to Limit “Reverse Payment” Settlements in Pharmaceutical Patent Litigation
First appeared in V&E Antitrust News & Notes, April 2009.
By Erin Thomson
Overview | Background and Issues | Reverse Payment | FTC View on Reverse Payment | Congress Considers Banning Reverse Payment
Overview
In 1984, Congress passed the Drug Price Competition and Patent Term Extension Act,1 commonly known as the Hatch-Waxman Act (the Act). The Act encourages competition between manufacturers of innovator drugs and generic versions of those drugs by streamlining the generic drug application process required by the Food and Drug Administration (FDA). The Act also provides incentives — in the form of periods of marketing exclusively — for the first manufacturer that applies to the FDA for approval to market a generic version of a drug. In exchange, the Act offers patent term extensions to innovator companies that grant a period of time in which the innovator can exclude competition lawfully and, at least in theory, recoup their research and development expenses before generic versions of their drugs enter the market.
The Hatch-Waxman legislative scheme has successfully encouraged greater generic competition in the pharmaceutical industry, and consequently, it has spurred patent litigation between innovator and generic drug manufacturers. Some of these suits have been settled on terms in which the innovator pays the generic manufacturer and, in exchange, the generic competitor agrees to delay the date upon which it will enter the market (typically before the relevant patents expire). These so-called “reverse payment” settlements have been challenged as violating the antitrust laws. In light of court decisions generally upholding the legality of the reverse payment settlements, Congress is considering banning them.
Background and Issues
The Act makes it easier for a manufacturer to gain approval to market a generic product because it allows
the applicant to reference parts of the innovator's application. The generic applicant may rely upon the innovator's safety and efficacy data rather than conducting new clinical trials on essentially the same drug product. As a result, generic drug development costs are typically much lower than the costs required for innovator drug development because the generic company piggybacks on much of the research and development and clinical trial expenses paid by the innovator drug company.
The Act also provides a procedural mechanism by which innovator and generic drug manufacturers may litigate their patent disputes before the generic product is marketed. The Act requires that a branded pharmaceutical company provide the FDA with a list of patents that cover its drug. When a manufacturer applies to market a generic version of that drug, the applicant must certify that either it will not market its product until those patents expire, or that the patents are either invalid or would not be infringed by the generic product. Following a certification that the patents are either invalid or not infringed, the innovator manufacturer has 45 days to file a patent infringement lawsuit against the generic manufacturer. The filing of the lawsuit effectively halts FDA review of the generic application for 30 months.
Reverse Payment
Over the last 10 to 15 years, many Hatch-Waxman suits have been settled using a “reverse payment.” The term “reverse payment” is used because the settlement is a role reversal from the usual patent infringement settlement agreement in which the accused infringer pays the patentee to dismiss the lawsuit. Some refer to this as a “pay-for-delay” agreement.
The Federal Trade Commission (FTC) and other citizen groups have challenged several of these settlements as violating the antitrust laws because, according to the plaintiffs, the settlements are a form of horizontal market allocation.2 Antitrust challenges to reverse payment settlements have had mixed results in the courts. The Sixth Circuit3 has concluded that one such settlement violated antitrust laws, while the Second, Eleventh, and Federal Circuits4 have upheld them as lawful.
Courts upholding the settlements rely on several rationales. First, the patent holder has a presumptively valid patent and may rightfully exclude others from practicing the invention.5 Absent some evidence that the lawsuit was a sham or the settlement extended the life of the patent beyond that permitted by the patent laws, such settlements do not reduce competition.6 Second, public policy favors the settlement of litigation, including patent litigation.7
FTC View on Reverse Payment
The FTC disagrees with this approach. The new Chairman of the FTC, Jon Leibowitz, has stated that: [Reverse payment agreements are] yet another example of pharmaceutical companies turning competition on its head. Congress enacted the landmark 1984 Hatch-Waxman Act to encourage early generic entry and save consumers money, but these anticompetitive deals threaten to destroy that benefit and make crucial portions of the Hatch-Waxman Act extinct in all but name.8
In essence, the FTC’s argument is that in the midst of patent litigation, the validity and infringement of the patent should not be assumed, particularly where there is a strong argument that the patent is invalid. In such scenarios, consumers are likely to be harmed by allowing a reverse payment settlement that delays competition between the innovator and generic manufacturer.
Congress Considers Banning Reverse Payments
In light of the conflicts among the courts and between certain courts and the FTC (and the possible momentum concluding such settlements are lawful), Congress is considering banning such settlements. Senator Herb Kohl, D.-Wisconsin introduced the “Preserve Access to Affordable Generics Act” (S. 369)30 that would make it illegal for parties involved in pharmaceutical patent litigation to sign a settlement agreement in which:
(1) the generic company receives “anything of value;” and
(2) the generic company “agrees not to research, develop, manufacture, market, or sell the [generic product] for any period of time.”
In effect, S. 369 seeks to end the practice of branded companies offering incentives — monetary or otherwise — to generic companies to delay the launch of the generic product. The prohibition on receiving “anything of value” could be interpreted to cover many types of settlement provisions going well beyond the reverse payment settlements described above.
For example, this bill might prevent the companies from entering into supply and manufacturing agreements or licensing agreements (for either the product at issue or different products). The bill clarifies, though, that the pharmaceutical companies could settle the lawsuit and agree that the generic company could launch its product at some date before patent expiration, but not in exchange for consideration from the branded company:
[n]othing in this section shall prohibit a resolution or settlement of a patent infringement claim in which the value paid by the [branded company] to the [generic company] as part of the resolution or settlement of the patent infringement claim includes no more than the right to market the [generic product] prior to the expiration of the patent.
Thus, a settlement including a delayed date of entry without a monetary payment would probably remain lawful under this bill. If passed, the bill would arguably reach beyond the concerns of the FTC. The FTC has only challenged reverse payment settlements when the branded drug enjoyed market power. The FTC has also permitted small payments from the innovator to the generic company to compensate for the cost of litigation. Moreover, the FTC recently supported a rule of reason approach to reverse payments. In contrast, Senator Kohl's bill would make every reverse payment settlement per se unlawful. Nonetheless, Chairman Leibowitz has encouraged Congress to pass this legislation and “ban these pay for delay deals completely.”9 Finally, the bill could have unintended consequences — including anticompetitive consequences — by altering the complex risk-reward analysis conducted by both innovator and generic drug manufacturers, thereby changing the parties' respective incentives to innovate and settle.
For more information about this and similar topics, please contact V&E lawyers William Vigdor or Erin Thomson. Visit our website to learn more about V&E's Antitrust practice.
Footnotes
1Pub. L. No. 98-417, 98 Stat. 1598 (codified as amended in scattered sections of 21 U.S.C. and 35 U.S.C.).
2See, e.g., Schering-Plough Corp. v. FTC, 402 F.3d 1056, 1068 (11th Cir. 2005).
3See In re Cardizem CD Antitrust Litig., 332 F.3d 896 (6th Cir. 2003) (finding antitrust liability for reverse payment settlement agreement).
4See In re Ciprofloxacin Hydrochloride Antitrust Litig., 544 F.3d 1323 (Fed. Cir. 2008) (finding no antitrust liability for reverse payment settlement agreement); In re Tamoxifen Citrate Antitrust Litig., 466 F.3d 187 (2nd Cir. 2006) (same); Schering-Plough Corp. v. FTC, 402 F.3d 1056 (11th Cir. 2005) (same).
5See Ciprofloxacin, 544 F.3d at 1333 (“a patent by its very nature is anticompetitive; it is a grant to the inventor of ‘the right to exclude others from making, using, offering for sale, or selling the invention.”).
6Id. at 1335-36.
7Schering-Plough Corp., 402 F.3d at 1072.
8See, Concurring Statement of Commissioner Jon Leibowitz, FTC v. Watson Pharmaceuticals et. al. (Feb. 2, 2009), available at http://ftc.gov/speeches/leibowitz/090202watsonpharm.pdf.
9A companion bill, H.R. 1706, has been introduced in the House of Representatives.
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