Over the past decade, reverse payment settlements between brand-name and generic drug manufacturers has become one of the most controversial topics in the patent-law and health-care communities.

Reverse payment, also known as “pay-for-delay,” occurs when a patent drug owner offers a generic drug company a license or money to delay production of a generic drug for a specified time. This allows the patent owner to maintain longer market control. Although public policy generally encourages settlement, the Federal Trade Commission (FTC) maintains reverse payments are presumptively anticompetitive and cost consumers billions of dollars in increased health-care costs. Meanwhile, the circuit courts disagree over the legality of reverse payments and the standard of law that applies.

Pay-for-Delay

Under the Hatch-Waxman Act, a generic drug company interested in entering the market prior to the expiration of a patented drug can file an abbreviated new drug application (ANDA) and rely on the FDA’s prior determination on the safety and efficacy of the patented drug. The ANDA applicant must identify any patent that claims the generic drug and certify that the patent is invalid or not infringed by the generic drug (known as paragraph IV certification). 21 U.S.C. § 355(j)(2)(A)(vii)(III)-(IV).

The Hatch-Waxman Act also provides that the first applicant to file an ANDA with a paragraph IV certification for a generic drug is entitled to 180 days of exclusive marketing rights. The exclusivity period begins either on the date that the first ANDA filer begins marketing its drug, or on the date of a final court decision rendering the patent listed in the ANDA invalid or not infringed. 21 U.S.C. § 355(j)(5)(B)(iv).

Because the 180-day market exclusivity begins at the start of marketing, reverse payment delays FDA approval of other subsequent rival generics waiting to market their generic forms of the patented drug.

Circuit Conflicts

In antitrust cases, courts usually apply the rule of reason or a per se rule. Until recently, the majority of the circuit courts addressing reverse payment cases have applied the scope of the patent test.

Somecircuit courts have held reverse payments are permissible provided the agreement does not exceed the exclusionary scope of the patent. Schering v. FTC, 402 F.3d 1056 (11th Cir. 2005); FTC v. Watson Chemicals, No. 10-12729 (11th Cir. April 25, 2012); In re Tamoxifen Citrate Antitrust Litigation, 466 F.3d 187 (2d Cir. 2006); In re Ciprofloxacin Hydrochloride Antirust Litigation, 544 F.3d 1323 (Fed. Cir. 2008).

Other circuit courts have concluded that where the agreement attempts to block all potential generic competition, reverse payments should be subject to strict antitrust scrutiny. In re Cardizem CD Antitrust Litigation, 332 F.3d 896 (6th Cir. 2003); Andrx Pharms. v. Biovail Corp. Int’l, 256 F.3d 799 (D.C. Cir. 2001).

Recently, one circuit held courts should presume reverse payments are unreasonable restraints of trade unless the parties can demonstrate otherwise. In re K-Dur Antitrust Litigation, 686 F.3d 197 (3d Cir. 2012).

• Per Se Illegal

Courts have found that because certain types of agreements are always unreasonable, and the anticompetitive effects so clearly outweigh the pro-competitive effects, these practices are “per se illegal.” Examples include horizontal price fixing, output limitations, market allocation and group boycotts. According to the FTC, reverse payment settlements are a per se violation of antitrust laws.

Agreeing with the FTC’s position, the Sixth Circuit affirmed summary judgment that a reverse payment agreement that created a bottleneck preventing other generics from entering the market was per se illegal. In Cardizem, a brand-name company agreed to pay a generic drug manufacturer $100 million per year to delay marketing its generic version of the patented drug while litigation was pending, and not transfer its 180-day exclusivity rights. Two years later, the litigation settled, the generic company received FDA approval and began marketing its generic version of the drug with the benefit of the 180-day exclusivity period.

The Sixth Circuit held this was a classic example of per se illegal restraint of trade because the agreement eliminated competition in that drug market. In re Cardizem, 332 F.3d at 908.

• Scope of the Patent

Rejecting Cardizem, several circuit courts have adopted the “scope of the patent” test. Under this test, reverse payments are permitted provided: (i) the exclusion did not exceed the scope of the patent; (ii) the patent owner’s claim of infringement was not objectively baseless; and (iii) the patent was not procured by fraud on the Patent Office.

In the Taxomifen case, the Second Circuit addressed whether exclusionary effects of an agreement exceeded the scope of the patent’s protection. The settlement agreement provided that the generic manufacturer would receive a $21 million payment and a non-exclusive license to sell tamoxifen, a cancer treatment drug, under the generic manufacturer’s label. In return, the generic company agreed not to market its generic drug until after the expiration of the tamoxifen patent. In the event another generic manufacturer tried to enter the market, the generic company would invoke its 180-day exclusivity rights.

The Second Circuit held reverse payments are not anticompetitive as long as the agreement does not block generics from entering the market after the expiration of the brand-name drug patent. In re Taxomifen, 466 F.3d at 213-216.

Following the analysis in Tamoxifen, the Federal Circuit held it is within a patent owner’s right to exclude others from profiting from its patented invention.In Ciprofloxacin Hydrochloride, the parties enteredinto a settlement agreement to delaymarket entry until six months prior tothe expiration of the patented drug inexchange for a $49.1 million payment.The brand-name companyalso agreed to supply the generic manufacturer with the patented drug for resale or make quarterly payments for a total of $349 million over a seven-year period.

The Federal Circuit concluded that because the agreement did notdelay the generic’s entry into the marketbeyond the expiration date of thepatent, or prevent the generic from marketingother drugs not covered by the patent,the agreement did not exceed the exclusionaryzone of the patent. In re Ciprofloxacin, 544 F.3d at 1337.

Applying the scope of the patent analysis in Schering v. FTC, the Eleventh Circuit held that because a patent is presumed valid, it affords the patent holder the ability to exclude those who infringe its product. Schering v. FTC, 402 F.3d at 1066.

In response to paragraph IV of the ANDAs filed by two generic companies for their generic version of Schering’s K-Dur 20 medication, used to treat high blood pressure, Schering entered into two separate reverse payment agreements. One agreement provided a $60 million payment from Schering to the generic manufacturer and an agreement not to market its generic version of K-Dur until 2001. The second agreement provided a $10 million payment from Schering and an agreement by the generic manufacturer not to market its generic K-Dur until 2004. Schering’s K-Dur patent expired in 2006.

The Eleventh Circuit held the overwhelming evidence demonstrated that the $60 million payment was for a license and not a reverse payment. Regarding the second agreement of $10 million, the court found the settlement was within the patent’s exclusionary power, and reflected a reasonable implementation of the protections afforded by patent law. Schering v. FTC, 402 F.3d at 1072.

• Rule of Reason

In addition to the FTC challenge in Schering v. FTC, several private parties filed antitrust lawsuits against the Schering settlement agreements, which were consolidated in the U.S. District Court for the District of New Jersey. The special master concluded the agreements did not exceed the scope of the K-Dur patent and the infringement claims were objectively baseless. The district court agreed.

Disagreeing, the Third Circuit rejected the scope of the patent test as failing to subject reverse payment agreements to any antitrust scrutiny. Rather, the test improperly relies on a rebuttable presumption that patents are valid, thus, allowing patent holders of weak patents to buy out competitors and prevent invalidation of their patent. In re K-Dur, 686 F.3d at 214-215.

The Third Circuit adopted a “quick look” rule of reason analysis. The traditional rule of reason analysis requires the plaintiff to make a showing that the agreement has anticompetitive effects. Under the quick look rule of reason, the finder of fact must treat any payment from a patent holder to a generic patent challenger who agrees to delay entry into the market as prima facieevidence of an unreasonable restraint of trade. The court noted a patent holder could rebut the presumption of illegality by showing that the reverse payment was for a purpose other than delaying market entry, or that the reverse payment offered some pro-competitive benefit. In re K-Dur, 686 F.3d at 218. The case was remanded to the district court for further proceedings in accordance with the quick look analysis.

Future Implications

Because of the split among the circuit courts, the Supreme Court will likely consider the legality of reverse payment settlements. During the interim, careful attention must be given to settlement agreements between brand-name and generic companies ensuring the agreements reflect benefits consistent with that particular market. With the rejection of the scope of the patent test, Third Circuit litigants must be prepared to rebut the presumption that the settlement agreement is anticompetitive by showing that the payment was for a purpose other than delaying generic market entry.n