FTC and U.S. Courts Raise Questions About Legality of Pharmaceutical Patent Suit Settlements

The Federal Trade Commission ("FTC") has identified health care as one of three FTC target markets, chosen because they "have the biggest impact on consumers." So said FTC Chairman Timothy Muris in a prepared statement before the U.S. House Committee on the Judiciary Antitrust Task Force on July 24, 2003. As part of its overall strategy with respect to the health care market, the FTC has challenged agreements made between drug manufacturers 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 is commonly known as the Hatch-Waxman Act. These typically include so-called "reverse" payments—i.e., payments made by a patent holder to an alleged infringer to settle patent infringement litigation.

Despite the courts having recognized the validity of "reverse payments" in this context, Chairman Muris has characterized them as "attempt[s] to ‘game’ the system," thus warranting FTC scrutiny. 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"). 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, the FTC addressed the legality of two such settlement agreements in In the Matter of Schering- Plough Corporation. 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.

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. 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. 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. If a patent is granted for the drug, the NDA holder must submit patent information to the FDA, including patent number and expiration date. The FDA then lists the patent in a publication called the Approved Drug Products with Therapeutic Equivalence Evaluations, commonly known as the Orange Book.

Under 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. The ANDA applicant, 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. 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."

The applicant also must provide notice to the patent holder, who has 45 days in which to file a patent infringement action against the applicant. If the patent holder sues, the FDA must stay final approval of the ANDA until the earlier of:

• 30 months from the date the patent holder receives notice of the paragraph IV certification, and
• the date that the district court hearing the patent infringement suit finds that the patent is either invalid or not infringed.

The first generic manufacturer to file an ANDA with a paragraph IV certification receives a 180-day period of exclusive marketing rights during which the FDA will not approve another ANDA. The Modernization Act has changed the rules relating to that 180-day period.

Parties sometimes settle patent infringement litigation that is triggered by the paragraph IV certification before a final ruling on whether the patent is invalid or is not infringed. These settlements have resulted in co-operative 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 anti-competitive means of delaying or deferring low-cost generic entry.

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 Litigation and Valley Drug Co. v. Geneva Pharmaceuticals Inc. The FTC subsequently issued its decision in In the Matter of Schering-Plough Corporation, which commented on the Cardizem CD and Valley Drug decisions. The FTC decision and its commentary on these recent decisions provide a glimpse of the challenges that drug manufacturers will face when they enter into settlement agreements involving reverse payments to settle patent infringement litigation that was triggered by a paragraph IV certification, especially now that the FTC is likely to review each such settlement pursuant to the Modernization Act’s filing requirements.

The U.S. Court of Appeals for the Sixth Circuit has held that an agreement between Hoechst Marion Roussel, Inc. ("HMR"), the pioneer for the prescription drug Cardizem CD, and Andrx Pharmaceuticals, Inc., a potential generic competitor, was a per se violation of § 1 of the Sherman Act. Cardizem CD is a brand name prescription drug used to treat angina and hypertension. The active ingredient, diltiazem hydrochloride, is delivered to the patient (who ingests just one dose per day) via a controlled-release system. In 1995, Andrx filed an ANDA with the FDA requesting approval of its generic version of Cardizem CD. Two months later, the U.S. patent office issued a patent to Carderm Capital, L.P. Carderm licensed its patent to HMR for Cardizem CD’s "dissolution profile" for 0-45% of the diltiazem to be released within 18 hours. Andrx then filed a paragraph IV certification stating that its product did not infringe any patent listed in the Orange Book. Because Andrx was the first generic manufacturer to file an ANDA, it was entitled to the 180-day marketing exclusivity provided by the Hatch-Waxman Act.

In January 1996, HMR and Carderm filed a patent infringement suit against Andrx. HMR’s lawsuit triggered the 30- month stay precluding FDA approval of Andrx’s ANDA. Andrx filed antitrust and unfair competition counterclaims against HMR. Thereafter, Andrx amended its ANDAto specify that the dissolution profile of its generic was for not less than 55% of the release of the diltiazem within 18 hours. Despite this change, HMR continued to pursue its lawsuit against Andrx. In September 1997, the FDA tentatively approved Andrx’s ANDA, stating that it would grant final approval after the expiration of the 30-month stay or the entry of a court order holding that the Carderm patent was not infringed. Nine days later, Andrx and HMR entered into the agreement that was the subject of this case.

Pursuant to that agreement, HMR agreed to pay Andrx quarterly payments of $10 million. Andrx agreed to refrain from marketing its generic version of Cardizem CD in the United States until the earliest of: (1) Andrx obtaining a final, nonappealable judgment in the patent infringement litigation; (2) HMR and Andrx entering into a licensing agreement; and (3) HMR entering into a license agreement with a third party. Andrx agreed to dismiss its counterclaims against HMR, to prosecute its ANDA diligently and to retain its 180-day marketing exclusivity rights, and HMR agreed not to seek a preliminary injunction in the patent infringement action. Further, HMR agreed to pay Andrx $100 million less the amount of quarterly payments made once: (1) there was a final, nonappealable judgment holding that the patent was not infringed; (2) HMR dismissed the patent infringement lawsuit; or (3) there was a final, non-appealable judgment that did not determine the patent’s validity, enforcement or infringement, and HMR failed to re-file its patent infringement lawsuit.

After the 30-month stay expired, the FDA granted final approval to Andrx’s ANDA. Pursuant to its agreement with HMR, Andrx did not bring its generic drug to market and HMR began making quarterly payments of $10 million to Andrx. A few months after the FDA approved Andrx’s ANDA, Andrx supplemented its ANDAto seek approval for a reformulated generic version of Cardizem CD and notified HMR, urging HMR to reconsider its patent infringement lawsuit. Several months later, Andrx filed its paragraph IV certification regarding the reformulated generic. On the same day that the FDA granted final approval to Andrx’s ANDA for the reformulated generic, HMR and Andrx entered into a settlement of the patent infringement lawsuit, which included a lump sum payment by HMR, and terminated their earlier agreement. The lump sum payment together with the quarterly payments made by HMR pursuant to the earlier agreement totalled $89.83 million. Thereafter, Andrx began marketing its generic and the 180- day exclusive marketing period began to run.

The legality of the HMR/Andrx agreement was challenged in a series of consolidated lawsuits. The plaintiffs alleged, inter alia, that the agreement was anticompetitive and was a per se violation of Section 1 of the Sherman Act and similar state antitrust statutes because it delayed entry of a lower cost generic into the market. The district court granted the plaintiffs’ motion for summary judgment, holding that the agreement was a per se illegal restraint of trade.

The U.S. Court of Appeals for the Sixth Circuit affirmed this decision. It found that the agreement guaranteed that HMR’s only potential competitor, Andrx, would refrain from marketing a generic equivalent after it obtained FDA approval. Further, by doing so, the agreement also precluded other generic competition because Andrx agreed to retain the 180- day market exclusivity right. In a broad brush opinion, the appellate court held:

In reaching its conclusion, the Court ignored the fact that the trial court completely disregarded the exclusive property right granted by the patents. Although not clear from the opinion, the Court appears to have relied on the fact that the agreement went beyond the scope of the patents.

This gap in the Sixth Circuit’s analysis was noted by the Eleventh Circuit in Valley Drug Co. v. Geneva Pharmaceuticals, Inc., when it refused to follow the In re Cardizem decision. In Valley Drug, the Eleventh Circuit reversed a decision of the Southern District of Florida that held that agreements between Abbott Laboratories and two generic manufacturers concerning Abbott’s drug Hytrin were per se unlawful. The Eleventh Circuit noted: "we recognize that the Sixth Circuit appeared to take the opposite view in In re Cardizem CD Antitrust Litigation," and attempted to explain the difference:

The Eleventh Circuit held that the antitrust laws cannot ignore the implications of the lawful exclusionary power of a patent. The court emphasized:

The appellate court guided the district court, stating that the appropriate analysis would be to identify the protections afforded by the patents and consider the extent to which the challenged agreements reflected a reasonable implementation of them.

Of note in the Eleventh Circuit’s opinion in Valley Drug is its discussion of the effect on the antitrust analysis of a subsequent court decision that found Abbott’s patent to be invalid. The court said that the reasonableness of the agreements must be judged at the time the agreements were executed, because at that time, no court had declared the patent to be invalid (and the Valley Drug appellees had not alleged invalidity). The court held that "the mere subsequent invalidity of the patent does not render the patent irrelevant to the appropriate antitrust analysis." The court noted, however, that such may not be the case if the patent was procured by fraud on the U.S. Patent Office. The court stated that the only circumstances under which the patent immunity from antitrust liability can be pierced is where the claimant has proven that the patentee enforced a patent knowing that the patent was procured by fraud.

As in Valley Drug, the FTC in Schering-Plough held that the outcome of the underlying patent infringement litigation did not dictate the antitrust analysis. It viewed the Valley Drug opinion as narrowly deciding only whether a subsequent finding of patent invalidity made a payment by a pioneer to a generic challenger illegal per se, and agreed that it was not logical to give decisive weight to an after-the-fact decision on the merits of the patent issues in settled cases. The FTC agreed with the Eleventh Circuit finding that a determination of liability must be made based on the "world as it was perceived by the parties at the time that they entered into the settlement agreement, when they could not be sure how the litigation would turn out." It noted, however, that the merits of patent litigation may nevertheless be crucial in a private action for damages.

In Schering-Plough, the FTC refused to find that settlement agreements between drug manufacturers that settle patent infringement litigation triggered by a paragraph IV certification are per se unlawful. Schering-Plough had entered into two separate agreements, one with Upsher-Smith and one with American Home Products ("AHP"), in which Schering-Plough agreed to dismiss lawsuits against, and make payments to, Upsher-Smith and AHP to refrain from marketing a generic form of Schering-Plough’s K-Dur 20 potassium chloride supplements. The FTC distinguished the Sixth Circuit’s decision in In re Cardizem on its facts, and, inter alia, cited Valley Drug in noting that the "current trend of authority seems to be moving in another direction."

The FTC rejected the notion that to determine the competitive effects, it needed to rely on indirect proof that Schering- Plough had a monopoly share of a properly defined relevant market. Rather, "the finding of actual, sustained adverse effects on competition…is legally sufficient to support a finding that the challenged restraint was unreasonable even in the absence of elaborate market analysis." In finding that the agreement was an unlawful restraint of trade, the FTC relied on evidence that Schering had predicted that generic entry would have a significant negative impact on its sales, which predictions changed after the parties executed the settlement agreement. Further, the evidence showed that prices dropped noticeably after the generic entered the market. The FTC found that predictions of generic market growth and related price drops were direct evidence of market impact.

Schering attempted to explain the market growth of the generic by: pointing to state substitution law mandates and managed care incentives that require pharmacists to substitute lessexpensive generics for more expensive brand-name drugs when filling prescriptions, and by noting that it is common practice for the pioneer drug manufacturer to reduce sales promotions after a generic equivalent enters the market. However, the FTC concluded that Schering’s explanations further supported its finding that generic competition was likely to have a substantial impact on the market and, therefore, an agreement to delay such competition likely would harm consumers.

The FTC went on to analyze whether the agreement resulted in greater delay than would have occurred had there been no reverse payment. The Commission noted:

However, the FTC made it clear that an agreement providing for a "reverse" payment is highly suspect: "Absent proof of other offsetting considerations, it is logical to conclude that the quid pro quo for the payment was an agreement by the generic to defer entry beyond the date that represents an otherwise reasonable litigation compromise." Payments having this effect were anticompetitive.

The FTC also made it clear that "[a] payment to delay generic entry under the Hatch-Waxman framework is no less anticompetitive than a similar payment under the ‘traditional’ regime" (i.e., when a party challenges a patent by entering the market with an infringing product and risks a lawsuit for damages). Significantly, it stated that the fact that Schering held a patent did not mean that it was presumed to have the right to preclude the entry of the generic. It would be for Schering to prove that the generic products infringed its patent. The FTC also refused to assume that the generic manufacturer had the right to enter the market earlier.

Although the FTC found the reverse payment in Schering- Plough to be illegal, it was unwilling to say that reverse payments included in a settlement agreement are always illegal. It recognized that such agreements "can be pro-competitive in limited circumstances," for example, where payments are made to a cash-starved generic manufacturer to use to enter the market earlier. However, parties defending such payments must present evidence of the pro-competitive benefits of the overall agreement. In Schering-Plough, they had failed to do so.

These decisions make it clear that settlement agreements between drug manufacturers to resolve patent infringement litigation triggered by a paragraph IV certification which involves reverse payments will be treated as highly suspect. Now that such agreements must be filed with the FTC and the DOJ within 10 days of their execution, drug manufacturers contemplating such agreements should be prepared to defend them on the merits against an almost certain challenge. 

Copyright © 2007, Mayer, Brown, Rowe & Maw LLP. and/or Mayer Brown International LLP. This Mayer Brown article provides information and comments on legal issues and developments of interest. The foregoing is not a comprehensive treatment of the subject matter covered and is not intended to provide legal advice. Readers should seek specific legal advice before taking any action with respect to the matters discussed herein.

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