Earlier this month, Federal Trade Commission staff sent letters to four pharmaceutical companies disclosing its current intention not to challenge pharmaceutical litigation settlement agreements. Despite press reports that these letters reflect a decision by the FTC not to challenge a "reverse payment" settlement, the pharmaceutical industry should not assume that the FTC is relenting in its pursuit of patent infringement settlements that it believes are anticompetitive.

The U.S. "Hatch-Waxman" law allows the manufacturer of the generic bioequivalent of a drug that already has been approved to rely on the Food and Drug Administration’s prior determination of the safety and efficacy of the branded drug. The generic manufacturer may file an "abbreviated" new drug application and, if it seeks approval to market its generic drug before the expiration of the patent covering the existing drug, give notice that it believes the patent to be invalid or not infringed. The generic manufacturer must delay marketing of its product, and the branded manufacturer may immediately challenge the generic’s patent infringement.

It is common for these patent challenges to be resolved with a settlement agreement under which the generic manufacturer will refrain from introducing its product for a number of years, in exchange for a payment by the branded manufacturer. As the payment flows from the patent holder to the challenger, in contrast to royalty payments, these are called "reverse payment" settlements.

The Federal Trade Commission has brought antitrust challenges to reverse payment settlements. Given the uncertainty of whether the infringement action would be successful, the FTC claims that, but for the payment to the alleged infringer, the litigants’ agreement would have allowed the generic to enter earlier. Simply put, given the potential for earlier entry, the reverse payment must have bought an agreement not to compete until later. The federal courts have rejected this theory. The courts have held that, so long as the patent is not “objectively baseless” and the agreement does not keep the generic off the market for longer than would the patent itself, there is no harm to competition.

UCB is the manufacturer of the branded anti-epilepsy drug Keppra. In 2004, UCB commenced Hatch-Waxman infringement litigation against generic manufacturers Mylan, Dr. Reddy's Laboratories, and Cobalt Pharmaceuticals. In October 2007, UCB settled with each of the companies, ending the litigations. Under the UCB/Mylan settlement, Mylan, the first filer under Hatch-Waxman law, would be permitted to launch certain dosage versions of the epilepsy product if it received FDA approval and if UCB had received pediatric exclusivity for Keppra. When both of those conditions did occur in 2008, Mylan launched its generic products. Dr. Reddy's and Cobalt were able to do the same in early 2009.

The other terms of the settlements – such as whether UCB provided any other consideration to the generic challengers – remain confidential. Thus, the reports by certain antitrust news services that these letters reflect a decision by the FTC not to challenge "reverse payment" settlements are not substantiated. The FTC often asserts that certain terms of a settlement, such as cross-licenses or agreements not to enter with an authorized generic, are pretexts for reverse payments, but here there is no public information as to whether any such terms existed. There is every reason to believe that the FTC will continue its crusade against reverse payment settlements, a discussed in detail in our recent commentary, "Antitrust Risks in Settling Patent Cases: The FTC and Congress Continue the Attack, While the Courts Continue To Be Unimpressed."

As so little is known about the UCB settlements, drawing any broader inferences about FTC enforcement based on its March 10 no-challenge letters would be unwarranted. The entry of all settling parties into the marketing and sale of the drug product at issue would certainly make further investigation and potential litigation pointless because competition has already entered the purported market. The closing letters themselves nevertheless are noteworthy because the FTC staff so rarely issues them.

FTC staff’s March 10, 2009, closing letters:

UCB Pharma, Inc.  

Dr. Reddy’s Laboratories, Inc.  

Cobalt Laboratories, Inc.

Mylan Laboratories, Inc.