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2013 Should Bring Clarity to Analysis of Settlements of Pharmaceutical Patent Litigation

The Federal Trade Commission (FTC) recently filed a brief with the U.S. Supreme Court in a case that promises to bring some clarity to the analysis of settlements of pharmaceutical patent litigation.  Under the Hatch-Waxman Act, a generic drug manufacturer can file an application with the Food and Drug Administration (FDA) stating that a pioneer manufacturer’s patent is invalid or that its generic drug does not infringe the patent.  By statute, such an application is a technical act of patent infringement, permitting the pioneer manufacturer to file patent litigation.  Some of these patent infringement suits are resolved by settlements that include a payment by the pioneer manufacturer to the generic manufacturer, which agrees to refrain from producing its generic drug for a specified period.  The FTC refers to these settlement agreements as “reverse payment agreements” or “pay-to-delay” agreements.[1]

The legality of these so-called reverse payment agreements under the antitrust laws has been hotly debated and litigated.  The courts have divided into two camps.  Most recent federal courts of appeals decisions had ruled that these agreements are presumptively lawfulas long as competition is only constrained within the scope of the patent and the patent was not obtained through fraud or the enforcement suit was not objectively baseless.  See, e.g., FTC v. Watson Pharms., Inc., 677 F.3d 1298 (11th Cir. 2012)In re Ciprofloxacin Hydrochloride Antitrust Litig., 544 F.3d 1323 (Fed. Cir. 2008)In re Tamoxifen Citrate Antitrust Litig., 429 F.3d 370 (2d Cir. 2005).  For example, in FTC v. Watson Pharmaceuticals, the generic manufacturer agreed to delay entry until 2015 as part of a settlement of patent litigation.  The FTC claimed the generic manufacturers agreed to delay entry in return for payments for services under marketing agreements, which the FTC alleged had little actual value.  The Court of Appeals for the Eleventh Circuit affirmed the dismissal of the lawsuit because the agreement allowed generic entry five years before the expiration of the patent in question and was therefore within the “scope of the patent.”

In July 2012, however, the Court of Appeals for the Third Circuit issued an opinion that applied a much different standard, holding that such agreements are presumptively unlawful and that the burden is on the parties to prove that any payments were for something other than a delay in market entry.  In re K-Dur Antitrust Litig., 686 F.3d 197, 205 (3d Cir. 2012).[2]  The Supreme Court granted the FTC’s petition for writ of certiorari in the Watson case on December 7, 2012 to resolve the circuit split created by the Third Circuit’s K-Dur decision.  The FTC filed its opening brief on January 22, 2013, and oral argument is scheduled for March 25, 2013.

While the Supreme Court’s decision is likely to provide clarity on the legal analysis to be applied by courts in evaluating reverse payment settlement agreements, it may not be the final word on the issue.  A bill titled “Preserve Access to Affordable Generics Act” was recently introduced in the Senate that would make a settlement of patent litigation presumptively unlawful if the generic manufacturer received “anything of value” as part of the settlement, unless the parties can prove by clear and convincing evidence that the procompetitive benefits of the settlement agreement outweigh its anticompetitive effects.  Similar bills introduced in the past have not received much traction, but the Supreme Court’s decision in Watson could trigger more interest in a legislative solution.  Pharmaceutical companies may also want to keep an eye on enforcement actions outside the United States.  The European Commission recently informed Johnson & Johnson and Novartis of its objections to an agreement between the companies’ Dutch subsidiaries related to a drug called fentanyl, stating that its preliminary view was that the agreement delayed generic entry in breach of European Union antitrust rules.[3]  Thus, while the Supreme Court’s decision in Watson may provide useful guidance to pharmaceutical companies in assessing how to settle patent litigation, this is an area of the law they will likely want to monitor long after the decision.


[1] A more detailed analysis of the Hatch-Waxman Act’s regulatory requirements, the incentives for pioneer and generic manufacturers under the Act, and the history of so-called reverse payment litigation can be found in the ABA’s Pharmaceutical Industry Antitrust Handbook, which was also written by the author of this post.

[2] The Third Circuit cited two earlier courts of appeals decisions as precedent, Andrx Pharms., Inc. v. Biovail Corp. Int’l, 256 F.3d 799 (D.C. Cir. 2001) and In re Cardizem CD Antitrust Litig., 332 F.3d 896 (6th Cir. 2003).  The FTC and the pharmaceutical company defendants in the Watson case distinguished these cases in briefs submitted to the Supreme Court on the grounds that they did not involve the settlement of patent litigation – both cases challenged the same agreement which involved payments to a generic manufacturer but did not settle the underlying litigation.

[3] See Press Release, European Commission, “Antitrust: Commission sends Statement of Objections to J&J and Novartis on delayed entry of generic pain killer” (Jan. 31, 2013) available here.

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About this Author

Richard Coe, Antitrust, Securities, M&A Attorney, Drinker Biddle
Partner

Richard E. Coe represents clients in complex disputes involving antitrust, mergers and acquisitions, securities and corporate governance issues. He routinely handles class action cases and has particular experience in the pharmaceutical and financial services industries. He is co-leader of the Commercial Litigation Team.

Rick frequently represents public companies, their directors and officers, and investors in the defense of claims arising from corporate transactions. He has defended clients against challenges to mergers and...

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