INNsight article by Alan Klein, July 2012

When I last wrote on the “pay-for-delay” issue, as critics like to call it, it was to highlight legislation then pending in the U.S. Congress to sharply restrict patent litigation settlement agreements between branded drug companies and generics challenging the validity of brand drug patents.  The proposed legislation – the Preserve Access to Affordable Generics Act and the Fair and Immediate Release of Generic Drugs Act – went nowhere, and neither Bill was enacted into law.  Nevertheless, these issues have continued to roil in the federal courts as a result of continuing Paragraph IV lawsuits between brand Pharma and Generics.

Just last week, the United States Court of Appeals for the Third Circuit issued an important ruling in a closely watched appeal which may serve as a catalyst for the review of patent settlement agreements and their antitrust implications by the United States Supreme Court, the court of final decision in the federal judicial system.

The Playing Field for Generics Challenging Brand Drug Patents

Hatch-Waxman permits a generic drug company to bring its drug to market before the patents on the branded reference listed drug have expired. When filing its Abbreviated New Drug Application (“ANDA”), the generic is provided with the option of arguing that its drug does not infringe the brand drug patents or that those patents are invalid.  When a generic includes a so-called Paragraph IV certification in its ANDA, thereby placing the validity of the brand drug’s patents at issue, the patent holder may, and frequently does, initiate litigation which automatically results in a 30-month stay on generic entry.  Branded drug companies have utilized several strategies to extend the 30-month stay and defeat the challenging generic’s competition, such as the listing of multiple patents, the use of FDA citizen petitions to block generic approvals, and the launch of “authorized generics” by the branded company, or, more often, its licensees.

Faced with expensive, time consuming litigation, and the prospect of “authorized generic” competition during the much-valued 180-day exclusivity period, a generic “first filer” will carefully assess its options and may decide to resolve the lawsuit with the branded company.

Likewise, the branded company, with significant sums invested in its product and the benefit of relatively high profit margins, may determine that the risks of litigation and an uncertain outcome strongly militate in favor of a negotiated resolution.

When drug patent litigation is settled, such settlements have generally featured “reverse payment agreements” in which the patent holder pays the generic for postponing its market entry.  These payments take the form of royalties, various licensing arrangements, supply agreements and research and development deals, among others.  These settlement agreements may also contain provisions by which the branded company agrees not to launch or license an “authorized generic”, or the generic “parking” its right to market its bioequivalent product for an indefinite period (having the effect of preventing other generic competitors from entering the market).  In one such instance involving the cardio drug Cardizem®, a successful challenge under the antitrust laws found this latter practice unlawful.  Since then, 2003 amendments to Hatch-Waxman have reduced the likelihood of “parking” and permit a subsequent generic ANDA filer to accelerate the first filer’s exclusivity period if the subsequent filer prevails in its challenge to the brand drug patents.  The 2003 amendments also require the parties who enter into such agreements to submit them to the Federal Trade Commission (“FTC”) and U.S. Department of Justice for antitrust review.

Courts are Divided on the Legality of Patent Settlement Agreements

The Third Circuit found that any brand patent settlement agreement providing for payments by the branded company to a generic challenger who delays product entry creates a per se unlawful restraint of competition.  The Third Circuit’s decision came two days prior to the entry of an Eleventh Circuit order refusing to reconsider that court’s earlier ruling rejecting the FTC’s claim that a patent settlement agreement between Solvay Pharmaceuticals and generics Paddock Laboratories and Watson Pharmaceuticals over Solvay’s blockbuster testosterone replacement drug, Androgel®, violated the antitrust laws. 

In the Androgel case, the Eleventh Circuit, following similar rulings in the Second and Federal Circuit Courts of Appeal, as well as its own precedents, applied the “scope of the patent” test that upholds such patent litigation settlements, even those providing for payments by the patent holder to a generic delaying its product’s market entry.  Under this test, these deals are deemed acceptable as long as the restraint of competition is within and does not exceed the scope of the challenged patent, the patent holder’s claim of infringement was not objectively baseless, and the patent itself was not procured by a fraud on the U.S. Patent Office.  Underlying this decision and others like it is a strong judicial policy favoring the negotiated settlement of litigation, and a recognition that litigants dealing at arm’s length, assessing the expense and risks of patent litigation, may rationally choose to settle rather than risk an unfavorable outcome. 

Similar results occurred in Tamoxifen® litigation in the Second Circuit, in the Federal Circuit involving Cipro®, and in prior challenges to patent settlement agreements in the Eleventh Circuit concerning K-Dur® and Hytrin®.
The Third Circuit’s decision was not without precedent, however, as the District of Columbia Circuit and Sixth Circuit Courts of Appeal had previously struck down brand patent settlement agreements, both involving Cardizem®, as constituting illegal restraints of trade.  At issue in the Third Circuit case were settlement agreements between Schering-Plough and two generics, Upsher-Smith Laboratories and Baxter International’s ESI-Lederle unit, resolving two suits challenging Schering’s K-Dur® patent.  Under these agreements, the generics deferred the marketing of their products in exchange for substantial payments from Schering.  Private plaintiffs, not the FTC, asserted that these agreements created an unreasonable restraint of generic drug competition in violation of the antitrust laws.

The Third Circuit’s Conclusion

After reviewing all of the precedents, the Third Circuit ruled that reverse payment settlements undermine the goal of Hatch-Waxman permitting generics to challenge weak or invalid brand drug patents.  By brand drug companies paying their potential competitors not to compete, the court concluded, such agreements “protect[] intellectual property, not on the strength of the patent holder’s legal rights, but on the strength of its wallet.”  These settlements, the court noted, create “unjustified monopolies by brand name companies” and, ultimately, fail to protect consumers, whom Congress intended to benefit under Hatch-Waxman.  In deciding that reverse payments by a branded drug patent holder to a generic challenger are “prima facie evidence of an unreasonable restraint of trade”, the court said that the parties to such agreements can avoid the impact of the antitrust laws only by demonstrating that the payment “was for a purpose other than [the generic’s] delayed entry or…offers some pro-competitive benefit.”

Interestingly, the Third Circuit’s decision is foursquare contrary to the Eleventh Circuit’s 2005 ruling upholding the very same K-Dur® settlement agreements.

Is Supreme Court Review a Likely Next Step?

A split in the federal Circuits often, but not always, presages a review by the United States Supreme Court to resolve differences and provide guidance for lower federal courts considering similar issues.  Although the Supreme Court has refused in the past to review this issue notwithstanding several opportunities to do so, the Third Circuit’s decision may now nudge the Court towards accepting a likely appeal by the litigant drug companies.  All observers believe that the Third Circuit’s decision, rejecting the “scope of the patent” test of the Eleventh, Second and Federal Circuits, but consistent with earlier precedents in the D.C. and Sixth Circuits, lays the foundation for an appeal to America’s highest court.  The entire pharmaceutical industry, the FTC, consumer groups, third-party payors, state governments and federal legislators now await a determination from the Supreme Court of whether it will entertain these issues.