Patent litigation in the pharmaceutical industry is a fierce business. Typically, a brand-name drug manufacturer seeks to prevent a competitor from selling a generic version of the incumbent's drug that the latter believes infringes its hard-won intellectual property. The strength of the relevant patents in these cases is often disputed, and especially in light of the high costs of patent litigation, there is significant pressure on both parties to settle. In some cases, the parties reach a settlement that provides for a compromise generic entry date, as well as additional consideration from the brand-name manufacturer to the generic manufacturer.
Detractors of such settlements refer to them as 'reverse payments' because they result in consideration flowing from the patent holder to the alleged infringer (whereas in other IP litigation the settlement payment typically goes in the opposite direction). However, supporters of these types of deal contend that as long as the brand-name manufacturer's patents are valid and infringed by the generic drug, any settlement agreement that restricts the entry date for the generic drug cannot harm lawful competition.
Over the past few years, antitrust enforcers have acted to thwart litigation settlements between pharmaceutical companies that involve such reverse payments on the grounds that such settlements are anti-competitive and improperly raise the cost to the consumer by excluding less expensive generic drugs.
In Summer 2011 the US Federal Trade Commission (FTC) issued a report which found that the number of pharmaceutical patent settlements involving a reverse payment increased by approximately 60% between fiscal years 2009 and 2010. Stopping reverse payment settlements is one of the FTC's highest enforcement priorities. In 2010 FTC Chairman Jon Leibowitz testified to Congress that reverse payment cases are "one of the Commission's top competition priorities" because agreements to "eliminate potential competition and share the resulting profits are at the core of what the antitrust laws proscribe". Moreover, a recent FTC study concluded that the practice of paying reverse settlements costs US consumers over $3.5 billion a year.
The FTC believes that patent settlements which include payments to the generic company are presumptive antitrust violations because they amount to what the FTC calls 'pay for delay'. In the FTC's view, the payment is made in return for acceptance of a later date for generic entry. It reasons that such settlements are unlawful, regardless of which party would ultimately have won the patent litigation, because without the payment the generic company would have insisted on an earlier entry date under the settlement.
However, most US courts have rejected this reasoning. They have typically found that patent settlements cannot harm competition without proof that the settlement had an impact on competition outside the scope of a valid patent.(1) The courts have typically required the parties that challenge such settlements to show that the settlement affects competition on products not covered by the patents, or that the underlying patent infringement case was objectively baseless or based on fraud.
The FTC has fought hard, albeit unsuccessfully, to overturn these decisions. In 2010 the US District Court for the Northern District of Georgia dismissed an antitrust challenge brought by the FTC and private plaintiffs to a reverse payment patent settlement relating to Solvay's testosterone gel, AndroGel.
In September 2006 Solvay settled patent litigation with the generic defendants. The terms of the settlement provided for an agreed date for generic entry and stipulated that in return for payment, one of the generic companies would act as a backup supplier of AndroGel for Solvay.
In February 2010 the court granted a motion by the defendants to dismiss the FTC's complaint. The court's decision was based on the plaintiff's failure to plead facts which indicated that the patent settlement had had an impact on competition outside the scope of the Solvay patents. The case was yet another setback for the FTC's efforts to reverse the trend of judicial decisions that analyse reverse payment patent settlements in what the FTC views as an improperly lenient manner. The decision was not unexpected, given that the court which issued the decision is within the jurisdiction of the Eleventh Circuit Court of Appeals, which had already ruled against the FTC's position on the antitrust treatment of patent settlements in cases such as Schering-Plough.
The court's decision dismissing the challenge to the patent settlement has been appealed to the Eleventh Circuit.
The AndroGel story does not end there. The FTC investigated the merger of Paddock (one of the companies involved in the AndroGel settlement) and Perrigo, another company that has filed with the Food and Drug Administration for a generic version of AndroGel. The FTC concluded that Perrigo's purchase of Paddock's assets would result in harmful concentration in the markets for a number of generic drugs. It therefore required the parties to agree to a consent order that would protect competition. The consent contains a provision which prohibits the parties from entering into a future reverse payment settlement with a branded producer of a testosterone gel product (ie, AndroGel). In short, the FTC used its regulatory power to extract a concession regarding reverse payments that it could not win in the courts.
In addition to the several antitrust lawsuits that it has brought against these types of settlement and the filing of amicus briefs in private litigation, the FTC has strongly promoted the idea of legislation that would either ban patent settlements with reverse payments or improve its ability to challenge them. A bill that would affect most such settlements advanced to the Senate floor earlier in 2011. Among other things, the proposed legislation would, in most cases, put the burden of proof on the parties to demonstrate that a patent settlement with a reverse payment is not anti-competitive. However, a recent speech by Commissioner Rosch acknowledged that the legislation faces an uphill battle, especially in the US House of Representatives.
Rosch also suggested that if efforts in Congress and the courts continue to fail, the FTC may seek to exercise its rulemaking authority - for example, by issuing a rule to provide that reverse payment patent settlements are "inherently suspect" under the Federal Trade Commission Act, and shift the burden of proof to the defendants to demonstrate that these deals are not anti-competitive. Such an effort would face significant legal challenges by industry participants, which would seek to assert that the FTC has no legal authority to issue such a rule. Such an attempt could lead to a legislative battle in Congress.
The FTC places a high priority on reining in pharmaceutical litigation settlements that involve payments from the branded company to the generic company, together with an agreed date for generic entry. Despite the reversals that it has suffered, the FTC continues to investigate alleged anti-competitive conduct in the pharmaceutical industry and to pursue creative ways to challenge it under the antitrust laws. Pharmaceutical companies that are considering IP settlements in the United States should exercise caution and seek to minimise the chances that the FTC will select their settlement for a future enforcement action.
For further information on this topic please contact Eric J Stock at Hogan Lovells US LLP New York office by telephone (+1 212 918 3000), fax (+1 212 918 3100) or email ([email protected]). Alternatively, contact Logan M Breed at Hogan Lovells US LLP Washington DC office by telephone (+1 202 637 5600), fax (+1 202 637 5910) or email ([email protected]).
(1) See, for example, Schering-Plough Corporation v FTC, In re Tamoxifen Citrate Antitrust Litigation and In re Ciprofloxacin Hydrochloride Antitrust Litigation.
An earlier version of this article first appeared in Competition Law Insight.