One Pill Makes You Larger and One Pill Makes You Small

September 21, 2012, 2:40 PM

Pharmaceuticals make up a big part of our health-care system and a major contributor to the growth in health-care costs. According to one study, purchases of prescription drugs rose from $12 billion in 1980 to $231 billion in 2008, rising from 4.7% to 10% of total health-care expenditures. Drugs are big business. Much of the growth of the pharmaceutical industry, and its profitability, are attributable to patent protection for drugs as well as aggressive patent strategies by Big Pharma.

A move to the freer availability of less-costly generic equivalents of formerly-patented drugs came in 1984 with the so-called Hatch-Waxman Act. It established elaborate procedures for manufacturers to obtain FDA approval for their generic equivalents without conducting their own costly clinical trials. Part of the price paid to Big Pharma for the legislation, however, were procedures that effectively extended, or enabled the extension of a patent holders exclusive rights. The Act also gave rise to more aggressive patent prosecution strategies by Pharma aimed at protecting or extending their exclusive rights.

In addition, Hatch-Waxman spawned, indeed encouraged a raft of patent litigation, triggered by generics manufacturers seeking FDA approval on the ground that their equivalents would not infringe the patent holders rights or that the patents were invalid. By statute, those applications for FDA approval gave patent holders grounds to sue for infringement, and the statutes provisions then automatically extended the patent holders exclusive rights for 30 months plus or until the patent is ruled not infringed or invalid, while simultaneously preventing FDA consideration of applications by other generics. Such extensions meant profits to the patent holders, and higher prices to consumers.

These patent suits resulted in a number of pay for delay settlements in which the plaintiff patentee pays the defendant generic manufacturer not to market the generic equivalent. The payments were substantial: for example, a payment $40 million per year in one case involving the drug Cardizem CD. Such settlements sometimes involved arguably anticompetitive devices, or other terms that arguably masked the pay-for-delay nature of the contract. According to the Federal Trade Commission (FTC), between FY2004 and FY 2009, a total of 66 of the 142 settled patent suits of this type involved pay-for delay settlements. A 2010 FTC Report concluded:

Pay-for-delay agreements are win-win for the companies: brand-name pharmaceutical prices stay high, and the brand and generic share the benefits of the brands monopoly profits. Consumers lose, however: they miss out on generic prices that can be as much as 90 percent less than brand prices.
In the eyes of the FTC, many commentators and a few courts, such agreements are classic agreements between competitors not to compete, restraints of trade that typically are per se violations of Section 1 of the Sherman Antitrust Act.
Courts considering challenges to pay-for-delay settlements have divided over their legality. 2001 and 2003 decisions by the D.C. Circuit and the Sixth Circuit, respectively (involving the same settlement but brought by different plaintiffs), ruled that the agreement at issue violated antitrust law. Later decisions from the Second, Eleventh and Federal circuit courts of appeal found no antitrust violations. Generally speaking, these decisions relied on settled principles of patent law: that the unexpired patents gave the patentee a lawful right to exclude competition; that, as a matter of law, the patents at issue were presumed to be valid; that, after all, there had been no final rulings that the patents were invalid or not infringed; and that the settlement agreements at issue did no more than affirm the patentees lawful rights
so long as the agreement did not exceed the scope or duration of the patent (and also so long as the patent was not secured by fraud on the PTO or other inequitable conduct). At least some observers had concluded from the more recent decisions that the FTC was fighting a losing battle.

The latest word on the issue came in July of this year, when the Third Circuit, in In Re: K-Dur Antitrust Litigation, considered a settlement agreement in which the plaintiff/patentee Schering-Plough agreed to pay the defendant/generic applicant Upsher Smith $60 million over three years to drop the patent suit and not to introduce a generic counterpart of its patented drug K-Dur 20 until a date certain. The settlement also included licenses from Upsher to Schering to sell certain other drugs Upsher had developed. In separate actions, the settlement was challenged by the FTC as well as by a class of several resellers that purchased K-Dur from Schering.

The Third Circuit reviewed the rulings of other courts of appeal, rejected the patent-based analysis of those courts upholding the settlements, and then directed the district court to apply a quick look rule of reason antitrust analysis based on the economic realities of the reverse payment settlement[s] rather than the labels applied by the settling parties. In this analysis, it directed, any payment from a patent holder to a generic patent challenger who agrees to delay entry into the market [must be treated] as prima facie evidence of an unreasonable restraint of trade, which could be rebutted by showing that the payment (1) was for a purpose other than delayed entry or (2) offers some pro-competitive benefit. The rejected patent-based analysis, it explained, relied too heavily on what was only a procedural presumption of patent validity, and that overreliance on the presumption undermines the policy favoring weeding out weak patents. It further agreed with the FTC that it was unnecessary to make detailed analysis of whether the patent-in-suit was in fact invalid because absent proof of other offsetting consideration, it is logical to conclude that the quid pro quo for the payment was an agreement by the generic to defer entry beyond the date that represents an otherwise reasonable litigation compromise.

The Third Circuits decision has received widespread attention from the intellectual property and antitrust bars, with many predicting that the ongoing legal debate running over a decade now
and stark differences in judicial approaches now tees the matter up for Supreme Court review. In Re K-Dur Antitrust Litigation may be particularly important in the string of decisions because of its thorough review of prior decisions and perhaps also because the Third Circuits territory covers an area where many pharmaceutical companies are headquartered.

The pay-for-delay debate is an interesting example of two doctrinal perspectives, each founded on settled principles in their respective bodies of law, passing each other in the night. Now they may well be on a collision course. Both positions can be argued with some force, but in my view most pay-for-delay settlements dont pass the smell test. Parties exchange cash in settlement all the time, but plaintiffs seldom pay defendants. The sums involved vastly exceed the costs of patent litigation, and seem to reflect instead the market value of the ongoing monopoly to the patentee. Lastly, a 2002 FTC study found that nearly two-thirds of Hatch-Waxman-based patent suits that did come to judgment found in favor of the generic applicant. Thus, there is good reason to believe, indeed presume that pay-for-delay agreements are not merely negotiated settlements of litigation disputes, but instead are agreements among competitors to maintain monopoly profits arising from patent rights, to split those profits, and to exclude competition to the detriment of consumers.

Christopher J. Mugel practices intellectual property and antitrust law from Kaufman & Canoles Richmond, Virginia office. --Christopher J. Mugel