Archive for the ‘Antitrust’ Category

Has Pay for Delay Seen Its Day?

Thursday, August 12th, 2010


Photo by Sage Ross, CC by-sa

What do you call it when a patent holder pays royalties to a possible infringer, and not the other way around?

In the pharmaceutical industry, it is called “reverse payment” or “pay for delay,” a practice in which the inventor of a patented drug pays the developer of a generic substitute not to produce until the patent is nearly expired.

The practice has withstood multiple court challenges, but is coming under increasing fire from the executive and legislative branches of the federal government as anti-competitive.

And a three judge panel of the influential federal Second Circuit Court of Appeals, which recently upheld a reverse payment arrangement, has even taken the unusual step of inviting the challengers to appeal their loss to the entire 10 judge circuit court panel.

The origins of pay for delay are in the Drug Price Competition and Patent Term Restoration Act of 1984, popularly known as the Hatch-Waxman Act. Hatch-Waxman provides that when a developer of a patented drug applies to the Food and Drug Administration for permission to market it, the maker of a generic version of the drug may file a certification that the generic does not infringe the new drug’s patents, or that the new drug’s patents are invalid. The certification itself is deemed an infringement of the new drug’s patents, and sets the stage for the new drug’s inventor to sue the makers of the generic version for patent infringement.

The original logic of Hatch-Waxman was to encourage development of generics without undue cost to patented drugs by resolving infringement issues at an early stage, before either party had invested huge amounts of money in production and marketing. But it did not work out that way. Many innovators chose instead to pay the generics a “reverse payment” not to produce, usually until shortly before the new drug’s patents expire. Often payment to the generic is in the form of a percentage of sales on the patented drug, in effect, a “reverse royalty.”

Reverse payments have been widely criticized as an unreasonable restraint of trade in violation of Section 1 of the Sherman Antitrust Act.

The Federal Trade Commission estimates that pay for delay settlements cost consumers $3.5 billion per year because of the unavailability of cheaper generic drugs.

But pharmaceutical manufacturers reply that the agreements are reasonable commercial agreements to avoid the expense and uncertainty of litigation, especially where the prospective generic manufacturer has not risked significant market entry expenses or infringement damages, and has little to lose in filing a challenge.

And courts for the most part have agreed. The Eleventh Circuit and the Federal Circuit have upheld the practice, while the Sixth Circuit has held it unlawful.

Two of the biggest class-action antitrust challenges to pay for delay were lengthy class action lawsuits decided by the Second Circuit Court of Appeals.

In 2005, the Second Circuit upheld the practice in In Re Tamoxifen Citrate Antitrust Litigation, in which it ruled that reverse payment agreements do not violate antitrust laws, “[u]nless and until the patent is shown to have been procured by fraud, or a suit for its enforcement is shown to be objectively baseless,” or the settlement agreement extends the patent beyond its original scope.

In Re Ciprofloxacin Hydrochloride Antitrust Litigation challenged a settlement of a 1991 patent infringement lawsuit in which Bayer Corporation paid Barr Laboratories reverse payment royalties estimated at nearly $400 million not to manufacture a generic version of Bayer’s patented drug Cipro. A three-judge panel of the court ruled in April that in light of the circuit’s earlier ruling in the Tamoxifen case, it was compelled to dismiss the plaintiffs’ case, because they had not properly alleged that Bayer’s patent was procured by fraud, nor that the underlying patent lawsuit was objectively baseless.

But the appellate panel had significant reservations about the practice of reverse payments as a whole, and invited the plaintiffs to challenge the decision before an en banc hearing of the circuit’s 10 active judges. The plaintiffs accepted the panel’s invitation, and filed a petition for an en banc hearing, which was joined by briefs submitted by the Federal Trade Commission and the Department of Justice criticizing reverse payment settlements. A ruling on the petition is expected shortly.

Sentiment is also mounting against pay for delay in the legislative branch. Senator Orrin Hatch, who lent his name to the Hatch-Waxman Act, has criticized the practice as increasingly anti-competitive. A bill pending in the Senate would greatly curtail pay for delay by presuming that such agreements are anti-competitive, while permitting the parties to rebut that presumption in court. The bill is similar to a measure that has already passed the House of Representatives.

Pay for delay may have seen its day.

Update, 9/17/10: But maybe just not yet. The Second Circuit declined by 9-1 to rehear the Cipro case en banc, which means that pay for delay has withstood yet another legal challenge.

Sports Licensing Corner: Licensing Revolution on the Campuses?

Monday, March 8th, 2010

An antitrust lawsuit brought by a former UCLA basketball star has the potential to upend the cozy, lucrative world of collegiate sports licensing, and even to make fundamental changes to the amateur nature of college sports.

Collegiate licensing is a $4 billion a year industry, about 80% of which is handled by the Collegiate Licensing Company (“CLC”), official licensing agent to the NCAA and over 200 universities.

One of the foundations of that industry is that college athletes are required to sign documents that relinquish in perpetuity their rights of publicity for college sports-related purposes, as a condition of participating in NCAA-sponsored college athletics. That means the NCAA can, without compensation to the athletes, license their names and images for apparel, video games, broadcasts, and highlight DVDs, long after they have graduated from college.

Ed O’Bannon, a former basketball star at UCLA during the 1990s, said he got angry seeing his highlight clips from 15 years ago being used to promote NCAA broadcasts, so last July he filed a class action lawsuit against the NCAA and CLC in federal District Court in San Francisco on behalf of himself and other former student-athletes.

The nub of O’Bannon’s legal argument is that requiring student athletes to sign away their rights of publicity in perpetuity is a violation of Section 1 of the Sherman Antitrust Act. Section 1 prohibits, “Every contract, combination…, or conspiracy, in restraint of trade or commerce among the several States….”

Agreements among the NCAA, CLC, and NCAA member universities, as well as the students’ relinquishments of their rights of publicity, are obviously “contracts,” so the next question under Section 1 is whether these contracts unreasonably restrain trade in a particular market. The NCAA will probably argue that: 1) the former athletes should not be able to bring an antitrust lawsuit in the first place, because they validly traded their rights of publicity for room, board, and tuition provided under their athletic scholarships; and 2) prohibiting college athletes from receiving payments for their athletic skills preserves the amateur nature of the college game, and therefore promotes, not restrains, competition in the market for college sports and sports products.

O’Bannon is likely to reply that: 1) requiring a college freshman to sign away his intellectual property rights in perpetuity without the presence of an attorney is invalid; and 2) assuming that amateurism by college athletes increases competition in the market for college sports, it is totally irrelevant to former athletes, who are no longer playing in games. O’Bannon argues that the NCAA, by prohibiting the former student-athletes from cutting their own apparel or video game licensing deals, is lessening competition, decreasing innovation, eliminating compensation to former athletes, and increasing prices to college sports fans, in violation of the Sherman Antitrust Act.

Indeed, by limiting their lawsuit to former students, the O’Bannon plaintiffs have considerably strengthened the legal arguments of their case.

The O’Bannon plaintiffs recently survived the defendants’ motion to dismiss the case before trial, but there is plenty of game left to play, sports fans. With so much money at stake, it is likely that no matter which side wins, there will be years of appeals before the matter is finally settled.

But if O’Bannon wins, the NCAA, CLC, and many college athletic departments could take a large financial hit. They all derive substantial revenue from that $4 billion in licensing fees, but the O’Bannon plaintiffs would claim a major (as yet unspecified) chunk as compensation to former student-athletes whose rights of publicity were utilized in licensing deals. In fact, antitrust law allows victorious plaintiffs to triple their damages. And of course the former college athletes would have the right to cut their own licensing deals going forward, independent of the NCAA and their alma maters.

Furthermore, if O’Bannon wins, it is possible that current college athletes might utilize the rationale in any O’Bannon victory to attempt to weaken or throw out the current system of signing their rights of publicity over to the NCAA and CLC. For example, if the court were to rule the waivers were defective because the NCAA failed to advise students that they should seek legal counsel before signing away rights to future compensation for their intellectual property, then current athletes might argue they too should have the right to be represented by counsel in negotiating rights waivers during their college playing careers. Then star college athletes could get embroiled in contract negotiations, just like professional athletes.

Stay tuned, licensing and college sports fans…