Status Of Reverse Payment Cases Against Pharmaceutical Companies

• Published date: 09 August 2023
• Subject Matter: Antitrust/Competition Law, Intellectual Property, Food, Drugs, Healthcare, Life Sciences, Antitrust, EU Competition , Patent, Food and Drugs Law, Biotechnology & Nanotechnology
• Law Firm: Lowenstein Sandler
• Author: Zarema A. Jaramillo, Jonathan L. Lewis, Sydney J. Kaplan and Joshua E. Morris

Summary of antitrust issues

Reverse payment cases arise in the context of settlement agreements between brand-name pharmaceutical companies and generic drug manufacturers to resolve patent litigation under the Hatch-Waxman Act² (Hatch-Waxman or the Act).³ Patent litigation under Hatch-Waxman is the product of the Act's effort to encourage drug innovation by brand-name pharmaceutical companies and other innovators while expediting the entry of generic drugs into the market.

Under the Act, no prescription drug can be marketed in the United States without approval from the US Food and Drug Administration (FDA).⁴ Generic drug manufacturers looking to enter the market seek FDA approval of their generic drug through an abbreviated new drug application (ANDA), in which the applicant must demonstrate that the generic drug contains the same active ingredients as, and is bioequivalent to, a brand-name drug listed in the FDA's Approved Drug Products with Therapeutic Equivalence Evaluations (commonly known as the Orange Book).⁵ An ANDA also must include one of four certifications for each patent listed for the brand-name drug by the patent holder in the Orange Book.

A Paragraph IV certification requires the applicant to certify that the brand manufacturer's patent listed in the Orange Book is invalid or will not be infringed by the generic drug (or both). The filing of a Paragraph IV certification constitutes a statutory act of infringement, enabling the brand manufacturer, which holds the Orange Book patent, to file a patent infringement case against the Paragraph IV filer without waiting for the generic manufacturer to make or sell the generic equivalent drug.⁶ Once the patent holder files a patent infringement action against the Paragraph IV filer, a statutorily imposed 30-month stay is triggered, preventing the FDA from granting the ANDA final approval - the last regulatory approval needed by the generic manufacturer to launch its product - until the stay has lapsed.⁷

It is within this regulatory framework that patent litigants often settle in lieu of pursuing a final court determination in favor of either the brand or the generic manufacturer. Although settlement normally is a favored form of dispute resolution - providing litigants with outcome certainty and legal cost savings and lessening the burden on the judiciary - a particular form of Hatch-Waxman settlement has drawn significant antitrust scrutiny in the past two decades. In some of these settlements, the agreements allegedly include a payment from the patent holder to the Paragraph IV applicant in return for an agreement by the Paragraph IV applicant to delay its entry into the market until a negotiated date up to the date of expiration of the patent. Settlement agreements containing such terms have been challenged by the Federal Trade Commission (FTC),⁸ private plaintiffs, and class action litigants as anticompetitive under certain circumstances, based on the theory that the patent holder is paying the generic manufacturer to stay out of the market longer than the patents at issue would otherwise allow, and, therefore, the patent holder may maintain its price above a competitive level.⁹ On the other hand, patent holders are entitled to settle litigation involving their patents, and many settlements permit generic firms to enter the market earlier than the expiration of the claimed patents.¹⁰

Challenges to these patent litigation settlements by the FTC and private and class litigants are brought under Sections 1 and 2 of the Sherman Act,¹¹ Section 5 of the FTC Act,¹² and various state antitrust laws. In October 2019, California became the first state to enact a law specifically aimed at reverse payment settlements.¹³ Generally, Sherman Act Section 1 claims are based on allegations that brand-name and generic drug companies are competitors or potential competitors, and any settlement in which the generic company receives money in exchange for staying out of the market is an agreement to allocate the market. Section 2 claims typically are based on the theory that the brand-name company, by inducing generic firms through payment to stay out of the market, is illegally extending its monopoly power in the relevant drug market.

Agencies' and courts' treatment of reverse payments

Early challenges to purported reverse payment settlements were met with inconsistent treatment by the federal courts.¹⁴ Although some courts have held that such agreements were presumptively legal and immune from antitrust scrutiny absent generic exclusion beyond the scope of the asserted patents,¹⁵ other courts have viewed the agreements as presumptively illegal or, at least, sufficiently anticompetitive to justify a 'quick look' approach.¹⁶ In 2013, the US Supreme Court resolved this circuit split in FTC v Actavis, Inc¹⁷ by holding that neither presumption applied; instead, it ruled that reverse payment settlements are subject to the rule of reason.

The facts underlying the Supreme Court's decision in Actavis involved settlement agreements between the brand-name drug company Solvay Pharmaceuticals and Paragraph IV generic applicants Actavis, Paddock, and Par, in resolution of Solvay's infringement action against the generic firms over Solvay's testosterone replacement drug, AndroGel.¹⁸ The FTC challenged the agreements under Section 5 of the FTC Act,¹⁹ asserting that the companies unlawfully agreed 'to share in Solvay's monopoly profits, abandon their patent challenges, and refrain from launching their low-cost generic products to compete with AndroGel for nine years.'²⁰ The US District Court for the Northern District of Georgia rejected the FTC's claims,²¹ and, on appeal, the US Court of Appeals for the Eleventh Circuit affirmed, ruling that 'absent sham litigation or fraud in obtaining the patent, a reverse payment settlement is immune from antitrust attack so long as its anticompetitive effects fall within the scope of the exclusionary potential of the patent.'²² The Supreme Court subsequently reversed the judgment of the Eleventh Circuit and remanded.²³

Although the Supreme Court accepted that the anticompetitive effects of the settlement agreements fell within the scope of the claimed patent, it rejected the argument that this fact alone immunized the agreements from antitrust scrutiny.²⁴ It reasoned that although the holder of a valid patent may be exempt from antitrust liability based on a legitimate patent right to exclude and collect monopoly profits, the issue in reverse payment cases is whether the patent holder has such a right.²⁵ Accordingly, if a generic drug firm is successful in demonstrating that a claimed patent is invalid or not infringed, the patent holder would not enjoy the right to exclude the proposed generic product from the marketplace. The Court concluded, therefore, that the agreements at issue had the potential to have 'significant adverse effects on competition,' reasoning that 'it would be incongruous to determine antitrust legality by measuring the settlement's anticompetitive effects solely against patent law policy, rather than by measuring them against procompetitive antitrust policies as well.'²⁶

...