On January 17, 2007, the FTC released its annual report summarizing the pharmaceutical settlements that were filed with the FTC over the past fiscal year pursuant to the Medicare Prescription Drug, Improvement, and Modernization Act of 2003. On the same day, Commissioner Leibowitz provided testimony on behalf of the FTC before the Senate Judiciary Committee discussing the report’s findings and related issues. An FTC press release indicates that the testimony provided by Leibowitz was approved by a Commission vote of 5-0, which is notable because it indicates that that the other members of the Commission share some of his concerns about brand-generic agreements, particularly those that involve so-called “reverse payments.”

The FTC’s testimony emphasized the finding in its report that there was a significant increase in the number of patent settlements that involved both a payment to the generic company (sometimes referred to as a “reverse payment") as well as a restriction on the generic’s ability to launch its product for a period of time. While in the prior fiscal year there were only three such settlements, this year there were 14 – out of a total of 28 final patent settlements filed with the FTC. In 10 of these 14 cases, the “reverse payment” to the generic company was part of a “side deal” involving products not directly related to the patent litigation. The FTC, however, emphasized that these “side deals” frequently appeared in settlements that involved a restriction on generic entry, but virtually never appeared in settlements that did not. In the FTC’s view, this suggests that the side deals might be “serving as a vehicle to compensate the generic challenger for its agreement to a later entry date . . . .” The FTC testimony did not address whether a side deal could provide “compensation” to the generic company if the payment by the branded manufacturer merely reflected the fair market value of the property or rights transferred from the generic company.

The FTC also expressed concern regarding the high proportion of agreements involving the first ANDA filer that involved a payment to the generic company. Of the 11 final settlements filed with the FTC that involved a first ANDA filer, nine included such a payment (generally as part of a side deal) as well as a restriction on entry.

The “side deals” containing the payments objected to by the FTC took several different forms, including: 1) the purchase of an IP license by the branded company (five cases); 2) payment for copromotion services to be provided by the generic company (four cases); 3) payment for the supply of products or raw materials by the generic company (three cases); and 4) payment for development or similar fees in connection with the branded firm’s planned use of the generic’s technology (two cases). In the four cases of “compensation” being provided to the generic company not as part of a side deal, there were three cases of the branded manufacturer providing consideration to the first ANDA filer in the form of a commitment not to launch an authorized generic during the 180-day exclusivity period, and one case where the only payment made was characterized as representing the branded company’s “saved litigation expenses

The FTC believes that this increase in settlements involving payments to generic companies and restrictions on entry was a direct result of the 2005 decisions by the Eleventh Circuit in Schering- Plough and the Second Circuit in Tamoxifen, which had rejected the FTC’s position that such settlements could be condemned without inquiring into the merits of the patent litigation. The FTC reiterated its objection to such settlements, stating that “whenever a patent holder makes a payment to a challenger to induce it to agree to a later entry than it would otherwise agree to, consumers are harmed – either because a settlement with an earlier entry date might have been reached, or because continuation of the litigation without the settlement would yield a greater prospect of competition.” Disputing the view that such settlements are presumptively lawful because patents are presumed to be valid, the FTC testimony stated that “antitrust law prohibits paying a potential competitor to stay out of the market, even if its entry is uncertain.” The FTC also disputed the argument that prohibiting such agreements would discourage settlement, noting that during the four to five year period after the FTC began challenging such settlements but before the decision in Schering-Plough, there was no evidence of a decrease in patent settlements.

Another finding of the FTC report was that five of the 14 agreements involving a reverse payment and a restriction on generic entry involved a “form of the brand-name company’s product not at issue in the litigation.” The Department of Justice and various courts have suggested that the inclusion of such a provision in the settlement at issue in In re Cardizem CD Antitrust Litig. is what distinguished that case, which applied the per se rule to the settlement at issue, from later cases such as Schering-Plough and Tamoxifen, which applied a more lenient standard. From the FTC report, it is not precisely clear what these agreements entailed and whether they raise the same type of competitive issues as the agreement at issue in Cardizem.

The FTC testimony also expressed concern about the settlements with the first ANDA filer because of the potential of such agreements to create a “bottleneck” on generic entry. The first ANDA filer is entitled to a 180-day period of generic exclusivity, but this period does not commence until the first ANDA filer begins marketing its product. If the branded manufacturer settles with the first ANDA filer under terms that bar the ANDA filer from marketing its product until a certain date, however, then the first filer’s 180-day period will not have commenced until such date, and the later filers’ ANDA filings cannot be approved in the interim period. The 180-day exclusivity period can be forfeited under certain conditions, including where the first ANDA filer fails to market its product within 75 days after an appellate decision finding the relevant patents invalid or not infringed. However, if the branded manufacturer declines to sue subsequent filers – thus avoiding a court decision – then the FTC is concerned that subsequent ANDA filers will not be able to end this “bottleneck,” especially in light of recent court decisions that have held that a generic company does not have standing to commence a declaratory judgment action for non-infringement in such circumstances. To resolve this perceived problem, the FTC called for legislation making dismissal of such a declaratory judgment action an event requiring the first ANDA filer to market its product within a certain amount of time or forfeit its exclusivity period.

Finally, the FTC endorsed “the intent behind”2 legislation introduced by Sens. Kohl, Leahy, Grassley, and Schumer, stating that, in its view, legislation could provide a swift resolution to the “reverse payment” issue. The legislation proposed by the senators would bar an ANDA filer from receiving “anything of value” as part of an agreement that involves a commitment by the generic company not to research, develop, manufacture, or market the product subject to the ANDA filing.