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Agreements between competitors to stifle competition are per se illegal; yet increasingly, brand-name pharmaceutical companies have settled patent lawsuits against generic companies by paying them to defer market entry. At first blush, it would seem these “reverse-payment settlements” should lead to antitrust liability for the settling competitors; indeed, the Federal Trade Commission thinks so. But most federal appellate courts have upheld such agreements – provided certain requirements are satisfied.

In most lawsuits, plaintiffs do not pay defendants to settle. In the pharmaceutical industry, however, the dynamic is different thanks to the Hatch-Waxman Act, which encourages generic drug manufacturers to file Abbreviated New Drug Applications (ANDAs). The Act grants manufacturers of generics standing to mount validity and noninfringement challenges against patents for branded generic counterparts and gives the first generic filer a 180-day exclusivity period during which other ANDA applications on the same drug will not be granted. This process has little risk for the generic company – some litigation costs, but typically no exposure to damages because no sales have taken place yet; in contrast, the branded patent holder’s litigation risk is substantial: loss of its patent monopoly. This makes it financially rational for the branded manufacturer to strike a financial deal with the first-to-file generic, thus Waxman exclusivity period, staving off all generic entry for a time.

Consumers and government agencies challenging reverse-payment settlements had some early success in the Sixth Circuit. In re Cardizem held that a reverse-payment settlement delaying generic entry was a per se violation of the antitrust laws. In re Cardizem, 332 F.3d 896, 908-09 (6th Cir. 2003). In that case, the generic company agreed it would not market non-infringing versions of the generic and promised not to relinquish its 180-day exclusivity period, thereby helping prevent any other generic from entering the market.

But other circuits have subsequently rejected per se condemnation of these settlements. For example, in Valley Drug Co. v. Geneva Pharm., Inc., 344 F.3d 1294, 1312 (11th Cir. 2003), the Eleventh Circuit noted there was no evidence the patent litigation was a sham or the patent itself was invalid. Absent those elements, the court stressed, “there is a presumption that the patent is a valid one.” The Second Circuit adopted a similar approach in In re Tamoxifen Citrate, 466 F.3d 187, 206 (2d Cir. 2006), and has continued to apply that approach in In re Ciprofloxacin Hydrochloride, No. 05-cv-2851, 2010 WL 1710683 (2d Cir. Apr. 29, 2010). Interestingly, however, the In re Ciprofloxacin panel has invited the plaintiffs to file a petition for en banc review. Id.

Consolidating this trend, the Federal Circuit has rejected the per se approach and endorsed a rule-of-reason test for reverse payment settlements. See In re Ciprofloxacin Hydrochloride, 544 F.3d 1323, 1332 (Fed. Cir. 2008). The core issue for the Federal Circuit was whether there were any anticompetitive effects outside the patent’s exclusionary zone. The court also concurred with the Second and Eleventh Circuits that unless there is evidence of fraud before the PTO or sham litigation, the court need not consider patent validity as part of the antitrust analysis.

While these cases are probably not the last judicial word on the issue, they make clear that the focus for litigants considering a reverse-payment settlement is whether the settlement exceeds the scope of the patent right. The only circuit court opinion to uphold antitrust liability, In re Cardizem, involved a settlement with terms exceeding the scope of patent protection by including promises about non-infringing generic products.

Settling parties, therefore, should examine contemplated agreements carefully to make sure the scope of the underlying patent’s protection is not exceeded. In addition, including pro-competitive provisions in settlements may mitigate antitrust exposure because they are weighed against anticompetitive effects in a rule-of-reason analysis. For example, an agreement may permit the generic company to enter the

market before the patent expires. Similarly, pro-competitive effects may result if the settling generic forfeits all or part of its 180-day exclusivity period, allowing other generic companies to enter the market.

Unfortunately, the decision to participate in a reverse-payment settlement is complicated by a disagreement among the DOJ and FTC on the proper enforcement approach. Any such settlement must be filed with both agencies no later than ten days after execution for their review and possible challenge.

The DOJ believes the agreements should be analyzed under the rule-of-reason, with a presumption of illegality, placing the burden on the settling parties to show the agreement does not harm competition substantially. The FTC, by contrast, considers reverse-payment settlements per se unlawful and has called for a complete end to them. Notably, the FTC can reach beyond federal antitrust law (the Sherman Act), relying instead on the unfair competition prong of Section 5 of the FTC Act to challenge these arrangements. No court has yet ruled on the legality of reverse-payment settlements under Section 5 alone, but such a ruling could dictate whether reverse payments remain viable.

The legal landscape concerning reverse payment settlements remains uncertain and subject to sudden change. Parties considering reverse-payment settlements should remain alert to late-breaking developments and tread carefully. 

For more information, please contact Paolo Morante, Stuart E. Pollack and Jarod M. Bona.

An expanded version of this article appears in the June 2010 issue of BNA's Pharmaceutical Law & Industry Report. Please read it here.