The Supreme Court granted certiorari in Federal Trade Commission v. Watson Pharmaceuticals, Inc., to address whether and when “reverse payment” agreements made to settle ANDA litigation violate antitrust laws. The Supreme Court may decide whether such reverse payments should be evaluated under the “scope of the patent” test (which upholds most agreements) or the “quick look rule of reason” test (which is more likely to find an antitrust violation).  Oral arguments are scheduled for March 25, 2013.

Reverse Payment Agreements

When a patented pharmaceutical product receives FDA approval, any relevant patents are listed in the FDA “Orange Book.” When a would-be generic company files an Abbreviated New Drug Application (ANDA) for approval of the same drug, it must make a certification against each patent listed in the Orange Book. Generic companies who want to enter the market before the patents expire usually must make a “Paragraph IV certification,” asserting that the patents are invalid or will not be infringed by the generic product.

The Hatch-Waxman Act makes a Paragraph IV certification an act of infringement under 35 USC § 271(e)(2). If the patent holder brings suit within a specified time period, it is entitled to a 30-month stay that prevents the FDA from approving the generic product for a 30 month period, or until the ANDA litigation is resolved against the patents.

ANDA litigation often is settled by a “reverse payment” agreement, wherein the patent owner pays the would-be generic company (the ANDA filer) to stay off the market for a period of time. (It is called a “reverse” payment because usually it is the infringer who pays the patent owner.)

The FTC’s Petition For Certiorari

While patents are given special treatment under antitrust laws, the FTC does not like reverse payment settlement agreements. According to the FTC’s assertions in its petition for certiorari in the Watson AndroGel® case:

Reverse-payment agreements tend to support monopoly pricing of brand-name drugs by delaying the onset of generic competition ….

Reverse-payment agreements … [cost] consumers billions of dollars each year.

The FTC also implies that the majority of patents would be invalidated if litigation proceeded:

[A] substantial fraction of fully litigated patent cases have, historically, resulted in a finding of patent invalidity.

Overall, in cases litigated to decision, would-be generic competitors have prevailed three quarters of the time in paragraph IV patent litigation against brand-name manufacturers.

In its petition for certiorari, the FTC asked the Supreme Court to resolve a “split” relating to the evaluation of reverse payment agreements under the antitrust laws. The U.S. Courts of Appeals for the Second, Eleventh, and Federal Circuits have applied the “scope of the patent” test and upheld reverse payment agreements. In contrast, the U.S. Court of Appeals for the Third Circuit applied the “quick look rule of reason” test and invalidated a reverse payment agreement, in In re K-Dur Patent Litigation. (A petition for certiorari is pending in the K-Dur case). 

The “Scope Of The Patent” Test

The “scope of the patent” test recognizes the special circumstance of a patent holder vis-a-vis the antitrust laws in view of the fundamental right to exclude others that is embodied in a patent. Under this test, reverse payment agreements are reviewed to confirm that they do not exceed the scope of the patent. As long as the agreement does not extend beyond the patent’s boundaries, it will be upheld unless the underlying patent litigation was a sham or the patent was obtained by fraud. Indeed, no court applying this test has invalidated a reverse payment agreement.

The Eleventh Circuit applied the “scope of the patent” test to the reverse payment agreement at issue in the Watson case, and found no antitrust violation.

The “Quick Look Rule Of Reason” Test

The “quick look rule of reason” test starts from an opposite perspective, and holds that a reverse payment agreement is “prima facie evidence of an unreasonable restraint of trade.” According to the Third Circuit  (writing in the K-Dur case), this presumption could be overcome under one of two circumstances:

  1. There was no reverse payment because any payment was “for something other than delay of market entry.”
  2. The reverse payment offered a competitive benefit, i.e., it somehow increased competition.

As the Third Circuit noted, it will be the “rare” agreement that survives scrutiny under this test.

Painting A Distorted Picture

The FTC’s petition for certiorari paints a distorted picture of brand-name pharmaceutical companies throwing large sums of money at would-be generic competitors in order to prevent challenges to their invalid patents and maintain their monopoly prices, with U.S. consumers and the U.S. government paying the price. However, the FTC paints an incomplete picture, and does not consider what the pharmaceutical landscape would look like without reverse payment agreements.

Reverse payment agreements are used to settle ANDA litigation because of the unusual position of the parties. Unlike normal patent infringement cases, the would-be generic company has not yet entered the market. Thus, instead of a settlement agreement where the alleged infringer agrees to stop marketing its product, the would-be generic company only can agree to stay off the market for an additional period of time. Further, because the would-be generic company has not yet sold any infringing products, there are no actual damages for it to pay the patent holder. Again, the most the patent holder can ask is that the would-be generic company continue to stay off the market.

If parties want to settle ANDA litigation but cannot (legally) agree that the would-be generic will stay off the market, another option may be to permit the would-be generic to pay the patent holder to enter the market as an “authorized generic.” While some parties do choose this option, having it as the only option for settling ANDA litigation could amount to compulsory licensing of pharmaceutical patents.

If ANDA litigation cannot be settled on mutually agreeable terms, the totals costs of ANDA litigation will rise. These costs will be borne by both the patent holder and the would-be generic, and certainly would be passed on to consumers in the pricing of branded and generic drugs.