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Pharma Reverse Patent Payments Are Not An Antitrust Violation


Written by Gene Quinn
President & Founder of IPWatchdog, Inc.
Patent Attorney, Reg. No. 44,294
Zies, Widerman & Malek
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Posted: April 29, 2010 @ 4:41 pm
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Earlier today, in In re Ciprofloxacin Hydrochloride Antitrust Litigation, the United States Court of Appeals for the Second Circuit issued a ruling addressing whether so-called reverse payments, payments made under a negotiated settlement by a pharmaceutical patent owner to a would-be generic entrant in exchange for not entering the market, are a violation of U.S. Antitrust Law.  The appeal came from a judgment of the United States District Court for the Eastern District of New York (Trager, J.) granting summary judgment for defendants, manufacturers of the antibiotic ciprofloxacin hydrochloride (“Cipro”) or generic bioequivalents of Cipro.  In a per curiam decision the Second Circuit panel (Judges Newman, Pooler and Parker) affirmed, determining in accordance with Second Circuit precedent (see In re Tamoxifen Citrate Antitrust Litig.) that reverse payments stemming from a patent settlement do not violate U.S. Antitrust Laws.

The plaintiffs had argued that defendants had in fact violated Section 1 of the Sherman Act when they settled their dispute concerning the validity of Bayer’s Cipro patent by agreeing to a reverse exclusionary payment settlement.  Bayer agreed to pay the generic challengers, and in exchange the generic firms conceded the validity of the Cipro patent.  The Second Circuit panel affirmed the granting of summary judgment, finding themselves confined by the previous Second Circuit ruling in Tamoxifen.  The panel did, however, make the extraordinary invitation to petition the Second Circuit for rehearing in banc, citing the exceptional importance of the antitrust implications, the fact that the primary authors of the Hatch-Waxman Act have stated reverse payments were never intended under the legislation and the fact that the Second Circuit in Tamoxifen simply got it wrong when they said that subsequent generic entrants could potentially obtain a 180 exclusive period even after the first would-be generic entrant had settled.

This litigation stems from the fact that Bayer is the owner of the patent relating to the active ingredient in Cipro, is the most prescribed antibiotic in the world.   The Cipro patent, U.S. Patent No. 4,670,444, was issued on June 2, 1987 and was scheduled to expire on December 9, 2003.   In 1991, Barr Laboratories sought to market a generic version of Cipro pursuant to the expedited FDA approval process established by the Drug Price Competition and Patent Term Restoration Act of 1984, which is commonly known as the “Hatch-Waxman Act.”  Under the Hatch-Waxman Act, a pharmaceutical company can seek approval to market generic versions of an approved branded drug without having to re-establish the drug’s safety and effectiveness by filing an Abbreviated New Drug Application (“ANDA”). Whenever a generic manufacturer
seeks to enter the market before the expiration of the branded firm’s patent, it must file a pre-expiration challenge, which is commonly referred to as a “paragraph IV certification.” This certification requires the generic firm to demonstrate the bioequivalence of its proposed version of the drug and also requires it to state the generic drug will not infringe the underlying patent because the relevant patent claims are invalid or there would not be infringement.   A paragraph IV certification is interpreted under Hatch-Waxman as an act of infringement, thereby allowing the patent owner the ability to sue for patent infringement immediately and solely based on the filing of a paragraph IV certification.  If the patent owner intends to bring a patent infringement lawsuit as a result of a paragraph IV certification it must be brought within 45 days of receiving notice.  If such a lawsuit is brought a stay is immediately placed on the pending ANDA.

Under Hatch-Waxman, generic manufacturer are encouraged file a paragraph IV certification and attempt to enter the market.  The carrot held out to generic manufacturers is significant — the first generic manufacturer to file a paragraph IV certification receives a 180-day exclusive right to market its generic version of the drug should it successfully prevail.  The catch is that only the first filed ANDA with a paragraph IV certification is eligible for the 180-day exclusivity period.  Even if the first filer loses, withdraws, or settles its challenge, subsequent filers do not become eligible for the exclusivity period.

The purpose behind the 180 exclusivity period was to encourage generic manufacturers to challenge patents and, if successful, enjoy a 180-day exclusive period in which they could sell the generic at super competitive prices.  The amount of money that can be made in such an exclusive market is significant even though it lasts only 180 days. At the conclusion of the 180 days the generic drug market would open up for all generic manufacturers, thereby allowing for generics to come to market more quickly than would otherwise be possible.  This purpose, however, is significantly compromised if pharmaceutical patent owners can simply settle the case and pay off the first generic manufacturer, thereby effectively taking away the incentive for other generics to challenge the patent and locking up the market through the effective life of the patent.

This Antitrust challenge was brought in 2000 by direct and indirect purchasers, who collectively filed over thirty antitrust lawsuits against  Bayer under federal and state law.  These cases were consolidated by the Multi-District Litigation Panel in the Eastern District of New York.  The plaintiffs alleged that defendants’ settlement exceeded the scope of Bayer’s patent rights because Bayer effectively paid its potential competitors hundreds of millions of dollars not to challenge its patent.   Plaintiffs also allege that the agreements were unlawful because Barr was permitted to reclaim the 180-day market exclusivity period if a subsequent challenger was successful in having the patent invalidated, and because the generic
manufacturers agreed not to file any paragraph IV certifications for products that relate to Cipro.

The question as articulated by the Second Circuit panel was whether patent settlements in which the generic firm agrees to delay entry into the market in exchange for payment fall within the scope of the patent holder’s property rights, or whether such settlements are properly characterized as illegal market-sharing agreements.  The Federal Trade Commission (“FTC”), the U.S. antitrust enforcement agency charged with supervising the pharmaceutical industry, had long insisted that reverse exclusionary payment settlements violate antitrust law and has challenged numerous agreements as unreasonable restraints of trade.   Over time this position has moderated and now the U.S. government takes the position that reverse exclusionary payment settlements may violate antitrust laws.

Most courts, however, including the Second Circuit in Tamoxifen, have held that the right to enter into reverse exclusionary payment agreements fall within the terms of the exclusionary grant conferred by the branded manufacturer’s patent.  The Tamoxifen court ruled that such a settlement agreement does not exceed the scope of the patent where (1) there was no restriction on marketing non-infringing products; (2) a generic version of the branded drug would necessarily infringe the branded firm’s patent; and (3) the agreement did not bar other generic manufacturers from challenging the patent.  This being the case, this panel of the Second Circuit was bound to find for the defendants and rule that the reverse payments to settle the litigation were not an Antitrust violation.  I do, however, think it is fair to say that the panel seemed to almost apologize for having to reach this decision and likely would have reached a different decision had the matter been a case of first impression in the Second Circuit.  Nevertheless, the panel should be commended for doing the judicially appropriate thing and follow precedent.

The panel that decided this case did, however, articulate several reasons why this case might be appropriate for reexamination by the entire Second Circuit.  These were:

  1. The United States has itself urged us to repudiate Tamoxifen, arguing that Tamoxifen adopted an improper standard that fails to subject reverse exclusionary payment settlements to appropriate antitrust scrutiny.
  2. There is evidence that the practice of entering into reverse exclusionary payment settlements has increased since Tamoxifen was decided.
  3. Senator Orrin Hatch (R-UT) and Congressman Waxman (D-CA), principal drafters of the Hatch-Waxman Act, have criticized the reverse payments settlement practice.
  4. Tamoxifen relied on an unambiguous mischaracterization of the Hatch-Waxman Act.  Tamoxifen was based in no small part on the panel majority’s belief that reverse exclusionary settlements open the relevant patent to immediate challenge by other potential generic manufacturers, which is simply not correct.

I personally think it is extremely likely that we have not heard the last of this case.  Whether the entire Second Circuit decides to hear this case or not, the issues presented here have US Supreme Court written all over them.  The Supreme Court loves to take issues of social importance, and has historically not shied away from Antitrust cases, perhaps even seeking to take them when the underlying market is of sufficient national importance.  Add the fact that there is a patent angle here and the prospects that a ruling could chip away at the exclusive rights granted to patentees and I think it is all but certain that there will be 4 judges on the Supreme Court enticed enough to want to take a look at the case.

Insofar as the merits, whether this panel of the Second Circuit would have done things differently if they could, the reality is Hatch-Waxman says what it says.  There is simply no justified reason for the U.S. government to grant rights and then become offended when those rights are exercised.  Patents give exclusive rights, which means the owner of those rights can exclude others.  Hatch-Waxman by its express terms allows only the first generic manufacturer to challenge a patent with a paragraph IV certification in an ANDA to enjoy the 180-day exclusivity.  So don’t get made at patent owners when the seek to enforce the rights granted to them.  You simply cannot say that the Antitrust Laws are offended when rights granted are exploited as specifically allowed by other statutes.

If the gaming of the Hatch-Waxman Act is legendary.  This is but one place where there is gaming that was likely never envisioned and likely never intended.  But that means full blame rests squarely with Congress.  Hatch-Waxman has been the law of the land for 26 years.  During that time if Congress didn’t like what was happening they could have changed it.  The fact is that it hasn’t been changed.  If Congress doesn’t like what is going on then allow for subsequent generic ANDA filers who make a paragraph IV certification to enjoy the 180-day exclusivity.

For more information about Hatch-Waxman see:

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Posted in: Antitrust, Biotechnology, Gene Quinn, IP News, IPWatchdog.com Articles, Patents, Pharmaceutical

About the Author

is a Patent Attorney and the founder of the popular blog IPWatchdog.com, which has for three of the last four years (i.e., 2010, 2012 and 2103) been recognized as the top intellectual property blog by the American Bar Association. He is also a principal lecturer in the PLI Patent Bar Review Course. As an electrical engineer with a computer engineering focus his specialty is electronic and computer devices, Internet applications, software and business methods.

 

11 comments
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  1. “Whether the entire Second Circuit decides to hear this case or not, the issues presented here have US Supreme Court written all over them.”

    Gene,

    Very likely true. Only the 6th Circuit in the Cardizem Litigation ruled that reverse payments were illegal. But the 11th, Federal Circuit and 2nd Circuit have gone the other way.

    The FTC has taken the view that reverse payments are per se illegal. But Kevin Noonan on Patent Docs did a very nice series analyzing all of the reverse payment cases, and explaining why a per se rule isn’t necessarily appropriate.

    You’re also correct about the inanity of the provisions Hatch-Waxman. Another instance where the “multi-headed hydra” (that’s what I call Hatch-Waxman) strikes again. Every time Congress cuts off one head, three spring up in its place. A really poorly drafted law.

  2. You’ve cited the Hatch-Waxman Act incorrectly. You mean Paragraph IV, not Paragraph VI. And the Act does not “encourage” generics to file Paragraph IV certifications. If the generic finds that their drug does not enfringe on the name brand, then they can file a paragraph IV certification. In that context, your analysis at the end of your piece makes no sense. In the future, I suggest you learn what the law is before you choose sides.

  3. TC-

    You are correct with respect to my transposing IV to VI. It should be paragraph IV, and I will make that change.

    You are, however, incorrect with respect to there not being an encouragement to file paragraph IV certifications. There most certain is an encouragement, and that encouragement is the 180-day exclusivity period. The encouragement is well known, understood, and explained in this case and in the voluminous literature that describes Hatch-Waxman. The fact that you are unfamiliar with the fact that there is great incentive for generic companies to file a paragraph IV certification shows you know very little about Hatch-Waxman, have not read the cases, have not looked at the Legislative History and are really rather clueless. So I suggest that YOU in the future learn more before you demonstrate to everyone that you don’t know what you are talking about.

    Cheers.

    -Gene

  4. Gene,

    “There most certain [sic] is an encouragement, and that encouragement is the 180-day exclusivity period.”

    Do you mean to tell me that in all of your very scholarly studying of this issue, you have missed the fact that if a brandname pharmaceutical sues the generic for patent infringement, then the generic has to wait 30 months before it can go to market? This give the patentholder an incentive to file suit, regardless of the merits of its case.

    And, again, if you take the time to actually read paragraph iv, instead of transposing it throughout your analysis, you would find that the generic is certifying that there is no infringement on the brandname’s patent. Often the reason there is no infringement is that the generic has been able to find that the brand has cheated in some way in obtaining the patent.

    The reverse payments you so richly support allow the brand to “bribe” the generic into remaining silent about the cheating. This allows both brand and generic to profit, at the expense of our own health care costs. But it sounds like that makes you happy.

  5. TC-

    If you want to play the “sic” game then let’s go.

    You said used the term “efringe” when you clearly meant “infringe.” See, two can play this game.

    As for what I said, it is 100% accurate. There is a tremendous incentive for generics to file a paragraph IV, just like there is a tremendous incentive for brand name patent owners to file an infringement action. This article, however, does not focus on the infringement action by the patent owner, but rather focuses on the paragraph IV certification. You obviously don’t like the fact that there is an incentive for generics to file a paragraph IV, or perhaps you just don’t understand.

    I don’t necessarily like this, but it is how the law is written. So get off your high horse and stop putting words in my mouth.

    -Gene

    Sent from iPhone

  6. Gene,

    Here is how you claim the law is written: “There is simply no justified reason for the U.S. government to grant rights and then become offended when those rights are exercised. Patents give exclusive rights, which means the owner of those rights can exclude others. ”

    Are you really not able to understand that a Paragraph iv certification says that the generic is not infringing on the patent? You say your article does not focus on the infringement action. This, at least, is perfectly true – you ignore it, and you have to. Because if you considered it, you’d realize that it totally undermines your argument.

  7. TC-

    Now I understand what your problem is. You don’t understand the article at all and are focusing on one aspect of it and taking it out of context. You are also only providing a part of the quote, so allow me to provide the WHOLE quote for you…

    “There is simply no justified reason for the U.S. government to grant rights and then become offended when those rights are exercised. Patents give exclusive rights, which means the owner of those rights can exclude others. Hatch-Waxman by its express terms allows only the first generic manufacturer to challenge a patent with a paragraph IV certification in an ANDA to enjoy the 180-day exclusivity. So don’t get made at patent owners when the seek to enforce the rights granted to them. You simply cannot say that the Antitrust Laws are offended when rights granted are exploited as specifically allowed by other statutes.”

    The statement you quote out of context relates to the fact that it is disingenuous for anyone, you, the Second Circuit, US Senators or whoever to get upset that parties have a right to settle a litigation. If a generic manufacturer makes a paragraph IV certification then the patent owner can file a lawsuit against them. The lawsuit can be settled and money can exchange hands. All of that is authorized by Hatch-Waxman. The fact that the second challenger is not entitled to a 180-day period of exclusivity is also pursuant to the specific dictates of Hatch-Waxman. So when a patent owner is granted a patent and Hatch-Waxman sets up a regulatory system, no one should be upset when the patent owner avails themselves of all rights provided by law. Similarly, no one should be upset when the generic manufacturer avails themselves of the rights provided by law, which are the right to file a paragraph IV certification and the right to settle a lawsuit.

    So, whether you like it or not, there is simply no justified reason for the U.S. government to grant rights (whether patent rights or rights under Hatch-Waxman) and then become offended when those rights are exercised. Patents give exclusive rights, which means the owner of those rights can exclude others. Hatch-Waxman by its express terms allows only the first generic manufacturer to challenge a patent with a paragraph IV certification in an ANDA to enjoy the 180-day exclusivity. So don’t get made at patent owners when the seek to enforce the rights granted to them. You simply cannot say that the Antitrust Laws are offended when rights granted are exploited as specifically allowed by other statutes.

    Please try and keep up, and please try and be at least somewhat intellectually honest.

    -Gene

  8. Bilski not out again. It could be awhile before SCOTUS issues opinions again (I think 2 weeks).

  9. Just-

    Any reason for the belief that it will be another 2 weeks before any other opinions from the Supremes?

    I would be just as happy though personally. I am in Chicago today at the BIO International Convention and then next week will be in New York City teaching the PLI patent bar review course.

    -Gene

  10. I’m following the lead of scotusblog.com

    Apparently, there are certain days that SCOTUS typically issues opinions/orders, and May 17th will be the next such day.

  11. JV-

    So the moon and the stars may line up appropriately on the 17th. Interesting. Good stuff. That would be perfect for me. I will be off the road and back in my Northern VA office that week. I will keep my fingers crossed it is the 17th, or at least some time that week.

    Thanks for the tip.

    -Gene