Payment After Actavis

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

7

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. ANTICOMPETITIVE EFFECTS ........................................................ 13

B. PATENT-TERM SPLIT AGREEMENTS ............................................ 16

C. PAYMENT UNDER ACTAVIS ......................................................... 18

IV. JUSTIFICATIONS ............................................................................... 19

A. JUSTIFICATION 1: LITIGATION COSTS .......................................... 19

B. JUSTIFICATION 2: UNRELATED GENERIC SERVICES ....................... 21

1. General Findings ............................................................. 22

2. Specific Examples ............................................................ 23

V. TEST FOR EXCLUSION PAYMENTS .................................................... 25

A. TEST ......................................................................................... 26

1. Requirement Greater Than Transfer of Value ............. 26

2. Scenario 1: At-Risk Entry ................................................ 27

3. Scenario 2: No Entry ....................................................... 27

B. CONSEQUENCES OF EXCLUSION PAYMENTS .................................. 29

C. SUPPORT FOR TEST .................................................................... 32

VI. APPLICATIONS ................................................................................. 35

A. CASE 1: CASH ........................................................................... 36

B. CASE 2: POISON PILLS ............................................................... 37

C. CASE 3: NO-AUTHORIZED-GENERIC PROVISION ........................... 41

D. CASE 4: BRAND FORGIVENESS OF DAMAGES ................................. 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”).