Supreme Court to decide legality of reverse-payment settlements in Paragraph IV disputes

March 2013 | PROFESSIONAL INSIGHT | INTELLECTUAL PROPERTY

Financier Worldwide Magazine

The long simmering battle over the legality of so-called ‘reverse-payment’ settlements in pharmaceutical patent cases has reached the US Supreme Court. In general, settlements of patent litigation take a variety of forms, including licence or exclusion agreements, and can involve payments by either side. But controversy surrounds some settlements of pharmaceutical patent litigations relating to infringement of brand name medicines by generic competitors. Several US Circuit Courts of Appeal and the Federal Trade Commission (FTC) have disagreed on whether so-called ‘reverse-payment’ settlements – agreements on a future date of generic launch in exchange for payment to the generic company accused of infringement – have potential anti-competitive effects. This article explores the recent case law leading up to the Supreme Court’s grant of certiorari in Federal Trade Commission v. Watson Pharmaceuticals, Inc.

The wars between brand name and generic pharmaceutical companies over patented products emerge from the framework of the Drug Price Competition and Patent Term Restoration Act of 1984 (the Hatch-Waxman Act). The Act allows a generic company to file an Abbreviated New Drug Application (ANDA) for a generic version of a branded drug, in which the generic company can rely on the brand company’s clinical studies of efficacy and safety and obtain FDA approval with only limited testing relating to the availability of the active ingredient at the site of action (‘bioequivalence’). (21 U.S.C. § 355(j)(2)(A)(iv)). If the branded product is covered by a patent, the generic company must choose whether to wait until patent expiration before launching its generic version or challenge the patent by certifying that the patent “is invalid or will not be infringed by the manufacture, use, or sale of the new drug…” (Id. at § 355(j)(2)(A)(vii)(IV)). The patent owner then has 45 days to sue for patent infringement or the generic can enter the market upon approval by the FDA. (Id. at § 355(j)(5)(B)(iii)). The Act promotes generic competition by granting the first generic challenger a 180-day exclusivity period during which the FDA cannot approve another generic – a six month period in which the first generic typically will take over 80 percent of the brand product’s sales. (See id. at § 355(j)(5)(B)(iv)).

Aside from legal fees, the ANDA filer has little to lose in Hatch-Waxman litigation. No actual damages for infringement can be awarded and such cases generally are not subject to a charge of wilful infringe-ment. (See In re Tamoxifen Antitrust Litig., 466 F.3d 187, 206-07 (2d Cir. 2006); Glaxo Group Ltd. v. Apotex, Inc., 376 F.3d 1339, 1351 (Fed. Cir. 2004)). Conversely, the patent holder faces the risk that it will lose its patent protection and a large portion of its market share. (In re Tamoxifen, 466 F.3d at 207-09). Under certain circumstances, it can make business sense for the brand manufacturer to make some payment to the generic in connection with a settlement that permits a specific generic entry date, typically in advance of the patent expiration, but later than could have been realised if the patent challenge had been successful. (Id.).

For over a decade, the FTC has worked to deter these reverse-payment settlements. Although the FTC takes the position that most any reverse payment settlement is anticompetitive, not all Circuit Courts have agreed. Recently, the Eleventh Circuit Court of Appeals found against the FTC and held that the reverse-payment settlement of a patent dispute involving the formulation for the brand-name testosterone product AndroGel® was lawful because the agreement did not exceed the exclusionary scope of the patent and there was no evidence of a sham litigation or fraud on the patent office in obtaining the patent. (Federal Trade Commission v. Watson Pharms., Inc., 677 F.3d 1298, 1312-13 (11th Cir. 2012)). The court rejected the FTC’s proposed rule that a settlement is unlawful if, as of the time of the settlement, the patent holder was unlikely to prevail in the underlying infringement action. (Id. at 1312-14 (noting the heavy burden this would place on the parties and the court reviewing the settlement)). The court’s decision was based largely on its own precedent and mirrored decisions of the Second Circuit and the Federal Circuit. (See Ark. Carpenters Health and Welfare Fund v. Bayer AG, 604 F.3d 98 (2d Cir. 2010); In re Ciprofloxacin Antitrust Litig., 544 F.3d 1323 (Fed. Cir. 2008); In re Tamoxifen Citrate Antitrust Litig., 466 F.3d 187 (2d Cir. 2006); Schering-Plough Corp. v. FTC, 402 F.3d 1056 (11th Cir. 2005); Valley Drug Co. v. Geneva Pharms, Inc., 344 F.3d 1294 (11th Cir. 2003)).

Conversely, the Third Circuit agreed with the FTC in In re K-Dur Antitrust Litig., and found that agreements involving consideration to a generic challenger are presumptively anticompetitive and unlawful. (In re K-Dur Antitrust Litig., 686 F.3d 197 (3d Cir. 2012)). The Third Circuit rejected the ‘scope-of-the-patent’ test on the grounds that it ignored the issues being litigated in the underlying patent case and presumed that the patent holder would have prevailed. (Id. at 214-215 (noting that a 2002 study of paragraph IV challenges found that the generic manufacturer prevailed 73 percent of the time)). Instead, the Third Circuit adopted the ‘quick-look’ rule of reason standard, directing the fact finder to treat any payment from a patent holder to a generic manufacturer in exchange for delayed market entry as prima facieevidence of an unreasonable restraint on trade, which can be rebutted by showing that the payment: (i) was for a purpose other than delay, such as back-up manufacturing; or (ii) offered a pro-competitive benefit that could not be otherwise achieved, such as a reasonable payment to spur the business of a struggling generic manufacturer. (Id. at 218).

Petitions for certiorari were filed in both the Watson and the K-Dur cases, with the Supreme Court accepting Watson and with no word on whether the Court will also hear the K-Dur case. Several amicus briefs in support of the FTC have been filed in the Watson case, including briefs for pharmaceutical manufacturer Apotex, Inc., 118 Law, Economics, and Business Professors of the American Antitrust Institute, Representative Henry A. Waxman, and a number of states.

In Watson, the FTC urges the Supreme Court to adopt the ‘quick look’ rule of reason approach. (Brief for the Petitioner, FTC v. Watson Pharms., Inc., Docket No. 12-416, filed Jan. 22, 2013, 15-16, 33). The Commission argues that any settlement involving reverse-payment is inherently anticompetitive because it dissuades the generic manufacturer from negotiating for the earliest possible entry date and “allows the brand-name manufacturer to co-opt its rival by sharing the monopoly profits that result from an artificially prolonged period of market exclusivity”. (Id. at 16). The FTC maintains that a presumption of illegality can be rebutted on evidence that the payment was for unrelated property or services or does not exceed the branded manufacturer’s avoided litigation costs. (Id. at 17, 37-38).

The effects of the Supreme Court’s decision on this issue potentially may be far-reaching – the FTC identified 40 settlements last year as potentially anti-competitive. (See Overview of Agreements Filed in FY 2012 (Oct. 2012)). Meanwhile, litigants continue to try to construct settlements that will pass scrutiny under current inconsistent legal standards. A definitive ruling from the Supreme Court would provide a measure of certainty to litigants seeking to resolve pharmaceutical patent infringement litigation.

Lisa B. Pensabene is a partner and Lisa Butler is an associate at Fitzpatrick, Cella, Harper & Scinto. Ms Pensabene can be contacted on +1 (212) 218 2255 or by email: lpensabene@fchs.com. Ms Butler can be contacted on +1 (212) 218 2505 or by email: lbutler@fchs.com.

Lisa B. Pensabene and Lisa Butler

Fitzpatrick, Cella, Harper & Scinto