Antitrust Analysis of Pharmaceutical Manufacturer Conduct

• Pages: 271-343

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CHAPTER VI

ANTITRUST ANALYSIS OF PHARMACEUTICAL

MANUFACTURER CONDUCT

This chapter surveys the principal issues that have arisen in the context

of antitrust challenges to the conduct of pharmaceutical manufacturers.

Parts A and B discuss patent settlement agreements and other agreements

between branded and generic companies. Part C discusses two forms of

litigation abuse: enforcement of patents obtained by fraud and sham

litigation. Part D addresses alleged abuses of the pharmaceutical

regulatory scheme, and Part E discusses the introduction of new drug

formulations as part of a product switching strategy.

A. Pharmaceutical Patent Settlements

Pharmaceutical patent settlements have been a major antitrust

battleground before the FTC and in the courts. In 2000, the FTC began

lodging complaints against several brand name and generic drug

companies alleging that the settlements of Hatch-Waxman infringement

litigation to which they were party constituted unfair methods of

competition in violation of Section 5 of the Federal Trade Commission

Act (FTCA).1 Private class actions soon followed. The Supreme Court’s

2013 decision in FTC v. Actavis2 resolved a number of issues that had

divided the lower courts but created a number of new questions that the

courts are just beginning to address.

1. See Complaint Counsel’s Statement of the Case, Schering-Plough, No.

9297 (FTC Sept. 18, 2001), available at http://www.ftc.gov/os/adjpro/

d9297/010918ccsotc.pdf; Complaint, Hoechst Marion Roussel, No. 9293

(FTC Mar. 16, 2000), available at http://www.ftc.gov/os/2000/

03/hoechstandrx complaint.htm; Complaint, In re Abbott Labs., No. C-

3945 (FTC Mar. 16, 2000), available at http://www.ftc.gov/os/2000/

03/abbottcmp.htm; see also FED. TRADE COMM’N, GENERIC DRUG ENTRY

PRIOR TO PATENT EXPIRA TION: AN FTC STUDY 4 (July 2002) [hereinafter

FTC, GENER IC DR UG ENTRY], available at https://www.ftc.gov/sites/

default/files/documents/reports/generic-drug-entry-prior-patent-

expiration-ftc-study/ genericdrugstudy_0.pdf.

2. 570 U.S. 136 (2013).

272 Pharmaceutical Industry Antitrust Handbook

1. Distinguishing Features of Hatch-Waxman Settlements

Reverse payments may be defined as payments (or other transfers of

value) made by the patent holder to the accused infringer—usually as part

of the settlement of patent infringement litigation—in exchange for an

agreement by the accused infringer not to enter until a future date. The

FTC’s objection to such payments, at least where they exceed nominal

litigation expenses, is clear:

If there has been a pa yment from the patent holder to the generic

challenger, there must have been some offsetting consideration. Absent

proof of other offsetting consideration, it is logical to conclude that the

quid pro quo for the payment was an agreement by the generic to defer

entry beyond the date that represents an otherwise reasonable litigation

compromise.3

The generic market price is significantly lower than the brand price.

The branded manufacturer might find it economically rational, therefore,

to pay the generic more money to keep its product off the market than the

generic would gain by winning the lawsuit and entering. By paying to

keep the generic out, the branded manufacturer can split the higher profits

it would earn by avoiding generic competition. In these circumstances,

consumers lose the benefit of lower prices from faster generic entry.4 The

presence of a reverse payment demonstrates, many argue, that the

settlement improperly extends the exclusionary power of patents.5

3. Schering-Plough, 136 F.T.C. 956, 988 (2003).

4. Protecting Consumer Access to Generic Drugs: The Benefits of a

Legislative Solution to Anticompetitive Patent Se ttlements in the

Pharmaceutical Industry: Hearing Before the H. Subcomm. on Commerce,

Trade and Consumer Protection, 110th Cong. 11-12 (2007) (statement of

the FTC), available at http://www.ftc.gov/os/testimony/

P859910Protecting_Consume_ Access_testimony.pdf.

5. See Alden F. Abbott & Suzanne T. Michel, The Right Balance of

Competition Policy and Intellectual Property Law: A Perspective on

Settlements of Pharmaceutical Patent Litigation, 46 IDEA 1, 15 (2005)

(arguing that “the payments from the patentee to the accuse d infringer in

the recent pharmaceutical patent litigation settlements purchased a degree

of exclusion that could not be obtained solely through the exclusionary

power of the patent.”); see also Maureen A. O’Rourke & Joseph F.

Brodley, An Incentives Approach to Patent Settlements: A Commentary on

Hovenkamp, Janis and Lemley, 87 MINN. L. REV. 1767, 1786 (2003).

Other commentators have viewed reverse payments “as a clear signal that

the settlement is likely to be anticompetitive” because “the patent holder

Antitrust Analysis of Manufacturer Conduct 273

The view that reverse payments are presumptively anticompetitive has

been challenged by other commentators. These commentators contest the

assumption that, absent a reverse payment, the parties would likely

inevitably have settled with an earlier generic entry date. They point

instead to situations in which reverse payments would promote earlier

generic competition than would have occurred absent the payments, citing

as examples situations in which the parties have asymmetric market

information, asymmetric expectations of the success in the litigation,

different time horizons, and different risk preferences.6

2. Pre-Actavis Case Law

Prior to the Supreme Court’s 2013 decision in Actavis, the federal

appellate courts were divided about the appropriate legal standard to apply

in analyzing reverse payments. Several federal courts decisions—in

particular, the Federal Circuit’s decision in the Cipro Hydrochloride

Antitrust Litigation,7 the Second Circuit’s decision in the Tamoxifen

Citrate Antitrust Litigation,8 and the Eleventh Circuit’s decisions in

Schering-Plough v. FTC9 and FTC v. Watson Pharmaceuticals10—largely

rejected antitrust claims based solely on reverse payments as long as the

would not pay more than avoided litigation costs unless it believed that it

was buying later entry than it expects to face through the litigation

alternative.” Carl Shapiro, Antitrust Limits to Patent Settlements, 34 RAND

J. ECON. 391, 407-08 (2003). Professors Hovenkamp, Janis, and Lemley

have argued that reverse payments in the Hatch-Waxman context should

be presumptively unlawful. Herbert Hovenkamp et al., Anticompetitive

Settlement of Intellectual Property Disputes, 87 MIN N. L. REV. 1719, 1759

(2003). In their view, patent holders can rebut the presumption by showing

that (1) they have a significant likelihood of prevailing in the patent

infringement litigation; and (2) the size of the p ayment is no more than the

attendant litigation costs. Id.

6. Kent S. Bernard & Willard K. Tom, Antitrust Treatment of Pharmaceutical

Patent Settlements: The Need for Context and Fid elity to First Principles,

15 FED. CIR. B.J. 617, 630 (2006); Marc G. Schildkraut, Patent-Splitting

Settlements and the Reverse Payment Fallacy, 71 ANTITRUST L.J. 1033,

1057-67 (2004); Robert D. Willig & John P. Bigelow, Antitrust Policy

Toward Agreements That Settle Patent Litigation, 49 ANTITRUST BULL.

655 (Fall 2004).

7. In re Ciprofloxacin Hydrochloride Antitrust Litig. (Cipro), 544 F.3d 1323

(Fed. Cir. 2008).

8. In re Tamoxifen Citrate Antitrust Litig., 466 F.3d 187 (2d Cir. 2006).

9. Schering-Plough v. FTC, 402 F.3d 1056 (11th Cir. 2005).

10. FTC v. Watson Pharms., 677 F.3d 1298 (11th Cir. 2012).