Despite some recent setbacks, the Federal Trade Commission (“FTC”) is still focused on so-called “reverse payments” from innovator pharmaceutical companies to generic drug manufacturers made in connection with the settlement of patent litigation. Additionally, the recent change in Congressional leadership makes it more likely that recently proposed legislation designed to prohibit these payments will be enacted. Therefore, companies should think carefully before making or receiving such a payment.

The “Hatch-Waxman Act,” 21 U.S.C. § 355, adopted in 1984, governs how the U.S. Food and Drug Administration (“FDA”) approves pharmaceuticals for marketing and provides incentives for generic drug manufacturers to challenge brand-name drug patents. As a result of this legislation, patent litigation proliferated between the innovator companies that hold the patents for brand name drugs and the manufacturers of the generic equivalents for these drugs. The FTC uses the terms “reverse payment” or “exclusion payment” to describe a settlement of this type of patent litigation “in which the brand-name drug fi rm pays its potential generic competitor to abandon the patent challenge and delay entering the market.” To illustrate one example, the FTC concluded that Schering-Plough Corporation settled patent litigation with two companies that planned to market a generic version of its innovator drug “K-Dur-20” by providing “reverse payments” to one generic drug manufacturer in the amount of $60 million to stay off the market for more than four years and $15 million to a second generic manufacturer to delay marketing for about six years. The Eleventh Circuit found it important that, under both agreements, the generic would enter well before the patent’s expiration in September 2006.

The FTC considers reverse payments anticompetitive because they delay the entry of lower priced generic drugs. According to the FTC, the profi t that generic companies make from the sale of a generic if they are successful in patent litigation is likely to be much less than the profi ts that the innovator company will lose, so it will typically be more profi table for both parties if the innovator company pays the generic manufacturer to settle the patent suit and delay entry. The FTC assumes that, absent this payment, the generic manufacturer would either prevail in the lawsuit or the parties would negotiate a settlement with an earlier entry date (or, if the innovator company prevails in the litigation, there would be no generic entry until after patent expiration).

On those grounds, the FTC has challenged settlements that it found to be anticompetitive because they involved a reverse payment. In 2005 and early 2006, however, decisions by the Eleventh Circuit in Schering-Plough Corp. v. FTC and the Second Circuit in the Tamoxifen Citrate Antitrust Litigation cast doubt on the FTC’s view that reverse payments are generally illegal. In Schering-Plough, the Eleventh Circuit vacated an FTC decision holding settlements of patent litigation illegal. The Tamoxifen case involved an antitrust challenge to a patent settlement brought by consumers. These courts took a more lenient view of reverse payments, stating that “[s]imply because a brand-name pharmaceutical company holding a patent paid its generic competitor money cannot be the sole basis for a violation of antitrust law” and declining to conclude that reverse payments are per se violations of the Sherman Act. The Eleventh Circuit stated that the following factors should be considered when evaluating a patent settlement:

(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. These cases seem to place more weight on the desirability of settling litigation than does the FTC.

As a party to the Eleventh Circuit case, the FTC sought review in the United States Supreme Court. Notably, the Solicitor General fi led a brief opposing review, and the Supreme Court decided not to grant certiorari. The plaintiffs in the Tamoxifen case have also fi led a petition for certiorari, and the Supreme Court recently asked the Solicitor General to weigh in again on whether granting cert would be appropriate.

The FTC and some members of Congress do not seem content to wait for a Supreme Court decision in the Tamoxifen case. According to the FTC, the Circuit Court of Appeals decisions have opened a “Pandora’s box” of settlements that it considers anticompetitive. The FTC claims that there were no reverse payments between 2000 and the end of 2004 but that the Schering and Tamoxifen decisions have led to the return of reverse payments. According to the FTC, fi fty percent of the patent settlements reached in 2006 included some form of payment from the brand-name fi rm to the generic challenger.

In response to this increase in reverse payments, Senator Chuck Grassley of Iowa joined with Senators Kohl, Durbin, Feingold, Kennedy, Leahy, and Schumer in introducing legislation that would prohibit reverse payments. Their “Preserve Access to Affordable Generics Act” would make it illegal for a generic manufacturer to “receive anything of value” in return for delaying generic entry:

It shall be unlawful under this Act for any person, in connection with the sale of a drug product, to directly or indirectly be a party to any agreement resolving or settling a patent infringement claim in which —

(A) an Abbreviated New Drug Application (“ANDA”) fi ler receives anything of value; and

(B) the ANDA fi ler agrees not to research, develop, manufacture, market, or sell the ANDA product for any period of time.

As of February 27, 2007, the bill had been reported out of the Senate Judiciary Committee. Although the FTC has not stated its position on the current version of this bill, it has said that it “strongly supports” the intent of the bill. Obviously, if the bill is enacted, the impact of the law will depend greatly on how the courts and the FTC defi ne the phrase “anything of value.” The FTC has defi ned compensation broadly and considers this term to include, among other things: an agreement not to launch an authorized generic; co-promotion agreements for products not at issue in the litigation; supply agreements; and development agreements for unrelated products. If the FTC’s defi nition is accepted, the law arguably would prohibit most of the settlements reached in 2006.

Given this proposed legislation and the FTC’s continued focus on reverse payments, it is likely that this issue will continue to receive considerable attention in the coming months. Therefore, any company entering into a patent litigation settlement should seek legal advice before submitting such an agreement to the FTC.