While often seen as incompatible, in a proper balance, antitrust and patent laws encourage innovation while promoting commerce, as a goal of each is to provide new and beneficial technologies to the marketplace. Indeed, as Judge Posner explained, ?It is not a violation of [the antitrust] laws to acquire a monopoly by lawful means, and those means include innovations protected from competition by the intellectual property laws.?1 Yet, despite this potential interplay, a tension between patent and antitrust laws arises when the exclusionary rights of a patent holder are exercised in a manner that exceeds the scope of the patent grant and negatively affects competition. This tension is exemplified in a number of recent settlements of patent litigations between innovator and generic drug companies in which the generic agrees to forego its challenge of the innovator?s patents and defer entry of its product into the market in exchange for a monetary settlement. These are termed ?reverse payment? settlements, as contrary to the usual scenario, the plaintiff compensates the alleged infringer. The legality of these settlements has been the subject of much debate recently, as the Federal Trade Commission (FTC or Commission) and private litigants have challenged a number of the settlements as anticompetitive, with differing results reached in a number of appellate courts.2 Two recent appellate decisions, Schering-Plough v. FTC3 and In re Tamoxifen Citrate Antitrust Litigation4 were appealed to the Supreme Court of the United States, which denied certiorari in both cases. Consequently, Congress became involved, proposing several bills making reverse payment settlements per se illegal; however, none have been passed yet and will not likely become law in the current legislative session. With this legislation stalled, the FTC continues its battle against these settlements in the courts, filing yet another lawsuit?this one against drug maker Cephalon in the district court.5

The Hatch-Waxman Act: Setting the Stage for Settlements

The backdrop against which these patent litigation settlements have played out is the Drug Price Competition and Patent Term Restoration Act?commonly termed the Hatch-Waxman Act?which governs the procedure for approval and marketing of generic drugs.6 Passed in 1984, the Hatch-Waxman Act amended the Federal Food, Drug and Cosmetic Act, which requires that a company seeking to market a new drug product obtain U.S. Food and Drug Administration (FDA) approval by undertaking the expensive and lengthy process of filing a New Drug Application (NDA). Under Hatch-Waxman, the marketing approval process for generic drug products is streamlined, as generic manufacturers may file an abbreviated New Drug Application (ANDA) that incorporates the safety and effectiveness data developed and submitted by the original pioneer drug manufacturer and adds only bioequivalence studies.7 Furthermore, under Hatch-Waxman, a generic manufacturer may develop and test the product without fear of an infringement action by the patent holder.8

As part of the ANDA process, a filer must make a certification regarding any patent listed by the innovator company,9 certifying that (I) no patent was listed for the drug, (II) the patent has expired, (III) the ANDA drug will not be marketed until the patent expires, or (IV) the patent is invalid or would not be infringed by the generic version.10 This last certification is known as a ?Paragraph IV? certification and creates an immediate cause of action for patent infringement by the innovator drug manufacturer. Upon such notice to the patent holder, the patentee has 45 days within which to sue.11 If suit is filed, there is an automatic stay of the 30 months, during which time the ANDA cannot be approved.12 Under Hatch-Waxman, the first generic challenger to submit a substantially complete ANDA containing a Paragraph IV certification can be eligible for a 180-day exclusivity period during which no other ANDA with a Paragraph IV certification for the same drug may be approved. Under the current law, the 180-day period begins to run after the first filer commences marketing of the generic drug unless the first filer has forfeited itsexclusivity.13 This exclusivity is quite valuable and thus provides an incentive to challenge the patented products of the innovator companies.

While this 180-day exclusivity was intended to encourage generic entry, it opened the possibility for quite the opposite effect should a first filer settle with the innovator and agree to delay marketing its generic product. This situation is viewed by both companies as ?win-win,? as the innovator company can assure its stockholders that there is no threat to its ability to market its drug for the full patent term and the generic company can be assured of getting on the market first with no competition, while obtaining a cash settlement. Thus, the unintended consequence of this framework was to set the stage for settlements between innovator and generic companies. In the years following the adoption of Hatch-Waxman, innovator and generic companies began entering into a variety of settlement agreements that involved reverse payments and other collaborative arrangements, including the recent ?authorized generic? relationships. A number of these agreements caught the attention of the FTC and in recent years have been challenged in court under the theory that such settlements are violations of antitrust law. Two of these cases were recently before the Supreme Court on certiorari petitions: Schering-Plough Corp. v. FTC and In re Tamoxifen Citrate Antitrust Litigation. In both instances, the Supreme Court denied certiorari.

SCHERING-PLOUGH V. FTC

Schering-Plough involved a challenge by the FTC against two patent litigation settlements that involved payment from Schering Plough Corp. (Schering) to the generic manufacturers Upsher-Smith Laboratories (Upsher) and ESE Lederle, Inc. (ELI). Upsher and ELI had both filed ANDAs with Paragraph IV certifications seeking approval from the FDA to market generic versions of Schering?s potassium chloride product K-Dur 20, which was covered by U.S. Patent No. 4,863,743.

Schering sued both Upsher and ELI for patent infringement, and before trial, both cases settled. As part of the Schering/Upsher settlement agreement, Schering paid Upsher a total of $60 million to license five Upsher products in exchange for Upsher delaying market entry of its generic product. Schering made a similar agreement with ELI under which Schering paid ELI $10 million dollars and ELI agreed to delay entry of its generic product into the market until three years prior to the expiration of the ?743 patent.

On March 30, 2001, more than three years after the parties had entered into their settlement agreements, the FTC filed an administrative complaint against Schering, Upsher and ELI alleging that the settlements were illegal agreements in restraint of trade in violation of Section 1 of the Sherman Antitrust Act and Section 5 of the Federal Trade Commission Act. The complaint also alleged that Schering monopolized and conspired to monopolize the potassium supplement market. The administrative law judge (ALJ) found both agreements lawful settlements of legitimate patent lawsuits and dismissed the complaint. The ALJ also found no proof that Schering maintained an illegal monopoly within the relevant potassium chloride supplement market. The FTC appealed the ALJ?s decision to the full Commission, which reversed the ALJ?s initial decision.

Schering appealed the decision of the Commission to the U.S. Court of Appeals for the Eleventh Circuit. The court reversed the Commission?s decision, holding that the settlements were not illegal as being anticompetitive. Relying on its decision in Valley Drug Co. v. Geneva Pharms,14 the court stated that monetary payments made to an alleged infringer as part of a patent litigation settlement did not constitute a per se violation of antitrust law. Further, the court stated that, ?In the context of patent litigation, however, the anticompetitive effect may be no more broad than the patent?s own exclusionary power. To expose those agreements to antitrust liability would ?obviously chill such settlements.??15 The court concluded that the ?743 patent gave Schering the lawful right to exclude infringing products and the ability to license its products. Therefore, the court concluded that the agreements with Upsher and ELI did not rise to the level of anticompetitive activity, finding ?the terms of the settlement to be within the patent?s exclusionary power, and ?reflect a reasonable implementation? of the protections afforded by patent law.?16 The FTC petitioned the Supreme Court to reconsider the Eleventh?s Circuit?s decision; however, the Supreme Court denied certiorari.

IN RE TAMOXIFEN CITRATE ANTITRUST LITIGATION

The issue of reverse settlements also came before the U.S. Court of Appeals for the Second Circuit, which found similarly to the Eleventh Circuit that the settlement agreement in question did not violate antitrust laws. Imperial Chemical Industries, PLC (ICI) obtained a patent in 1985 for the drug tamoxifen, which is used in the treatment of breast cancer. At the time the drug was sold by a subsidiary, Zeneca, that later succeeded to ownership of the patent. Shortly thereafter, Barr Laboratories (Barr) filed an ANDA with a Paragraph IV Certification to produce a generic version of the drug, and ICI timely filed suit for patent infringement. At trial, the district court found the patent invalid, based on the court?s conclusion that that ICI had deliberately withheld information concerning tests on the safety and effectiveness of the drug.17

During the appeal to the Federal Circuit, Zeneca and Barr entered into a settlement agreement, wherein Zeneca paid Barr $21 million and granted Barr a non-exclusive license to sell Zeneca manufactured tamoxifen. Barr further agreed not to market its own generic version of tamoxifen until the patent expired or was invalidated by another party. Finally, as part of the settlement agreement, Zeneca and Barr jointly filed a motion to vacate the district court?s judgment that the patent was invalid, which was granted by the Federal Circuit. Subsequently, three other generics filed ANDAs with Paragraph IV Certifications relating to tamoxifen and each was sued by Zeneca. In these cases, however, the validity of the patent was upheld.

While these generic challenges were being litigated, consumer groups filed numerous lawsuits challenging the settlement between Barr and Zeneca, which were then consolidated into a class action in the Eastern District of New York. The class action lawsuit alleged that the settlement agreement was a restraint of trade in violation of the antitrust laws. The defendants successfully moved to dismiss the action for failure to state a claim upon which relief could be granted. On appeal, the dismissal was affirmed by the Second Circuit, which concluded that a patent settlement, regardless of whether it includes a reverse payment, is generally not a violation of the antitrust laws so long as the patent holder is not acting in bad faith beyond the limits of the patent monopoly to restrain or monopolize trade.18 According to the court, reverse payment settlements might seem ?suspicious? but ?as long as a patent litigation is neither a sham nor otherwise baseless? the patent holder is seeking to arrive at a settlement to protect ?a lawful monopoly over the manufacture and distribution of the patented product.?19 As the court found, the settlement agreement did not extend the monopoly of the tamoxifen patent and, thus, there is ?no sound basis for categorically condemning reverse payments employed to lift the uncertainty surrounding the validity and scope of the holder?s patent.?20 The plaintiffs petitioned the Supreme Court for certiorari, which was denied.

Legislative Response to Pharmaceutical Patent Litigation Settlements

In 2003, Congress amended the Hatch-Waxman Act, in part to address certain ramifications of pharmaceutical patent settlements, including the increase of ?reverse payment? settlements and the ability of a first filer to ?park? its 180-day exclusivity in order to bar further generic competition. Through the Medicare Prescription Drug, Improvement, and Modernization Act (MMA), Congress provided a mechanism for monitoring reverse payment settlements, as it mandated that the FTC receive copies of certain patent settlement agreements between ANDA applicants and NDA holders relating to the marketing of generic products. As to the issue of ?parking? exclusivity, the MMA established a number of forfeiture events that, if triggered, cause a first paragraph IV ANDA filer to lose its entitlement to the 180-day generic exclusivity, including, for example, in the event the FTC obtains a final court decision that the agreement violates the antitrust laws, or if marketing has not begun within 75 days after a favorable settlement has been entered.21 However, despite the filing obligations and forfeiture provisions, the MMA did not set any substantive standards as to the validity or legality of these agreements?this was left for litigants to challenge in the courts under general antitrust principles.

Furthermore, in response to the Supreme Court?s denial of certiorari in Schering-Plough and the differing position of the various courts of appeals on reverse payments, a bi-partisan group of legislators introduced a bill to explicitly prohibit brand-name drug manufacturers from compensating generic companies to delay introducing a generic drug to the market. The ?Preserve Access to Generics Act? (S.3582) proposed an amendment to Section 3 of the Federal Trade Commission Act (15 U.S.C. § 45) making it an unfair method of competition for ?a 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 ANDA filer receives anything of value and (b) the ANDA filer agrees not to research, develop, manufacture, market or sell the ANDA product for any period of time.?22 Importantly, under this bill, only the FTC can take action against parties entering into settlement agreements in violation of this provision.

While this bill stalled in the 109th Congress, new legislation entitled ?Preserve Access to Affordable Generics Act? (S. 316) was introduced in the 110th Congress by the same bi-partisan group. Senate Bill 316 amends the Clayton Act (15 U.S.C. § 12 et seq.) to provide that ?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 ? (1) an ANDA filer receives anything of value; and (2) the ANDA filer agrees not to research, develop, manufacture, market or sell the ANDA product for any period of time.?23 The bill does not prohibit settlement agreements if the ANDA filer only obtains the right to market its generic prior to the expiration of the patent that is the basis of the infringement claim. As this amends the Clayton Act, private causes of action may be filed with the threat of treble damages and attorneys? fees. Thus, S. 316 has enforcement options not found in S.3562, nor in the currently pending H.R. 1902 ?Protecting Consumer Access to Generic Drugs Act of 2007?, introduced in April 2007 which like S.3562, amends the Federal Trade Commission Act.24

The FTC Continues Its Battle with FTC v. Cephalon

While these proposed bills continue to hit snags as they move through Congress, the FTC reported that agreements between branded and generic drug companies to settle patent litigation persist. According to the FTC?s report, in 2007 more than 30 settlements were reached, with 14 of those agreements including both compensation to the generic challenger and an agreement to delay marketing of a generic version of a drug.25 There has been a steady increase in ?reverse payment? agreements since the FTC first began collecting the statistics. In the year 2004 there were no such agreements; there were three in 2005 and 14 in 2006.26

In response to this continuing trend, the FTC decided to bring its fight back to the courts. On February 13, 2008, the FTC filed suit against Cephalon, Inc., alleging that the company illegally extended the monopoly over its drug Provigil by entering into patent litigation settlements with four generic drug manufacturers in which they were each paid to delay entry of their generic drug.27 In contrast to the FTC approach in Schering, the FTC?s complaint against Cephalon alleges only that Cephalon?s actions constitute anticompetitive conduct in contravention of Section 2 of the Sherman Act?no Section 1 action is alleged. According to the FTC, but for Cephalon?s payment to the generics, competition to Provigil would have occurred prior to patent expiry. Under this strategy, the FTC need not prevail in showing the illegality of each of the generic agreements.

Significantly, the FTC filed the suit in the U.S. District Court for the District of Columbia instead of initiating its usual administrative proceeding, which goes before an administrative law judge and is then appealed to the Commission. By doing this, the FTC sought to block Cephalon?s ability to appeal to the court of appeals of its choice?which would likely be to one of the courts in which its position has already prevailed. In a setback to the FTC?s plan, Cephalon successfully moved to transfer the case to the Eastern District of Pennsylvania, where related cases were already pending.28 This transfer may hinder the FTC?s plan to force a split among circuit courts and increase its chances of certiorari review by the Supreme Court again. For now, the future of this issue may be in the hands of the Third Circuit.

The Future of Reverse Payment Settlements

While legislation has garnered support from the FTC, which has seen the amount of patent litigation settlements involving reverse payments grow exponentially in the past several years, to date none of the legislation has fared well in Congress. Much of the blame for this has been attributed to lobbying by innovator and generic pharmaceutical companies, as both sides oppose the legislation.29 Opponents of the bills seemingly echo the views set out by the Second and Eleventh Circuits in claiming that settlements of litigations are long favored by the courts and that the proposed amendments may actually decrease incentives for innovation and discourage patent challenges by generic companies.30 But, even the sponsors acknowledge that a compromise will be necessary to get the legislation passed. In the meantime, the FTC continues to investigate drug patent settlements and has publicly advised that it will continue to fight this battle in the courts. Should the Supreme Court ultimately accept certiorari of such a case, litigants in the public and private sectors can hope for a standard by which to judge settlements between innovator and generic companies that strikes the balance between pro-competitive and anticompetitive agreements.