A 2010 FTC study estimated that such settlements cost consumers $3.5 billion annually in increased drug cost.
The settlements are a consequence of the Hatch-Waxman Act passed in 1984 to increase generic competition to patented drugs. As an incentive for generic manufacturers to challenge drug patents, the Act provided a 180-day exclusivity period to the first generic manufacturer to file a certification with the FDA certifying that it had a good faith belief that either the patent is invalid or that its generic version of the approved drug does not infringe. Until expiration of that 180-day period, the FDA is precluded from approving any other generic manufacturer’s product.
The certification to the FDA is deemed a technical infringement that allows the patent holder to commence suit in the absence of actual marketing of the proposed generic version of the drug. The Act provides that the filing of such a suit triggers an automatic thirty month stay during which the FDA is prohibited from finally approving the generic application for approval of its drug, presumably to allow the patent litigation to run its course. The various antitrust cases challenging the settlements have often arisen from efforts of the patent holders to reach some resolution protecting their patent monopoly from generic competition as the thirty month stay is about to expire before resolution of the patent litigation.
The first filing generic has been able to exact a premium in its settlements because it is able “bottleneck” all competition by settling because it can retain the exclusivity period even though it settled its claim and agreed not to go to market until expiration of the patent. With very limited exception, the exclusivity period runs from the date the first filing generic actually begins delivering its version of the drug to market and is not forfeited by a settlement. By settling, the first filing generic effectively removes any incentive for any other generic to challenge the patent since even were the later filer’s suit successful, it generally could not come to market until 180 days after the settling first filer begins delivering its product to market.
Such settlements have been repeatedly challenged as an illegal market division in violation of the Sherman Antitrust Act. The issue has arisen in five circuits and led to three divergent approaches. In the earliest of the cases, In re Cardizem CD Antitrust Litigation, the Sixth Circuit found such an agreement to be a market division among competitors and therefore a per se violation of the Sherman Act. Subsequent cases over the next eight years distinguished Cardizem factually—the agreement there did not resolve the entire litigation and arguably extended to behavior beyond the patent grant itself—and applied a “scope of the patent” test. Under this test, which purports to apply a rule of reason analysis under the Sherman Act, patent law and the policy of encouraging settlement trump antitrust law. The court is to look solely at the scope of the patent grant. If the behavior of the parties agreed to under the settlement falls entirely within the claims of the patent and does not exceed the patent grant, there was no violation of the antitrust law. Rather, the courts view this as a sharing of the legal monopoly granted to the patent holder.
This was the view taken by the Eleventh Circuit in Valley Drug Co. v. Geneva Pharmaceuticals, Inc., and Schering-Plough Corp. v. Federal Trade Commission; and the Federal Circuit (In re Ciprofloxacin Hydrochloride Antitrust Litigation). The Second Circuit took this view in In re Tamoxifen Citrate Antitrust Litigation, but a subsequent panel, though bound by Tamoxifen, had second thoughts in Arkansas Carpenters Health & Welfare Fund v. Bayer AG, and expressed strong grounds for reconsideration of the issue, though a subsequent petition for reconsideration en banc was denied over the strong dissent of Judge Pooler. It was this scope of the patent test that was followed by the Eleventh Circuit in Federal Trade Commission v. Watson Pharmaceuticals Inc., the case currently before the Supreme Court.
While purporting to apply a rule of reason analysis, these decisions almost invariably resulted in approval of the settlements and immunization from the antitrust laws by creating a presumption of patent validity and leaving nothing to be balanced under the traditional rule of reason scale. In these cases the FTC and other plaintiffs suggested a variety of different tests to be applied such as weighing the strength of the patent at the time the settlement was achieved against the payment actually being paid.
Last July, the Third Circuit rejected the “scope of the patent” analysis which had effectively provided for per se validity in In re K-Dur Antitrust Litigation. In an opinion by Judge Dolores Sloviter, a recognized antitrust scholar, the Circuit held, “the finder of fact must treat any payment from a patent holder to a generic patent challenger who agrees to delay entry into the market as prima facie evidence of an unreasonable restraint of trade, which could be rebutted by showing that the payment (1) was for a purpose other than delayed entry or (2) offers some pro-competitive benefit.”
The Third Circuit recognized that the “scope of the patent” test undermined the purpose of the Hatch Waxman Act in promoting generic competition and encouraging challenges to drug patents by presuming the validity of patents that a party to the agreement had asserted was invalid. It rewarded monopolization and encouraged the worst gaming of the system. The “reverse payments permit the sharing of monopoly rents between would-be competitors without any assurance that the underlying patent is valid.” The Circuit noted that the presumption of validity, a tinsel assumption in general, was undermined by the fact that most challenges of drug patents by generic manufacturers that went to trial succeeded in invalidating the patents.
The Court has not yet ruled on the pending petition for certiorari in K-Dur. However, the question presented by the FTC’s certiorari petition in Watson places the question squarely at issue:
Whether reverse-payment agreements are per se lawful unless the underlying patent litigation was a sham or the patent was obtained by fraud (as the court below held), or instead are presumptively anticompetitive and unlawful (as the Third Circuit has held).Howard Langer has specialized in complex commercial litigation, particularly antitrust law, since graduating the University of Pennsylvania Law School in 1977. He was lead counsel in In re Linerboard Antitrust Litigation, which resulted in the largest antitrust settlement ever in the Third Circuit and was lead counsel in Faloney v. Wachovia Bank, which recovered over $150 million on behalf of victims of telemarketing fraud. Howard is Professor of Law (Adjunct) at the University of Pennsylvania Law School where he teaches antitrust law. In 2009, Howard was a visiting fellow at the Centre for Competition Law and Policy at Oxford. He is the author of The Competition of Law of the United States.