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Monday, February 25, 2013

Pharmaceutical Patent Settlements: Issues in Innovation and Competitiveness

John R. Thomas
Visiting Scholar

Although brand-name pharmaceutical companies routinely procure patents on their innovative medications, such rights are not self-enforcing. Brand-name firms that wish to enforce their patents against generic competitors must therefore commence litigation in the federal courts. Such litigation ordinarily terminates in either a judgment of infringement, which typically blocks generic competition until such time as the patent expires, or a judgment that the patent is invalid or not infringed, which typically opens the market to generic entry.

As with other sorts of commercial litigation, however, the parties to pharmaceutical patent litigation may choose to settle their case. Certain of these settlements have called for the generic firm to neither challenge the brand-name company’s patents nor sell a generic version of the patented drug for a period of time. In exchange, the brand-name drug company agrees to compensate the generic firm, often with substantial monetary payments over a number of years. Because the payment flows counterintuitively, from the patent owner to the accused infringer, this compensation has been termed a “reverse” payment.

Commentators have differed markedly in their views of reverse payment settlements. Some observers believe that they are a consequence of the specialized patent litigation procedures established by the Hatch-Waxman Act. Others have concluded that when one competitor pays another not to market its product, such a settlement is anti-competitive and a violation of the antitrust laws.

Since 2003, Congress has required that litigants notify federal antitrust authorities of their pharmaceutical patent settlements. That legislation did not dictate substantive standards for assessing the validity of these agreements under the antitrust law, however. That determination was left to judicial application of general antitrust principles. Facing different factual patterns, some courts have concluded that a particular reverse payment settlement constituted an antitrust violation, while others have upheld the agreement. The Supreme Court agreed to hear a reverse payment settlement case, Federal Trade Commission v. Watson Pharmaceuticals, Inc., on December 7, 2012, and may possibly issue a ruling that provides a nationally uniform judicial approach to these agreements.

Congress possesses a number of alternatives for addressing reverse payment settlements. One possibility is to await further judicial developments. Another option is to regulate the settlement of pharmaceutical patent litigation in some manner. For example, one unenacted proposal from the 112
th Congress, H.R. 3995, would have declared that certain reverse payment settlements violate the antitrust laws. Another possibility, proposed by S. 27 in the 112th Congress but not enacted, would establish a presumption of either legality or illegality under the antitrust laws, along with consideration of relevant factors to be weighed by the courts. Still another unenacted proposal from the 112th Congress, S. 1882, would have introduced reforms to the food and drug laws that would have reduced incentives for generic firms to settle with brand-name companies. Any of these, or other proposals, may be revisited by policymakers during the 113th Congress.

Date of Report: February 15, 2013
Number of Pages: 16
Order Number: R42960
Price: $29.95

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