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FTC Staff Report Summarizes Recent Pay-for-Delay Settlements
by James Buchanan Camden

On October 25, 2011, the Federal Trade Commission (FTC) Bureau of Competition staff released a report providing an overview of recent settlements filed with the FTC concerning patent disputes between brand and generic pharmaceutical companies.  Such settlements must be filed with the FTC under the Medicare Prescription Drug, Improvement, and Modernization Act of 2003.

According to the FTC staff report, 28 of the 156 final settlements filed with the FTC in fiscal year 2011 were potential reverse payment, or “pay-for-delay,” agreements in which the branded pharmaceutical company both provided some type of compensation to the generic and “restricted the generic’s ability to market its product.”  The FTC has long been opposed to pay-for-delay settlements because they can delay the entry of lower-cost generics to market, thereby potentially increasing prescription drug costs for consumers.

The 28 potential pay-for-delay settlements identified by the FTC staff in FY 2011 “involved 25 different branded pharmaceutical products with combined annual U.S. sales of more than $9 billion.”  Of those 28 settlements, 18 involved generics eligible for 180-day “first-filer” exclusivity, meaning these generics were the first to challenge the patent of the branded drug and were eligible for 180 days of market exclusivity for their generic equivalent.  This first-filer exclusivity is provided by the Hatch-Waxman Act, passed by Congress to promote the entry of generic equivalent drugs to the market by granting market exclusivity to those companies first to challenge the patent of a branded drug.  The FTC finds pay-for-delay settlements involving potential first-filers particularly troublesome because if a first-filer is delayed entry to the market, other generic manufacturers may also be blocked until the first-filer enters the market.

Notably, compensation provided to a generic as part of a settlement might not take the form of a cash payment.  Of the 18 settlements in which a generic was eligible for first-filer exclusivity, 10 included either an agreement by the branded drug company not to compete with an authorized generic equivalent drug or an exclusive license for the generic company to market the authorized generic equivalent drug.  An authorized generic—the branded drug manufacturer’s generic version of its own drug—can be sold during the generic first-filer’s 180-day exclusivity period because the branded drug manufacturer has already received FDA approval for its product.  In such circumstances, not only does a pay-for-delay settlement delay the entry of the generic to the market, thus shielding the branded drug from competition with a lower-cost generic for the duration of the delay, but once the generic enters the market, it does not face competition from other authorized generics during the 180-day exclusivity window.

Overall, the report found that pay-for-delay settlements have been increasing in recent years, with the FTC receiving almost as many potential pay-for-delay settlements in the past two fiscal years as the total number of such agreements filed between FY 2004 and FY 2009.

Practice Note:  The FTC’s distaste for pay-for-delay settlements is unlikely to abate.  Indeed, the FTC has challenged certain pay-for-delay settlements in court, winning only one challenge when the branded drug company’s patents had terminated.  The FTC has lobbied Congress to restrict pay-for-delay agreements through legislation that presently is pending.  Clients need to be alert that entering into pay-for-delay agreements will likely draw the attention of the FTC as there appears to be a strong policy of the FTC to challenge these settlements.  
 Patents / Pay-for-Delay
 

California Appeals Court Rejects Antitrust Challenge to “Pay-for-Delay” Settlement of Patent Infringement Suit
by Lincoln Mayer

Foreclosing the most promising non-federal venue for plaintiffs challenging “pay-for-delay” settlements, whereby branded drug makers pay generic companies to delay marketing of generic versions of branded medications, a California state appeals court affirmed summary judgment for defendants Bayer AG and Barr Pharmaceuticals in a “pay-for-delay” case brought under state antitrust law.  In re Cipro Cases I & II, Case No. D056361 (Cal. Ct. App., Oct. 31, 2011) (Nares, J.).

Bayer’s patent on antibiotic Cipro was set to expire at the end of 2003.   In 1991, Barr challenged the validity of the patent pursuant to the Hatch-Waxman Act, which gives an incentive to the first drug manufacturer to successfully dispute a patent in the form of 180 days to exclusively market a generic version of the drug.  Bayer promptly sued Barr for patent infringement.  In 1997, the parties reached a settlement under which Bayer ultimately paid Barr $398 million to accept the validity of Bayer’s Cipro patent and to defer introducing a generic version of the drug for the duration of the patent.

Following the settlement, Bayer filed a request for reexamination of the patent with the U.S. Patent and Trademark Office (USPTO), which confirmed the patent’s validity.  Bayer also successfully fought off several challenges to the patent from other generic drug makers.  In 2000 and 2001, direct and indirect purchasers of Cipro sued in federal district courts alleging that Bayer and Barr’s reverse payment settlement violated the antitrust laws.  The courts consolidated the cases as a Multidistrict Litigation in the U.S. District Court for the Eastern District of New York, and that court granted summary judgment to defendants, noting that the settlement had not prevented other generic drug companies from challenging the patent’s validity.  The U.S. Court of Appeals for the Federal Circuit (in the indirect purchaser case) and the U.S. Court of Appeals for the Second Circuit (in the direct purchaser case) affirmed because the competitive restraint was within the scope of the patent.  Since a patentee had the right to exclude all competition with its patent, it could choose to pay competitors to acquiesce in that exclusion.

Adopting the reasoning of the 2d Circuit and Federal Circuit in parallel federal litigation to the California case, the court concluded that as long as the patent was not procured by fraud and the enforcement suit was not objectively baseless, the settling parties could agree to restrain competition within the scope of the patent.  In applying California’s antitrust statutes, the Cartwright Act and Unfair Competition Law, the court found that the federal appellate courts that have upheld such reverse payment settlements to be more persuasive than the one federal appellate court that has not.  In siding with the Second and Federal Circuits, the Court distinguished a U.S. Court of Appeals for the Sixth Circuit case that found a reverse payment settlement involving the drug Cardizem to be illegal per se.  There, the generic drug maker had agreed not to market other bioequivalent or generic versions of the drug that were not at issue in the litigation and further agreed to not introduce a generic version during its 180-day exclusivity period.  The California court deemed such concessions to be beyond the scope of the patent and differentiated the cases on that basis.  The court further concluded that per se treatment was inappropriate because, among other reasons, judicial policy favored encouraging settlement.

Practice Note:   For now, the decision significantly bolsters the staying power of reverse-payment settlements.  The decision adds to the growing weight of authority supporting the validity of these settlements under antitrust law.  The court’s decision is binding only on state trial courts, however and not on subsequent panels of the state appellate courts.  The FTC, having lost a challenge to a similar pay-for-delay settlement in the U.S. Court of Appeals for the Eleventh Circuit, has recommended that Congress pass legislation banning the practice.