Reverse Payments: Into the Belly Of The Hatch-Waxman Beast Part 3
|Written by Eric W. Guttag
Eric W. Guttag IP Law Office
Posted: April 24, 2013 @ 7:30 am
In my first installment on Paragraph IV Certifications under Hatch-Waxman, I explored the basics of this “beast.” See A Primer on Paragraph IV Certifications: Into the Belly of the Hatch-Waxman Beast Part 1. In my second installment on Paragraph IV Certifications under Hatch-Waxman, I discussed one of the more litigated “trouble spots” for Paragraph IV Certifications, namely the “carve out” cases. See Carve Outs: Into The Belly of the Hatch-Waxman Beast Part 2. In my third and final installment, I’ll focus on probably the most contentious “trouble spot,” namely Hatch-Waxman “reverse payment” cases, now before the Supreme Court in FTC v. Watson Pharmaceuticals (renamed as FTC v. Actavis, Inc.) for which oral argument was recently heard. So let’s strap on our safety belts one last time, and dive back into the “belly” of this Hatch-Waxman “beast” to look at “reverse payment” cases.
“Reverse payment” cases are an outgrowth of a key feature I noted in my first article on the basics of Paragraph IV Certifications: the filing of an Abbreviated New Drug Application (ANDA) by the generic drug maker with a Paragraph IV Certification is treated as a technical act of patent infringement. After receiving notice of the Paragraph IV Certification, the patent owner/NDA holder has 45 days to bring suit, otherwise the FDA can move forward on approving the ANDA. Conversely, if the patent owner/NDA holder does bring an infringement suit within the prescribed 45 day period, the FDA cannot approve that ANDA for 30 months, unless the patent(s) that are the subject of the Paragraph IV Certification are earlier deemed invalid or not infringed in that suit.
The need to file suit within this prescribed 45 day period whenever the ANDA includes a Paragraph IV Certification puts the patent owner/NDA holder on the horns of dilemma. Failure to bring suit within this 45 day period means the FDA will move forward with the process of reviewing the ANDA for approval. But bringing such a suit to try to delay approval of the ANDA for that 30 month period also puts whatever patents are involved in the Paragraph IV Certification at risk of either being judged by the court as not infringed, or worse yet, invalid; not only would such a judgment permit approval of the ANDA by the FDA, but would also potentially give the generic drug maker freedom to market the generic drug, in competition with patent owner’s/NDA holder’s own branded drug, as soon as the ANDA was approved by the FDA.
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So how could the patent owner/NDA holder avoid putting its patents potentially at risk in such an infringement suit, yet also prevent potentially quicker approval of the generic drug maker’s ANDA by the FDA? And what about all those other potential generic drug makers sitting on the sidelines and “salivating” over the prospect of this first generic drug maker’s Paragraph IV Certification ANDA potentially creating a “hole” in the NDA holder’s patent rights to “drive” their own ANDAs through? Well, as you may recall, I mentioned in my first article that the first such Paragraph IV Certification ANDA filer got a marketing “bonus” in the form of a 180-day period of marketing exclusivity against any later filed ANDAs based on a Paragraph IV Certification involving the same NDA. Even better, that first Paragraph IV Certification filer didn’t need to establish that the patent rights held by the NDA holder were invalid and/or not infringed to get that 180-day period of marketing exclusivity.
So some crafty patent owners/NDA holders faced with this situation decided to make a “pact” (i.e., settlement agreement) with the “devil” they knew, namely the first generic drug maker filing such an ANDA Paragraph IV Certification, to avoid having even more generic drug makers “come out of the woodwork” and potentially increase competition with respect to their branded drug. Thus was born the “reverse payment” settlement agreement, characterized as such because the patent owner/NDA holder paid the first generic drug maker filing the Paragraph IV Certification ANDA to settle that infringement suit. Sometimes, the “reverse payment” settlement agreement went even further to permit that first generic drug maker to share in the profits of the patent owner’s/NDA holder’s branded drug. What made such “reverse payment” agreements a particular anathema to the other generic drug makers was that the first generic drug maker’s 180-day period of marketing exclusivity under Hatch-Waxman benefited not only that first generic drug maker, but also the patent owner/NDA holder by keeping the approval of any other generic drug maker’s ANDA in limbo for at least half a year, even if that later ANDA filer(s) included a Paragraph IV Certification.
Quite naturally, such “reverse payment” settlement agreements were attacked by private parties (usually those other generic drug makers) and later by the FTC as an alleged “restraint of trade” and thus an antitrust violation. In fact, the earliest cases in the D.C. Circuit and the Sixth Circuit involving such “reverse payment” settlement agreements found them either to be “prima facie evidence of an illegal agreement,” or even worse, per se illegal. But subsequent cases in the Second Circuit, the Eleventh Circuit, and the Federal Circuit were to uphold the enforceability of such agreements under a “rule of reason” approach, especially on the basis that the patent owner/NDA holder, in entering into the “reverse payment” settlement agreement with the first generic drug maker filing a Paragraph IV Certification ANDA, was merely exercising its rights “within the scope of the patent,” (hereafter referred to as the “scope of the patent” rationale). In fact, the FTC was completely unsuccessful in getting the Eleventh Circuit to agree with its view that such “reverse payment” settlement agreements were at least presumptively illegal, and even should be deemed per se illegal. Only in 2012 was the FTC able to get the Third Circuit in the K-Dur case to accept its view that such “reverse payment” settlement agreements were at least presumptively illegal.
At first, I too found such “reverse payment” agreements to be a weird “outgrowth” of the Paragraph IV Certification Hatch-Waxman “beast,” as well as appearing to be, on their face, an unlawful “restraint of trade” under the Sherman Act. (And now Congress has started to weigh in by proposing legislation, such as S. 214, that would make such “reverse payment” settle agreements presumptively unlawful unless the pro-competitive benefits of such agreements can be proven to outweigh the anti-competitive effects; more on that in a minute.) But others, including Kevin Noonan at Patent Docs, have convinced me that such “reverse payment” settlement agreements should not necessarily be judged as “bad” or illegal, and should definitely not be deemed per se illegal or even presumptively an illegal “restraint of trade.” Even more convincing to me is a “white paper” by Bender et al. entitled “S. 214’s Inappropriate Interference With the Fundamental Right to Settle Litigation” that argues (convincingly in my opinion) against the position taken by the FTC that such “reverse payment” settlement agreements should be at least presumptively illegal, and even per se illegal.
In arguing against enactment of S. 214, the Bender et al. “white paper” premises its opposition to the FTC’s view of presumptive/per se illegality of such “reverse payment” settlement agreements based essentially on the following points:
1. Settlement of patent infringement cases that bring generic drugs to market before the end of the patent term of the patented drug “serve the public interest in accelerating the availability of inexpensive generic drugs,” and should therefore be encouraged, not discouraged.
2. Presuming that such settlement agreements are illegal “conflicts with the fundamental due process principle that private litigants are ordinarily entitled to decide, free from government interference, how to litigate their own cases.”
3. A presumption that such agreements are invalid would be inconsistent with the statutory presumption that issued patents are valid, and would “turn on its head” the normal requirement that the plaintiff/complaining party has the burden to prove its case, i.e., that the “reverse payment” settlement agreement is anti-competitive and thus an illegal “restraint of trade.”
4. Besides placing the burden of proof on the wrong party, the wrong issue is posed as the basis for deciding whether or not to permit settlement, namely proof that such an agreement, in addition to “shortening the effective patent term,” would have “pro-competitive rather than anti-competitive” effects which is “an abstract and essentially meaningless speculative question where presumably valid patents are concerned, since patents are intended, if valid, to preclude competition in the patented product for the extent of the patent term.” This point is essentially restates the “scope of the patent” rationale that has been used by the Second Circuit, Eleventh Circuit, and Federal Circuit to uphold the enforceability of such “reverse payment” settlement agreements.
To the surprise of some, the Supreme Court will be weighing in on the enforceability of such “reverse payment” settlement agreements not in the Third Circuit’s K-Dur case that embraced the FTC’s view of presumptive/per se illegality, but instead in the Eleventh Circuit case of FTC v. Watson Pharmaceuticals (now renamed as FTC v. Actavis, Inc.) that upheld such agreements under the “scope of the patent” rationale. From what I’ve seen of the Supreme Court oral argument transcript in Actavis, as well as the commentary on that oral argument, there was some definite “skepticism” expressed by the Justices as to whether these “reverse payment” settlement agreements should be judged as presumptively/per se illegal (as argued by the FTC), versus a “rule of reason” approach. Also, while Justice Scalia expressed the view in that oral argument that the provisions of the Hatch-Waxman “beast” that spawned these reverse payment” settlement agreements may be due to a “mistake” on Congress’ part, he also appeared to be of the view that it was up to Congress to “fix” that “mistake,” and not for the Supreme Court to create a new type of antitrust violation. But as anyone who has tried to read the “tea leaves” in oral argument realizes, it is better to wait for the Supreme Court’s actual opinion (or opinions) in the Actavis case before rushing to any conclusion on which side such reverse payment” settlement agreements will fall (i.e., illegal either presumptively or per se vs. potentially lawful under a “rule of reason” approach).
And with the end of my discussion of “reverse payment” cases also concludes my series of articles exploring (and hopefully revealing) the “beast-like” nature of Paragraph IV Certifications under Hatch-Waxman. Even so, I might suggest holding onto those safety belts a little while longer until after we hear from the Supreme Court in the Actavis case. And who knows what other “horrors” remain to be discovered in the “belly” of the Hatch-Waxman “beast”!
*© 2013 Eric W. Guttag. Posted April ___, 2013 on IPWatchdog.com
 677 F.3d 1298 (11th Cir. 2012).
35 U.S.C. § 271(e)(2)(A).
 21 U.S.C. § 355(j)(5)(B)(iii).
 21 U.S.C. § 355(j)(5)(B)(iii).
 21 U.S.C. § 355(j)(5)(B)(iv).
 It was not uncommon for such a “reverse payment” settlement deal to be struck between an adverse district court judgment relating to the patent(s) involved in the Paragraph IV Certification and while an appeal of the adverse judgment was pending, usually to the Federal Circuit. See, e.g., In re Tamoxifen Citrate Antitrust Litigation, 466 F.3d 187 (2nd Cir. 2006)(“reverse payment” settlement agreement reached after judgment by the district court that tamoxifen patent invalid due to inequitable conduct and during pending appeal of that judgment to the Federal Circuit).
 See Schering-Plough Corp. v. FTC, 402 F.3d 1056 (11th Cir. 2005)(“reverse payment” of initially $60 million, $10 million in milestone royalty payments, and 10% or 15% royalties on sales).
 See Andrx Pharmaceuticals, Inc. v. Biovail Corp. International, 256 F.3d 799 (D.C. Cir. 2001).
 See In re Cardizem Litigation, 332 F.3d 896 (6th Cir. 2003). The settlement agreement held illegal in Cardizem is illustrative of such “reverse payments” and had the following terms: The generic drug maker (Andrx) would not market a bioequivalent generic version of the drug (Cardizem CD) until the earliest of: (1) Andrx obtaining a favorable, final and unappealable determination in the patent infringement case; (2) the branded drug maker (HMR) and Andrx entering into a license agreement; or (3) HMR entering into a license agreement with a third party. Andrx also agreed to dismiss its antitrust and unfair competition counterclaims, to diligently prosecute its ANDA, and to not “relinquish or otherwise compromise any right accruing thereunder or pertaining thereto,” including Andrx’s 180-day exclusivity marketing period. In exchange, HMR agreed to make interim payments to Andrx in the amount of $40 million per year, payable quarterly, beginning on the date Andrx received final FDA approval. HMR further agreed to pay Andrx $100 million per year in the event that: (a) there was a final and unappealable determination that HMR’s patent was not infringed; (b) HMR dismissed the patent infringement case; or (c) there was a final and unappealable determination that did not determine the issues of the HMR patent’s validity, enforcement, or infringement, and HMR failed to refile its patent infringement action.
 See In re Tamoxifen Citrate Antitrust Litigation, 466 F.3d 187 (2nd Cir. 2006)(“reverse payment” of $21 million to generic drug maker); In re Ciprofloxacin Hydrochloride Antitrust Litigation, 604 F.3d 98 (2nd Cir. 2010)(“reverse payment” of $49.1 million, plus additional quarterly payments of between $12.5 and $17.125 million for the life of the patent, except for the last 6 months of the patent term).
 See Valley Drug Co. v. Geneva Pharmaceuticals, Inc., 344 F.3d 1294 (11th Cir. 2005)(“reverse payment” of $4.5 million per month until another generic version of the drug (terazosin hydrochloride) was marketed ,or if the patent owner/NDA holder (Abbott) won a favorable decision in district court for infringement of its patented version of the drug); Schering-Plough Corp. v. FTC, 402 F.3d 1056 (11th Cir. 2005)(“reverse payment” of initially $60 million, $10 million in milestone royalty payments, and 10% or 15% royalties on sales); FTC v. Watson Pharmaceuticals 677 F.3d 1298 (11th Cir. 2012), cert. granted sub nom FTC v. Actavis, Inc. (“reverse payment” of $10 million per year for 6 years, as well as sharing profits of patented topical drug Androgel for treating symptoms of low testosterone with generic drug manufacturer).
 See In re Ciprofloxacin Hydrochloride Antitrust Litigation, 544 F.3d 1323 (Fed. Cir. 2008)(same “reverse payment” as in 2010 Second Circuit Ciprofloxacin Hydrochloride case.
 See, e.g., In re Ciprofloxacin Hydrochloride Antitrust Litigation, 544 F.3d 1323 (Fed. Cir. 2008); In re Ciprofloxacin Hydrochloride Antitrust Litigation, 604 F.3d 98 (2nd Cir. 2010).
 See Schering-Plough Corp. v. FTC, 402 F.3d 1056 (11th Cir. 2005; FTC v. Watson Pharmaceuticals (11th Cir. 2012), cert. granted sub nom FTC v. Actavis, Inc.
 See In re K-Dur Antitrust Litigation (3rd Cir. 2012) which rejected the “scope of the patent” rationale of the Second Circuit, Eleventh Circuit, and the Federal Circuit. In fact, the FTC came close in K-Dur to getting the Third Circuit to agree that such “reverse payment” settlement agreements were per se illegal, not simply presumptively illegal. Even more interesting, the Third Circuit K-Dur case involved the same patented drug (K-Dur 20) for which the Eleventh Circuit in the 2005 Schering-Plough case had ruled the “reverse payment” settlement agreement lawful under a “rule of reason” approach.
 See Executive Summary at pages 1-2 of Bender et al. “white paper.”
 See In re Tamoxifen Citrate Antitrust Litigation, 466 F.3d 187 (2nd Cir. 2006); In re Ciprofloxacin Hydrochloride Antitrust Litigation, 604 F.3d 98 (2nd Cir. 2010).
 See Valley Drug Co. v. Geneva Pharmaceuticals, Inc., 344 F.3d 1294 (11th Cir. 2005); Schering-Plough Corp. v. FTC, 402 F.3d 1056 (11th Cir. 2005); FTC v. Watson Pharmaceuticals (11th Cir. 2012), cert. granted sub nom FTC v. Actavis, Inc.
 See In re Ciprofloxacin Hydrochloride Antitrust Litigation, 544 F.3d 1323 (Fed. Cir. 2008).
 677 F.3d 1298 (11th Cir. 2012).
 Justice Scalia appeared to be particularly skeptical of the FTC’s representative, Malcolm L. Stewart, that there could be an antitrust violation where the patentee, by entering into a “reverse payment” settlement agreement was acting within the “scope of the patent.” See dialogue at page 6 of the oral argument transcript between Justice Scalia and Stewart. In fact, Justice Ginsburg soon after questioned whether the FTC had changed its position on the propriety of the “scope of the patent” rationale that the Third Circuit in K-Dur had rejected. See dialogue at pages 8-9 of the oral argument transcript between Justice Ginsburg and Stewart.
 See comments by Justice Scalia at pages 10-11 of oral argument transcript with respect amendments made with respect to certain unspecified amendments to Hatch-Waxman : “Yes, and so — and so do suits against this kind of payment. And I have — I have the feeling that what happened is that Hatch-Waxman made a mistake. It did not foresee that it would produce this kind of — this kind of payment. And in order to rectify the mistake the FTC comes in and brings in a new interpretation of antitrust law that did not exist before, just to make up for the mistake that Hatch-Waxman made, even though Congress has tried to cover its tracks in later amendments, right, which -which deter these, these — these payments?”
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