Patent law strives to stimulate innovation by awarding inventors a temporary monopoly over patented inventions. Antitrust law seeks to ensure efficient competition, in part by restricting monopolistic behavior. Perhaps the most scrutinized area of intersection between patent law and antitrust law is the proper treatment of “reverse payments,” also referred to as “pay-for-delay” settlements. Arkansas Carpenters Health and Welfare Fund v. Bayer AG, 625 F.3d 779, 780 (2d Cir. 2010) (Pooler, J., dissenting). These are settlement agreements in patent infringement litigation in which a patent holder pays the alleged infringer to concede the validity of the patent and refrain from entering the market. Henry N. Butler & Jeffrey Paul Jarosch, Policy Reversal on Reverse Payments: Why Courts Should Not Follow the New DOJ Position on Reverse-Payment Settlements of Pharmaceutical Patent Litigation, 96 Iowa L. Rev. 57, 60 (2010).
Senators Chuck Grassley and Herb Kohl recently introduced legislation in Congress that would create a presumption that pay-for-delay deals in the pharmaceutical industry are illegal. Additionally, there is currently a circuit split over the proper standard for determining whether reverse payment settlements are improper. The Supreme Court has not spoken on the issue, and recently denied a petition for certiorari by the Plaintiffs-Appellants in Arkansas Carpenters Health and Welfare Fund v. Bayer AG challenging the reverse payment settlement in that case. Amicus curiae supporting the petitioners included 32 state Attorneys General and the American Antitrust Institute.
This commentary will explain why Congress and the judiciary should continue to allow pioneer patent holders and firms challenging those patents to use reverse payment settlements to settle their disputes. To that end, this commentary will explain the importance of recognizing the right to exclude granted by patent laws and discuss the judicial policy in favor of settlements. Some courts have referred to this as the “exclusionary zone of the patent,” and have essentially found that because patents provide a monopoly, any anticompetitive effects stemming from the exclusion of generic manufacturers through settlements should be recognized as a valid outgrowth of rights inherent in the patent grant.
While recognition of those underlying policies provides significant deference to patent holders, it also provides an incentive for patent holders to conduct sham litigation to eliminate threats to the validity of weak patents. Thus, Congress should amend the current regime to clarify that where a reverse payment is challenged, some scrutiny of the patent’s validity is necessary. Further, Congress should amend the 180-day exclusivity period, currently granted only to the first generic firm to challenge a pioneer patent, to give a subsequent challenger the same benefit where the first challenger settles.
A. The Hatch-Waxman Amendments to the Federal Food, Drug, and Cosmetic Act
The manufacture and distribution of pharmaceutical drugs is regulated under the Federal Food, Drug, and Cosmetic Act, 21 U.S.C. §§ 301, et seq. In 1984, the Hatch-Waxman Amendments were passed “to make available more low cost generic drugs. . . .” accomplished partially by developing a less cumbersome and time-consuming drug approval process for generic drugs. H.R.Rep. No. 98-857, pt. 1, at 14 (1984); Laura J. Robinson, Analysis of Recent Proposals to Reconfigure Hatch-Waxman, 11 J. Intell. Prop. L. 47, 52 (2003).
An applicant seeking approval of a generic version of an existing drug files an Abbreviated New Drug Application (“ANDA”). 21 U.S.C. § 355(j) (2010). A firm submitting an ANDA must certify, among other things, that any patent over the proposed generic drug is either “invalid or will not be infringed by the manufacture, use, or sale of the new drug” (henceforth, a “paragraph-IV” certification). 21 U.S.C. § 355(j)(2)(A)(vii)(IV) (2010). 35 U.S.C. § 271 makes it an act of infringement to submit a paragraph-IV certification, allowing applicants to challenge patents without risking infringement damages or the cost of market entry. 35 U.S.C. § 271(e)(2)(A) (2010); H.R.Rep. No. 98-857, supra, at 46 (1984). . Additionally, the first generic firm to submit a paragraph-IV certification is granted a 180-day exclusivity period. 21 U.S.C. § 355(j)(5)(B)(iv) (2010).
In the exclusivity period, the first filer is the only firm permitted in the marketplace for the generic drug and no subsequent ANDA for the same generic drug can be approved for 180 days from the date that the first filer begins marketing its generic drug. Id. (note that a court decision holding the subject patent invalid or not infringed also starts the exclusivity period). This provision gives generic drug companies the incentive to bear the risk and expense of litigating against pioneer drug companies and, therefore, encourages greater availability of lower priced generic drugs on the market. Edward J. King, Don’t Bite the Hand That Provides Life-Saving Drugs: Application of the Hatch-Waxman and Sherman Acts to the Pharmaceutical Industry and the Detrimental Effects to Future Innovation in Order to Achieve Current Savings for Consumers, 49 Vill. L. Rev. 591, 602 (2004). The first generic company to enter the market bears all of the risk involved with challenging a patent, including the risk of losing an infringement suit brought by the patent holder. Id. Without the exclusivity period, generic companies would have an incentive to wait for another company to challenge the patent. Id.
The 2003 Medicare Prescription Drug, Improvement, and Modernization Act (“Medicare Act”) established forfeiture events that cause ANDA paragraph-IV filers to lose their 180-day exclusivity period if they fail to market the generic within a certain time period after FDA approval or a court’s non-infringement ruling. Pub. L. No. 108-173, 117 Stat. 2066, § 1102 (2003) (codified in 21 U.S.C. §355(j)(5)(D)(i)). The Medicare Act also requires companies to file settlement agreements with the Federal Trade Commission (“FTC”), and Department of Justice (“DOJ”). These amendments close potential loopholes allowing generic firms to enter into settlements where the generic firm would never begin marketing the generic drug, thereby blocking entry onto the market of subsequent relevant generic drugs. S. Rep. No. 107-167, at 4 (2002). However, the amendments do not prohibit settlements.
B. Reverse Payments
Commonly, a generic firm will file an ANDA, triggering the benefits of the Hatch-Waxman Amendments, and subsequently settle the dispute. See Arkansas Carpenters Health and Welfare Fund v. Bayer AG, 604 F.3d 98, 109 (2d Cir. 2010). In these settlements, the patent holder will typically pay the ANDA filer to concede the validity of the underlying patent and refrain from entering the market. Butler, supra, at 60. This has the curious result that the party holding the patent actually pays the alleged infringer to settle the infringement lawsuit. As explained by the Second Circuit in In re Tamoxifen Citrate Antitrust Litigation, this surprising result occurs because an unsuccessful ANDA filer will be liable for few, if any, damages, while an unsuccessful patent owner has its patent invalidated, resulting in potentially huge amounts of lost revenue. 466 F.3d 187, 209-10 (2d Cir. 2006). Thus, the patent owner is the party with the most to lose and the least leverage.
After a generic firm files its paragraph-IV certification and infringement litigation begins, incentive to enter into a monetary settlement often arises because the generic firm and pioneer patent holder value licenses differently. A pioneer firm sells drugs at a higher cost than a generic firm does, and entry of a competitor into the market reduces the amount for which the pioneer firm can sell the drug. Corrected Brief of Defendants-Appellees Barr Laboratories at 10, In re Ciprofloxacin Hydrochloride Antitrust Litigation, 544 F.3d 1323 (Fed. Cir. 2008) (No. 2008-1097), 2008 WL 1771301. For this reason, a competitor’s market entry through a license can cost the pioneer firm more per day than the generic firm can make per day through the license. Id. The attractiveness of reverse payment settlements can be seen empirically as well. There were zero reverse payment settlements between 2000 and 2004, but after appellate courts applied a relaxed review of those settlements “roughly 70 to 80 percent of settlements between brands and first generic filers have involved reverse payments.”
Many parties, including the FTC, academics and consumer groups, oppose reverse payments, contending they amount to nothing more than payments not to compete, violating antitrust law. These opponents argue reverse payment settlements are contradictory to the Hatch-Waxman Amendments’ purpose of making low-cost generic drugs more readily available. Opponents contend these settlements protect weak patents that could otherwise be invalidated, and thereby prevent entry of less expensive generic drugs onto the market. They also argue that pharmaceutical companies could manipulate the 180-day exclusivity period to block subsequent companies from entering the relevant market. Carrier, Unsettling Drug Patent Settlements: A Framework for Presumptive Illegality, 108 Mich L. Rev. at 48-49.
Conversely, proponents note that patents necessarily delay entry of competitors, that all settlements involve the transfer of consideration to avoid risk, and that prohibiting reverse payments ignores the purpose of the patent grant, which is to incentivize invention by providing a temporary monopoly. Brief of Amicus Curiae Generic Pharmaceutical Association in Support of Appellees’ Request for Affirmance at 10, 14, 18-20, In re Ciprofloxacin Hydrochloride Antitrust Litigation, 544 F.3d 1323 (Fed. Cir. 2008) (No. 2008-1097), 2008 WL 937442.
C. Court Decisions in Reverse Payment Cases
There is currently a circuit split over the proper standard for determining whether reverse payment settlements are improper. The Sixth Circuit found that such payments are per se illegal. In re Cardizem CD Antitrust Litig., 332 F.3d 896, 900 (6th Cir. 2003). The Second, Eleventh, and Federal Circuits take the opposite view. Butler, supra, at 61.
In In re Cardizem CD Antitrust Litigation, the Sixth Circuit considered a settlement agreement where the pioneer drug firm paid the generic company $10 million per quarter to refrain from marketing its generic version of the drug, even after the generic company had obtained FDA approval. 332 F.3d at 907. The generic firm preserved the underlying patent dispute and did not begin to market the drug in the market, thereby preventing the commencement of the 180-day exclusivity period and delaying other generic companies from entering the market. Id. at 908-09 n.12. Under these circumstances, the Sixth Circuit concluded that the settlement was a per se illegal restraint on trade. Id. at 908.
In Schering-Plough Corp. v. FTC, a pioneer drug company settled patent infringement cases with two generic firms. 402 F.3d 1056, 1059-61 (11th Cir. 2005). The FTC challenged these settlements, alleging they violated antitrust laws. Id. at 1061. After a trial before an Administrative Law Judge, and several subsequent appeals, the Eleventh Circuit found that the settlements did not violate antitrust laws. Id. at 1076.
The Eleventh Circuit noted that patents “[b]y their nature . . . create an environment of exclusion and . . . cripple competition.” Id. at 1065-66. The court started with the presumption that the patent was valid and examined “(1) the scope of the exclusionary potential of the patent; (2) the extent to which the agreements exceed that scope; and (3) the resulting anticompetitive effects.” Id. at 1066 (citation omitted). Ultimately, the court found that the agreements “fell well within the protections of the . . . patent, and were therefore not illegal.” Id. at 1076.
The court noted that precluding settlements was contrary to the purpose of the patent grant because “[p]atent litigation breeds a litany of direct and indirect costs” which “may actually decrease product innovation by amplifying the period of uncertainty around the drug manufacturer’s ability to research, develop, and market the patented product or allegedly infringing product.” Id. at 1075.
Similarly, in In re Tamoxifen Citrate Antitrust Litig. the Second Circuit found that reverse payments did not constitute per se violations and that the settlement did not violate antitrust laws. 466 F.3d 187, 206 (2d Cir. 2006). The court stated that “so long as the patent litigation is neither a sham nor otherwise baseless,” a patent holder is permitted to settle “to protect that to which it is presumably entitled: a lawful monopoly over the manufacture and distribution of the patented product.” Id. at 223.
In In re Ciprofloxacin Hydrochloride Antitrust Litigation, the generic firm Barr Labs filed an ANDA for a generic version of Cipro. 544 F.3d 1323, 1328 (Fed. Cir. 2008). The pioneer drug owner, Bayer, sued Barr for patent infringement. Id. at 1327-28. Just prior to trial, the parties settled, and Bayer paid Barr $49.1 million to concede the enforceability of the underlying patent. Id. at 1328-29. Direct and indirect purchasers of the underlying drug, along with certain advocacy groups, challenged the settlement as violating antitrust law. Id. at 1329. The District Court found no violation. Id. at 1330. The plaintiffs appealed, and the Second Circuit retained jurisdiction over the appeals of the direct purchasers and affirmed, but the appeal of the indirect purchaser plaintiffs was transferred to the Federal Circuit. Arkansas Carpenters Health and Welfare Fund v. Bayer AG, 604 F.3d 98, 103 (2d Cir. 2010).
In affirming the district court’s decision, the Federal Circuit started with the presumption of patent validity and found that the settlements merely “exclude the defendants from profiting from the patented invention,” and that “[t]his [was] well within Bayer’s rights as the patentee.” In re Ciprofloxacin Hydrochloride Antitrust Litigation, 544 F.3d at 1333. The Federal Circuit also noted that “there is a long-standing policy in the law in favor of settlements,” including patent settlements. Id.
D. Pending Legislation
On January 25, 2011, Senators Chuck Grassley (R-Iowa) and Herb Kohl (D-Wis.) introduced the Preserve Access to Affordable Generics Act in Congress. The same bill was introduced, but not passed, in the previous year. Under the bill, reverse payment settlements are “presumed to have anticompetitive effects and be unlawful” unless the parties thereto “demonstrate by clear and convincing evidence that the precompetitive benefits of the agreement outweigh the anticompetitive effects of the agreement.”
III. Why Presumptive Invalidity of Reverse Payments is Improper
In recognition of the rights that come with patent grants, and in compliance with the language of the Federal Food, Drug, and Cosmetic Act, Congress and the judiciary should continue to permit pioneer patent holders and generic firms to settle their disputes. The right to exclude is central to the patent grant, courts favor patent settlements, patents are presumed valid, and permitting reverse payments does not prevent other would-be-competitors from challenging the original patent.
The primary purpose of patent law is “To promote the Progress of Science and useful Arts.” U.S. Const., Art. I, § 8, cl. 8. In order to meet that purpose, patent laws grant the patent holder an exclusive right to their invention for a limited time. Eldred v. Ashcroft, 537 U.S. 186, 223 (2003). The Supreme Court has gone as far as stating that “the essence of a patent grant is the right to exclude others from profiting by the patented invention.” Dawson Chem. Co. v. Rohm & Haas Co., 448 U.S. 176, 215 (1980). Additionally, the Court has expressed its favor of patent settlements, even when the settlement may adversely affect competition. Standard Oil Co. v. United States, 283 U.S. 163, 171 (1931) (“Where there are legitimately conflicting claims or threatened interferences [with patent rights], a settlement by agreement, rather than litigation, is not precluded [under antitrust laws].”). Courts would have to completely ignore this relevant precedent to conclude that pioneer patent holders and generic firms cannot settle disputes arising under the Hatch-Waxman Amendments.
The language of the Federal Food, Drug, and Cosmetic Act does not merit this result. If Congress intended such a sweeping reversal of patent law precedent, it certainly would have said so. Moreover, the exclusionary right inherent in patent grants would have limited value as an incentive if patent owners were required to litigate every single challenge to a final judgment. It would also inhibit generic companies from attempting to enter the market in light of the expensive legal battle that would follow such a decision.
For the same reasons, Congress and the judiciary should not view reverse payment settlements as per se illegal or even presumptively illegal. Either standard would likewise force patent litigants to expend significant resources to litigate all disputes to final judgment, because any settlement would likely be prohibited. Additionally, those standards would be inconsistent with the aforementioned favor of patent settlements and the presumption of patent validity found in 35 U.S.C. § 282. That section states that a “patent shall be presumed valid.” 35 U.S.C. § 282 (2002).
If a patent is presumed valid in the context of settlement of a patent infringement dispute, then the public is presumptively held not to be harmed as long as the settlement is within the scope of the patent. That is because the patent owner has the exclusive right to practice a valid patented invention. In other words, the stance that a patent settlement is presumptively invalid is tantamount to presuming that the underlying patent is invalid, and, therefore, the settlement is outside of the monopoly right inherent in the patent grant, leading to a violation of antitrust law.
Finally, permitting reverse payments does not prevent other would-be-competitors from challenging the original patent. In the Cipro cases, at least four generic firms challenged the validity of the patent after Bayer and Barr entered into their settlement agreement. Brief of Defendants-Appellees Barr Laboratories at 6, In re Ciprofloxacin Hydrochloride Antitrust Litigation, 544 F.3d 1323, 1328 (Fed. Cir. 2008) (No. 2008-1097), 2008 WL 1771301. Thus, if a patent were susceptible to invalidation, it could still be invalidated by subsequent challenges. However, as discussed below, this safeguard does have its limitations.
IV. A Legislative Response is Necessary to Remove Vulnerabilities in the Current System
While Congress and the judiciary should not stray from the regime articulated in Schering-Plough, Tamoxifen, and the Ciprofloxacin cases regarding the permissibility of reverse payment settlements, a legislative response is necessary. Congress should amend the current regime to make sure that patents underlying antitrust challenges to reverse payment settlements undergo some scrutiny. Additionally, in light of the fact that companies do settle their patent disputes, Congress should amend the 180-day exclusivity period to make sure that subsequent generic firms have the incentive to challenge the pioneer patent after a first challenger settles.
As noted in Part II.C. above, several courts have held that antitrust review of patent settlements only looks at portions of the agreement falling outside of the scope of the patent. Thus, agreements within the scope of the patent are presumptively valid under antitrust review. This per se validity review of patent settlements gives companies free reign to keep competitors out of the market under the guise of a patent settlement. This result is particularly troublesome in light of the fact that many litigated patents are eventually found invalid. Although subsequent challenges could eventually result in invalidation of a weak patent, relying on that backstop is inadequate, especially where there are few market players or where the first ANDA filer that later settles was the company in the best position to challenge the pioneer patent.
Additionally, as noted above, several courts cite the presumptive validity of patents as a justification for their per se view. While this view is reasonable given the current lack of legislative direction, Congress should shore up current vulnerabilities inherent in this view. A better interpretation of the presumption of validity would be to require a party challenging a reverse payment settlement to prove invalidity of the underlying patent with clear and convincing evidence. This deferential scrutiny would protect the policy behind the patent grant while making sure that consumers are not overcharged as a result of weak patents. For these reasons, Congress should update the current regime accordingly.
Further, without the extra motivation provided by the 180-day exclusivity period to the first ANDA filer, subsequent generic firms may not be able to make viable challenges. While the 2003 amendments to the Federal Food, Drug, and Cosmetic Act limited the vulnerability of the 180-day exclusivity period to improper blocking of subsequent ANDA applications, that provision is still susceptible to manipulation by parties to a settlement agreement.
The vulnerability of the current exclusivity period would be at least partially addressed if: (1) the first filer automatically forfeited its exclusivity right upon entry into a settlement with the pioneer patent holder; and (2) the second ANDA filer gained the right to an exclusivity period. This would recognize that the exclusivity period’s purpose of motivating generic firms to bear the risk of litigating with pioneer firms is still applicable where the first challenger settles. Without enticement, generic firms are motivated to wait for another party to bear the cost of litigation, and the goal of lower cost generic drugs is put on hold.
For the foregoing reasons, Congress and the judiciary should continue to permit pioneer patent holders and firms that challenge those patents to settle their disputes. That is the only result that recognizes: (1) that the right to exclude is central to the patent grant, (2) the Supreme Court’s favorable position on patent settlements, and (3) the presumption of patent validity. However, Congress should amend the current regime to clarify that where a reverse payment is challenged, some scrutiny of the validity of the underlying patent is necessary. Congress should also make the 180-day exclusivity period currently granted to the first generic challenger transferable to a subsequent challenger when the first challenger settles its challenge. These changes would help prevent companies from keeping cheaper generic drugs off the market by protecting weak patents and would ensure that generic firms have the incentive to challenge a patent after the first challenger settles.