Reverse Payments: Into the Belly Of The Hatch-Waxman Beast Part 3

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[1] (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.[2]  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.[3]  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.[4]

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.

[Bio-Pharma]

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.[5]  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.[6]  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.[7]  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,”[8] or even worse, per se illegal.[9]  But subsequent cases in the Second Circuit,[10]  the Eleventh Circuit,[11] and the Federal Circuit[12] were to uphold the enforceability of such agreements under a “rule of reason” approach,[13] 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[14] 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.[15]

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:[16]

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,[17] Eleventh Circuit,[18] and Federal Circuit[19] 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[20] (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.[21]  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.[22]  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