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Friday, July 26, 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.

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 lower courts had concluded that a particular reverse payment settlement constituted an antitrust violation, while others have upheld the agreement.

The June 17, 2013, decision of the U.S. Supreme Court in Federal Trade Commission v. Actavis, Inc. resolved this disagreement by holding that the legality of reverse payment settlements should be evaluated under the “rule of reason” approach. However, the Court declined to hold that such settlements should be presumptively illegal under a “quick look” analysis. The lower courts now face the potentially complex task of applying the rule of reason to reverse payment settlements going forward.

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. In the 113
th Congress, the Preserve Access to Affordable Generics Act (S. 214) 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. Another proposal, the FAIR Generics Act (S. 504), would introduce reforms to the food and drug laws that would reduce incentives for generic firms to settle with brand-name companies.

Date of Report: June 28, 2013
Number of Pages: 18
Order Number: R42960
Price: $29.95

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