Reverse payment settlements: how Actavis activated the rule of reason.

• Author: Estwick, Christopher O.

1. INTRODUCTION II. BACKGROUND A. Patent Law 1. Registration of Inventions 2. Patent Prosecution 3. Scope of Patent Rights B. Antitrust Law C. Hatch-Waxman Act 1. Abbreviated New Drug Application 2. Paragraph IV Certification 3. 180-Day Exclusivity Period D. Patent Litigation and Settlements III. ANALYSIS A. Schering-Plough Settlements 1. Schering-Plough Corp. v. FTC--Patent Scope Test 2. In Re K-Dur Antitrust Litig.--Rule of Reason Approach B. Actavis 1. Factual Background 2. Procedural History 3. Supreme Court's Adoption of the Rule of Reason IV. RECOMMENDATION A. Rule of Reason Approach B. Presumption of Illegality V. CONCLUSION I. INTRODUCTION

   In the pharmaceuticals industry, once a drug manufacturer develops a new drug, the manufacturer acquires patent protection for it. Upon receiving a patent, the patentee holds the power to exclude any other manufacturer from the market for that particular drug. If the drug is successful, other manufacturers will produce and attempt to market generic versions of the drug. When generic manufacturers file an application with the Food and Drug Administration (FDA) to sell a generic version of a patented drug, the patentee may sue for patent infringement, based on the application alone. In many cases, the parties settle before litigation begins. In a small number of cases, the parties settle, but with a twist: the patentee--who initiated the patent infringement litigation--pays the generic manufacturer a large sum of money in exchange for the generic manufacturer's delayed entry into the market. These settlements are called reverse payment settlements and have recently attracted the Federal Trade Commission's (FTC) attention.

   According to the FTC, reverse payment settlements cripple pharmaceutical consumers, costing them as much as $3.5 billion per year. (1) On average, reverse payment settlements prevent competition from generic manufacturers for almost 17 months longer than similar settlements that do not involve a cash transfer. This, in turn, prevents generic drugs--which could cost as much as 90% less than their brand name counterparts--from entering the market and reducing costs for consumers. (2)

   Part II of this Note provides the fundamental principles of patent and antitrust law. Part II also provides the legal framework that guides the process generic manufacturers must follow to introduce generic drugs to the market. Part III discusses the two tests appellate courts have created to evaluate whether reverse payment settlements violate the Sherman Act. Part III also analyzes the Supreme Court's FTC v. Actavis decision. (3) Part IV expresses support for the Actavis Court's adoption of antitrust analysis. However, Part IV also recommends the Court go one step further, by subjecting reverse payment settlements to a presumption of illegality in order to shift the burden of proof to the defendants in antitrust actions.

2. BACKGROUND

   This Part discusses the regulatory backdrop in which reverse payment settlements arise. It provides a brief review of the relevant principles of patent and antitrust law. This Part then discusses the Hatch-Waxman Act, Congress's attempt to incentivize generic manufacturers to produce and sell generic versions of patented drugs. This Part ends with a description of the legislative efforts to address reverse payment settlements.

   1. Patent Law

      In an effort to promote "the Progress of Science and useful Arts," the framers of the Constitution empowered Congress to grant monopolies to inventors for a limited period of time for new inventions. (4) Congress has exercised such power several times, enacting laws relating to patents such as the Patent Act in 1952. (5) The Act codified the process inventors use to register new inventions with the United States Patent and Trademark Office (USPTO) and the criteria for registering new inventions. (6)

      1. Registration of Inventions

         The first three sections of the Patent Act provide the requirements for the registration of an invention. (7) Section 101 of the Patent Act allows "[w]hoever invents or discovers any new and useful process, machine, manufacture, or composition of matter ... [to] obtain a patent therefor." (8) Congress intended patentable subject matter to include "anything under the sun that is made by man." (9)

         Sections 102 and 103 provide further patent registration requirements. (10) Section 102 mandates that, in order to qualify for registration, the invention must be novel, which means that it must not already be in existence. (11) Section 103 provides that the invention must be nonobvious in that it cannot be a menial improvement on prior art or technology. (12) In order to justify patent protection and the resultant monopoly that the inventor will enjoy, the invention must constitute a significant, meaningful advance beyond prior technology. (13) This carefully crafted bargain that Congress created between inventors and the public relies on the eventual release into the public domain of a novel invention that would otherwise have been kept private.

      2. Patent Prosecution

         Patent prosecution is the USPTO application process that each applicant must undergo. (14) During patent prosecution, inventors must demonstrate to the USPTO how their invention satisfies the elements of patentability. (15) Once an inventor has successfully demonstrated patentability and is issued a patent, she enjoys a monopoly on her invention for a period of 20 years. (16)

      3. Scope of Patent Rights

         Once the USPTO issues a patent, the inventor owns property rights for the invention. (17) Those property rights include "the right to exclude others from making, using, offering for sale, or selling the invention throughout the United States." (18) In the event of patent infringement, the patent holder has the ability to bring a patent infringement action against the alleged infringer for any damage incurred by the patent holder, as well as the ability to obtain an injunction to prevent the alleged infringer from any further use of the invention. (19)

   2. Antitrust Law

      In the late 19th century, Congress passed the Sherman Act in response to a number of corporate trusts that controlled entire industries and stifled competition. (20) The purpose of the Act was to promote free, open competition in the marketplace, and to penalize any entity or collection of entities that sought to hinder such competition. (21) To further that purpose, the Act proscribed "[e]very contract ... in restraint of trade or commerce among the several States," (22) as well as every monopoly, "or attempt to monopolize ... any part of trade or commerce." (23)

   3. Hatch-Waxman Act

      In 1938, Congress passed the Federal Food, Drug, and Cosmetic Act. (24) Before a pharmaceutical manufacturer could market a new drug, the Act required the manufacturer to complete a lengthy and expensive application process to prove that the drug was safe and effective. (25) Prior to 1984, generic manufacturers completed the same process for FDA approval of generic drugs. (26) Eventually, Congress recognized that the process was unduly burdensome for generic manufacturers because they had to prove that their generic versions of drugs had the same active ingredients, effects, and clinical testing results as the original, brand name versions. (27) Furthermore, generic drug manufacturers were unable to conduct clinical testing while the applicable patents were valid because doing so constituted patent infringement. (28) In 1984, Congress passed the Drug Price Competition and Patent Term Restoration Act--better known as the Hatch-Waxman Act--to streamline the application process for generic manufacturers and make generic drugs more accessible. (29)

      1. Abbreviated New Drug Application

         Hatch-Waxman made it easier for generic manufacturers to complete the application process by introducing Abbreviated New Drug Applications (ANDAs). (30) Instead of having to submit clinical data to prove the safety of a generic drug, under Hatch-Waxman, generic manufacturers only have to show that the drug is a "bioequivalent" of the brand name drug. (31) In order to prove bioequivalency, generic manufacturers must provide information that: (1) the generic version of the drug has the same active ingredient as the brand name drug; (2) the generic drug has the same route of administration as the brand name drug; and (3) the generic drug's labeling is the same as the brand name drug. (32) ANDAs allow the FDA to rely on its previous findings regarding the safety and efficacy of the brand name drug in determining whether to allow the generic version on the market. (33)

      2. Paragraph IV Certification

         At the end of the ANDA, generic manufacturers must file at least one of the following four certifications for any patented drugs that are relevant to the generic version: (I) the patent information has not been filed with the FDA; (II) the patent has expired; (III) the date when the patent expires; or (IV) the patent is invalid or will not be infringed by the manufacture, use, or sale of the new drug. (34) If the generic manufacturer seeks to introduce a drug that is essentially the equivalent of a brand name drug, it will submit a Paragraph IV...