Settlements of drug patent infringement suits have been the subject of escalating controversy in recent years, as antitrust law enforcers and private plaintiffs argue that certain settlements are inherently anticompetitive, while federal courts maintain that the incentives for innovation provided by patents must be reasonably accommodated by the antitrust laws. Balancing these innovation incentives against the opportunities for market entry by generic drug manufacturers is precisely what was intended by the regulatory scheme Congress adopted in 1984 via the Hatch-Waxman Amendments to the Federal Food, Drug and Cosmetic Act. It is the Hatch-Waxman regulatory scheme, however, that is at the root of much of the litigation over patent settlements. Now, with Congress about to step into the fray, the legal status of these settlements may be on the verge of changing.

At issue are so-called “reverse payment” settlements of patent infringement lawsuits, whereby the branded pharmaceutical company pays money to the alleged infringer, a generic firm, and the generic company agrees not to market the branded company’s drug until the patent expires or upon a date prior to patent expiration. The Federal Trade Commission has consistently taken the position that these settlements violate the antitrust laws. The Commission believes that these settlements are harmful to consumers because they may delay the defendant’s market entry in comparison to the date of entry if there were no reverse payment. For example, in a September 29, 2006 speech to the Generic Pharmaceutical Association, Commissioner Leibowitz cited recent litigation over generic Prozac. In that case, he said, the generic manufacturer offered to settle the case and drop its patent challenge in return for a stated sum. The branded manufacturer refused, and the generic ended up winning the patent litigation. The result, according to Leibowitz, was a competitive market and cost savings for consumers that would not have come about if the litigation had settled.

Two Courts of Appeals have considered this issue and have disagreed with the Commission. In a March 2005 decision, the Eleventh Circuit rejected the FTC’s attempt to condemn these agreements as illegal. Schering-Plough Corp. v. FTC, 402 F.3d 1056 (11th Cir. 2005). The trouble with this approach, said the court, is that it assumes that the patent is invalid. But not all challenged patents are invalid; if the patent holder were to win the litigation, and the patent remained in effect, the generic manufacturer would be excluded from the market for the same period as under the settlement. In these cases, the settlement does not delay generic entry at all, and it benefits the parties and the public by reducing litigation costs. The court concluded that “[g]iven the costs of lawsuits to the parties, the public problems associated with overcrowded court dockets, and the correlative public and private benefits of settlements, we fear and reject a rule of law that would automatically invalidate any agreement where a patent-holding pharmaceutical manufacturer settles an infringement case by negotiating the generic’s entry date.” The Commission requested certiorari, which the Supreme Court denied. 126 S. Ct. 2929 (June 26, 2006).

The Second Circuit reached a similar conclusion in a November 2005 decision. In re Tamoxifen Citrate Antitrust Litig., 429 F.3d 370 (2d Cir. 2005). Tamoxifen was a private antitrust suit, brought by consumers and indirect payors who claimed to have been injured by the settlement in question. The court refused to consider patent settlements to be per se invalid, because that would involve an attempt to guess the outcome of the patent litigation, resulting in an assumption that the patent is invalid. According to the court, deciding based on such an uncertain foundation would be particularly unacceptable here, where it would defeat the public benefits resulting from settlement of litigation. The Tamoxifen plaintiffs have filed a petition for certiorari to the U.S Supreme Court.

Because the lawfulness of the exclusion depends on the existence of a patent, these courts held that settlements are only legal to the extent that their exclusive effect does not exceed the scope of the patent itself. If the exclusionary effect of the settlement goes beyond the scope of the patent, this legal doctrine provides the parties with no protection from the antitrust laws. See In re: Cardizem CD Antitrust Litig., 332 F.3d 896 (6th Cir. 2003) (interim settlement agreement that restrained generic firm from marketing bioequivalent versions of Cardizem that were not covered by the patent and were not at issue in the litigation held to be per se unlawful).

The Commission has made its disagreement with these decisions more than clear. In testimony before the Senate Judiciary Committee on January 17, 2007, Commissioner Leibowitz stated that the FTC is “looking to bring a case that will create a clearer split in the circuits and encourage the Supreme Court to resolve this issue.” Congress has started in a direction that would essentially enact the FTC’s position into law. On January 17, 2007, Senator Herb Kohl introduced the “Preserve Access to Affordable Generics Act,” S.316. The bill would make it unlawful 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, manufacturer, market, or sell the ANDA product for any period of time.” (The Hatch-Waxman regulatory scheme allows for accelerated FDA approval of a drug through an Abbreviated New Drug Application or “ANDA”.) Thus, S.316 would draw a bright line, making it per se unlawful to be a party to a settlement that delays generic entry in return for compensation.

In a March 1, 2007 panel discussion at The Conference Board Antitrust Conference, Chairman Majoras made it clear that the Commission is not waiting to see whether Congress acts. She said that the Commission has several ongoing investigations into drug patent settlements and will bring a case if the facts are right.

Aside from uncertainties presented by some of its proposed language, S.316 poses two significant policy consequences, which undermines the goals underlying the Hatch-Waxman amendments. First, it would decrease the incentive for companies to innovate, as taking any action against the infringement of their patent rights would mean either protracted litigation with no ability to settle, or a settlement allowing the defendant to market its infringing product before the patent expiration, which defeats the basic purpose of a valid patent (i.e., to provide a period of exclusivity to the creator). Patent holders would find themselves between a rock and a hard place, and the incentives provided by patents would thus diminish.

Second, consumers would not necessarily benefit under this new regime. By raising the stakes involved in generic entry, the proposed legislation would provide a disincentive for generic manufacturers to proceed with an already-risky “Paragraph IV” certification under Hatch-Waxman, the measure by which the generics assert that the patent at issue is invalid or not infringed. Under these circumstances, the generic manufacturer may well be reluctant to subject itself to an infringement suit, and may be less likely to challenge a patent. In this way, Congress will have reached the opposite of the result it claimed to advance with the Hatch-Waxman Amendments: fewer generics will attempt to enter the market, and consumers will pay the price.