Congress Attempts to Fix a System that Isn't Broken

Sometimes, the only prospect more chilling than the unintended consequences of Congressional legislation is the intended consequence. To make the point, the US Congress may soon enact a law designed to ban reverse payments or pay-for-delay patent settlements. These settlements fall under the Hatch–Waxman Act and involve the allegedly infringing generic-drug applicant dropping its challenge in exchange for money, a license, or both. The Federal Trade Commission (FTC) has mounted a crusade against such settlements for 10 years—a crusade which has thus far failed spectacularly in the courts. The courts have rejected FTC's attempt to brand these settlements as anticompetitive without accounting for the fact that, "if settlement negotiations fell through and the patentee went on to win his suit, competition would be prevented to the same extent" (1). Beginning in 2006, FTC turned to Congress, ghost-writing a statute that would declare such settlements presumptively illegal.

Kevin D. McDonald

Congress seems poised to act. The full US House of Representatives has passed the measure twice. The first measure was included in the 2010 omnibus healthcare bill, but the settlements provision had to be stripped before final passage to match the Senate version (thus keeping the bill filibuster-proof). More recently, the measure was added to the House's war funding bill for Afghanistan, but dropped again. At the time of this writing, the US Senate Appropriations Committee has inserted the measure into its Fiscal Year 2011 spending bill. If the House follows suit, the bill could be passed shortly after Congress returns from its summer recess. As these stealthy tactics suggest, however, it is not clear whether the members of Congress understand what the bill provides. Senator Herb Kohl (D-WI), a primary sponsor, said that, "our bill will not ban any settlement which does not involve an exchange of money" (2), a statement the bill itself expressly contradicts.

But this much is clear: if enacted, this law will fundamentally change the behavior of every company, branded or generic, that engages in the Hatch–Waxman approval process for generic drugs. Why? First, the statute's reach may extend far beyond settlement agreements and include everyday licenses given to generic-drug filers outside of litigation. Second, the statute grants nearly unfettered authority to FTC to condemn agreements based on any "factor" that FTC, "in its discretion, deems relevant" (3).

The statute's scope

The bill would allow FTC to challenge "any agreement resolving or settling .... a patent infringement claim" involving a drug product (4). Such an agreement would be "presumed" unlawful if a generic filer (a) "receives anything of value," and (b) agrees to limit its sale of the generic drug in any way (e.g., splitting the remaining patent life). The term "anything of value" is as broad as it sounds—every rational settlement gives value to the generic-drug filer.

The real breadth of the bill lies in its definition of a "patent infringement claim." No lawsuit is required; the definition includes "any allegation..., whether or not included in a complaint [in] court," that the generic drug "may infringe any patent" (5). Thus, FTC may argue that, when a branded company discusses the possibility of a license with a generic-drug filer, even one who has not challenged the patent, it is "alleging" that the patent would otherwise be infringed (why else would a license be needed?), and the statute thus applies.

I can see FTC making the argument, and a presumption of illegality against any resulting license would follow by definition. The statute purports to allow a safe harbor for settlements that grant a license that is limited, in essence, to a single term: the generic-drug's entry date. Adding any other term such as charging a royalty or making the license exclusive, would trigger the presumption of illegality. I have seen dozens of Hatch–Waxman settlements, and not one would satisfy this bill.

The statute's scope will discourage potential litigants at all stages of the Hach–Waxman process. The statute looms not only over the brand's decision to file a lawsuit, but also over the generic applicant's prior decision to file an application challenging the patent. The generic firm would then know that it may not be permitted to settle on terms that the parties select, and there will be fewer challenges as a result. Indeed, even the brand company's original decision to list the relevant patent in the Orange Book—which FDA law mandates if a generic could infringe the patent—is newly portentous. Under the proposed statute, any of these decisions could trigger a process that ends only in one of two ways: in a fully litigated patent judgment, or a private contract that must be approved by FTC.

FTC's authority

Once FTC acts, the statute's process for evaluating the competitive effect of the agreement is almost comically biased against the settlement. To rebut the presumption of illegality, the parties would have to prove the settlement procompetitive "by clear and convincing evidence"—a standard borrowed from patent law but not found elsewhere in antitrust law. During that process, the "fact finder shall not presume" (a) that the patent would have excluded the generic, or (b) that the agreement "is pro-competitive" simply because it allows early entry to market by the generic drug. The statute never considers the patent's potential to exclude the generic option altogether as relevant to the competitive analysis. It is not even included in a list of "factors" that "must" be considered—that's the same list that ends with "any other factor" identified by FTC "in its discretion" (6). These standardless standards, along with new rule-making authority, would transform FTC from an antitrust enforcement agency into a close regulator of all Hatch–Waxman settlements.

If the statute is passed and has a milder effect than I foresee, the likely cause will be its conceptual weakness and artless wording. Courts may consider it odd, for example, that the statute makes two factors that courts have repeatedly held are not anticompetitive (i.e., transfers "of value" and restrictions within the scope of the patent) presumptively unlawful. At the same time, it attempts to make two other factors that courts have deemed critical to any competitive analysis (i.e., the patentee's right to exclude and the benefit of assured generic entry) irrelevant to the legality of the agreement. The courts may conclude, as they have with respect to the Robinson–Patman Act (7), that this statute is not intended to promote competition as such, and hence should be interpreted narrowly. The courts will also recognize, as the statute's drafters apparently do not, that the failure to presume that a generic drug infringes a patent does not provide evidence that the generic drug does not infringe. The courts may conclude that the procompetitive benefits of any settlement, especially one that guarantees some early entry, obviously outweigh the "anticompetitive" effects of the statute's threshold factors (e.g., payments), which are not anticompetitive at all.

Kevin D. McDonald is a partner in the Washington office of Jones Day, a global law firm. He focuses on antitrust litigation. kdmcdonald@jonesday.com.

References

1. Asahi Glass Co. v. Pentech Pharm., Inc., 289 F. Supp. 2d 986, 994 (N.D. Ill. 2003)

2. Sen. H. Kohl, Statement before the 111th US Congress, Cong. Rec. S1433, Feb.3, 2009.

3. H.R. 4899, Preserve Access to Affordable Generics Act, in the US Supplemental Appropriations Act 2010 (111th Congress, 2010).

4. H.R. 4899, p. 74.

5. H.R. 4899, p. 84.

6. H.R. 4899, p. 76.

7. The Robinson-Patman Act, which forbids certain kinds of price discrimination, was passed in the early 20th century at the behest of small retailers attempting to survive competition from larger rivals such as Sears, Roebuck. Because it forbids practices that are plainly not anticompetitive, it has been interpreted narrowly by the Supreme Court and others [e.g., Volvo Trucks North Am., Inc. v. Reeder-Simco GMC, Inc., 546 US 164 (2006.)]