FTC, Split Circuit Courts Raise Questions About Legality of Pharmaceutical Patent Suit Settlements

In a prepared statement before the U.S. House Committee on the Judiciary Antitrust Task Force on July 24, 2003, Federal Trade Commission ("FTC" or "Commission") Chairman Timothy Muris identified health care as one of three FTC target markets because they "have the biggest impact on consumers."1 As part of its overall strategy with respect to the health care market, the FTC has challenged agreements between drug manufacturers that were executed in connection with patent infringement litigation triggered by a generic drug manufacturer's application to the Food and Drug Administration ("FDA") for approval of a generic drug under what commonly is known as the Hatch-Waxman Act.2 These agreements typically include so called "reverse" payments - i.e., payments made by a patent holder to an alleged infringer to settle patent infringement litigation. Courts have recognized the validity of "reverse payments" in this context, and therefore some courts have applied a "rule of reason" analysis to determine their legality under the antitrust laws.3

The U.S. Court of Appeals for the Eleventh Circuit recently noted that per se condemnation of such settlement agreements would "impair the incentives for disclosure and innovation . . . [b]y restricting settlement options, which would effectively increase the cost of patent enforcement."4 Nevertheless, Chairman Muris has characterized these agreements as "attempt[s] to 'game' the system," thus warranting FTC scrutiny.5 And FTC scrutiny is apparently what Congress intended with the recent enactment of the Medicare Prescription Drug, Improvement, and Modernization Act of 2003 (the "Modernization Act").6 Pursuant to Section 1112 of the Modernization Act, certain agreements between brand-name and generic drug manufacturers executed on or after January 7, 2004 regarding the manufacture, marketing, and sale of generic versions of brand-name drugs must be filed with the FTC and the Department of Justice ("DOJ") within 10 days of their execution.

On December 8, 2003 in an 88-page opinion and order, the FTC addressed the legality of two such settlement agreements in In the Matter of Schering-Plough Corporation.7 Schering-Plough is the FTC's first decision on the merits after a full administrative trial and record in this area. This article discusses this recent FTC decision, as well as two recent private challenges to such agreements which produced opposite results. As the foregoing demonstrates, settlement agreements involving "reverse payments" will be viewed by the FTC as suspect and parties to such agreements must be prepared to defend them on the merits in what likely will be a case by case factual analysis.

The Hatch-Waxman Act

The "system" that Chairman Muris believes drug companies have "gamed" was created by The Drug Price Competition and Patent Term Restoration Act of 1984, commonly known as the Hatch-Waxman Act.8 The Hatch-Waxman Act was enacted as compromise legislation between the competing interests of the "pioneers," drug manufacturers that invest significant resources into research and development activities to develop new therapies, and "generic" manufacturers that develop copies of the pioneers' drugs. It was designed to encourage generic entry (and the corresponding price reductions), while at the same time preserving incentives for pioneers to invest the hundreds of millions of dollars needed to develop new drugs and bring them to market.

No new drug can be marketed or sold in the U.S. without prior FDA approval.9 A pioneer obtains FDA approval by filing a new drug application ("NDA"), which must include exhaustive information about the drug, including safety and efficacy studies.10 If a patent issues for the drug, the NDA holder must submit patent information to the FDA, including patent number and expiration date.11 The FDA then lists the patent in a publication called the Approved Drug Products with Therapeutic Equivalence Evaluations, commonly known as the Orange Book.12

Pursuant to the Hatch-Waxman Act, a potential generic drug manufacturer of a patented pioneer drug may file an Abbreviated New Drug Application ("ANDA") with the FDA.13 The ANDAapplicant, rather than providing new safety and efficacy studies, may piggyback on the FDA's prior determination of the safety and efficacy of the active ingredients in the pioneer drug.14 The ANDA applicant must include a certification with respect to each patent that the NDA holder has listed for that drug: (1) that the patent information has not been filed with the FDA; (2) that the patent has expired; (3) that the patent will expire and the date on which it will expire; or (4) that the patent is invalid or is not infringed by the manufacture, marketing or sale of the generic for which the ANDA is sought, which is known as a "paragraph IV certification."15 The applicant also must provide notice to the patent holder, who has forty-five days in which to file a patent infringement action against the applicant.16 If the patent holder sues, the FDA must stay final approval of the ANDA until the earliest of the following to occur: (1) 30 months from the date the patent holder receives notice of the paragraph IV certification or (2) the date that the district court hearing the patent infringement suit finds that the patent is either invalid or not infringed.17 The first generic manufacturer to file an ANDAwith a paragraph IV certification receives a 180- day period of exclusive marketing rights during which the FDA will not approve another ANDA.18 Until the recent passage of the Modernization Act, the 180-day period began the earlier of when: (1) the ANDA applicant begins commercial marketing of the generic drug or (2) the district court rules that the patent is invalid or not infringed.19 The Modernization Act has eliminated the district court ruling trigger for the 180-day period of marketing exclusivity. Further, a first-filing generic manufacturer now must begin commercial marketing of the generic within 75 days after final FDA approval (or other specified events) or else forfeit the 180-day market exclusivity. Further, the 180-day exclusivity period now will be determined separately for each drug, rather than for each patent, and is shared by all generic manufacturers that file ANDAs and provide paragraph IV certifications on the same day. The 180-day period of marketing exclusivity is intended to encourage generic drug manufacturers to challenge the validity of the pioneers' patents.

The Challenged Agreements

Parties sometimes settle patent infringement litigation that is triggered by the paragraph IV certification prior to the entry of a non-appealable ruling deciding whether the patent is invalid or is not infringed. These settlements have resulted in cooperative marketing or research and development arrangements on unrelated drugs, distribution agreements or licenses concerning the patented drug, and/or "reverse" payments by the patent holder to the generic challenger in exchange for an agreement by the generic manufacturer to abandon its ANDA challenge of the patent. The FTC and private parties have challenged these settlements as being anticompetitive means of delaying or deferring low cost generic entry.20

Two private actions challenging these settlement agreements reached the appellate courts during the last half of 2003 and produced opposite results in In re Cardizem CD Antitrust Litigation21 and Valley Drug Co. v. Geneva Pharmaceuticals Inc.22 The FTC subsequently issued its decision in In...

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