Senate Judiciary Committee Acts on Reverse Payments

    By Kevin E. Noonan --

With fresh life being breathed into its patent "reform" bill by the new Commerce Secretary and PTO management, the Senate Judiciary Committee on Thursday acted on another "reform" measure, voting in favor of sending to the floor of the Senate a bill prohibiting "reverse payments."  These are payments by branded drug makers to generic drug companies that forestall generic drug entry into the marketplace, which many, including the Federal Trade Commission, contend are (or should be) presumptively illegal.  The FTC maintains that these arrangements cost consumers about $3.5 billion annually in additional prescription drug costs.  The new administration's Justice Department has also changed the opinion espoused by the Bush administration, and now embraces the FTC's "presumptively unlawful" stance; President Obama is reported by Reuters to support the ban.

However, the FTC and others have not been able to convince the Federal Circuit that there is anything illegal in these arrangements (as in In re Ciprofloxacin Hydrochloride Antitrust Litigation), and as a result these agencies have turned to Congress to mandate the illegality of such payments.

The bill (S. 369) was co-sponsored by Senators Kohl (D-WI), Grassley (R-IA), Feingold (D-WI), Durbin (D-IL), Brown (D-OH), Collins (R-ME), Klobuchar (D-MN), Nelson (D-NE) and Franken (D-MN).  As reported by the Committee, it provides, inter alia, that:

(1) In 1984, the Drug Price Competition and Patent Term Restoration Act (Public Law 98-417) (referred to in this Act as the '1984 Act'), was enacted with the intent of facilitating the early entry of generic drugs while preserving incentives for innovation.

(2) Prescription drugs make up 10 percent of the national health care spending but for the past decade have been one of the fastest growing segments of health care expenditures.

(3) Until recently, the 1984 Act was successful in facilitating generic competition to the benefit of consumers and health care payers - although 67 percent of all prescriptions dispensed in the United States are generic drugs, they account for only 20 percent of all expenditures.

(4) Generic drugs cost substantially less than brand name drugs, with discounts off the brand price sometimes exceeding 90 percent.

(5) Federal dollars currently account for an estimated 30 percent of the $235,000,000,000 spent on prescription drugs in 2008, and this share is expected to rise to 40 percent by 2018.

(6)(A) In recent years, the intent of the 1984 Act has been subverted by certain settlement agreements between brand companies and their potential generic competitors that make 'reverse payments' which are payments by the brand company to the generic company.

(B) These settlement agreements have unduly delayed the marketing of low-cost generic drugs contrary to free competition, the interests of consumers, and the principles underlying antitrust law.

(C) Because of the price disparity between brand name and generic drugs, such agreements are more profitable for both the brand and generic manufacturers than competition, and will become increasingly common unless prohibited.

(D) These agreements result in consumers losing the benefits that the 1984 Act was intended to provide.

The Act is intended:

(1) to enhance competition in the pharmaceutical market by stopping anticompetitive agreements between brand name and generic drug manufacturers that limit, delay, or otherwise prevent competition from generic drugs; and

(2) to support the purpose and intent of antitrust law by prohibiting anticompetitive practices in the pharmaceutical industry that harm consumers.

And the prohibitions of the Clayton Act (15 U.S.C. § 12 et seq.) are amended as follows:

SEC. 28. PRESERVING ACCESS TO AFFORDABLE GENERICS

(a) In General-

(1) ENFORCEMENT PROCEEDING- The Federal Trade Commission may initiate a proceeding to enforce the provisions of this section against the parties to any agreement resolving or settling, on a final or interim basis, a patent infringement claim, in connection with the sale of a drug product.

(2) PRESUMPTION-

    (A) IN GENERAL- Subject to subparagraph (B), in such a proceeding, an agreement shall be presumed to have anticompetitive effects and be unlawful if--

        (i) an ANDA filer receives anything of value; and

        (ii) the ANDA filer agrees to limit or forego research, development, manufacturing, marketing, or sales of the ANDA product for any period of time.

    (B) EXCEPTION- The presumption in subparagraph (A) shall not apply if the parties to such agreement demonstrate by clear and convincing evidence that the procompetitive benefits of the agreement outweigh the anticompetitive effects of the agreement.

(b) Competitive Factors- In determining whether the settling parties have met their burden under subsection (a)(2)(B), the fact finder shall consider--

(1) the length of time remaining until the end of the life of the relevant patent, compared with the agreed upon entry date for the ANDA product;

(2) the value to consumers of the competition from the ANDA product allowed under the agreement;

(3) the form and amount of consideration received by the ANDA filer in the agreement resolving or settling the patent infringement claim;

(4) the revenue the ANDA filer would have received by winning the patent litigation;

(5) the reduction in the NDA holder's revenues if it had lost the patent litigation;

(6) the time period between the date of the agreement conveying value to the ANDA filer and the date of the settlement of the patent infringement claim; and

(7) any other factor that the fact finder, in its discretion, deems relevant to its determination of competitive effects under this subsection.

(c) Limitations- In determining whether the settling parties have met their burden under subsection (a)(2)(B), the fact finder shall not presume--

(1) that entry would not have occurred until the expiration of the relevant patent or statutory exclusivity; or

(2) that the agreement's provision for entry of the ANDA product prior to the expiration of the relevant patent or statutory exclusivity means that the agreement is pro-competitive, although such evidence may be relevant to the fact finder's determination under this section.

(d) Exclusions- Nothing in this section shall prohibit a resolution or settlement of a patent infringement claim in which the consideration granted by the NDA holder to the ANDA filer as part of the resolution or settlement includes only one or more of the following:

(1) The right to market the ANDA product in the United States prior to the expiration of--

    (A) any patent that is the basis for the patent infringement claim; or

    (B) any patent right or other statutory exclusivity that would prevent the marketing of such drug.

(2) A payment for reasonable litigation expenses not to exceed $7,500,000.

(3) A covenant not to sue on any claim that the ANDA product infringes a United States patent.

(emphasis added)

The bill permits the FTC to "exempt certain agreements" if the Commission finds that they are "in furtherance of market competition and for the benefit of consumers."  The legislation omits a requirement in draft versions of the bill that all agreements between generic and branded drug manufacturers were to be submitted under oath to the FTC and the DOJ under the Medicare Prescription Drug, Improvement, and Modernization Act of 2003, and also omits provisions wherein the 180-day exclusivity period granted under the Hatch-Waxman Act to the first ANDA filer would be forfeited if it enters into a "reverse payment" agreement with the branded drug manufacturer.

The Committee vote was 12-7.  The bill is as yet unscheduled for a floor vote, and a companion bill in the House (H.R. 1706, introduced by Congressman Rush (D-IL) and co-sponsored by Congressmen Waxman, Dingell, Doyle, Markey, Stupak, Schakowsky and DeGette) has been forwarded by the Subcommittee on Commerce, Trade and Consumer Protection to the House Energy and Commerce Committee and to the Judiciary Committee for action.

Comments

[Incognito]

Kevin,

Grassley is a Republican, not a Democrat.

[Kevin E. Noonan]

Thanks, Incognito. Just a typo, but one we are happy to fix and grateful for the heads-up.

[EG]

Kevin,

As someone else has said, it would be much easier (and more logical) to amend Hatch-Waxman to make such "reverse payments" a nullity by causing the 180-day exlusivity to roll over to later ANDA filers once the 1st ANDA filer enters into such a "reverse payment" settlement.

[Dan Feigelson]

As I read this, it seems to me that a patentee could simply agree to let the first ANDA filer go to market one day before the first expiration of a patent in suit; this would put the first ANDA filer's invalidity challenge to bed. Since the bill would do nothing to change the first ANDA filer's 180-day exclusivity period, a later ANDA filer would gain nothing by challenging the validity of the first-expiring patent. So in this scenario, assuming I haven't missed something (feel free to jump if I have), it's not clear what benefit would accrue to the public.

Obviously, the time remaining between the first patent expiration and the date of the settlement, as well as the existence of later-expiring patents would affect this calculus. Which is why I agree with EG that if one views reverse payments as a problem, there are simpler ways to address the matter, that don't necessarily reduce incentives to challenge the validity of patents.

[Matthew Avery]

As I've argued before, making reverse payments illegal is not the right way to approach this problem. Instead, Congress should remove the incentive to enter pay-for-delay settlements. This could most easily be done by revising Hatch-Waxman so that the 180-day exclusivity period rolls over to later ANDA filers if the 1st filer enters into a settlement agreement.