Excessive Reverse Payments in the Context of Hatch-waxman

• Publication year: 2008
• Citation: Vol. 10 No. 2008

Satish Chintapalli⁰

Reverse payments, such as the one at issue in Arkansas Carpenters Health & Welfare Fund v. Bayer AG, are controversial because they appear to be nothing more than agreements between competitors not to compete. However, because a patent was involved, the Federal Circuit refused to declare this agreement unlawful—even when the patentee offered to pay the alleged infringer large sums of money to exit the market. The recent introduction of The Preserve Access to Affordable Generics Act is an attempt by Congress to clarify its intent with respect to reverse payments under Hatch-Waxman. Although this legislation targets the right problem, it is too broad a solution because it would prohibit pro-competitive settlements in some circumstances. This Recent Development suggests modifying the Act so that such settlements would be prohibited only where the underlying patent is likely invalid or not infringed.

I. Introduction

The 2001 anthrax attacks on the United States underscored a tension in the United States' patent system between the right of a pharmaceutical drug patentee to settle a patent lawsuit by paying competitors to leave the market and the goal of providing consumers with the benefits of competition in the pharmaceutical drug industry.¹ During the attacks, Bayer's antibiotic, "Cipro," was in heavy demand because it was the only drug initially approved to treat anthrax inhalation.² Thus, supplies of Cipro were limited.³ This fact exacerbated an already serious public health emergency.⁴ In addition, Bayer had paid a rival, Barr Laboratories, Inc., to exit the market, guaranteeing this limited supply and illustrating how the interests of patent holders and the public can diverge sharply.⁵

This arrangement between Bayer and Barr drew media criticism.⁶ It also sparked a lawsuit by purchasers of Cipro alleging antitrust violations.⁷ Ruling on the latest round of this litigation, the Federal Circuit recently held in In re Ciprofloxacin Hydrochloride Antitrust Litigation⁸ that a patent settlement agreement in which Bayer paid Barr Laboratories, Inc. (a generic challenger) to delay introduction of a generic version of Bayer's Cipro did not violate the Sherman Antitrust Act.⁹ According to the Federal Circuit, this settlement, also known as a "reverse payment" or an "exclusion payment," is not illegal under antitrust law because the "anti-competitive effects" of the agreement stem from the "exclusionary zone" of the patent.¹⁰ In other words, Bayer's patent enabled it to exclude all competition from the market and Bayer's participation in the settlement agreement, irrespective of its allegedly anticompetitive features, was a proper means of exercising this right.¹¹ Moreover, because all patents are "presumed valid," the court held Bayer and Barr's agreement did not violate antitrust laws.¹² However, this Recent Development will illustrate some of the problems with this approach.

Part II of this Recent Development provides a brief overview of the generic drug industry, pharmaceutical patents, the Drug Price Competition and Patent Term Restoration Act, patent settlements, and anticompetitive settlement agreements. Part II also discusses In re Ciprofloxacin Hydrochloride Antitrust Litigation. Part III discusses a Senate proposal that would preclude settlements where the patentee pays the alleged patent infringer and proposes a modification that would allow certain pro-competitive settlements currently excluded by the legislation.

II. Background

A. Overview of the Generic Pharmaceutical Industry

Pharmaceutical drugs are costly to develop and market.¹³ In addition, pharmaceutical research and development is an uncertain process.¹⁴ Thus, patents provide "brand name manufacturers" the opportunity to recover their initial research and development costs by providing a limited duration "monopoly."¹⁵ "Generic drug manufacturers" offer lower price versions of previously patented drugs.¹⁶ once a drug is no longer patented, generic drug manufacturers reduce the cost to consumers of pharmaceutical drugs by increasing the availability of lower cost alternatives.¹⁷ The availability of generic alternatives to patented drugs is credited with "lower[ing] average prices" and, according to at least one study by the Congressional Budget office ("CBo"), significantly reducing overall pharmaceutical expenditures by the public.¹⁸ According to the CBO, generics drugs have helped control "average prices for drugs that are no longer protected by a patent."¹⁹

By statute, a patent is granted for twenty years.²⁰ During this time, the patentee has "the right to exclude others from the right to exclude others from making, using, offering for sale, or selling the invention . . . ." ²¹ However, "[i]n the case of pharmaceutical drugs, twenty full years of exclusivity normally are not enjoyed due to the lengthy amount of time a pharmaceutical company must spend conducting FDA-mandated clinical trials."²² Regardless, once a patented drug enters the market, consumers will pay "prices above competitive levels" for the drug until the patent expires.²³ Upon expiration, competition with generics reduces the "average price[]" of the drug.²⁴

B. The Hatch-Waxman Act

1. Legislative Backdrop

Prior to the enactment of the Drug Price Competition and Patent Term Restoration Act of 1984 ("Hatch-Waxman Act"), generic manufacturers were required to undergo a similar FDA approval process as their brand counterparts.²⁵ Also, generic manufacturers could not begin the process of seeking FDA approval for their competing product until the patent term expired on the branded drug.²⁶ These requirements effectively "extended the [patent] term of the brand-name company's" product because the brand name manufacturer was not subject to competition while the generic manufacturer was obtaining FDA approval.²⁷ Consequently, fewer generic alternatives were available to consumers after the patent on the brand drug expired.²⁸ Seeking to increase the availability of generic pharmaceutical drugs, Congress crafted the Drug Competition and Patent Term Restoration Act of 1984 ("Hatch-Waxman").²⁹

2. "Statutory Experimental Use Exception"³⁰

Congress through "[t]he Hatch-Waxman Act modified the 1952 Patent Act by creating a statutory exemption from certain claims of patent infringement."³¹ This exemption is "codified in 35 U.S.C. § 271(e)(1)":³²

it shall not be an act of infringement to make, use, offer to sell, or sell within the United States or import into the United States a patented invention (other than a new animal drug or veterinary biological product . . . ) solely for uses reasonably related to the development and submission of information under a Federal law which regulates the manufacture, use, or sale of drugs or veterinary biological products.³³

The principal reason for this statute is to ensure that the patentee's monopoly is not indirectly extended because of the interplay between United States patent law and FDA regulations.³⁴ The effect of 35 U.S.C. § 271(e)(1) is that "generic manufacturers may commence work on a generic version of an approved drug any time during the life of the patent, so long as that work furthers compliance with FDA regulations."³⁵

3. Abbreviated New Drug Applications

Hatch-Waxman also established a quicker, separate mechanism for generic drug manufacturers to obtain FDA approval for their products.³⁶ Under Hatch-Waxman, generic drug manufacturers may file an "Abbreviated New Drug Application" ("ANDA") as opposed to following the same procedure for new drugs by filing a "New Drug Application" ("NDA").³⁷ "An ANDA may be filed if the active ingredient of the generic drug is the bioequivalent of the approved drug."³⁸ In addition, "[a]n ANDA allows a generic drug manufacturer to rely upon the safety and efficacy data developed by the original manufacturer."³⁹ Hatch-Waxman "continue[s] the FDA's earlier 'paper NDA' practice by establishing what has come to be known as a section 505(b)(2) application."⁴⁰ The section 505(b)(2) application allows the applicant to "rel[y], . . . in part, upon safety and efficacy data that the applicant . . . did not itself develop, but rather is available in the published literature."⁴¹ The effect of both the ANDA and section 505(b)(2) has been an improvement in the timely introduction of generic drugs on the market.⁴²

4. Certifications

For certain types of generic drugs, Hatch-Waxman requires "a patent certification." ⁴³ Applicants filing a patent certification must comply with the following:

(vii) a certification, in the opinion of the applicant and to the best of his knowledge, with respect to each patent which claims the listed drug referred to in clause (i) or which claims a use for such listed drug for which the applicant is seeking approval under this subsection and for which information is required to be filed under subsection (b) or (c) of this section—

(i) that such patent information has not been filed,

(ii) that such patent has expired,

(iii) of the date on which such patent will expire, or

(IV) that such patent is invalid or will not be infringed by the manufacture, use, or sale of the new drug for which the application is submitted; . . . .⁴⁴

These provisions "are respectively termed paragraph I, II, III, and iV certifications."⁴⁵

5. "Patent Infringement Proceedings"⁴⁶

As shown above, a paragraph IV certification asserts that the ANDA applicant's product either does not infringe on a drug patent or that the referenced patent is invalid.⁴⁷ Applicants using a paragraph IV certification must also submit notice to the patentee that they are seeking approval from the FDA to market a generic competitor.⁴⁸ The Patent Act specifically gives patentees the right to sue for patent infringement upon receipt of this notice.⁴⁹ Patentees are afforded an automatic 30 month stay of FDA approval of the ANDA application if they file their patent infringement suits within 45 days of receiving notice.⁵⁰...