It is not news that drugs are big business. Sales of prescription drugs in the United States are approaching $300 billion per year, with the average price for prescriptions rising at a rate more than two-and-one-half times that of the average rate of inflation.1 Many view the entry of generic drugs as integral to keeping this market in check.2
In an effort to further this initiative, the Hatch-Waxman Act, also known as the Drug Price Competition and Patent Term
Restoration Act, was enacted in 1984 to amend the Food, Drug and Cosmetics Act.3 A primary purpose of Hatch-Waxman was to encourage manufacturers of generic drugs to compete in the market at an earlier time. To this end, the Act includes three significant provisions. First, as part of the procedure by which a manufacturer seeks FDA approval for a new drug by filing a New Drug Application (“NDA”), the manufacturer must identify and list all patents having claims that cover the new drug product and, thus, would possibly be infringed by a generic product.4
Second, Hatch-Waxman provides for an accelerated process by which a generic manufacturer can “short circuit” the FDA approval process by filing an Abbreviated New Drug Application (“ANDA”), demonstrating only that its product is bioequivalent to a drug that had previously been approved for sale by the agency. Based on that showing, the generic manufacturer can rely upon the safety and effectiveness tests conducted and submitted to the FDA by the pioneer drug manufacturer.5 To the extent that there are listed patents associated with the pioneer drug, the generic manufacturer may make a certification – referred to as a “Paragraph IV certification” – to the effect that its proposed generic product does not infringe each patent, or that the patent claims at issue are not valid or are unenforceable.6
Although the generic manufacturer will not, by this time, have made, used, imported, sold, or offered to sell its product, the Patent Act defines the filing of an ANDA with a corresponding Paragraph IV certification as a technical act of infringement, and requires that the patentee pioneer drug manufacturer file suit within 45 days of the ANDA filing.7 If it does not file a patent infringement lawsuit, the FDA will immediately approve the generic drug for marketing.8
However, if the patentee timely files suit, the FDA will stay approval of the ANDA until the earliest of: 1) the patent(s) expiration; 2) a final judgment in the infringement lawsuit; or 3) the running of a 30-month period.9 Because most patent infringement litigation will last longer than 30 months, the effect of this provision is that, barring settlement or expiration of the patent, the patentee pioneer drug manufacturer gets a 30-month stay before entry of the generic drug in the market.
The third key provision of the Hatch-Waxman Act and perhaps the most significant incentive to generic manufacturers, grants to the first generic manufacturer to file an ANDA including a Paragraph IV certification a 180-day period of exclusivity once it enters the market.10 That is, during the first 180 days after it markets its generic drug, no other generic manufacturers may sell their products.11 Importantly, this 180-day period begins to run from the day on which the generic manufacturer begins to market its drug product.
Recently, parties to lawsuits brought pursuant to these provisions of the Hatch-Waxman Act have adopted with increasing frequency a settlement model under which the brand-name pioneer drug manufacturer – the patentee and plaintiff in the suit – pays or otherwise provides value to the generic manufacturer – the alleged infringer – in exchange for which the latter entity agrees to delay marketing its generic product. While there is little question that these “reverse payment” or “pay-to-delay” settlements are permissible under patent law, a number of commentators – as well as the Federal Trade Commission (“FTC”) and more recently, the Department of Justice (“DOJ”) – have expressed concerns that they run afoul of antitrust laws and, in so doing, contravene the purpose of the Hatch-Waxman Act.12
There is a complicated and often uneasy relationship between antitrust and patent laws. In principle, both regimes are intended to enhance and promote competition, but in practice, they may sometimes appear to be in conflict. Federal and state antitrust laws are enacted and enforced to protect competition and the competitive process for the benefit of consumers, but the procompetitive designs of the patent laws are not always so clear. On the surface, in fact, the patent laws may appear intentionally anticompetitive. The Supreme Court acknowledged as much, noting that patents are “an exception to the general rule against monopolies and to the right to access to a free and open market.”13
The patent system operates on the rationale that innovation is itself inherently procompetitive, and seeks to encourage innovators by conferring upon them extended periods of monopoly during which they can commercialize and profit from their inventions. In exchange, innovators agree to fully disclose their inventions to the public, who is free to practice those inventions after the expiration of the patent monopoly, and to improve upon and further develop the technology of those inventions.
Accepting that the underlying motivation for the patent law is procompetitive, its application perhaps strains against that purpose under certain circumstances, particularly in the context of agreements to license inventions and settle litigation. Such agreements between patentees and others are not necessarily procompetitive and often incorporate terms and limitations that effectively restrain trade by, for example, carving the market among competitors based on criteria such as geography or customer type.
Moreover, in consideration for such agreements, patentees may be able to impose premium royalty payment on companies seeking to participate in the market and, thereby, may “control” the cost of otherwise competitive goods sold under the patent.14 Of course, patentees will argue – and rightly so – that the ability to earn economic rents by the exercise of their patents, whether by collecting royalties from licensees or as a result of their monopoly power in the market, is appropriate and warranted in light of the often significant expense associated with their innovation. In the pharmaceutical industry, for example, pioneer drug manufacturers typically incur considerable costs in connection with research, development, testing, securing FDA approval, and marketing their new drug products. To allow generics and other competitors to benefit from their inventions – i.e., to “free ride” – will almost certainly have the effect of discouraging future innovation.
Agreements of these types are decidedly anticompetitive, and would likely be per se unlawful in any context other than patent licenses or settlements.15 Conduct of patentees that would constitute unlawful restraints of trade under nearly any other circumstances will generally be shielded from liability under the antitrust laws when it arises out of a license for a valid and infringed patent. This result is appropriate when one considers that, by operation of the patent laws, a patentee is free to exclude all others from selling infringing products into the market at all. Thus, a license agreement is no more restrictive, and is arguably more procompetitive, than the alternative in which only the patentee can make, use, and sell products covered by its patents. And a settlement in a genuinely disputed patent infringement action will generally be no more anticompetitive than the result of that litigation would have been.
This is not to say, though, that all patent license agreements are immune from scrutiny under antitrust laws.16 The FTC and DOJ periodically provide guidelines for agreements involving the transfer of rights in intellectual property such as patents, and courts may be called upon to consider the competitive affects of patent license and settlement agreements. In general, though, these agreements will be allowed as long as the patentee is not attempting to extend the rights to exclude beyond the scope permitted by its patent.
The results of settlements in ANDA patent infringement litigation – even those settlements involving reverse payments – often differ little from those in patent license or settlement agreements in the context of other technologies, so it may not be altogether clear why these cases might merit a different level of scrutiny or analysis. Critics of reverse payment settlement agreements in pharmaceutical patent lawsuits argue that those agreements violate this principle by incorporating a term under which, in exchange for valuable consideration, the generic competitor agrees to stay out of the market for some period greater than that required by either or both of the Hatch-Waxman Act or the patent law. Other commentators respond that such settlements can be justified and are not, in fact, in conflict with the antitrust laws.17
The FTC, among others, has long opposed such agreements, contending that, although branded pharmaceutical manufacturers and their generic competitors tend to view reverse payment settlements favorably, consumers may suffer because “the miss out on generic prices that can be as much as 90 percent less than brand prices.18 The DOJ has recently joined that position, but courts addressing this question remain divided, having been forced to struggle with this tenuous balance between the patent and antitrust laws under these apparently unique circumstances.19
In one of the earlier decisions regarding the antitrust implications of reverse payment settlements, the Sixth Circuit Court of Appeals held as per se unlawful an agreement under which the patentee pioneer drug manufacturer paid $40 million to the generic patent challenger in exchange for that manufacturer’s promise to delay its entry into the market.20 In so doing, the court rejected the patentee’s arguments that the arrangement was procompetitive and encouraged innovation, and concluded that this agreement was, “at its core, a horizontal agreement to eliminate competition” in the market for the drug at issue and, as such, was “a classic example of a per se illegal restraint of trade.”21
Subsequent courts have been reluctant to adopt this reasoning. The Eleventh Circuit Court of Appeals reverted to the more traditional analysis in cases involving the intersection of antitrust and patent issues: Was the effect of the agreement within the scope of the patent? In Schering-Plough Corp. v. FTC,22 that court focused its analysis on the permissible exclusionary scope under the patent as compared to the exclusions and anticompetitive effects arising out of the agreement.23 The court rejected the FTC’s argument that, because the patentee’s payment to its prospective generic competitor was compensation for the latter’s agreement to defer entry into the market, the reverse settlement agreement in question had the anticompetitive effect of eliminating competition and was unlawful under the antitrust rule of reason analysis.24 According to the court, such an approach would undermine the nature and purpose of patent law. “By their nature, patents create an environment of exclusion, and, consequently, cripple competition.”25 Moreover, “antitrust liability might undermine the encouragement of innovation and disclosure” that is the hallmark of patent law.26 Because any anticompetitive effects of the reverse payment settlement were not beyond the potential exclusionary scope of the patent at issue, the court refused to find any antitrust liability.
The Second Circuit applied similar reasoning in In re Tamoxifen Citrate Antitrust Litigation, declining to find an antitrust violation arising out of a reverse payment agreement absent a showing that the anticompetitive effects of the agreement exceed the patent’s lawful exclusionary scope.27 And the Federal Circuit Court of Appeals expressly agreed with the previous decisions of the Second and Eleventh Circuits in In re Ciproflaxin Hydrochloride Antitrust Litigation.28 “A settlement is not unlawful if it serves to protect that to which the patent holder is legally entitled – a monopoly over the manufacture and distribution of the patented invention.”29 Affirming the lower court’s finding that the agreement did not unlawfully attempt to extend the patent monopoly, the Federal Circuit reiterated that “[t]he essence of the inquiry is whether the agreements restrict competition beyond the exclusionary zone of the patent.”30
The Second and Federal Circuits, as well as other courts, based their conclusions in part on the preference under parties and courts toward settlement of litigation.31 Certainly this policy is often appropriate and offers substantial benefits to parties and courts that cannot be overlooked. However, there may be some justification for considering the benefits of settling patent litigation under the Hatch-Waxman Act according to a different calculus than other patent-related lawsuits.
As an initial matter, it bears noting that the significant majority of patent suits brought pursuant to Hatch-Waxman Paragraph IV certifications that are subsequently settled do not include any reverse payment terms. A recent FTC analysis found that only 66 of the 218 settlements – approximately 30 percent – during the period between 2004 and 2009 included terms under which the brand-name manufacturer of the principle drug paid or otherwise provided some value32 to the generic manufacturer attempting to enter the market.33 Thus, reverse payment terms are hardly essential to the parties’ efforts to reach settlement in Hatch-Waxman lawsuits.
Perhaps more significantly, though, the rationale that we must favor settlement of patent infringement litigation on any terms ignores the context in which these lawsuits and their settlements arise. As described above, Hatch-Waxman was enacted in large part to trigger increased and earlier competition by generics in the market for pharmaceutical products. The framework by which the Act set out to accomplish this goal actually encourages patent infringement litigation to address what was perceived by some as possible abuses of the patent system to extend and expand the patent monopoly held by manufacturers of the principal drugs.
The Act has been quite successful in this regard. Between 1992 and 2002, in the lawsuits commenced under Hatch-Waxman by brand-name pharmaceuticals in response to ANDA and Paragraph IV submissions of generic manufacturers, 73 percent of those resolved by court decisions were resolved in favor of the generic.34 This statistic would seem to suggest that, in a significant majority of these cases, the listed patents at issue were found to be invalid or not infringed.
Thus, consideration of the context in which these antitrust claims have arisen, including the underlying purposes and operation of the Hatch-Waxman Act, may suggest a different analysis by the courts. The approach adopted by a majority of courts in these cases effectively endorses a system under which a pioneer drug manufacturer can secure its patent monopoly free from challenge by a generic competitor – including the uncertainty of litigating its patents’ validity and enforceability – by “buying off” those prospective competitors. The Hatch-Waxman Act, and the results of patent infringement litigation brought under that Act, see supra, suggests that the public interest may be better served by disallowing settlements under which prospective generic competitors are significantly incented to withdraw any patent challenges and stay out of the market.
There is little doubt that the scope of the reverse payment settlements in most cases is well within the “exclusionary zone” of the respective patents – as the Second, Eleventh, and Federal Circuits have all agreed – provided those patents are valid and enforceable and the generic product infringes its claims. To the extent any of those presumptions falls, though, the agreement is just as undoubtedly an unlawful restraint of trade. The question, then, becomes whether it is incumbent upon a court faced with a settlement of this type to at least inquire into the soundness of each of those presumptions. That is, should courts in these cases consider whether the patents at issue are valid and infringed as part of their analyses of these settlements.
So far, the judicial answer to that question has been a resounding “no.” The Second, Eleventh, and Federal Circuits, as well as several district courts, have agreed that, “in the absence of evidence of fraud or sham litigation, [courts] need not consider the validity of the patent in the antitrust analysis of a settlement agreement involving a reverse payment.”35 Patentees will argue that this position of the courts is consistent with the statutory presumption of validity afforded all issued patents, and this should be enough to settle
However, in Arkansas Carpenters Health & Welfare Fund, et al. v. Bayer AG, et al., Appeal No. 05-2851-cv, a companion case to In re Ciprofloxacin, decided in 2008 by the Federal Circuit, the Second Circuit is preparing again to take on the question of whether reverse payment settlements in Hatch-Waxman infringement lawsuits violate the antitrust laws. And there are some indications that, this time, the Second Circuit’s result may be different from its previous decision in the In re Tamoxifen case. Commentators who favor greater antitrust scrutiny for reverse payment settlements are heartened by the fact that the Second Circuit panel for Arkansas Carpenters Health & Welfare Fund includes a judge who previously dissented from the majority opinion in In re Tamoxifen.
Moreover, after the court invited briefing on the issue, the DOJ filed a brief last July adopting a position – for the first time – that such agreements are not immune from antitrust scrutiny and, in fact, should be seen as “presumptively unlawful” upon a prima facie showing by an antitrust plaintiff that the agreement incorporates terms under which a patentee pays a patent challenger in exchange for a promise to withdraw a validity challenge.36 The defendants may rebut this presumption by showing the agreement does not unreasonably restrain competition. The defendants may meet this burden if they can demonstrate, for example, that the consideration paid to the patent challenger would be no more than the patent holder’s avoided litigation costs, or that the agreement allows for some generic competition prior to the expiration of the patent.37
If the Second Circuit adopts the DOJ’s analysis in cases of reverse payment settlements – an approach that largely mirrors the long-time position of the FTC – it would be dramatic departure from the court’s prior “per se legal” stance with regard to such agreements. And it would breathe new life into the campaign against reverse payment settlements that has suffered rather significant setbacks of late. As described above, most recent court decisions have come down against subjecting these agreements to more stringent antitrust scrutiny.38
Opponents of these settlements were hopeful that a legislative resolution to this issue might be forthcoming.39 Both the Senate and the House had actively considered legislation that would proscribe reverse payment settlements, or at least impose a heightened antitrust analysis in cases involving such settlements, and those initiatives had the support of the President.40 The Senate had included in S. 369 an amendment that would adopt an approach similar to that proposed by the FTC and DOJ. Under the Senate amendment, reverse payment settlements would have been presumptively illegal, allowing parties to overcome that presumption by clear and convincing evidence that the procompetitive benefits of the agreement outweigh its anticompetitive effects.41 And the House went further in H.R. 3962, banning outright such agreements.42
However, these provisions, which were opposed by both branded pharmaceutical manufacturers and generics, were removed from the final version of the bill approved by Congress on March 21, 2010, and signed into law on March 23 as the Patient Protection and Affordable Care Act.43 Until the courts craft a uniform judicial solution – led possibly by the Second Circuit’s upcoming decision in Arkansas Carpenters Health & Welfare Fund, and perhaps, ultimately, by a decision of the Supreme Court, who has so far refused all requests to take up the question – these reverse payment settlements show no sign of abating, and litigation, whether undertaken by the FTC or private parties, seems inevitable.
Jospeh J. Jacobi, Esq.