On August 12, 2015, the Seoul Western District Court held GlaxoSmithKline ("Glaxo") and Dong-A ST ("Dong-A") liable to the National Health Insurance Service ("NHIS") for damages caused by a reverse payment settlement made between Glaxo and Dong-A.

[Facts]

Glaxo is the assignee of a patent covering the manufacturing method for the drug ondansetron, brand name Zofran. Zofran is used to prevent nausea and vomiting caused by chemotherapy, radiation therapy, surgery, and gastroenteritus. Glaxo has been marketing Zofran in Korea since 1996.

Dong-A successfully obtained a patent on a manufacturing method for ondansetron that is distinguishable from Glaxo's manufacturing method. Dong-A has been marketing a generic version of ondansetron called "Ondaron" in Korea since September 1998.

In April 2000, Glaxo and Dong-A entered into a settlement agreement, an ondansetron distribution and supply agreement, and an exclusive distribution and supply agreement for Valtrex (Glaxo's antiviral drug used in the management of herpes simplex, herpes zoster (shingles), and herpes B). These agreements were entered into in settlement of litigation relating to the infringement of Glaxo's patent by Dong-A(the "Settlement"). Glaxo granted Dong-A the right to distribute both Valtrex and Zofran and provided financial incentives for Dong-A agreeing not to manufacture and distribute products that may compete against Valtrex and Zofran, pursuant to the Settlement.

The Korean  Fair Trade  Commission ("FTC") initiated an  investigation and ultimately issued a corrective order and imposed a penalty on Glaxo and Dong-A for unfairly restricting competition. The FTC determined that the Settlement exceeded the scope of rights granted by the patent. The  administrative  order above was confirmed by the court in a later administrative appeal.

Glaxo manufactured and marketed Zofran 8mg, which was included in the Drug Reimbursement List in 1996, and the NHIS remitted reimbursement for prescriptions of Zofran to relevant medical organizations from October 2004 to December 31, 2009.  

[Decision]

1. Compensation for Damages Suffered by the NHIS

The  NHIS  initiated  a  lawsuit  claiming  damages  against  Glaxo  and  Dong-A,

asserting that it paid out an excessive amount of reimbursement relating to ondansetron because  of the  reverse  payment settlement between  Glaxo and Dong-A.

The Seoul Western District Court held that the Settlement between Glaxo and Dong-A constituted collusion between competitors to limit competition in the market for ondansetron, pursuant to Article 19 Clause 1-9 of the Monopoly Regulation and Fair Trade Act ( "MRFTA"). The Court found Glaxo and Dong-A liable for damages suffered by the NHIS resulting from their improper collusion pursuant to Article 56 of the MRFTA, which stipulates rules relating to compensation for damages.

Glaxo and Dong-A argued that Dong-A's sale of Ondaron would have been prohibited regardless of the Settlement in view of the Korean Supreme Court's August 2001 decision holding that Dong-A infringed Glaxo's patent. As a result, Glaxo and Dong-A argued that there is no causal relationship between the Settlement and the damages. The Court, however, disregarded this argument.

2. Scope of Damages

The Court held that the damages sufferedby the NHIS and caused by the Settlement include the difference in the reimbursement paid relating to ondansetron from October 1, 2004 to December 31, 2009. In addition, the Court calculated the damages by estimating what Dong-A's market share would have been without the Settlement. Using the market share theory, the Court calculated the damages by converting the change in market share into an estimated sales volume. However, recognizing that the market share theory is a type of statistical prediction that has a certain degree of uncertainty, the Court limited the amount of damages to 80% of the calculated damages.

[Lessons and Implications]

A reverse payment settlement is a type of litigation settlement where a brand name drug manufacturer pays money (or provides other benefits) to a generic drug manufacturer in exchange for the market withdrawal of the generic. Consumers and the government can be viewed as being harmed by such settlements, because it delays the sale of less expensive generics.

This case is significant not only because it is the first litigation seeking damages that was initiated by the NHIS regarding a reverse payment settlement, but also because the Court acknowledged the NHIS suffered monetary damages caused by the collusion between a brand name drug manufacturer and a generic drug manufacturer. The Court even provided a specific method to calculate such damages.

In Korea, since the drug approval-patent linkage system became effective in March 15, 2015 pursuant to the KORUS FTA, regulations  relating to reverse payment settlements have been strengthened. For example, all patent litigation settlements between a brand name drug manufacturer and a generic drug manufacturer must now be reported to both the Ministry of Food and Drug Safety and the Fair Trade Commission. In view of this heightened scrutiny, brand name drug manufacturers and generic drug manufacturers must now be careful how and when they settle patent litigation to guard against an investigation by the Fair Trade Commission, as well as potential litigation for damages by the NHIS.