In the next few months, there will be new legislation (or, failing that, continued antitrust agency enforcement efforts) to restrict the use of litigation settlement agreements to resolve disputes between pharmaceutical industry IP rights holders and generic drug companies. The settlements typically involve 1) a payment to a generic drug manufacturer to resolve patent infringement litigation and 2) an agreement by the generic manufacturer to delay its entry into the segment of the drug market covered by the pharmaceutical company's IP rights.

The main argument of those advocating for restrictions on payments to settle generic drug patent suits is that such settlements are essentially horizontal market division agreements that would normally be considered illegal per se under Section 1 of the Sherman Act, 15 USC §1. Critics contend that the settlements deprive consumers of the benefits of price competition that come from early generic entry into the market to compete with branded drugs. The Federal Trade Commission has asserted that the settlements are anticompetitive and, in its view, “impose enormous costs on consumers and the health care system.”1

Yet the picture is not always that simple. According to the proponents of such settlements, they are essential to resolve disputed infringement claims,2 and complicating these disputes will only protract litigation and further delay entry of generic drugs.

The problem for settlement opponents, like the FTC and the Antitrust Division of the U.S. Department of Justice, is that they have lost virtually every challenge so far. While there have been some limited exceptions, courts have regularly approved the settlement of IP litigation even if the settlement delays generic entry into the market, and have dismissed efforts to block such resolutions.3 The rationale seems to be fairly straightforward: The IP rights holder has a constitutionally protected right to exclude from the marketplace products infringing that monopoly right.

Whatever the technical merits and complexities of the issues, the antitrust enforcement agencies and their allies in Congress are actively pushing a legislative resolution that would make these settlements much more difficult to achieve. Opponents of certain such legislative proposals have not been limited to those that bring infringement actions against generic drug companies alleged to be infringing IP rights. For example, the Generic Pharmaceutical Association, reacting to action in July 2009 by a House of Representatives Committee, said that bans on settlements could have “the unintended effect of benefitting the brand industry and ultimately harming consumers by keeping more affordable generics from getting into the market in a timely manner.”4

Nevertheless, momentum continues to build for legislative action. On October 15, 2009, the Senate Judiciary Committee approved legislation to make most “reverse payment settlements” illegal under the U.S. antitrust laws. The Senate Judiciary Committee bill, which is now awaiting full Senate debate, would ban such settlements unless the proponents of the settlement can establish that the settlement will promote competition by “clear and convincing evidence.”5 Similarly, in early November 2009, the full House of Representatives passed its version of health care legislation that contained restrictions on generic drug settlements.

There are a number of considerations that make resolution of this issue complex. These include:

  1. The duration of the settlement agreement (Does it extend beyond the life of the patent or patents at issue?)
  2. The scope of the settlement (Does it sweep in a commitment not to enter with a product that does not infringe?)
  3. Who is settling and delaying (Is it the first or a follow-on generic, and what will be the chilling effect, if any, on other potentially permissible entry?)
  4. The amount of compensation being paid (Is it reasonably related to the underlying dispute or is it a disguised vehicle to thwart entry?)
  5. The implications outside the drug industry (and existing regulatory structure established by the Hatch-Waxman Act)
  6. The effect on constitutionally-protected rights to petition for redress enshrined in the Noerr-Pennington doctrine and related cases
  7. The possibility that the “problem” of entry by the alleged infringer can be resolved through acquisition of the alleged infringer by the IP rights holder, rather than settling litigation through a so-called “reverse payment”  

Where the line is properly drawn seems increasingly lost in some of the rhetoric of the political debate. One can be assured, however, that challenges by patent owners to products alleged to infringe will not disappear, and, if settlements of these disputes are complicated or restricted, these suits are less likely to end until there is a resolution of the underlying infringement claims.