Department of Justice Weighs in Against Reverse Payment Settlement Agreements

July 15, 2009

Settlement agreements between drug patentees and generic drug manufacturers to dismiss a challenge to the validity of a patent and delay the generic’s entry into the marketplace until the patent’s expiration in exchange for money are per se illegal. That was the message the U.S. Department of Justice buried in a 35-page brief submitted recently at the request of the U.S. Court of Appeals for the 2nd Circuit in Arkansas Carpenters Health & Welfare Fund v. Bayer AG, Appeal No. 05-2851.

More readily apparent, but perhaps as surprising, was the DOJ’s assertion that settlement agreements that result in a lesser delay to entry into the marketplace in exchange for payments are — or, more accurately, should be treated as — presumptively illegal. The statements in the brief mark a dramatic shift in DOJ policy and bring the DOJ in line with the long-held position of the Federal Trade Commission.

The underlying case pits purchasers of ciprofloxacin hydrochloride (Cipro) against innovator Bayer AG and generic manufacturers including Barr Laboratories, Inc. The purchasers contend that the settlement agreements struck by Bayer and the generics, which ultimately resulted in payments by Bayer approaching $349 million over several years to keep generic versions of Cipro off the market, restrained competition in violation of Section 1 of the Sherman Act, 15 U.S.C. 1.

A related appeal in the same case resulted in the Federal Circuit upholding the Bayer/generics settlement agreements on the basis that patentees enjoy the right to exclude others from profiting from the patented product for the duration of the patent. See In re Ciprofloxacin Hydrochloride Antitrust Litigation, 544 F.3d 1323, 1340 (Fed. Cir. 2008), cert. denied, No. 08-1194, ____ U.S. ____, 2009 WL 1738658 (June 22, 2009). The Federal Circuit stated, “[T]he essence of the Agreements was to exclude the defendants from profiting from the patented invention. This is well within Bayer’s rights as the patentee.” Notably, the DOJ’s brief to the 2nd Circuit did not discuss the Federal Circuit’s opinion.

The 2nd Circuit’s request for the DOJ’s input in the Cipro case followed the Federal Circuit’s holding, which suggests that the 2nd Circuit is at least entertaining the possibility of reaching a different conclusion. This would result in an unusual split between two circuits hearing appeals in the very same case, which may get the U.S. Supreme Court’s attention, notwithstanding the fact that the Supreme Court denied certiorari in the appeal before the Federal Circuit. To get to that point, however, the 2nd Circuit will effectively have to reverse its 2006 opinion in In re Tamoxifen Citrate Antitrust Litigation, 466 F.3d 187 (2d Cir. 2006), which reached a conclusion similar to that espoused by the Federal Circuit. The 2nd Circuit’s jurisdiction to address the issue also is in question. Regardless of the outcome of the litigation, the DOJ’s brief sends a warning that future reverse payment settlements may be the subject of DOJ scrutiny.

The question posed by the 2nd Circuit in its request to the DOJ was “whether settlement of patent infringement lawsuits violates the federal antitrust laws when a potential generic drug manufacturer withdraws its challenge to the patent’s validity, which if successful would allow it to market a generic version of a drug, and the brand-name patent holder, in return, offers the generic manufacturer substantial payments.” The DOJ’s answer: “The anticompetitive potential of reverse payments in the Hatch-Waxman context in exchange for the alleged infringer’s agreement not to compete and to eschew any challenge to the patent is sufficiently clear that such agreements should be treated as presumptively unlawful under Section 1 of the Sherman Act.”

In explaining its position, the DOJ offered the court a road map for analyzing reverse payment settlement agreements in the context of litigation arising under the Hatch-Waxman amendments to the Federal Food, Drug, and Cosmetic Act, 21 U.S.C. § 301 et seq. Under the DOJ’s proffered analysis, the antitrust plaintiff would have the burden of establishing a prima facie antitrust violation by demonstrating that (1) the generic manufacturer withdrew its challenge to the validity of the patent at issue; (2) money (or equally valuable consideration) “flowed” from the patent holder to the generic manufacturer; and (3) the payment accompanied the agreement to withdraw the challenge to the patent.

Once the prima facie case is established, the agreement would be presumed illegal, and the defendant would then have the burden of proving that the agreement “does not impose an unreasonable restraint on competition.” This could be accomplished, the DOJ stated, by demonstrating that the payment by the patent holder “was no more than an amount commensurate with the patent holder’s avoided litigation costs” (or not greatly in excess of that amount). According to the DOJ, “Liability properly turns on whether, in avoiding the prospect of [patent] invalidation that accompanies infringement litigation, the parties have by contract obtained more exclusion than warranted in light of that prospect.” Nevertheless, the strength of the “prospect” (i.e. likelihood of the success of the challenge to the patent’s validity) would be irrelevant under the DOJ’s analysis.

Importantly, the DOJ stated that “defendants will be unable to carry their burden if the settlement allowed no generic competition until patent expiration.”