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.