On 15 February 2007, the Senate Judiciary Committee unanimously passed a bill, the “Preserve Access to Affordable Generics Act”, that would prohibit brand drug manufacturers from using out-of-court settlements known as reverse payments to delay generic entry into the market. In 2005, two appellate court decisions overturned the Federal Trade Commission’s (“FTC”) long-standing position against this practice and upheld settlements that included such pay-offs. In one such decision, Schering, the manufacturer of a brand-name drug called “K-Dur 20,” settled patent litigation with two manufacturers of generic counterparts. The two generic manufacturers agreed to forbear marketing their generic drugs until specified dates in exchange for guaranteed cash payments totalling $60 million and $15 million respectively. The Commission concluded that in each settlement, Schering had paid its generic competitors to accept the settlement and that the settlements provided Schering with more protection from competition than a settlement without a payment or simply proceeding with litigation.

Following these decisions, the FTC reported that at least seven settlement agreements made in 2006 included a pay-off from the brand manufacturer in exchange for a promise by the generic company to delay entry into the market. This report led to the introduction of the above bill, which would prohibit a brand name manufacturer from settling a patent infringement claim by paying “anything of value” to a generic company.

The FTC argued in support of the bill stating that in virtually any case in which generic entry is contemplated, the profit that the generic anticipates will be much less than the amount of profit the brand-name drug company stands to lose from the same sales. Consequently, it will typically be more profitable for both parties if the brand-name manufacturer pays the generic manufacturer to settle the patent dispute and agree to defer entry. Therefore, by eliminating the potential for competition, the parties can share the consumer savings that would result if they were to compete.

In response, Mr. Billy Tauzin, the President and CEO of the Pharmaceutical Research and Manufacturers of America stated that the bill could almost cover any settlement agreement because a generic challenger logically would only settle in exchange for something of value. He argued that restricting the options for settlement would raise the cost of patent enforcement, and patent challenges, by forcing both sides to incur additional litigation costs.

The bill will now be considered by the full Senate.