Payment After Actavis

• Author: Michael A. Carrier
• Position: Distinguished Professor, Rutgers Law School
• Pages: 7-49

Payment After Actavis Michael A. Carrier  ABSTRACT: One of the most pressing issues in patent and antitrust law involves agreements by which brand-name drug companies pay generic firms to delay entering the market. In FTC v. Actavis , the Supreme Court held that these payments could violate the antitrust laws. In the wake of the decision, courts, the parties, and commentators have been fiercely debating the question of what constitutes a payment, with courts reaching divergent outcomes. This Article offers a framework that answers this question. It first articulates two justifications based on litigation costs and brand payments for generic services. It then introduces a test based on whether the brand conveys to the generic a type of consideration not available as a direct consequence of winning the lawsuit. Such a showing—accompanied by a finding of an exclusion payment that violates the antitrust laws—demonstrates that the generic’s exclusion from the market is based on the payment rather than the patent. Applying the framework, the Article finds that the test is satisfied when generics delay entering the market after receiving cash, “poison pill” clauses allowing the acceleration of generic entry, and brand agreements not to introduce their own generics. In contrast, the test is not satisfied when the brand forgives damages accrued by a generic that has entered the market. The test thus solves the puzzle articulated by Judge Posner that every settlement provides something of value to the generic. And it offers a framework that resolves a contentious issue with significant consequences for health care and the economy while being consistent with common sense, economics, and the policies underlying the relevant legal regimes.  Distinguished Professor, Rutgers Law School. I would like to thank Scott Hemphill, Herb Hovenkamp, Mark Lemley, Steve Shadowen, and David Sorenson for very helpful comments. 8 IOWA LAW REVIEW [Vol. 100:7 I. INTRODUCTION ................................................................................. 8 II. REGULATORY FRAMEWORK .............................................................. 11 III. PAYMENT ......................................................................................... 12 A. A NTICOMPETITIVE E FFECTS ........................................................ 13 B. P ATENT -T ERM S PLIT A GREEMENTS ............................................ 16 C. P AYMENT U NDER A CTAVIS ......................................................... 18 IV. JUSTIFICATIONS ............................................................................... 19 A. J USTIFICATION 1: L ITIGATION C OSTS .......................................... 19 B. J USTIFICATION 2: U NRELATED G ENERIC S ERVICES ....................... 21 1. General Findings ............................................................. 22 2. Specific Examples ............................................................ 23 V. TEST FOR EXCLUSION PAYMENTS .................................................... 25 A. T EST ......................................................................................... 26 1. Requirement Greater Than Transfer of Value ............. 26 2. Scenario 1: At-Risk Entry ................................................ 27 3. Scenario 2: No Entry ....................................................... 27 B. C ONSEQUENCES OF E XCLUSION P AYMENTS .................................. 29 C. S UPPORT FOR T EST .................................................................... 32 VI. APPLICATIONS ................................................................................. 35 A. C ASE 1: C ASH ........................................................................... 36 B. C ASE 2: P OISON P ILLS ............................................................... 37 C. C ASE 3: N O -A UTHORIZED -G ENERIC P ROVISION ........................... 41 D. C ASE 4: B RAND F ORGIVENESS OF D AMAGES ................................. 44 VII. CONCLUSION .................................................................................. 47 I. INTRODUCTION One of the most pressing issues in patent and antitrust law today involves agreements by which brand-name drug companies pay generic firms to delay entering the market. In the landmark case of FTC v. Actavis , the Supreme Court concluded that these payments “tend to have significant adverse effects on competition” and could violate the antitrust laws. 1 In ensuring a robust role for antitrust analysis, the Court handed down one of the most important business cases in the past generation. But it left unresolved several critical issues. It is no surprise, then, that courts, the parties, and commentators are already fiercely debating the scope of the 1. FTC v. Actavis, Inc., 133 S. Ct. 2223, 2231 (2013). 2014] PAYMENT AFTER ACTAVIS 9 decision. One of the most contentious issues, with which numerous courts are currently wrestling, 2 involves the question of what constitutes a payment from a brand to a generic. There is no dispute that settlements in which a brand pays cash to a generic for delayed entry constitute payment. But beyond this scenario, opinions diverge. How should more recent, complex settlements be analyzed? Should courts find a payment when a brand pays for unrelated services provided by the generic? When a brand promises not to introduce its own generic drug during the first-filing-generic’s exclusivity period? When a brand forgives damages for which a generic could be liable after entering the market? This Article answers this question, articulating a framework for determining what constitutes an “exclusion payment” that violates the antitrust laws. The analysis begins by articulating two justifications that do not constitute exclusion payments. The first, which will be simple to show but will typically not apply, involves payments that do not exceed the litigation costs the brand would incur after settlement. This is not an exclusion payment because the brand would be required to pay these costs in any event, and this relatively small amount does not present significant anticompetitive harm. The second justification involves brand payments for a generic’s unrelated services rather than for delay. Given that brands are increasingly paying generics for these “side deals,” this justification could apply in many cases. But it must be taken with a significant grain of salt. These arrangements typically do not occur outside the settlement context, and many—such as an arrangement by which a brand relies on a generic for its marketing expertise—belie common sense. The Article then offers a test for determining exclusion payments. The test asks if the brand conveys to the generic a type of consideration not available as a direct consequence of winning the lawsuit. If the generic is able to obtain such consideration, its exclusion from the market cannot be traced to the strength of the brand’s patent. In such a case, the brand is providing compensation beyond what even a valid and infringed patent would justify. And, presenting antitrust concern, the generic delays entering the market because of this payment. In addition to articulating a clear framework, such a test also helps resolve one of the most difficult issues introduced by drug patent settlements: the presence of a patent. Antitrust law typically does not tolerate one company 2. E.g. , In re Lamictal Direct Purchaser Antitrust Litig., No. 12-cv-995 (WHW), 2014 WL 282755, at *1 (D.N.J. Jan. 24, 2014), notice of appeal filed ; In re Nexium (Esomeprazole) Antitrust Litig., 968 F. Supp. 2d 367, 386–87 (D. Mass. 2013); In re Lipitor Antitrust Litig., No. 3:12-cv-2389 (PGS), 2013 WL 4780496, at *1 (D.N.J. Sept. 5, 2013); see also Julia K. York, Reverse-Payment Litigation in the Wake of FTC v. Actavis, ABA SECTION OF ANTITRUST LAW, Winter 2014, at 4, 5 (noting that “the question of non-monetary consideration is present in at least ten of the fifteen pending reverse-payment antitrust litigations”). 10 IOWA LAW REVIEW [Vol. 100:7 paying a second not to enter the market. 3 But the presence of a patent complicates the analysis. The settling parties have justified payments based on the patent. And under the “scope of the patent” test that the Federal, Second, and Eleventh Circuits had adopted before being overturned by the Supreme Court in Actavis , brand payments to generics were automatically upheld as a form of exclusion available to patent holders, with courts assuming the patent was valid and infringed. 4 The simplicity of the test offered in this Article makes clear that when a brand conveys a type of consideration not otherwise available to a generic, it does not matter if the patent is valid and infringed. The reason is that the brand is offering more than it would be able to as a result of obtaining a court decision upholding the patent and finding infringement. The test thus provides the first framework by which courts can effectuate the Actavis Court’s instruction—which is already being tested by the settling parties—not to litigate the merits of every patent dispute. It solves the puzzle articulated by Judge Posner of every settlement providing something of value to the generic. It pinpoints for condemnation settlements in which exclusion is based on the payment rather than the patent. And it offers a simple and predictable analysis that resolves nearly all of the disputed cases that arise today. Part II of this Article provides an overview of the relevant regulatory framework, focusing on the pathway by which generics reach the market. Part III explains why exclusion payments present antitrust concern, paying particular attention to the Court’s opinion in Actavis . Part IV sets forth the justifications of payments not exceeding litigation costs and payments for unrelated generic services. Part V introduces the test for determining exclusion payments, which analyzes whether a brand conveys to a generic a...