Senators mistaken, IPRs do not frustrate Hatch-Waxman

By Gene Quinn
June 4, 2015

Senator Orrin Hatch (R-UT)

Senator Orrin Hatch (R-UT)

Earlier today the Senate Judiciary Committee held an Executive Business Meeting at which the PATENT Act was discussed and marked up. The PATENT Act was voted out of Committee by a 16 to 4 vote, with only Senators Chris Coons (D-DE), Dick Durbin (D-IL), David Vitter (R-LA) and Ted Cruz (R-TX) voting against the bill.

During the meeting Senators repeatedly brought up the Hatch-Waxman legislation. One after another Senators discussed how inter partes review (IPR) of pharmaceutical patents at the United States Patent and Trademark Office (USPTO) has, in an unanticipated way, upset the delicate balance reached in Hatch-Waxman to ensure that generic drugs would come to market quickly.

Those familiar with IPR and Hatch-Waxman will undoubtedly recognize that this concern is entirely misplaced. Hatch-Waxman has been so thoroughly gamed over the years that it has long since ceased ensuring that generics quickly enter the market. On the other hand, a successful IPR would result in the immediate death of patent claims, which would inure to the benefit of all generics, which would in fact result in generics entering the market quickly.

Let’s start at the beginning.

 

Senator Grassley

During his prepared statement, Senator Chuck Grassley (R-IA), who is the Chair of the Judiciary Committee, explained this morning that any proposals to amend the patent laws that relate to challenges to drug patents will need the input of the Senate’s Health Education Labor and Pension (HELP) Committee. According to Grassley, the HELP Committee has jurisdiction over Hatch-Waxman issues concerning challenges to a drug. Senator Lamar Alexander (R-TN) is Chair of the HELP Committee.

Grassley explained:

[T]here is a proposal by the life sciences community concerning the applicability of the PTO’s post grant proceedings to patents that are subject to the Hatch-Waxman Act and Biologics Price Competition and Innovation Act (BPCIA) processes.  The Hatch-Waxman process has been instrumental in facilitating the entry of low cost generic drugs in the market.  Consumers want access to cheaper drugs as soon as possible, so I’ve been a big supporter of this law.  I’m also supportive of incentivizing biosimilar market entry.  When the America Invents Act was considered, it’s my understanding that there was no debate over whether or how IPR would impact these important processes.   

It’s imperative for us to hear from all sides, get additional information and data, and consult with the HELP Committee, which is the Committee of jurisdiction over the Hatch-Waxman Act and Biologics Price Competition and Innovation Act (BPCIA) laws.  This is a complex issue that needs to be seriously and responsibly considered, including further review, discussion, and vetting.  My colleagues and I have already started getting views on this matter, and we continue to review and conduct outreach.   

I agree that we need to preserve incentives for generics to come to market, and I’m committed to working on this issue as we move towards the floor.

In addition to recognizing that the PATENT Act will require input from a separate Senate Committee, Senator Grassley suggests that IPRs somehow disrupt the incentive structure for generic manufacturers to take generic drugs to market. Other Senators echoed this concern.

According to Senator Chuck Schumer (D-NY), the language relating to proposed reforms to the IPR process needs further work, but must be looked at carefully because “no one anticipated that [IPR proceedings] would be a run-around for Hatch/Waxman.” Senator John Cornyn (R-TX) echoed these views: “No one anticipated that IPR would affect Hatch/Waxman the way that it has.” The views of both these Senators is particularly important given their standing within their respective parties. Senator Cornyn is the second ranking Republican in the Senate. Senator Schumer is Democratic Leader in waiting thanks to the retirement announcement earlier this year by Senator Harry Reid (D-NV).

 

The problem

Senators Grassley, Schumer, Cornyn and others who share their concern have a problem. IPR does not make it at all difficult for a generic manufacturer to take a generic drug to market. In truth, a successful IPR on a pharmaceutical patent would pave the way for generics to immediately enter the market, or as immediately as the FDA process will allow. In fact, a successful IPR would invalidate the patent claims that are being used by the brand name drug owner to prevent generic competition. Indeed, one would be hard pressed to define a process more likely to result in the quick entry of generics to the market.

A successful IPR would guarantee that any generic manufacturer interested in selling a generic could do so. What IPR does do is nullify the byzantine process established by Hatch-Waxman. It also makes it impossible for generic manufacturers to sue in federal district court to invalidate a patent claim. The fact that generic manufacturers would not be able to sue in federal district court is why they are complaining to Congress about the IPR process.

It is difficult to understand why Republicans, who are always complaining about wanting to reduce litigation, would want to embrace a broken and dysfunctional Hatch-Waxman process that requires federal court litigation rather than a quicker, cheaper administrative process such as provided by IPRs at the USPTO.

 

Hatch-Waxman Gaming

Anyone familiar with the 1984 Hatch-Waxman Amendments knows that gaming the system is something that can be accomplished with extraordinary ease. As a result of a healthy dose of extremely specific and narrowly tailored provisions, creative lawyering and a ridiculously byzantine process the Congressional purpose of attempting to speed up the approval of generic drugs repeatedly has been foiled. Over the years Hatch-Waxman has become so thoroughly misused and abused that any relevance it once had is long since gone.

At the time Hatch-Waxman was enacted, it was the intent of Congress to strike a balance between two competing policy interests: (1) inducing pioneering research and development of new drugs; and (2) enabling competitors to bring low-cost, generic copies of those drugs to market. In reality, what Congress enacted was a full employment act for lawyers, and underground funding of generic drug manufacturers who have an incentive to challenge patented drugs.

In the United States, in order for a new drug to receive market approval, a New Drug Application, known as an NDA, must be submitted to the Food and Drug Administration (FDA). To lessen the burden on generics, Hatch-Waxman allows generic manufacturers to submit Abbreviated New Drug Applications, known as ANDAs. In the event that the generic manufacturer can establish that the drug mentioned in the ANDA is the bioequivalent of a drug approved in a NDA, the generic manufacturer can sail through the approval process by relying on the costly, time-consuming studies previously submitted as a part of the NDA. Thus, the whole purpose of Hatch-Waxman was to make it easier for a generic drug manufacturer to piggyback on the studies previously submitted by the original creator of a new drug.

The wrinkle with respect to Hatch-Waxman, at least in patent terms, comes with respect to certain statements that must be made by the generic manufacturer in the ANDA. An ANDA applicant must make one of four certifications regarding each patent that applies to the drug for which approval is being sought: (I) no such patent information has been submitted to the FDA; (II) the patent has expired; (III) the patent is set to expire on a certain date; or (IV) the patent is in valid or will not be infringed by the drug covered in the ANDA. It is the paragraph IV certifications that are the most interesting from the patent perspective. Although making a paragraph IV certification is not an active act of infringement, thanks to specific provisions within the legislation, when a paragraph IV certification has been made the patent owner of the drug covered by the NDA may immediately institute infringement proceedings.

Despite the fact that the filing of an ANDA with a paragraph IV certification will many times result in an immediate patent infringement litigation, generic manufacturers have great incentive to file ANDAs. The statute provides a 180-day exclusivity period to the first ANDA applicant to file a paragraph IV certification. Under this 180-day exclusivity period only the patent owner and that single generic company would be able to market the drug. Thus, Hatch-Waxman Congress provides an incentive, in the form of a promised 180-day oligopoly, for generic manufacturers to challenge the scope and validity of drug patents.

The key to understanding Hatch-Waxman abuse and misuse, which has been the subject of a recent Supreme Court decision, is to appreciate that only the first generic drug manufacturer who files the ANDA and challenges the patent is entitled to a 180-day exclusivity period.  This gives generic manufacturers incentive to quickly file an ANDA with a paragraph IV certification, but it also means that no other subsequent manufacturer can ever be entitled to the 180-day exclusivity period. This has led patent owners to settle with the generic manufacturer who was the first to file. Such settlements frequently have the patent owner paying the generic manufacturer a large sum of money, which is known as a reverse payment. The generic manufacturer also agrees not to enter the marketplace, thereby allowing the brand name drug patent owner to continue to exercise a monopoly within the market. No other generics go through the exercise of filing an ANDA with a paragraph IV certification because even if they prevail the best possible outcome would be to kill the patent, which would immediately open the market for all generics. No one wants to pay for the patent litigation where the results will wind up benefitting many free riders that did not fund the litigation.

Once you understand the gaming of Hatch-Waxman and the fact that through reverse payments generics are paid off not to enter the market, you realize that Hatch-Waxman has been a failure. If the goal is to ensure generics make it to the market quickly Hatch-Waxman is simply not the answer. On the contrary, an IPR must be completed within 12 to 18 months. Thus, a successful IPR is undeniably far more effective at achieving the stated goal of Hatch-Waxman.

If you have not figured it out, all of this IPR talk is about the so-called Kyle Bass problem. Bass is reportedly shorting pharmaceutical stocks and then filing IPRs. This process is either characterized as evil or genius. Regardless of what you think it seems clear that the laws allow for anyone to file an IPR to challenge a patent for any reason. The fact that Bass is doing so to take out patents and make money has rubbed many the wrong way. Admittedly, this use of IPR is not what the legislative history suggests Congress envisioned, but the statute does specifically allow for it to occur.

As willing as some may be to tar and feather Kyle Bass one thing is clear. If he takes out pharmaceutical patents through IPR he will achieve what no generic would achieve with Hatch-Waxman. Reverse payments have so thoroughly contaminated the Hatch-Waxman process that the legislation is not capable of carrying out its stated purpose. If you are concerned with generic drugs getting to market quickly the last thing you want to see happen is an IPR fix. That would only ensure more litigation in federal courts and line the pockets of generic manufacturers without any benefit to the general public.

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If you are interested in patent reform please consider joining me for a live program in Washington, DC, on Friday, June 12, 2015, that will take a look at the major patent reform bills pending in Congress. The program will take place at the Washington, DC, offices of DrinkerBiddleBob Stoll, former Commissioner for Patents and current DrinkerBiddle partner will co-host the event with me. Former Federal Circuit Chief Judge Paul Michel will deliver a keynote speech, and will also participate on the first panel, which I will moderate. Other participants will include Brad Olson (Barnes Thornburg), Michael Remington (Drinker Biddle), Dean John Whealan (George Washington University Law School),  Vince Garlock (AIPLA),  Hans Sauer (Biotechnology Industry Organization) and Adam Mossoff (George Mason University School of Law). Stoll will moderate the second panel and provide opening remarks. The event is free and Virginia CLE is being requested. To Register CLICK HERE.

The Author

Gene Quinn

Gene Quinn is a Patent Attorney and Editor and founder of IPWatchdog.com. Gene is also a principal lecturer in the PLI Patent Bar Review Course and an attorney with Widerman Malek. Gene’s specialty is in the area of strategic patent consulting, patent application drafting and patent prosecution. He consults with attorneys facing peculiar procedural issues at the Patent Office, advises investors and executives on patent law changes and pending litigation matters, and works with start-up businesses throughout the United States and around the world, primarily dealing with software and computer related innovations. is admitted to practice law in New Hampshire, is a Registered Patent Attorney and is also admitted to practice before the United States Court of Appeals for the Federal Circuit. CLICK HERE to send Gene a message.

Warning & Disclaimer: The pages, articles and comments on IPWatchdog.com do not constitute legal advice, nor do they create any attorney-client relationship. The articles published express the personal opinion and views of the author and should not be attributed to the author’s employer, clients or the sponsors of IPWatchdog.com. Read more.

Discuss this

There are currently 5 Comments comments.

  1. Stratton June 5, 2015 8:17 am

    Thanks for the excellent summary. One thing I still don’t understand though is if IPR is so great for generic manufacturers, why are they complaining to Congress about not being able to sue in federal district court? And wouldn’t that be pretty simple to fix, compared to all these very many new provisions?

  2. Gene Quinn June 5, 2015 11:22 am

    Stratton-

    The generics are complaining not because they want to take generic drugs to market, but rather because if others are using IPR against drug patents that means they won’t be able to sue to obtain the 180 exclusivity. In reality, many (if not most) generics don’t want the 180 exclusivity period. They sue so that the patent owner will settle with them and pay them off with a large reverse payment. That way the generic gets paid NOT to enter the market. With Kyle Bass and possibly others using IPR to take out drug patents they will not be able to use Hatch-Waxman gaming to obtain payments for doing nothing.

    -Gene

  3. Paul F. Morgan June 5, 2015 12:38 pm

    Gene, this article of yours is a real public interest service, and I hope it gets picked up by major media.
    If the issue is really just the 15 IPRs so far presumably filed by hedge funds holding short or option positions hoping to make a killing by dropping the price of the drug patent owners stock, there is a simple non-draconian fix. To simply require disclosure by an IPR petitioner if they, a privy, a RPI, or an investor therein has such a position or investment that would benefit from a decrease in the stock price of the subject patent’s owner or licensee.
    Which can then be reported the SEC, which is the proper agency for dealing with this conduct, not the PTO.]
    In support of one of your other points, note this latest news: “The Federal Trade Commission’s $1.2 billion settlement with Cephalon Inc. over the company’s huge payments to rivals is a fresh sign that so-called pay-for-delay deals involving big exchanges of money will be difficult to defend in the wake of a landmark U.S. Supreme Court decision from two years ago, experts say. The record payout from Cephalon, which is now owned by Teva Pharmaceutical Industries Ltd., stems from $300 million in so-called reverse payments given to a quartet of generic-drug makers. According to the FTC, those payments were disguised by sham business agreements for licensing and development, and were really meant as compensation for postponing copycat versions of blockbuster narcolepsy treatment Provigil.” [But this same article goes on to suggest there there may still be ways to delay commercial competition between generics that would lower drug prices.]

  4. Paul F. Morgan June 6, 2015 2:01 pm

    I received the following discouraging observation from a knowledgeable source, indicating that from what they had seen and heard, Gene’s posting reaches the wrong conclusion as to how IPRs will really be used in the Hatch-Waxman world. Namely that what is now happening with IPRs is what Gene suggests Hatch-Waxman patent challenges have become. That is, what is actually happening is apparently that threats of IPR filings are being used to extort “settlements”— payments made by the patent owner to the threatening IPR petitioner in exchange for not actually filing an IPR petition that has been drafted and would have publicly disclosed prior art and its relevance if actually filed.
    But if so, and the “settlement” result is delayed competition in drug prices, is that not more grist for the active FTC mill on this issue, and are such “settlements” even enforceable agreements?

  5. Gene Quinn June 6, 2015 5:21 pm

    Paul-

    What I wrote in the article is correct.

    I did not write anything about the abuse of the IPR process in this article, although I have written about it before.

    In an IPR patent claims are invalidated. If a patent claim is invalidated that means that there are no longer any exclusive rights. If you want to take out pharmaceutical patents, as was the stated goal of Hatch-Waxman, then you want people like Kyle Bass and others filing IPRs to invalidate pharmaceutical patents. That opens the market for all generics, which the government says is what they want. Of course, that isn’t at all what they want.

    What Congress is doing is telling a lie — namely that IPRs make it less likely for generics to make it to market. They are doing this so that they can then pretend that they need to defend Hatch-Waxman. The fix — all in the name of making sure generics get to market — will be to exempt pharmaceuticals and biosimilars from IPRs. They can then say that thanks to Hatch-Waxman generics will continue to get to market early, which is a lie. Thanks to reverse payments, which the Supreme Court refused to rule a per se antitrust violation, generic manufacturers are getting paid not to take generic drugs to market.

    So yes, from what I hear there is a lot of IPR abuse. The problem seems to be, however, that the IPR abuse is preventing generics and brand name drug owners from abusing the Hatch-Waxman process.

    -Gene