The Korea Fair Trade Commission (the “KFTC”) has announced its 2014 work plan. According to the KFTC’s work plan, the KFTC plans to adopt a reporting system for patent disputes in the healthcare sector, whereby the settlement of drug patent disputes between pharmaceutical companies has to be reported to the KFTC. The KFTC plans to incorporate such system in the Pharmaceutical Affairs Act through an amendment.

Patent Dispute Settlement Reporting System

Under the reporting system, when pharmaceutical companies settle a patent infringement suit relating to a drug patent, the terms of settlement are required to be reported to the KFTC.

Background of Proposed System

As the free trade agreement between Korea and the U.S. went into effect on March 15, 2012, the drug approval-patent linkage system was adopted, which imposed a notification obligation on applicants of generic drugs.

A patent holder may file a patent infringement suit upon notification of a generic drug application, and drug approval for the generic may be stayed for a certain period (effective from March 15, 2015).

Once the drug approval-patent linkage system takes full effect, patent disputes between pharmaceutical companies are likely to increase, and in the process, potential anticompetitive activities, such as reverse payment agreements, are also likely to increase.

In the U.S., reverse payment agreements are regulated by the Hatch-Waxman Act, which provides that the terms of settlement of drug patent disputes between pharmaceutical companies are to be reported to the U.S. Federal Trade Commission (the “USFTC”), and if the USFTC, upon review, determines that such settlement is anticompetitive, the USFTC takes appropriate legal measures.

Following adoption of the drug approval-patent linkage system in Korea, patent disputes between pharmaceutical companies and related reverse payment agreements are likely to increase, and the KFTC seeks to monitor and regulate such activities by requiring patent dispute settlements to be reported to the KFTC.

Significance and Outlook

According to the USFTC, in 2012, 40 out of 140 drug patent disputes in the U.S. were actually settled through reverse payment agreements.

The USFTC has found several reverse payment agreements to be in violation of antitrust laws, and has taken legal measures to prohibit them. In FTC v. Actavis, the U.S. Supreme Court held that reverse payment agreements may violate antitrust laws.

Likewise, the European Commission is paying close attention to reverse payment agreements between pharmaceutical companies, and there are recent cases which have held that reverse payment agreements violate competition laws.

In Korea, the KFTC found that an original drug patent holder’s agreement to grant a distributorship and other economic benefits to a generic drug manufacturer in consideration for withdrawing from the market a generic drug that had already been launched and not manufacturing and selling competing drugs constituted cartel activity, and imposed a corrective order together with a surcharge of KRW5.1 billion (October 2011).

Once the patent dispute settlement reporting system is incorporated into the Pharmaceutical Affairs Act, the KFTC is expected to enhance monitoring and regulation, and penalties such as surcharges may be imposed for violations. Therefore, pharmaceutical companies seeking to resolve patent disputes through settlement would have to be careful.