In Re K-dur Antitrust Litigation: Pharmaceutical Reverse Payment Settlements Go Beyond the “scope of the Patent”

• Publication year: 2012
• Citation: Vol. 14 No. 2012

NORTH CAROLINA JOURNAL OF LAW & TECHNOLOGY VOLUME 14, ISSUE 1: FALL 2012

IN RE K-DUR ANTITRUST LITIGATION: PHARMACEUTICAL REVERSE PAYMENT SETTLEMENTS GO

BEYOND THE “SCOPE OF THE PATENT”

Seiko F. Okada*

Reverse payment settlements occur in patent infringement suits by innovative drug manufacturers against potential generic manufacturers under the Hatch-Waxman Act, where the innovator pays the generic and the latter agrees to delay market entry. Three circuit courts have endorsed such settlements under the “scope of the patent” (“SOP”) test. In In re K-Dur Antitrust Litigation, the Third Circuit rejected the SOP test, holding that reverse payment settlements are presumptively illegal. Reverse payment settlements typically involve monopoly sharing and warrant antitrust scrutiny. K-Dur’s presumptive illegality approach, as compared to the extremely deferential SOP test, the over-inclusive per se approach, or the prohibitively complex full “rule of reason” analysis, is the best practicable judicial approach. Congress and the federal agencies should implement policies to enhance public interest in both a fair competitive market and innovative drug development.

1. INTRODUCTION

   Developing an innovative drug is a risky investment.1 Creating a “new chemical entity” takes ten to fifteen years and costs more than $1 billion.2 Additionally, the Food and Drug Administration

   
   

   * J.D. Candidate, University of North Carolina School of Law, 2014. Ph.D., Medical Sciences (Cell Biology), University of Tokyo, 2007. M.D., University of Tokyo, 1998. The author thanks Dr. Jeffrey Childers, Professor Andrew Chin, Ms. Rebecca Crandall, and Mr. Charles Bentley for their insightful guidance.

   1. U.S. CONG., OFFICE OF TECH. ASSESSMENT, OTA-H-522, PHARMACEUTICAL

      R&D: COSTS, RISKS, AND REWARDS, at iii (1993), available at http://www.fas.o rg/ota/reports/9336.pdf.

   2. Colleen Kelly, The Balance Between Innovation and Competition: The Hatch-Waxman Act, the 2003 Amendments, and Beyond, 66 FOOD & DRUG L.J.

      
      

      303

      
      

      (“FDA”) approves only five of 5,000 drugs that begin preclinical testing.3 A patent on an innovative drug has an important role in encouraging innovative drug development 4 and incentivizing studies of new indications or applications of already patented drugs.5

      After a patent has expired, or has been challenged and invalidated, the patented product passes into the public domain.6 Upon FDA approval, a generic version of the same drug may be produced and marketed by anyone.7 While the FDA requires that a generic drug have the same quality and efficacy as its innovative counterpart,8 some practical and substantive differences can exist between generic and innovative drugs. First, a huge price difference exists—the cost of a generic drug is about eighty to eighty-five percent lower than its innovative counterpart on average. 9 Secondly, inactive ingredients may differ between a generic drug and its innovative counterpart.10 Thirdly, a generic

      
      

      417, 418 (2011) (quoting FOOD AND DRUG LAW: CASES AND MATERIALS 577 (3d ed. 2007)); see also CONG. BUDGET OFFICE, PUB. NO 2589, RESEARCH AND DEVELOPMENT IN THE PHARMACEUTICAL INDUSTRY 2, 19–22 (2006) (discussing

      that, in 2000, developing an innovative drug of a new molecular entity took about twelve years and cost more than $800 million, including expenditures on failed projects and the value of forgone alternative investments).

   3. Kelly, supra note 2, at 418.

   4. See Pharmaceutical Patents: The Value of Pharmaceutical Patents & Strong Intellectual Property Protection, INNOVATION.ORG 5, http://www.innovat ion.org/documents/File/Pharmaceutical_Patents.pdf (last visited Dec. 27, 2012) (“[P]atents are a fundamental incentive to innovative activities in pharmaceuticals and biotechnology.” (internal citation omitted)).

   5. See generally Henry Grabowski et al., Does Generic Entry Always Increase Consumer Welfare?, 67 FOOD & DRUG L.J. 373 (2012) (discussing consumers’

   interest in innovative drug development, including clinical studies of already patented drugs for new use indications).

   6 See 35 U.S.C. § 102 (2006).

   1. See id.

   2. U.S. FOOD & DRUG ADMIN., FACTS ABOUT GENERIC DRUGS, http://www.fda

      .gov/Drugs/ResourcesForYou/Consumers/BuyingUsingMedicineSafely/Underst andingGenericDrugs/ucm167991.htm (last visited on Nov. 16, 2012).

   3. Id.

   4. Id. (“Generic drugs do not need to contain the same inactive ingredients as the brand name product.”). An inactive ingredient unique to a generic drug (or,

      
      

      drug and its innovative counterpart may look different—courts have traditionally recognized an innovator’s “trade dress” right that the appearance of an innovative drug not be mimicked by others.11

      As much as consumers benefit when innovative drugs become available, they also benefit when low-cost generic drugs become available. The FDA estimates that the use of FDA-approved generic drugs saved consumers $158 billion in 2010, an average of

      $3 billion per week. 12 While cost is just one of several considerations when choosing between innovative and generic drugs,13 the availability of options is advantageous for consumers.

      Congress intended to promote consumer benefits from generic market entry as well as innovative drug development when it

      
      

      conversely, an innovative drug) may cause side effects, including allergic reactions. DEPRESSION AND BIPOLAR SUPPORT ALLIANCE, GENERIC AND BRAND

      NAME DRUGS: UNDERSTANDING THE BASICS 4 (2007), available at www.dbsalli ance.org/pdfs/GenericRx.pdf.

   5. Jeremy A. Greene et al., Why Do the Same Drugs Look Different? Pills, Trade Dress, and Public Health, 365 NEW ENG. J. MED. 83, 83–84 (2011). The article discusses further that trade dress rights were historically recognized to

      prevent the sale of counterfeit products. Id. In the modern context of innovative

      and generic drugs, where the FDA approves only those generic drugs that have efficacy equivalent to innovative counterparts, the article recommends a policy to encourage similar appearances between innovative and generic drugs to minimize consumers’ confusion. Id. at 87–88.

   6. See U.S. FOOD & DRUG ADMIN., supra note 8 (citing GENERIC PHARMACEUTICAL ASS’N, SAVINGS: AN ECONOMIC ANALYSIS OF GENERIC

      DRUG USAGE IN THE U.S. (2011), available at http://patentdocs.typepad.com/file s/gpha-ims-study-web-sep20-11.pdf). But see Grabowski, supra note 5, at 375– 82 (discussing that generic market entry may disadvantage consumers). Generic market entry disincentivizes innovator drug companies from promoting their innovative drugs with free sample distribution. Id. at 375–80. An innovative

      drug with free samples may cost consumers less than a generic drug. Id.

      Further, generic market entry may disincentivize an innovator drug company to conduct costly clinical studies for new indications of the drug at issue because the innovator drug company will no longer be able to gain enough profit from the sales of the innovative drug to fund such clinical studies. Id. at 380–82.

   7. See DEPRESSION AND BIPOLAR SUPPORT ALLIANCE, supra note 10, at 6–7

      (discussing other factors such as “medical histories, insurance, and personal preferences”).

      
      

      passed the Hatch-Waxman Act14 in 1984.15 The Act was initially successful in encouraging challenges for innovative drug patents and, therefore, in facilitating generic market entry: Consumers saved almost ten billion dollars from the introduction of generic competition with Prozac (an antidepressant), Zantac (an antacid), Taxol (an anti-cancer drug), and Plantinol (an anti-cancer drug) in the 1990’s alone.16 At the same time, however, the Hatch-Waxman framework caused pharmaceutical companies to “game” this complex statute to their benefit.17

      One of the major gaming activities was a “reverse payment settlement” by an innovative drug company to its generic challenger in patent challenge cases brought under the Hatch- Waxman framework.18 The settlement payment, usually millions of dollars, 19 flows from the plaintiff (patent holder) to the

      
      

   8. Drug Price Competition and Patent Term Restoration Act of 1984, Pub. L. No. 98-417, 98 Stat. 1585 (1984); 21 U.S.C. § 355 (1984) (amending the

      Federal Food, Drug, and Cosmetic Act, 21 U.S.C. §§ 301–399) (codified as amended at 21 U.S.C. § 355 (2006)).

   9. Kelly, supra note 2, at 421 (discussing the dual motivations of Congress to encourage generic market entry and to encourage innovation and development of new drugs); see H.R. REP. NO. 98-857, pt. 1, at 15–17 (1984), reprinted in

      1984 U.S.C.C.A.N. 2647, 2648–50.

   10. Michael A. Carrier, Unsettling Drug Patent Settlements: A Framework for Presumptive Illegality, 108 MICH. L. REV. 37, 39 (2009) (citing Generic

       Pharmaceuticals: Marketplace Access and Consumer Issues: Hearing Before the S. Comm. on Commerce, Science, & Transp., 107th Cong. 61 (2002) (statement of Kathleen F. Jaeger, President and CEO, Generic Pharm. Ass’n),

       available at http://www.gpo.gov/fdsys/pkg/CHRG-107shrg90155/pdf/CHRG-10

       7shrg90155.pdf).

   11. Stacey L. Dogan & Mark A. Lemley, Antitrust Law and Regulatory Gaming, 87 TEX. L. REV. 685, 687, 709 (2009) (explaining that the very regulatory structure that exists to promote competition can ironically create gaming opportunities for competitors bent on achieving anticompetitive goals,

       and that such “regulatory gaming” is particularly common in pharmaceutical

       industries).

   12. Carrier, supra note 16, at 51.

   13. See e.g., In re K-Dur Antitrust Litig., 686 F.3d 197, 205 (3d Cir. 2012) (involving a reverse payment of $60 million over three years); In re Tamoxifen

       Citrate Antitrust Litig., 466 F.3d 187, 213 (2d Cir. 2006) (involving a reverse

       payment of $21 million); Andrx Pharmaceuticals, Inc. v. Biovail Corp., 256

       
       

       defendant (alleged patent infringer) “in reverse” of a regular settlement, in return for delaying market entry of generic drugs.20 A reverse payment settlement is distinct from a typical settlement in that the settling parties share aligned incentives to create a monopoly and share the monopoly deals at the expense of consumers.21

       Despite the anticompetitive nature of reverse payment settlements, three circuit courts have held that such payments do not

       ...