The 'pay for delay' debate

On June 23, the chairman of the U.S. Federal Trade Commission, Jon Leibowitz, delivered a speech that urged Congress to pass controversial legislation amending the U.S. antitrust laws to prohibit "reverse payment" or "pay for delay" patent settlements between branded and generic pharmaceuticals companies. Such settlements, involving payments by branded firms to their generic rivals that potentially slow the introduction of generic versions of branded drugs, have been the subject of several FTC enforcement actions in recent years.

Leibowitz's comments and the pending legislation are controversial because, among other things, most federal courts -- including the Federal Circuit, the 2nd Circuit and the 11th Circuit -- that have examined reverse-payment settlements, have held that such agreements do not violate U.S. antitrust laws when (i) the agreement does not restrict competition beyond the "exclusionary zone" of the relevant patent and (ii) there is no evidence that the settled infringement litigation was a "sham" or that the patentee committed fraud on the Patent and Trademark Office. The Supreme Court underscored this in late June, when it refused to hear an appeal from a February 2009 Federal Circuit Court of Appeals decision upholding such an agreement.

In 1984, Congress passed the Hatch-Waxman Amendments to the Food, Drug and Cosmetic Act. Among other things, the Hatch-Waxman Act governs regulatory approval and market entry for both branded and generic pharmaceuticals. The Hatch-Waxman Act was designed to balance two policy objectives: (i) encourage brand-name pharmaceuticals companies to make the investments necessary to introduce new drugs; and (ii) enable generic competitors to bring cheaper copies of those drugs to market faster.

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The Hatch-Waxman Act created a cumbersome procedure to manage New Drug Applications of branded pharmaceuticals companies and the corresponding Abbreviated New Drug Applications, or Anda, of their generic competitors. When a generic pharmaceuticals company submits an Anda for a generic version of a branded drug that still is patent protected, it must certify: (i) the required patent information has not been filed by the branded pharmaceuticals company; (ii) the relevant patent(s) already has expired; (iii) the patent(s) has not yet expired, but will do so prior to Food and Drug Administration approval of the Anda; or (iv) the patent(s) protecting the branded drug is invalid or will not be infringed. In order to encourage generic firms to challenge suspect patents, the Hatch-Waxman Act awards 180 days of generic exclusivity to the generic company that first certifies a branded pharmaceuticals company's patent(s) is invalid or will not be infringed by a generic.

Once a generic company certifies that a branded firm's patent(s) is invalid or will not be infringed by the generic product, it must notify the branded pharmaceuticals company, which then has 45 days to initiate a patent infringement lawsuit against the generic. If the branded company subsequently files a patent infringement action, a 30-month stay is triggered automatically, preventing the FDA from approving a generic company's Anda until expiration of the 30-month stay or final resolution of the patent litigation.

Although not anticipated or provided for by the Hatch-Waxman Act, pharmaceuticals companies involved in the resulting patent infringement suits have increasingly resolved their disputes by entering reverse-payment settlements that provide for a payment from the branded pharmaceuticals company to the generic firm and a specific date in the future prior to the scheduled expiration of the branded firm's patent(s) upon which the generic firm can introduce a generic version of the branded product.

Since 2000, the FTC has challenged several reverse-payment settlements between branded and generic pharmaceuticals firms without much success. In the first two FTC matters, In re Abbott Labs and In re Hoechst Marion Roussel Inc., the pharmaceuticals firms agreed to enter consent orders with the FTC rather than litigate the legality of their settlement agreements. In 2001, the FTC challenged two Schering-Plough Corp. reverse-payment settlements. In its subsequent administrative decision, the FTC held that Schering-Plough's settlement agreements violated the antitrust laws. In 2005, however, the 11th Circuit Court of Appeals overturned the FTC's Schering-Plough decision. One year later, the FTC's policy defeat was reinforced by the 2nd Circuit Court of Appeals, which upheld the validity of a similar reverse-payment settlement in the Tamoxifen private litigation.

Since the Supreme Court declined to hear appeals in both Schering-Plough and Tamoxifen, the FTC has pursued a two-pronged strategy: (i) bringing enforcement actions against reverse settlements in federal districts outside of the 2nd, 11th and Federal Circuit Courts of Appeal in hopes of developing more favorable case law in other circuits and ultimately provoking a circuit split that could draw Supreme Court involvement in the issue; and (ii) openly endorsing legislation that would make reverse-payment settlements in the pharmaceuticals industry presumptively unlawful.

In the past 18 months, the FTC has brought two new challenges against reverse-patent settlements involving Cephalon Inc. in the U.S. District Court for the District of Columbia and Solvay SA in the U.S. District Court for the Central District of California. By bringing these actions in the District of Columbia and California, the FTC apparently hopes to evade the adverse precedent of the 2nd, 11th, and Federal Circuit Courts of Appeal. The FTC's choice of forum for the Cephalon and Solvay cases also are consistent with then-Commissioner Leibowitz's 2007 assertion that "[i]t's public knowledge that we're looking to bring a case that will create a clear split in the circuits." The Cephalon and Solvay cases still are pending, but the Solvay case has been transferred from California to the Northern District of Georgia, which to the dismay of the FTC is located in the 11th Circuit.

When the FTC issued its complaint against Cephalon in February 2008, then-Commissioner Leibowitz stated, "Although I am confident the Commission will win this case against Cephalon, it will likely take years, as most antitrust cases do. In the meantime, Congress should pass the bipartisan legislation -- now moving through both Houses -- that would ban these pay-for-delay deals completely (while still allowing legitimate settlements)." In a speech given on June 23, Leibowitz publicly renewed the call for legislation and reported that "earlier this month, in a critical vote, a House Energy and Commerce subcommittee by a vote of 16 to 10 approved [H.R. 1706] that would establish a clear, bright-line standard to prohibit pay-for-delay patent settlements." Leibowitz also optimistically noted that "[t]he Senate Judiciary Committee is poised to report out similar legislation [S. 369]."

The consensus -- and arguably unanimous -- view among the federal circuit courts that have decided cases involving reverse-payment settlements in the pharmaceuticals industry is that they are not presumptively illegal and in most circumstances have not been shown to harm competition. In his speech, Leibowitz asserted that "several circuit courts have mistakenly blessed these anticompetitive settlements." However, Leibowitz -- or anyone else from the FTC -- has not explained why the FTC's inability to persuade a federal court judge that reverse-payment settlements are anticompetitive necessitates an amendment to the antitrust laws rather than a re-evaluation of the merits by the FTC or, at a minimum, a reconsideration of the arguments and evidence presented by the FTC in support of its position.

Thomas Ensign is counsel in the antitrust, competition and trade group in the Washington office of Freshfields Bruckhaus Deringer LLP.

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