January 31, 2011

"Pay-for-Delay" Settlements: Antitrust Violation or Proper Exercise of Pharmaceutical Patent Rights?

How the judiciary and Congress are dealing with the increased use of reverse payment settlements in the pharmaceutical industry.

In recent years, there has been a surge of agreements between pharmaceutical patent holders and generic drug manufacturers in which the market entry of competing generic drugs is delayed by agreement, effectively extending the patent holder's market exclusivity and profit. Known as "reverse payment settlements" or "pay-for-delay" settlements, these arrangements are characterized by payments from pharmaceutical patent holders to generic manufacturers in return for settling challenges to the patent's validity, and for delaying the introduction of generics into the market. As these settlements have become increasingly popular among pharmaceutical companies, they have also become increasingly controversial. The issue is whether reverse payment settlements are illegal restraints of trade under the Sherman Antitrust Act.

The Federal Trade Commission (FTC) has taken a strong stance in both courts and in Congress that reverse payment settlements are per se illegal. As FTC Chairman Jon Leibowitz has written, "One of the Commission's top competition priorities is stopping 'pay-for-delay' agreements between brand-name pharmaceutical companies and generic competitors that delay the entry of lower priced generic drugs into the market." Because of what the FTC calls "the inherently anticompetitive nature of these deals and the enormous consumer harm caused by pay-for-delay," the FTC continues to challenge these arrangements in court and by initiating investigations.

The FTC's opposition to reverse payment settlements has had limited success in the courts. The Circuit Courts of Appeals have split over the antitrust implications of reverse payment settlements. Most courts that have ruled on the issue have held that these settlements are a valid by-product of a patent holder's exclusionary rights, while only the Sixth Circuit has adopted the FTC's per se argument. Ultimately, however, the issue may be resolved not in the courts, but by Congress, which is currently considering legislation that would end the practice of reverse payment settlements.

The resolution of this question involves billions of dollars, and will have far-reaching consequences for drug manufacturers and the public. According to the FTC, "[d]elays in generic competition harm all those who pay for prescription drugs: individual consumers, the federal government (which purchases roughly one-third of all prescriptions), state governments struggling with the cost of providing access to health care, and American businesses striving to compete in a global economy." Reverse payment settlements currently protect at least $20 billion in sales of branded drugs from generic competition, and the FTC estimates that reverse payment settlement cost consumers $3.5 billion a year--or $35 billion over the next 10 years.

This article examines how reverse payment settlements were born out of the Hatch-Waxman framework, and explores how the judiciary and Congress are dealing with the increased use of reverse payment settlements in the pharmaceutical industry.

Hatch-Waxman Statutory Framework

In the pharmaceutical industry, reverse payment settlements are a common way of resolving patent infringement suits filed under the Hatch-Waxman Act (Hatch-Waxman). Hatch-Waxman, which was designed to promote the availability of generic drugs in the pharmaceutical market while simultaneously advancing the financial incentive to research and develop new pharmaceuticals, allows generic manufacturers to achieve marketing approval from the U.S. Food and Drug Administration (FDA) in a cost- and time-efficient manner. Rather than performing independent human trials on pharmaceuticals, Hatch-Waxman allows generic manufacturers to submit bio-equivalence studies to achieve FDA approval.

Hatch-Waxman permits a generic pharmaceutical manufacturer to file an Abbreviated New Drug Application (ANDA) with the FDA prior to the expiration of a brand-name manufacturer's patent without infringing the brand-name manufacturer's patent. Prior to the enactment of Hatch-Waxman, any preparatory acts to file an ANDA constituted infringement. Thus, work toward filing an ANDA in many instances could not begin in a meaningful way until after expiration of the applicable patents. In effect, this rule granted the patentee an extension on its patent term to include the period of time after expiration that the ANDA applicant required to run bioequivalence studies and file its ANDA.

A brand-name pharmaceutical manufacturer seeking approval from the FDA must file a New Drug Application (NDA). The NDA details safety and efficacy studies conducted on the brand-name drug, the components of the drug, the methods used in the "manufacture, process and packaging of the drug," and any patents issued on the composition or methods of using the drug. The FDA publishes the patent information in the "Approved Drug Products with Therapeutic Equivalence Evaluations," also known as the "Orange Book."

When a generic pharmaceutical manufacturer wishes to enter into the market a generic version of a pharmaceutical already listed in the Orange Book, it may rely on the brand-name manufacturer's previous research and the FDA's determination concerning the brand-name pharmaceutical's safety. Instead of filing an NDA, the generic manufacturer may file an ANDA, typically a less costly way of entering the pharmaceutical market. An ANDA requires that a generic manufacturer demonstrate bioequivalence between its generic drug and the FDA-approved brand-name drug. Additionally, an ANDA filer must select one of the following certifications: (1) that the "patent information has not been filed" on the generic brand's equivalent (Paragraph I certification); (2) that a patent on the branded pharmaceutical has expired (Paragraph II certification); (3) that a brand-name patent exists, including "the date on which such patent will expire," with a promise not to market the generic drug until that date (Paragraph III certification); or (4) "that such patent is invalid or will not be infringed by the manufacture, use, or sale if the new drug for which the application is submitted." (Paragraph IV certification).

A Paragraph IV certification is deemed an act of infringement on the brand-name manufacturer's patent, and can be challenged by the brand-name manufacturer in court. Paragraph IV certification permits challenges to patents of questionable validity. To incentivize early challenges to such patents, the first generic pharmaceutical manufacturer to submit a Paragraph IV certification with regard to a particular ANDA obtains a 180-day exclusivity period during which no other ANDA filer may compete in the pharmaceutical market.

In practice, Hatch-Waxman has had the unintended effect of encouraging patent infringement suits and reverse payment settlements, especially with regard to first-filers. In order to protect the brand-name manufacturer's patent, the brand-name manufacturer and the first ANDA filer sometimes agree to a settlement that delays the entry of the generic drug into the market. Given the 180-day exclusivity period that (unless forfeited) prevents other ADNA filers from marketing their own generic versions of the patent-holder's brand-name drug, such a settlement can also effectively delay the market entry of any generic version of the drug.

Given the delayed entry generated by such settlements (and the harm to consumers by denying them earlier access to cheaper generic pharmaceuticals), the FTC has not looked fondly upon reverse payment settlements, particularly if a first-filer receives payments from the brand manufacturer. According to the FTC, these settlements are per se violations of Section 1 of the Sherman Antitrust Act. As discussed below, the FTC's position is currently supported only by the Sixth Circuit Court of Appeals. All other circuits that have weighed in on the issue, including the Federal Circuit, the Eleventh Circuit, and the Second Circuit, have upheld reverse payment settlements.

A Circuit Split Emerges

The increasing popularity of reverse payment settlements in recent years has given rise to a split among the United States Circuit Courts of Appeals on the question of whether and to what extent reverse payment settlements are lawful. Although it has had numerous opportunities (including a current pending petition for certiorari), the Supreme Court has yet to decide whether reverse payment settlements are enforceable, or if they violate the Sherman Antitrust Act.

The Sixth Circuit--Per Se Illegal Restraints

In In re Cardizem CD Antitrust Litig., 332 F.3d 896, 914-15 (6th Cir. 2003), the Sixth Circuit adopted the FTC's view and held that a reverse payment settlements are per se violations of section 1 of the Sherman Antitrust Act. Defendant Hoechst Marion Roussel (HMR), a brand-name manufacturer, produced Cardizem CD. Andrx was the first to file an ANDA with a Paragraph IV certification seeking approval to market a generic Cardizem product, entitling it to the 180-day exclusivity period once it received FDA approval. After HMR sued Andrx for patent infringement (and while the litigation was pending), HMR and Andrx entered into an agreement whereby HMR would make quarterly payments of $10 million to Andrx. In exchange, Andrx agreed to stay out of the market until either: (1) there was a final decision in the patent infringement case allowing Andrx to market the pharmaceutical; (2) HMR and Andrx entered into a license agreement; or (3) HMR entered into a license agreement with a third party. Andrx also agreed not to "relinquish or otherwise compromise" its 180-day exclusivity period.

The Sixth Circuit held that the agreement was "an illegal per se restraint on trade" under the Sherman Antitrust Act because it was "a horizontal agreement to eliminate competition." In finding the agreement per se illegal, the Sixth Circuit was particularly troubled by the fact that HMR's agreement with Andrx effectively used the 180-day exclusivity period to delay the entry of other generic competitors. In this regard, the court noted: "By delaying Andrx's entry into the market, the Agreement also delayed the entry of other generic competitors, who could not enter until the expiration of Andrx's 180-day period of marketing exclusivity, which Andrx had agreed not to relinquish or transfer."

As of the date of this writing, no other appellate court or district court has followed the Sixth Circuit in holding that reverse payment settlements are a per se illegal restraint on trade.

The Federal Circuit and the Eleventh Circuit

Three months after the Cardizem decision, the Eleventh Circuit reached a different conclusion in Valley Drug Co. v. Geneva Pharms., Inc., 344 F.3d 1294 (11th Cir. 2003). Unlike the Sixth Circuit, the Eleventh Circuit adopted an "exclusionary zone" test to evaluate the validity of reverse payment settlements. As applied to the facts before it, the court refused to invalidate a reverse payment settlement.

Valley Drug involved settlement agreements between Abbott Laboratories and two generic competitors, Geneva Pharmaceuticals and Zenith Goldine Pharmaceuticals. Geneva and Zenith both filed ANDAs challenging Abbott's patents relating to Hytrin, a brand-name hypertension drug. Abbott sued Geneva alleging patent infringement. Geneva admitted infringement but alleged that Abbott's patent was invalid. Zenith filed its own lawsuit against Abbott seeking to delist Abbott's patent from the Orange Book and requesting a declaratory judgment that its proposed generic drug did not infringe Abbott's patent. Abbott entered into reverse payment agreements with both Zenith and Geneva, paying each generic manufacturer to delay the release of its generic drug. The district court found the agreements constituted per se antitrust violations.

The Eleventh Circuit reversed, holding that the grant of patent rights necessarily encompasses the right to exclude generics from the market. The court reasoned that a threshold analysis of the exclusionary scope of the patent must precede any specific antitrust inquiry. If the terms of the agreements are found to have effects "beyond the exclusionary effects of [the] patent," they "may then be subject to traditional antitrust analysis to assess their probable anticompetitive effects in order to determine whether those provisions violate § 1 of the Sherman Act." The court held the Zenith and Geneva agreements to be valid because they were within the scope of Abbott's patent rights.

The Eleventh Circuit subsequently reaffirmed the reasoning set forth in Valley Drug in Schering-Plough Corp. v. Fed. Trade Comm'n, 402 F.3d 1056, 1065 (11th Cir. 2005) (holding that pay-for-delay agreements with the generic manufacturers fell well within the scope of the patent). The court emphasized the fact that the agreements permitted the generic manufacturers to enter the market before the expiration of the patent. The court further restated its view that "neither the rule of reason nor the per se analysis is appropriate" in the context of reverse payment settlements. Rather, the Eleventh Circuit clarified the standard adopted in Valley Drug, explaining that the proper analysis of antitrust liability requires an examination of: "(1) the scope of the exclusionary potential of the patent; (2) the extent to which the agreements exceed that scope; and (3) the resulting anticompetitive effects."

The Federal Circuit subsequently adopted the Eleventh Circuit's "exclusionary zone" test to evaluate reverse payment settlements. In re Ciprofloxacin Hydrochloride Antitrust Litig., 544 F. 3d 1323, 1341 (Fed. Cir. 2008). In Ciprofloxacin, Barr filed an ANDA seeking approval to market a generic version of Bayer's Cipro pharmaceutical. Bayer sued Barr for patent infringement. The parties entered into a settlement agreement whereby Barr agreed not to market its generic version of Cipro until after Bayer's patent expired. In exchange, Bayer agreed to make payments to Barr totaling almost $400 million. Indirect purchasers of Cipro and several advocacy groups challenged the settlement as a violation of antitrust laws. The district court granted summary judgment to defendants, holding that any anticompetitive effects "were within the exclusionary zone of the patent." The Federal Circuit affirmed, holding that the mere presence of a patent entitles the patent holder to purchase protection from generic competition, absent fraud or sham litigation.

The Second Circuit--A New Approach

The Second Circuit has also rejected the FTC's per se rule and held that reverse payment settlements do not violate antitrust laws where they fall within the exclusionary zone of the patent. In re Tamoxifen Citrate Antitrust Litig., 466 F.3d 187, 228 (2d Cir. 2006).

In Tamoxifen,Barr submitted an ANDA seeking approval to market a generic version of Zeneca's pharmaceutical. Zeneca filed suit for patent infringement, and the district court held Zeneca's patent to be invalid. Thereafter, Barr and Zeneca entered into a settlement agreement whereby Zeneca paid Barr $21 million and granted Barr a non-exclusive license to sell brand-name tamoxifen. As part of that settlement, the parties agreed to vacate the district court's judgment finding the patent invalid. Barr further agreed not to market a generic tamoxifen product until either Zeneca's patent expired or another party successfully challenged the Zeneca patent as invalid. Consumer groups filed lawsuits challenging the reverse payment settlement, in part because the settlement was alleged to violate the Sherman Antitrust Act by preventing competition by other generic manufacturers. The district court dismissed these claims, finding that although an agreement between a monopolist and a potential competitor ordinarily violates the Sherman Antitrust Act, such agreements are not necessarily unlawful when the monopolist is a patent holder because of the nature of the patent right.

The Second Circuit affirmed, agreeing with the Eleventh Circuit that simply because a brand-name pharmaceutical company pays a generic competitor to stay out of the market, there is no antitrust violation unless the exclusionary effects of the agreement exceeded the scope of the patent. Finding that the agreement did not exceed the scope of the patent, the Second Circuit opined that the antitrust plaintiff could only prevail by proving either fraud or that the underlying infringement lawsuit was a sham.

The Second Circuit reaffirmed the approach it took in Tamoxifen when it upheld a reverse payment settlement in Arkansas Carpenters Health and Welfare Fund v. Bayer, AG, 604 F.3d 98, 105-106 (2d Cir. 2010). In Arkansas Carpenters, Barr agreed to delay entry of its generic pharmaceutical into the market in exchange for payments amounting to $398.1 million. The Second Circuit held that it was bound by the Tamoxifen decision and thus the only potential basis for an antitrust violation would be if the settlement agreement "exceeded the scope of the [ ] patent."

In its decision, however, the Second Circuit identified several reasons for revisiting that precedent and invited plaintiffs to petition for rehearing en banc. Most notably, the court cited the Department of Justice's (DOJ) urging to repudiate Tamoxifen, and cited an FTC report that the practice of entering into reverse payment settlements has increased since the Tamoxifen decision. The DOJ and FTC filed amicus briefs recommending that the Second Circuit reconsider its decision.

On September 7, 2010, the Second Circuit denied the request for rehearing en banc. Circuit Judge Rosemary S. Pooler filed a vigorous dissent criticizing the Tamoxifen decision and reverse payment settlements in general. Judge Pooler noted that reverse payment settlements, "once unheard of, [have] become increasingly common. This Court has played a significant role in encouraging this unfortunate practice." Arkansas Carpenters Health & Welfare Fund v. Bayer, AG, Nos. 05-2851, 05-2852, 05-2863, 2010 U.S. App. LEXIS 18893, at *3 (2d Cir. Sept. 7, 2010). Judge Pooler noted that in the five years before Tamoxifen was decided, "there were no settlements involving exclusion payments, and even pharmaceutical industry representatives appear to have conceded the illegality of the practice . . ." However, "[i]n the four years since Tamoxifen, by contrast, the Federal Trade Commission has identified fifty-three pharmaceutical patent settlements involving exclusion payments." Judge Pooler stated that reverse payment settlements serve "no obvious redeeming social purpose" and opined that the Tamoxifen decision should be reconsidered:

The Tamoxifen majority recognized the "troubling dynamic" of permitting exclusion payments that "inevitably protect patent monopolies that are, perhaps, undeserved." Subsequent experience has shown that the majority was right to be "troubled."
. . . It will be up to the Supreme Court or Congress to resolve the conflict among the Courts of Appeals.

On December 7, 2010, a group of drug purchasers filed a petition for writ of certiorari in the Supreme Court in the Arkansas Carpenters case, arguing that reverse payment settlement agreements cost consumers and taxpayers billions of dollars each year. The petition echoed Judge Pooler's concern that reverse payment settlements have become an increasingly controversial practice, and urged the Supreme Court to side with the FTC and DOJ in rejecting these settlements. Attorneys general from 32 states have filed amicus briefs siding with the FTC and urging the Court to review the case.

It remains to be seen if the Supreme Court will capitalize on this opportunity to resolve the continuing controversy over the validity of reverse payment settlements. It may be, with the DOJ's new opposition, a growing circuit split, and a strong dissenting opinion from the Second Circuit, that pay-for-delay settlements will finally pique the Supreme Court's interest.

Pending Federal Legislation

At the same time as reverse payment settlements have been litigated in the courts, Congress has become increasingly focused on passing legislation to prohibit (or severely limit) the use of reverse payment settlements.

Federal legislation on reverse payment settlements has been pending in both the House and the Senate since 2009. In March 2009, the House introduced H.R. 1706 (which has since been tabled), proposing to amend the Federal Tort Claims Act by prohibiting an ANDA filer from receiving anything of value in exchange for an agreement with a brand-name manufacturer "not to research, develop, manufacture, market, or sell [the generic product] . . . for any period of time." A similar bill was introduced in the Senate in February 2009 (S. 369, entitled the "Preserve Access to Affordable Generics Act"), stating that "settlements which include a payment from a brand-name manufacturer to a generic manufacturer to delay entry by generic pharmaceuticals are anti-competitive and contrary to the interests of consumers," and therefore, the bill's intention was "to prohibit payments from brand-name to generic pharmaceutical manufacturers with the purpose to prevent or delay the entry of competition from generic pharmaceuticals."

The House thereafter adopted S. 369 as an amendment to the War Funding Bill in H.R. 4899, the Supplemental Appropriations Act of 2010. H.R. 4899 would allow the FTC to act on any settlement believed to be illegal. Proposed penalties under the amendment included forfeiture of up to three times the value received in the reserve payment settlement or the value reasonably attributable to violation of H.R. 4899. However, not all reverse payment settlements would be prohibited. For a settlement to be excluded from penalties, it must allow for at least one of the following: (1) the right of the generic manufacturer to market the generic pharmaceutical in the market; (2) payment to the generic manufacturer for litigation expenses that does not exceed $7,500,000; or (3) a covenant not to sue the generic pharmaceutical manufacturer for patent infringement.

H.R 4899 was cleared for White House approval on July 27, 2010, but not before the Senate stripped away the amendment on reverse payment settlements. Senate Majority Leader Harry Reid (D-NV) moved to adopt the House amendment, but the Senate disagreed by unanimous consent. The bill was returned to the House, and the House agreed to accept the Senate's earlier version of the bill.

It remains to be seen what will happen with the pending federal legislation on reverse payment settlements, but it is unlikely that this debate is over. This is particularly true given the president's past support of such legislation. Should such legislation be passed in the future, the FTC will be able to curtail the use of reverse payment settlements, essentially abrogating the federal court decisions discussed above.

Will the High Court Weigh In?

The United State Supreme Court has passed on a number of opportunities to resolve the circuit split over the validity of reverse payment settlements, suggesting that the most likely solution may come from Congress. However, the Supreme Court's unwillingness to weigh in on the issue in the past may have been influenced by the Bush administration's position on the issue--which has markedly shifted with the new Obama administration.

During his presidential campaign, Senator Barack Obama was especially critical of the Bush administration's record of enforcement against what he saw as anticompetitive conduct, and promised that his administration would focus on "reinvigorate[ing] antitrust enforcement," specifically focusing on competition in health care and pharmaceuticals. This position departed from the Bush administration's approach to reverse payment settlements. In the Schering-Plough case, the DOJ under Bush filed an amicus brief disagreeing with the FTC and encouraging the Supreme Court to deny review. Now, however, the DOJ has changed course to reflect the Obama administration's disfavor for reverse payment settlements. In the Arkansas Carpenters case, the DOJ accepted the Second Circuit's invitation to weigh in on the issue. In its amicus brief in the Second Circuit, the DOJ for the first time sided with the FTC and argued that reverse payment settlements should be treated as "presumptively unlawful" as antitrust violations. Should the Supreme Court grant certiorari in the Arkansas Carpenters case, it is reasonable to assume that the DOJ will weigh in again as an amicus--but this time, on the side of the FTC.


It is unclear whether reverse payment settlements will continue to be a viable means of resolving patent infringement lawsuits. If Congress continues to pursue federal legislation limiting the legitimacy of these agreements--or if the Supreme Court finally takes up the issue in Arkansas Carpenters--the landscape of reverse payment settlements may soon change. Both brand-name and generic pharmaceutical manufacturers should stay tuned.