Antitrust Issues in the Settlement of Pharmaceutical Patent Disputes, Part Iii

• Publication year: 2006
• Citation: Vol. 30 No. 02

SEATTLE UNIVERSITY LAW REVIEWVolume 30, No. 2WINTER 2007

Antitrust Issues in the Settlement of Pharmaceutical Patent Disputes, Part III

Thomas B. Leary(fn*)

I. Introduction

Once again, I will address the issue of litigation settlements between companies that hold patents on pharmaceutical products (sometimes "pioneers") and would-be generic entrants ("generics") who challenge the validity of the patent and/or a claim of infringement.(fn1) In my two earlier papers, I discussed various aspects of those settlements and acknowledged some evolution in views with progressively deeper immersion in the subject. This paper will focus on one subject which has been the focus of a particularly lively debate, namely, the legality of those settlements in which the generic agrees to defer entry for a period of time in return for the pioneer's monetary payment. A payment of this kind is sometimes called a "reverse payment" to distinguish it from more familiar settlements that involve the payment of a royalty to the patentee.

In my second paper, published in 2001, I concluded that reverse payments raised serious legal issues. Two years later, in In re Schering-Plough Corp.,(fn2) the Commission unanimously held that respondent Schering-Plough Corporation's two reverse payment settlements violated § 5 of the Federal Trade Commission Act. The debate continues, however, because judicial reaction to the opinion has been somewhat less than enthusiastic. The Court of Appeals for the Eleventh Circuit reversed the Commission summarily,(fn3) and the Supreme Court declined to hear the case.(fn4) In 2006, the Court of Appeals for the Second Circuit granted summary judgment against private plaintiffs in In re Tamoxifen Citrate Antitrust Litigation,(fn5) a case predicated on the theory that a similar settlement violated the antitrust laws. As detailed below, both the majority and dissent in Tamoxifen analyzed the legality of reverse payments in ways fundamentally different from the Commission's approach in Schering.

In light of these opinions (and others), it is appropriate to go back to square one and once more highlight the basic policy issues that these cases present. This discussion will focus on the Tamoxifen opinion, with passing reference to other decisions. Obviously, reasonable people can disagree on these issues, but I still believe the Commission's approach in Schering was correct.

II. The Fundamental Dilemma

The old adage that "hard cases make bad law" may or may not be true, but "hard cases" are surely hard to decide. The fundamental problem in this particular set of cases is that there are two apparently compelling lines of argument that point in opposing directions.

The first line of argument flows from the exclusionary rights conferred by a patent; the presumptive validity of patents; the strong judicial policy in favor of settlements; and the consequent conclusion that any settlement which permits generic entry on or before patent expiration cannot be anticompetitive, even if it provides for a reverse payment.

The second line of argument flows from the fact that Congress has passed a statute specifically designed to facilitate earlier entry by generic competition, the Drug Price Competition and Patent Term Restoration Act of 1984, commonly known as the Hatch-Waxman Act.(fn6) This statute provides specific incentives for both patentees and challengers designed to encourage litigation to a conclusion, and because of the special economic dynamics of the pharmaceutical market, reverse payment settlements will defeat the objectives of the statute.

A. Application of the First Line of Argument in Tamoxifen

A patentee has an absolute right to bar competition from any products that infringe its patent, and a patent is presumptively valid absent clear and convincing proof to the contrary. If it ultimately turns out that a patent is indeed valid and infringed, it is hard to see how consumers can be harmed by any settlement that provides for generic entry before the patent expiration date, regardless of whether the settlement contains a reverse payment. Consumers cannot complain simply because the patentee has chosen to share some of the "monopoly" profits(fn7) with a potential challenger in the settlement. In these circumstances, it is not appropriate to speculate on whether consumers might have been even better off if the settlement had been structured in a different way. The straightforward simplicity of the argument, coupled with judicial preference for settlements, has obvious appeal.

For these reasons, the ultimate conclusion of the Tamoxifen majority may well be correct; it was appropriate to dismiss the complaint. It appears from the face of the opinion that patent validity, not infringement, was the determinative issue in the patent case that had been settled. In the period between the settlement and the Second Circuit opinion, the validity of the patent had apparently been upheld in three separate lawsuits.(fn8)

However, one apparent problem is that, generally, the antitrust validity of a settlement agreement should be determined as of the date on which the agreement was signed, rather than the date the antitrust case is decided (or even the date the record in the antitrust case is closed).(fn9) In Tamoxifen, the only available judicial precedent was a lower court opinion that held the patent at issue invalid.(fn10) This apparent problem is not all that serious in the context of a private suit for damages. Even if it were assumed that the original settlement had been illegal, subsequent events could undercut a damage claim. Subsequent events do not transform an illegal agreement into a legal one; they just break the chain of causation between the illegal act and the market consequences. There are similar examples in other areas of antitrust. One example is a price fixing agreement, which is illegal per se. Such an agreement does not give rise to a damage claim if the parties thereafter have ignored it. Perhaps a somewhat closer analogy is a per se illegal agreement not to compete after some future date. Such an agreement would not cause damage if the party that gives the promise is barred from entry for other reasons- perhaps an import barrier-before the restriction becomes effective.

Assume, however, that an antitrust prosecutor, not a damage claimant, must assess the antitrust legality of a settlement before the merits of the underlying patent case have been resolved, and infringement is also an issue. The Commission confronted this situation in Schering and in a number of other cases that have been resolved by consent decrees.(fn11) For reasons explained below, it is also a situation that continues to confront the Commission. What then?

B. Application of the Second Line of Argument in the Commission's Schering Opinion

The line of argument that induced the Commission to take an adverse view of reverse payments in the Schering opinion may be restated as follows. In the Hatch-Waxman Act,(fn12) Congress created a number of special incentives and rewards, in aid of an overarching objective of speeding generic entry without chilling innovation. To analyze these special features and their effects on the dynamics of settlement, it is necessary first to summarize some salient features of the Act.

The complex Hatch-Waxman provisions are outlined in many opinions, including the Commission's opinion in Schering. For purposes of this discussion, the most significant elements begin with a process that enables a would-be generic competitor to get prompt FDA approval of its drug so long as it certifies that-for various alternative reasons-its sales will not infringe on a pioneer manufacturer's patent rights.(fn13) The most common certification (a "paragraph IV" certification) declares either that the pioneer's patent is invalid or that the generic would not infringe.(fn14) A generic that selects this form of certification must notify each affected patentee.(fn15)

If no patentee brings an infringement action within forty-five days, the generic may get immediate FDA approval and start to sell its product.(fn16) If, however, a patentee brings an infringement action within this period, the patentee is entitled to an automatic stay for a period that is likely to last up to thirty months.(fn17) It will terminate earlier if there is a judicial decision on the merits of the action.(fn18) As a result, pioneers effectively receive an automatic preliminary injunction, and generics receive the opportunity to litigate patent issues before they have actually entered the market and incurred crushing damage exposure. As an added incentive, the FDA rules give the first generic challenger the right to market a generic product exclusively for 180 days.(fn19) This incentive can also benefit the pioneer because other generic challengers are not allowed to enter the market until 180 days after the first challenger enters.

Because of the particular dynamics of competition between pioneers and generics in the pharmaceutical industry, these special incentives have consequences that may not be immediately obvious. It is now generally recognized that the total profits available to the pioneer in the absence of generic entry exceed the total profits of both the pioneer and the generic after generic entry.(fn20) Thus, a pioneer can afford to "buy off a generic challenger by a...