By: Kevin Kim
Introduction
As is the case with any industry, the pharmaceutical industry is regulated by laws seeking to balance rewarding producers for innovation and encouraging other producers to engage in competition with the original innovator. In this particular industry however, the nature of pharmaceutical products require an painstakingly extensive examination of more than 6 months by the Food & Drug Administration to ensure the safety of the new product for consumers upon entry into markets. This feature creates complications and an enormous amount of time required for those seeking to enter the market with similar products after the original producers’ patent expires.
This inefficiency is what the Drug Price Competition and Patent Term Restoration Act, commonly referred to as the Hatch-Waxman Act, sought to address. It allowed subsequent producers (henceforth referred to as “generic producers”) to “piggy-back” on the FDA approval process of the original innovator (henceforth referred to as “brand-name producers”) to ensure a speedy entry of generic drugs into the market after the brand-name’s patent expires to promote an increase in competition and lower prices for consumers.
The Hatch-Waxman Act has undoubtedly eased the entry of generic producers into markets and has achieved a majority of the goals its sponsors envisioned. However, a specific feature that will be elaborated on in the article has given birth to a cooperative practice between competing firms known as reverse payment settlements in which the brand-name producer pays generic producers to delay entry into the market until its patent expires. In this article, I examine the background and specific features of the Hatch-Waxman Act and reverse payment settlements, the legality and antitrust scrutiny of reverse payment settlements through the lens of cases such as FTC v. Actavis Inc., and the reasons supporting the case-by-case interpretation of reverse payment settlements over an illegal per se ruling of such practices.
Examining the Hatch-Waxman Act and the Reverse Payment Settlement
Despite earlier Congressional efforts such as the Abbreviated New Drug Application (ANDA) to support a smooth entry of generic drugs into the markets to compete with the currently dominating brand-name drug, only a few number of generic drugs were actually entering the market due to legal complications with patents that brand-name producers possessed along with the long FDA approval process. As such, the Hatch-Waxman Act was passed in 1984 to combine the simplification of the testing process of generic drugs through a continued use of ANDAs and a new initiative to specify legal pathways generic drug manufacturers may take to either avoid or combat brand-name producers’ patents that prevent generic entry.
ANDAs simplify the FDA approval process for generic producers by shifting their burden from proving that their drug is safe and working to proving that their drug is scientifically similar enough to the already approved brand-name drug so that safety may be inferred from the brand-name producers’ previous testing record.
The introduction of 4 specific legal pathways addressing brand-name producers’ patents paved the way for an easier entry of generic producers into the market. Under the Act, brand-name producers are required to notify the FDA of any patents they possess. When a generic producer seeks FDA approval for their new drug, they have the option of addressing these patents in one of four ways and assure the FDA that the generic drug will not infringe on the brand-name’s patents by:
certifying that the brand-name manufacturer has not listed any relevant patents
certifying that any relevant patents have expired
requesting approval to market their product beginning when any in-force patents expire
certifying that any listed, relevant product is “invalid or will not be infringed by the manufacture, use, or sale” of the drug described in the ANDA (this particular method is commonly referred to as “Paragraph IV”)
Paragraph IV is undoubtedly the most legally complicated as initiating it will automatically be considered as infringing the brand-name patent and often provokes litigation. If the brand-name manufacturer brings an infringement suit within 45 days, which it most likely will, the FDA is legally required to withhold from approving the generic for 30 months while parties litigate patent validity/infringement in court. However, Paragraph IV also provides a special incentive for a generic producer to be the first to file an ANDA by using this route by offering a period of 180 days of exclusivity which often raises several hundred million dollars if they can overcome any patent obstacle and bring the generic to market.
The threat of Paragraph IV litigation is where the practice of reverse payment settlement was born. For our hypothetical, let’s assume there are two producers of a similar product, with Company A is the brand-name producer and possesses several patents with 5 years before they expire. On the other hand, Company B is a generic producer who seeks FDA approval for a speedy entry into the market. The reverse payment settlement occurs when Company B decides to file an ANDA and Paragraph IV against all of Company A’s patents claiming that the patents were invalid and/or irrelevant for whatever reason unimportant to this hypothetical. Anticipating costly legal fees and waste of resources and time, Company A suggests a reverse payment settlement which, if Company B agrees to, will avoid litigation in court and instead allow for Company A and B to settle the dispute on their own. Under reverse payment settlements, the general settlement includes terms which enforce that (1) Company B will delay its entry into the market and retract its Paragraph IV filing and (2) Company A will pay Company B a certain amount of money as “compensation.” In essence, a reverse payment settlement is an agreement in which the brand-name producer pays the generic producer to stay out of the market until its patent expires.
FTC v. Actavis Inc. (2013)
FTC v. Actavis Inc. (Actavis) is perhaps the landmark Supreme Court case applying antitrust scrutiny to the practice of reverse payment settlements. In this case, the Federal Trade Commission filed a complaint alleging that respondents Solvay Pharmaceuticals, Actavis Inc., and Paddock Laboratories engaged in anticompetitive conduct in violation of Section 5 of the Federal Trade Commission Act by agreeing to a reverse payment settlement offered by Solvay.
In 1999, Solvay Pharmaceuticals filed a New Drug Application for a brand-name drug used to treat low levels of testosterone resulting from medical reasons, AndroGel, which the FDA approved in 2000. In 2003, Solvay obtained a relevant patent and disclosed that fact to the FDA, but later in the year, Actavis Inc. filed an ANDA for a generic drug similar to AndroGel and initiated a joint Paragraph IV with Paddock Laboratories alleging that Solvay’s listed patent was invalid and their drugs did not infringe upon it.
Thirty months later, after much litigation and settlements, the FDA eventually approved Actavis as the first-to-file generic supplier and was ready to grant the 180-day exclusive period. However, this Paragraph IV dispute was suddenly settled as Actavis agreed to a reverse payment settlement with Solvay in which Actavis agreed to delay its entry into the market until August 31st, 2015, which would be 65 months before Solvay’s patent expired, and they also agreed to promote AndroGel to urologists in exchange for $19-30 million paid annually by Solvay.
While the parties involved claimed that their reason for such payments were “compensation” for the services that Actavis provided such as recommending AndroGel to urologists, the FTC alleged that this was an attempt to “share in Solvay’s monopoly profits, abandon their patent challenges, and refrain from launching their low-cost generic products to compete with Androgel.” In short, the FTC alleged that this was a horizontal conspiracy to form a shared monopoly for 9 years in which Solvay would benefit by possessing the only product in the market and Actavis would benefit by receiving a share of the profits that Solvay makes from the monopoly.
Previous rulings by the District Court and the Eleventh Circuit Court of Appeals concluded that as long as the scope of the settlement was within the anticipated reduction of competition resulting from Solvay’s patent, FTC’s claim of anticompetitive conduct could not move forward. However, after granting certiorari due to the lack of guidance lower courts had when faced with such settlements, the Supreme Court ruled that the FTC was entitled to have its claims heard owing to the anticompetitive potential of such settlements.
Court Ruling
In essence, the Supreme Court did not offer any straightforward guidance to lower courts despite their reason for accepting the case. Justice Stephen Breyer, who delivered the majority opinion in a 5-3 split, mainly rested his reasoning on 2 different considerations which led the majority to conclude that in this specific case, the FTC’s claims should not be dismissed.
The first consideration cited prior cases such as United States v. Singer Mfg. Co. and United States v. New Wrinkle, Inc. to argue that despite a patent’s intentional and established exclusion of competition, settlements for any purpose between the generic and brand-name producers may have anticompetitive effects. To that end, Justice Breyer suggested that reverse payment settlements should be measured by not only their anticompetitive effects but also against procompetitive antitrust law policy. In other words, Justice Breyer refused to decide on reverse payment settlements considering only whether or not their effects were within the scope of the original patent (which in this case and most cases it would be within such scope if the generic producer is paid to delay their entry into the market until after the brand-name producer’s patent expires), and Justice Breyer argued that the effects of such settlements on areas traditionally examined under antitrust scrutiny such as consumer welfare should also be considered. Chief Justice John Roberts, in dissent, argued that as long as the brand-name producer offers a settlement within the scope of its patent, the settlement, no matter what it entails, is a basic right entitled to the brand-name producer to defend its patent. Justice Breyer concludes that this is not enough and that any violations of antitrust policy must also be considered.
Justice Breyer’s second reason focused on the possibility of anticompetitive practices and power misuse. He limited his considerations to only this specific case, but his concern over the potential anticompetitive effects represent the arguments of those who wish for the Court to consider reverse payment settlements as illegal per se. Justice Breyer displayed his concern over the possibility that a brand-name producer could simply pay the generic producers to stay out of the market and charge monopoly prices and the fact that these effects would be brought into the market with such ease. While Justice Breyer conceded that not all reverse payment settlements were anticompetitive, he failed to offer guidelines for lower courts on how to judge the effects of such practices and when to rule them anticompetitive, which is an aspect of the case that Chief Justice Roberts points out.
In sum, Justice Breyer did not rule whether reverse payment settlements were generally unlawful. Instead, he remanded the case and advised that all reverse payment settlements must be decided under the rule of reason, a more back-and-forth legal procedure between the plaintiffs and defendants in antitrust litigation in which the plaintiffs and defendants argue the anticompetitiveness, the justifications for such practices, and the implications of such practices on society as a whole, instead of outright banning such practices, contrasting with the minority’s argument that the Court should not interfere with any settlements within the scope of the original patent.
Analysis of the Ruling and Current Debate
In this section, I would like to offer my personal thoughts on this case and the general practice of reverse payment settlements with respect to the ongoing debate and efforts to ban such settlements.
With respect to the case of Actavis, I affirm Justice Breyer’s judgment to rule reverse payment settlements with the rule of reason. Given the relatively confusing purposes of reverse payment settlements, I understand Justice Breyer’s caution in ruling specifically for or against such practices. However, as much as I agree with Justice Breyer’s caution due to the thin line between settlements purposed for efficiency concerning litigation costs for both parties and settlements purposed for malicious monopoly profit sharing, the Court could have gone further in ruling for the FTC and identified specific aspects of the case which would demonstrate Actavis and Solvay’s anticompetitive purposes for their settlement.
According to basic economic principles, the main objective of a firm is to maximize its profits. Stemming from this understanding is what we consider “rational business behavior.” We, along with the FTC and the Courts, expect for firms to choose the course of action which would generate the most revenue, and if they do not, the FTC raises its suspicion for anticompetitive business behavior, because absent another motive or incentive, why would a firm forgo potential profits? In fact, the idea of rational business behavior is so entrenched in antitrust scrutiny that a firm claiming that it was taking rational business behavior to maximize its individual profits easily escapes the FTC’s allegations as seen in cases such as Theatre Enterprises v. Paramount Distributing and In re Text Messaging in which competitors accused of conspiring together, similar to Actavis and Solvay in this case, were able to justify their actions as independent rational behavior to maximize their individual profits.
In this case, I see the exact opposite. Actavis had no reason to agree to a reverse payment settlement with Solvay if they were consistent with their rational decision-making. Actavis was already approved by the FDA as the first-to-file generic product and was one step closer to acquiring the 180-day exclusive selling period in which they could have generated hundreds of millions of dollars and built a reliable customer base for future sales and market dominance. However, they opted to settle with Solvay, settling for a maximum of $270 million from Solvay. Subtract from this monetary value what Actavis would lose from recommending a competitor’s product to urologists, the primary party connecting consumers to suppliers, and this brings to question whether Actavis was truly engaging in profit-maximizing behavior or whether there was another motive behind Actavis forgoing its reward from months of litigation against Solvay and settling for a less desirable sum. I suspect that there were additional promises between Solvay and Actavis which would have persuaded Actavis to take the settlement, whether it be in the form of an increase in the price of AndroGel during Solvay’s exclusive patent-supported selling period to further maximize revenues of this essentially shared monopoly or another practice that has not yet been reviewed by courts. Regardless, Justice Breyer was correct to note the anticompetitive potential of this settlement.
The question of whether a reverse payment settlement is efficient arises from the terms of the settlement and potential impact on all parties. The justification for such settlements being cost-efficient for litigation takes substance when the parties still have a lot of litigating left and when both parties agree that a settlement would be more efficient. However, Actavis, if they considered the potential for their future profits, should have had no incentive to settle. They would have borne no additional litigation costs if they did not agree to such settlements because they have already been approved as the first-to-file product after 30 months of litigation, and this settlement occurred after much litigation has already taken place. On the other hand, Solvay would have had a great incentive to offer Actavis any sum of money to protect their patent, especially if it believed that there was a possibility that its patent could be ruled invalid in court. If Solvay were truly confident in its patent, it would have little reason to settle, and instead continue with the litigation to ensure a complete legal victory defending its patent. This thought raises two negative potentials for this case. Firstly, if Actavis had already obtained the first-to-file generic product designation, Solvay was in great danger of losing the current exclusive market they obtained after investing an enormous amount of money in R&D for AndroGel. It would have been more economically efficient for Solvay to reduce their losses and offer Actavis some money instead of losing their monopoly entirely, and given that Solvay invested more resources to obtain this exclusive selling than Actavis would spent “piggy-backing” on Solvay’s past FDA approval efforts, Solvay’s greater value on the AndroGel market indicates their incentive to reduce their losses instead of losing an entire exclusive market. And secondly, Solvay’s lack of confidence in its patent’s ability to be proved as valid in court raises questions about the quality and validity of the patent. If the patent had such a potential for being ruled as invalid to the point where Solvay offered a competitor hundreds of millions of dollars to defend the patent, the fact that consumers are purchasing and using AndroGel is alarming.
Of course, I have no insight into the business decision-making of Actavis and Solvay to make such accusations. However, neither did Justice Breyer. With all due respect, if Justice Breyer took a less cautious approach and included an analysis into Actavis’ potential incentives and anticompetitive purposes with his well-written explanation of the potential anticompetitive impacts of the reverse payment settlement in FTC v. Actavis, lower courts would have more guidance in deciphering between settlements truly designed for cost-efficiency and settlements created for malicious intent. Also, if Actavis truly took this settlement to reduce its costs resulting from being the first-to-file settlement (although I highly doubt this as the FDA approval process, the most costly portion of the process, was concluded by the time of the settlement), then I would be flawed to accuse it of any anticompetitive purposes. However, as the defendants of this case failed to mention this point, I assume that this was not the case.
As for the general practice of reverse payment settlements, the lack of clear guidance from the Supreme Court has left many experts debating over whether such practices should be held illegal per se. There are 3 factions in the debate. The first faction such as Michael A. Carrier in his Michigan Law Review Article emphasizes the atypical nature of reverse payment settlements and while acknowledging the court’s preference that parties settle, argue that the anticompetitive potential of such settlements are too great and such settlements must be ruled illegal per se. The second faction includes David A. Crane notes the economic efficiency and the lack of a clear “yardstick” to measure the anticompetitive purpose of such settlements and agrees with Justice Breyer on applying the rule of reason to judge reverse payment settlements. Finally, those such as Chief Justice Roberts believe that there should be no issue as long as the scope of the settlement stays within the scope of the original patent.
Conclusion
The lack of a transparent look into the business decisions of firms leave experts debating over the principal purpose of such settlements and its effects on society as a whole. Owing to such factors, Justice Breyer was wise to advise all courts to employ the use of rule of reason over a quick look analysis or illegal per se approach. As much as reverse payment settlements may represent, as those strongly against them emphasize, the brand-name producer “paying off” its competitors, for those smaller generic producers, this is an economically efficient method to gain an ANDA approval and to prepare for a delayed market entry.
Those generic producers without the resources to support the enormous litigation costs against larger firms may use the money they gain to create better features of the generic product they are developing to later differentiate it from the brand-name drug they will compete against in the future. While they may seem anticompetitive at first, reverse payment settlements do not exclude and bar competition from the market forever. Absent anticompetitive purposes or an incentive for a shared monopoly such as in the case of FTC v. Actavis, reverse payment settlements may be an economically efficient method for smaller generic producers to gain a foothold in the market in the future. And if in this idealistic setting the smaller generic producers manage to differentiate their product from the brand-name drug upon market entry, wouldn’t the improvement of a competing product indicate that a desirable procompetitive effect took place due to the settlement?
Of course, the scenario above is highly idealistic, which is why I support Justice Breyer’s case-by-case rule of reason approach. The ability to differentiate from the malicious to the efficient settlements is paramount in this legal debate, and until experts find a clear method to offer guidance to courts, Justice Breyer’s rule of reason method must be set as the standard.