With the Supreme Court set to address the validity of "reverse payment" settlements of pharmaceutical patent litigation, the FTC released a summary of its new report, announcing that in 2012 drug companies entered "a record number" of such settlements. However, the underlying data and analysis merely highlight that the devil is in the definitions:over time the FTC has expanded its definition of the term "payments."Unless the Supreme Court moots this issue in FTC v. Watson Pharmaceuticals, 677 F.3d 1298 (11th Cir. 2012), cert. granted, 568 U.S. ___(U.S. Dec. 7, 2012) (No. 12-416), this far-reaching definition of "payment" may become the next critical front in the FTC's campaign against "reverse payment" settlements. 

The Dispute Over Reverse Payments 

In a "reverse payment" settlement (in the FTC's vernacular, a "pay-for-delay" settlement), the branded-drug manufacturer settles a challenge to its patent by providing compensation to the generic challenger. In exchange, the generic manufacturer typically agrees to drop its patent challenge and enter the market as a licensee at some later time before the patent expires. Since roughly 2000, the FTC has engaged in a largely unsuccessful effort to persuade courts that such settlements should be presumed unlawful, whether or not the generic drug infringed the subject patent. After failing in the Second, Eleventh, and Federal Circuits, the FTC finally persuaded the Third Circuit in 2012 to accept its view, which created the circuit split soon to be resolved by the Supreme Court in Watson

The FTC's 2012 "Overview" 

The new FTC report, entitled "Agreements Filed With the Federal Trade Commission Under the Medicare Prescription Drug, Improvement, and Modernization Act of 2003: Overview of Agreements Filed in Fiscal Year 2012," is the latest in a series of annual reports, which commenced in 2004 after Congress required all pharmaceutical patent settlements with generic challengers to be filed with the FTC.  For the last three fiscal years the FTC has provided only brief "overviews" of the actual report (the last full version of such an annual report released by the FTC was for FY2009). The 2012 overview emphasizes two points.  First, the report states that, in 2012, branded and generic drug companies entered 40 settlements "that potentially involve pay-for-delay payments," which is the highest annual figure since the FTC began collecting such data in 2003. According to the report, these 40 settlements "potentially involve pay for delay because they contain compensation to the generic manufacturer and a restriction on the generic manufacturer's ability to market its product."  Second, although the report does not disclose the nature of the compensation in 21 of those agreements, it states that, in 19 of these 40 agreements, "compensation took the form of a brand manufacturer's promise not to market an authorized generic...for some period."  This form of compensation thus includes any agreement that gives the generic manufacturer an exclusive license to sell a generic version of the drug for a period of time.

While the report states that both of these developments are record-setting, these conclusions depend on the FTC's extension of the definition of "payment."  In its original challenges to "reverse payment" settlements, the FTC stressed that monetary payments warrant antitrust scrutiny.  See, e.g., In re Schering-Plough Corp., 136 F.T.C. 956, 987  (F.T.C. 2003), rev'd sub nom. Schering-Plough Corp. v. FTC, 402 F.3d 1056 (11th Cir. 2005) ("A settlement agreement is not illegal simply because it delays generic entry until some date before expiration of the pioneer's patent....  [T]he payment of money by Schering ... is what makes this case different.").  Over time, the FTC expanded its understanding of "payment" to mean "some form of compensation" (including "agreements with incentives for a branded company not to launch an authorized generic product").  See FTC, Summary of Agreements Filed in FY 2008, at 1, n.2.  In a recent amicus brief, the FTC argued that the definition of "payment" encompasses any "valuable thing" exchanged. See Brief for FTC as Amicus Curiae, In Re Lamictal Direct Purchaser Antitrust Litig., 2012 WL 6725580 (D.N.J., Dec. 6, 2012) at 10, n.29 (emphasis in original).   

Without such an expanded definition of "payments," the FTC would be hard-pressed to maintain that reverse payments still occur, because – based on our experience and a careful reading of the FTC's annual reports – no Hatch-Waxman settlement has included a direct monetary payment in over a decade.  (Few are willing to risk the burden of an FTC investigation, even if they would ultimately prevail in court.) On the other hand, dozens of such settlements have provided the generic with an exclusive license for some period of time. 

Implications 

1)    The FTC's current definition of "payment" – meaning "some form of compensation" or any "valuable thing" – could include, it seems, every type of consideration available in a patent-litigation settlement, such as allowing an early entry date, a low royalty to the patent-holder, a beneficial field of use restriction, or a compromise on a damages claim – as well as paying cash or providing an exclusive license. Since all patent settlements convey "value" to both parties, the FTC's definition threatens to make all patent-litigation settlements involve "reverse payments," which in turn would mean that all patent settlements are presumptively anticompetitive.  The FTC's position thus raises the stakes in the Supreme Court's forthcoming decision in Watson because, even if the FTC continues to approve of settlements that merely split the remaining patent life, private plaintiffs may not interpret the law in the same way. 

2)    Despite the FTC's current, far-reaching definition of "payment," the FTC itself has never challenged a settlement merely because the branded-drug manufacturer agreed not to release an authorized generic (which, as noted above, is indistinguishable from granting a wholly exclusive license). For the FTC, bringing such a case undoubtedly would be an uphill battle, given the established rule that antitrust law does not prohibit "a restraint of commerce that may arise from reasonable and legal conditions imposed upon the ... licensee of a patent."  Bement v. Nat'l Harrow Co., 186 U.S. 70, 92 (1902).

3)    Nevertheless, in the recent amicus brief discussed above, the FTC argued that by agreeing not to release an authorized generic – thereby granting an "exclusive license" to the generic manufacturer – a branded-drug manufacturer engaged in a "reverse payment" settlement that should be deemed presumptively anticompetitive under the Third Circuit's recent decision in In re K-Dur Antitrust Litigation, 686 F.3d 197 (3d Cir. 2012).  The district court rejected the FTC's position, holding "that the term 'reverse payment' is not sufficiently broad to encompass any benefit ... to [the generic] in a negotiated settlement."  In Re Lamictal Direct Purchaser Antitrust Litig., 2012 WL 6725580, at *6 (D.N.J., Dec. 6, 2012). 

4)    Finally, the Supreme Court's Watson opinion may provide the final word on this topic and on many other aspects of "reverse payment" settlements as early as June 2013.  Stay tuned. 

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