United States: 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 "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.

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 the Matter of Schering-Plough Corporation,²³ which commented on the Cardizem CD and Valley Drug decisions. The FTC decision and its commentary on these recent decisions provides 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 recent changes in the law that require the parties to file such agreements with the FTC and the DOJ within 10 days of execution.²⁴

The U.S. Court of Appeals for the Sixth Circuit affirmed summary judgment for the plaintiffs in a class action lawsuit, holding that an agreement between Hoechst Marion Roussel, Inc. ("HMR"), the pioneer for the prescription drug Cardizem CD, and Andrx Pharmaceuticals, Inc. ("Andrx"), a potential generic competitor was a per se violation of § 1 of the Sherman Act.²⁵ 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. On September 22, 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") (the "584 patent"). Carderm licensed the patent to HMR for Cardizem CD’s "dissolution profile" for 0-45% of the diltiazem to be released within 18 hours. Thereafter, Andrx filed a paragraph IV certification stating that the generic 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, and within the 45-day period provided by the Hatch-Waxman Act, HMR and Carderm filed a patent infringement suit against Andrx. HMR’s lawsuit did not seek a preliminary injunction or damages, but it 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 ANDA to specify that the dissolution profile of its generic was for not less than 55% of the release of the diltiazem within 18 hours. Notwithstanding the difference in the dissolution profile, HMR continued to pursue its patent infringement lawsuit against Andrx. On September 15, 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 584 patent was not infringed. Nine days later, Andrx and HMR entered into an agreement (the "Agreement"). 

Pursuant to the Agreement, HMR agreed to pay Andrx quarterly payments of $10 million and 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, non-appealable judgment in the patent infringement litigation; (2) HMR and Andrx entering into a licensing agreement; or (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, non-appealable 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 the agreement, 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 the Agreement. The lump sum payment, together with the quarterly payments made by HMR pursuant to the Agreement totaled $89.83 million. Thereafter, Andrx began marketing its generic and the 180-day exclusive marketing period began to run.

The legality of the Agreement was challenged in a series of lawsuits that were consolidated by the Judicial Panel on Multidistrict Litigation in the U.S. District Court for the Eastern District of Michigan. In the 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 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. The Sixth Circuit found that the Agreement guaranteed that HMR’s only potential competitor, Andrx, would refrain from marketing a generic equivalent after it obtained FDA approval.²⁶ Further, by doing so, the Agreement also precluded other generic competition because, under the Agreement, Andrx agreed to retain the 180-day market exclusivity right. In a broad brush opinion, the appellate court held:

In reaching its conclusion, the Sixth Circuit ignored the fact that the trial court completely disregarded the exclusive property right granted by the patents. Although not clear from the opinion, the Sixth Circuit appears to have relied on the fact that the Agreement went beyond the scope of the patents.²⁸

This void 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 and remanded 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.²⁹ The Eleventh Circuit noted: "we recognize that the Sixth Circuit appeared to take the opposite view in In re Cardizem CD Antitrust Litigation,"³⁰ 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.³² The court emphasized:

The appellate court guided the district court on remand 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.³⁴

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 made that assertion).³⁵ The court held that "the mere subsequent invalidity of the patent does not render the patent irrelevant to the appropriate antitrust analysis."³⁶ The court noted, however, that such may not be the case if the patent was procured by fraud on the U.S. Patent Office. Citing the U.S. Supreme Court decision in Walker Process Equipment, Inc. v. Food Machine & Chemical Corp.,³⁷ 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.³⁸

As in Valley Drug, the FTC in Schering-Plough held that the outcome of the underlying patent infringement litigation was not dispositive to the antitrust analysis "at least, not in this case of first impression for the Commission."³⁹ The Commission 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 Commission 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."⁴⁰ The Commission noted, however, that the merits of patent litigation may nevertheless be crucial in a private action for damages.⁴¹

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. There, Schering-Plough had entered into two separate agreements, one with Upsher-Smith and one with American Home Products ("AHP"), whereby 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.⁴² 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."⁴³ The FTC explained that, "the evaluation of horizontal restraints takes place along an analytical continuum in which a challenged practice is examined in the detail necessary to understand its competitive effect."⁴⁴

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."⁴⁵ In finding that the agreement in Schering-Plough was an unlawful restraint of trade, the FTC relied on evidence in the record that Schering had predicted that generic entry would have a significant negative impact on Schering’s sales, which predictions changed after the parties executed the settlement agreement. The Commission noted that the parties’ "predictions about the likely effects of generic entry, which were consistent with historic experience of other branded drugs, are just as compelling as predictions based on market shares. Moreover, these predictions turned out to be true."⁴⁶ Further, the evidence showed that prices dropped noticeably after the generic entered the market. The Commission found that such predictions of generic market growth and related price drops were direct evidence of market impact from the agreement.

Schering attempted to explain the market growth of the generic by: (1) pointing to state substitution law mandates and managed care incentives that require pharmacists to substitute less expensive generics for more expensive brand name drugs when filling prescriptions, and (2) noting that it is common practice for the pioneer drug manufacturer to reduce sales promotions after a generic equivalent enters the market. However, the Commission concluded that Schering’s explanations further supported the Commission’s 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.

Having concluded delayed generic entry in this case would harm consumers by depriving them of a less costly alternative drug, the Commission went on to analyze whether the agreement resulted in greater delay than otherwise would have occurred absent the reverse payment. The Commission noted: 

However, the Commission made 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."⁴⁸ The Commission explained that payments having this effect were anticompetitive.

The Commission also made 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).⁴⁹ Significantly, the Commission stated that the fact Schering held a presumptively valid patent did not mean that it was presumed to have the right to preclude the entry of the generic: "One issue in the patent case – perhaps the most important one – was not whether Schering’s patent was valid but rather whether [the generic manufacturer’s] product infringed the patent. . . . On this issue, Schering had the burden of proof."⁵⁰ The Commission thus refused to assume that Schering had the right to exclude the particular generic for the life of the patent. At the same time, the Commission refused to assume that the generic manufacturer had the right to enter earlier.⁵¹

Although the Commission found the reverse payment in the agreement at issue in Schering-Plough to be illegal, the Commission said that it was "unwilling to say reverse payments included in a settlement agreement are always illegal."⁵² The Commission recognized that such agreements "can be procompetitive in limited circumstances," for example, where payments are made to a cash-starved generic manufacturer to use to enter the market earlier.⁵³ However, it made clear that parties defending such payments must present evidence of the pro-competitive benefits of the overall agreement. In Schering-Plough, the Commission held that the parties had failed to do so:

The foregoing decisions make clear that settlement agreements between drug manufacturers to resolve patent infringement litigation triggered by a paragraph IV certification, and that involve 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 the agreements 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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