One of the most debated issues in patent and antitrust law today involves pharmaceutical patent settlements. Brand-name drug manufacturers pay generic firms to settle patent litigation and delay entering the market. How should the antitrust laws respond?
Recent appellate courts have upheld the settlements with an analysis bordering on per se legality. The Second Circuit recently offered such analysis in upholding Bayer’s $398 million payment to Barr to delay entering the market with a generic version of antibiotic ciprofloxacin hydrochloride (Cipro). I (along with David Balto) recently filed an amicus brief on behalf of several consumer organizations recommending that the Supreme Court grant certiorari. I made three arguments for why the Court should take the case.
The first was to resuscitate the text and legislative history of the Hatch-Waxman Act, legislation Congress enacted in 1984 to address minimal generic entry and stifled brand innovation. Congress promoted generic competition through a process allowing generic firms to rely on the brand’s safety and effectiveness studies, a revitalized experimental use defense, and a 180-day period of marketing exclusivity for the first generic (known as a “Paragraph IV generic”) to certify that the brand firm’s patent was invalid or not infringed.
The drafters also increased incentives for brand-firm innovation through patent term extensions, an automatic 30-month stay of FDA approval, and market exclusivity periods such as a four-year period for a drug with a new active ingredient.
In the years since the passage of the Hatch-Waxman Act, the drafters of the legislation have expressed their disapproval of reverse-payment settlements (so called since they flow from patentee to infringer). Representative Waxman explained that such agreements “turn the . . . legislation on [its] head” and Senator Hatch made clear that “[w]e did not wish to encourage situations where payments were made to generic firms not to sell generic drugs.”
The second reason the Court should hear the case is to ensure the viability of the important antitrust case of Verizon v. Trinko, which articulated a framework governing the intersection of antitrust and regulation. Like the telecommunications and securities regimes that were the subject of earlier cases, the Hatch Waxman Act offers an exhaustive scheme that prescribes Congress’s desired balance between competition and innovation in the drug industry and that frees courts from the thorny task of reconciling the patent and antitrust laws.
It is not just the presence of the regulatory regime that matters, but also its effectiveness. In the Hatch-Waxman setting, generic firms have recently been ineffective in promoting competition through patent challenges. Not only have generics agreed not to challenge patents and not to enter markets in exchange for payment, but they also have often received more through settlement than they would have by entering the market. The 180-day bounty, in particular, has been twisted from an incentive for the generic to challenge patents to a barrier to entry that significantly delays other generics’ entrance into the market.
These concerns are heightened given the severe anticompetitive potential threatened by reverse-payment settlements. Of all the types of business activity, agreements by which competitors divide markets portend the most dangerous anticompetitive effects. Market division restricts all competition between the parties on all grounds. Settlement agreements by which brands pay generics not to enter the market threaten dangers similar to territorial market allocation, with the brand blocking all competition for a period of time.
The analogy to market division depends on the patent’s validity and infringement. These determinations are difficult to conduct in antitrust litigation. But conspicuous red flags appear in the form of substantial payments to generics not warranted by the strength of the patent. In the Hatch-Waxman context, an agreement concerning the generic entry date, without any cash payment, should reflect the odds of the parties’ success in patent litigation.
A brand is likely to gain additional exclusivity by supplementing the parties’ entry-date agreement with a payment to the generic. Such a payment aligns the incentives of the settling parties as the brand can use some of the monopoly profits it gains by delaying generic entry to pay the generic. The quid pro quo for the payment would appear to be the generic’s agreement to stay off the market beyond the expected entry date.
The third reason the Court should hear the case is to reverse the erroneous holdings of the Second Circuit in Cipro and other courts such as Ciprofloxacin (Fed. Cir.), Tamoxifen (2d Cir.), and Schering-Plough (11th Cir.). Overbroad reliance on four arguments has introduced the gravest errors in the Second Circuit and elsewhere: (1) settlements are beneficial, (2) patents are presumed valid, (3) reverse payments fall within the scope of the patent, and (4) reverse-payment settlements are a natural by-product of the Hatch Waxman Act.
First, courts have voiced a general policy in favor of settlement. But reverse-payment agreements are not typical settlements. They are agreements that dispose of the validity and infringement challenges central to the Hatch-Waxman scheme. Any general preference in the law for settlement was significantly weakened by the Act’s specific framework, in which a 180-day exclusivity period for the first challenger only makes sense in the context of encouraging patent challenges, and in which (in contrast to other patent settlements) a regulatory barrier to entry prevents later-filing generics from entering the market.
Second, courts have upheld settlement agreements based on Section 282 of the Patent Act, which states that patents “shall be presumed valid.” Courts have relied on this presumption to determine the validity that is so crucial to deciding the appropriate antitrust treatment. But for five separate reasons, the Patent Act’s presumption of validity is entitled to far less weight than courts have accorded it.
First, even if a patent is presumed to be valid, the burden of proof is always on the patentee, not the infringer, to prove infringement. Second, the presumption is only procedural in nature. Third, the presumption should be entitled to the least amount of deference when the parties enter agreements that prevent validity from even being challenged.
Fourth, the Hatch-Waxman Act’s text and legislative history demonstrate the importance of invalidity challenges, with the 180-day bounty to the first generic to challenge a patent’s invalidity crucial to the regime. Fifth, empirical studies have consistently shown that a significant percentage of granted patents are invalid. See Allison & Lemley (courts invalidated 46% of patents between 1989 and 1996); Moore (alleged infringer prevailed in 42% of patent cases that reached trial from 1983 to 1999); Patstats.org (from 2000 to 2004, courts found 43% of patents invalid and 75% not infringed). In the context of generic challenges in particular, the rate of invalidity is even higher. In a study of paragraph IV challenges between 1992 and 2000, the FTC found that the generic prevailed in 73% of the cases.
The third argument to which courts have deferred involves the patent’s scope. Courts have upheld reverse payments as a type of activity falling within the temporal scope of the patent. This concept, however, cannot do all the work courts require of it. The overriding question in these cases (besides infringement) is whether the patent is valid. If it is, then an agreement allowing entry before the end of the patent term is within the scope. But if the patent is not valid, it does not have any scope. For that reason, judicial inquiries into the temporal scope of the patent assume validity and thus frustrate antitrust analysis.
The fourth argument that some courts have accepted centers on the “natural” status of reverse payments under the Act. Courts are correct that reverse payments have accompanied Hatch Waxman settlements. But that is a far cry from a conclusion that such a development is beneficial. In fact, it may reflect no more than the parties’ preference for sharing monopoly profits.
Finally, as an empirical matter, reverse payments are not needed. Between 1992 and 1999, 8 of the 14 final settlements between brands and generic first-filers involved reverse payments. After the FTC announced in 2000 that it would challenge such settlements, not one of 20 reported agreements in the next 4 years involved a brand paying a generic to delay entering the market.
In 2005, two appellate courts took a lenient view of these agreements. In the next 2 years, 31 of 72 final settlements between brand and generic firms included such payments. And in recent years, roughly 70 to 80 percent of settlements between brands and first generic filers have involved reverse payments.
The brief concluded by explaining that the Cipro case presents an ideal vehicle for Supreme Court review. It involves a simple, undisputed payment from brand to generic to delay entering the market. The latest round of settlements, and the ones that would confront the Court in future cases, are more complicated, involving agreements that the parties claim entail “independent” side deals.
I recognize that the issue of drug patent settlements is one that elicits a broad range of strongly held positions. But I wrote this brief because I think the intended purpose of the Hatch Waxman Act has been lost in today’s settlements and in courts’ deferential treatment of them.