The use of merger analysis techniques to assess the competitive effects of reverse payment settlements.

Author:Toomey, Michael

    Reverse payment settlements, in which a brand drug manufacturer makes a payment to a generic drug manufacturer in exchange for the generic manufacturer delaying entry into the market, are a frequent topic of scholarship. Common debates range from favoring either antitrust (1) or patent (2) laws to analyzing which settlements are most likely to be harmful to competition. (3) The Supreme Court partially resolved these issues in FTC v. Actavis, Inc. (4) when it held that lower courts analyzing reverse payment settlements should apply the "rule of reason" in weighing the anticompetitive concerns of the settlement against any procompetitive justifications. (5) In doing so, the Court left to lower courts the task of structuring the particular rule of reason analyses. (6)

    This Note offers a solution for lower courts conducting the rule of reason analysis: consider a reverse payment settlement the functional equivalent of a merger and apply the techniques and case law associated with Section 7 (7) merger cases. As will be explored below, lower courts have attempted many forms of analysis, many of which were rejected in Actavis. (8) Because mergers frequently raise the same anticompetitive concerns as reverse payment settlements, the analyses take place in a common structure, which allows the imputation of merger case law to settlement analysis. Merger analysis is also sufficiently flexible such that only the truly anticompetitive settlements will be prevented. By providing a common framework for assessing reverse payment settlements, merger analysis allows for consistent holdings across the federal circuits--a consistency severely lacking in pre-Actavis case law.

    This Note proceeds in four parts. Part II examines the history of reverse payment settlements and highlights the need for a consistent analysis structure. Part III compares the anticompetitive concerns of reverse payment settlements and mergers to argue that applying merger analysis is appropriate. Part IV surveys the available tools and relevant case law of merger analysis. Finally, Part V applies these tools to reverse payment settlements.


    Reverse payment settlements sit at the intersection of patent law and antitrust law. The unique regulatory framework governing the pharmaceutical industry creates a system that encourages these settlements, but federal courts have disagreed over their legality. Although presented with an opportunity to resolve the disagreement, the Supreme Court merely noted the incorrect approaches and left it to the trial courts to establish the proper structure of the analysis. (9) To fully explore the analyses available after Actavis, it is necessary to first review the major legislation governing the introduction of generic pharmaceuticals and the legal tests historically applied to reverse payment settlements.

    1. The Hatch-Waxman Act

      The regulatory framework established by the Federal Food, Drug, and Cosmetic Act requires pharmaceutical manufacturers to engage in a thorough approval process that includes several rounds of clinical testing. (10) The process is both costly and lengthy. (11) In fact, the original approval process often took so long that a considerable portion of the patent term expired before the drug even reached the market. (12) Patent laws, however, barred generic manufacturers from beginning the FDA approval process for a generic version of a patented drug while the brand-name patent was still in effect. (13) The lengthy approval process for a generic drug therefore effectively extended the length of the brand manufacturer's patent. (14) In short, the original process was cumbersome and harmful to both brand and generic manufacturers.

      Congress passed the Drug Price Competition and Patent Term Restoration Act, also known as the Hatch-Waxman Act, in part to alleviate barriers to generic entry into the market. (15) The Act has two relevant effects. First, conduct by generic manufacturers that would ordinarily be considered patent infringement is exempt from patent liability. (16) Second, a generic manufacturer can "piggyback" off a brand manufacturer's New Drug Application (NDA) data and obtain FDA approval simply by filing an Abbreviated New Drug Application (ANDA) and showing that the generic drug is "bioequivalent" to the patented brand drug. (17) By allowing generic manufacturers to rely on the brand manufacturer's data demonstrating the safety and efficacy of the drug, the Act makes market entry much cheaper and thus has ultimately made generic entry much more feasible. (18)

      The Act requires that an ANDA contain a "certification" for each relevant patent held by the brand drug manufacturer that would affect the generic drug. (19) Under a "Paragraph IV" certification, the ANDA alleges that the brand manufacturer's "patent is invalid or will not be infringed by the manufacture, use, or sale" of the generic drug. (20) ANDA applicants have strong incentives to claim a Paragraph IV certification. First, an ANDA applicant is "protected from infringement liability so long as it has not begun marketing the drug." (21) The generic manufacturer thus faces little risk in filing a Paragraph IV certification. (22) Second, the first successful filer of a Paragraph IV certification for the generic version of a particular drug is granted a 180-day exclusive distribution period for the generic drug if the ANDA is ultimately successful. (23) Paragraph IV certifications, therefore, are very appealing to generic manufacturers.

      If a generic manufacturer successfully challenges a brand manufacturer's patent by showing that either the patent is invalid or the generic drug does not infringe upon the patent holder's rights, (24) the generic manufacturer essentially creates, at a minimum, a duopoly with the brand manufacturer. (25) The addition of a competitor encourages lower market prices for consumers. (26) As a result, Paragraph IV certifications provide brand drug manufacturers with strong incentives to settle with generic manufacturers rather than litigate and risk potential patent invalidity.

      These settlements, known as reverse payment settlements, typically involve payments from the brand manufacturer to the generic manufacturer in exchange for the generic manufacturer agreeing to refrain from "purchasing, manufacturing, using, selling, distributing, and shipping to third parties any form of the generic's drug product until the expiration of the patents." (27) The settlement allows the brand manufacturer to preserve the effect of its patent without the risk of litigation. (28) The ultimate effect of such a settlement, however, is that the brand manufacturer continues to charge supracompetitive prices for its product and consumers do not receive the benefit of generic entry. (29)

    2. Differing Legal Standards

      Though a patent grants the brand drug manufacturer a certain amount of monopoly power over the production and sale of the patented drug, the field of antitrust law has developed to prevent monopoly power from being used to harm competition and consumers. (30) In the context of reverse payment settlements, the antitrust issue arises when the brand manufacturer preserves its monopoly through a large cash payment to a potential competitor. (31) It is this payment, not the settlement itself, that draws scrutiny and renders the transaction potentially anticompetitive. (32) Several circuits have considered the issue and reached vastly different conclusions.

      1. Per Se Illegality

        The Sixth Circuit held in 2003 that reverse payment settlements are unreasonable restraints of trade and are thus per se illegal. (33) The court emphasized that the brand manufacturer effectively eliminated its only potential competitor through the settlement, explaining, "[I]t is one thing to take advantage of a monopoly that naturally arises from a patent, but another thing altogether to bolster the patent's effectiveness in inhibiting competitors by paying the only potential competitor $40 million per year to stay out of the market." (34) The court found no justification for the settlement other than keeping the generic drug out of the market, and thus found the per se rule appropriate. (35)

      2. Scope of the Patent Test

        The Second Circuit declined to apply the per se rule. (36) The court reasoned that reverse payment settlements should not be considered per se illegal because "reverse payments are particularly to be expected in the drug-patent context because the Hatch-Waxman Act created an environment that encourages them." (37) Instead, the court adopted the "scope of the patent" test. (38) Under this test, "[w]hatever damage is done to competition by settlement is done pursuant to the monopoly extended to the patent holder by patent law unless the terms of the settlement enlarge the scope of that monopoly." (39) The Second Circuit further held that "until the patent is shown to have been procured by fraud, or a suit for its enforcement is shown to be objectively baseless, there is no injury to the market cognizable under existing antitrust law, as long as competition is restrained only within the scope of the patent." (40)

        In the case that the Supreme Court later heard as FTC v. Actavis, the Eleventh Circuit echoed the Second Circuit's scope of the patent reasoning in 2012. (41) The court explained that "absent sham litigation or fraud in obtaining the patent, a reverse payment settlement is immune from antitrust attack so long as its anticompetitive effects fall within the scope of the exclusionary potential of the patent." (42) The Eleventh Circuit reasoned that the scope of the patent test will not overprotect weak patents because

        [i]f the patent actually is vulnerable, then presumably [additional] generic companies ... will attempt to enter the market and make their own challenges to the patent.... Although a patent holder may be able to escape the jaws of competition by sharing...

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