Christopher Snyder The Hatch-Waxman Act - Pharma Patents and Antitrust Liability

Christopher J. Snyder December 2014

Preserving Intellectual Property Rights in Treatment of Reverse Settlements:

an Unstoppable Force Meets an Immovable Object

Factual Scenario

Healthcare in the United States has been a major focus over the last decade. From the

passage of Medicare Prescription Drug, Improvement, and Modernization Act of 20031 to the

Patient Protection and Affordable Care Act,2 the economics of caring for our bodies continues to

be in the headlines and on the minds of many in our society. A large part of the cost of

maintaining our health is the money that Americans spend on pharmaceuticals; in 2012 alone

Americans spent 325.8 billion dollars on pharmaceuticals.3

A person can hardly turn on the television anymore without seeing an advertisement for a

pill or cream to help with anxiety, depression, high blood pressure, erectile dysfunction, or even

overactive sweat glands. These drugs are a major part of American life and subject of pop-

culture references, social discussions, and high-dollar lawsuits. Pharmaceutical companies in the

United States spend billions upon billions of dollars every year developing new drugs to improve

the health and well-being of the world. While the cost of getting a new drug to sale is estimated

at about $350 million dollars4, only nineteen of twenty of these developments are approved by

the U.S. Food and Drug Administration5 for sale.6 Pfizer alone has spent 77.8 billion dollars

over the last ten years in research and development costs, only to produce ten drugs to take to

1 Medicare Prescription Drug, Improvement, and Modernization Act of 2003., 117 Stat. 2066, 108 P.L. 1732 Patient Protection and Affordable Care Act., 124 Stat. 119,111 P.L. 148, 124 Stat. 1193 Murray Aitken & Michael Kleinrock, Declining Medicine Use and Costs: For Better or Worse?, IMS Institute for Healthcare Information, May 2013, Pg. 84 Matthew Herper, The Cost Of Creating A New Drug Now $5 Billion, Pushing Big Pharma To Change, Forbes Magazine, (Oct. 11, 2013, 11:10 AM), http://www.forbes.com/sites/matthewherper/2013/08/11/how-the-staggering-cost-of-inventing-new-drugs-is-shaping-the-future-of-medicine/5 Hereinafter “FDA”6 Matthew Herper, How Much Does Pharmaceutical Innovation Cost? A Look At 100 Companies, Forbes Magazine, (Oct. 11, 2013, 11:10 AM), http://www.forbes.com/sites/matthewherper/2013/08/11/the-cost-of-inventing-a-new-drug-98-companies-ranked/

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market.7 These figures also ignore the marketing, production, and overhead costs of these

innovative companies. These new drugs are protected with patents, giving the inventor all the

intellectual property rights that are granted to a holder under the patent laws of the United States

and existing treaty countries. With so much on the line it goes without saying that the

pharmaceutical developers will exercise and protect those rights vigorously.

When visiting a pharmacy to pick up prescriptions, one of the first questions asked in

many instances is whether the patient would like the name brand or generic drug. While patents

on pharmaceuticals are granted for a twenty-year period by the patent and trademark office, the

FDA grants exclusive marketing rights of an approved drug that can range from 180 days to

seven years.8 A new chemical entity (drug) is generally granted a five-year exclusivity period.9

After the period of exclusivity, another manufacturer may produce medicine containing the

chemical entity in a generic version. The most recent data shows that the expiration of patent

exclusivity has led to a 28.9 billion dollar loss to pioneer pharmaceutical inventors in recent

years.10 The threat of generic medication has led the pharmaceutical companies to engage in

activity that open them up to liability under the Sherman Antitrust Act11.

The generic alternative to name-brand medication accounted for 84% of the medicines

dispensed in this country in 2012.12 The loss profits and combating free riders has led the name

7 Id.8 U.S. Food and Drug Administration, Frequently Asked Questions on Patents and Exclusivity (Updated Aug. 18 , 2014) http://www.fda.gov/Drugs/DevelopmentApprovalProcess/ucm079031.htm#How many years is a patent granted for?9 New drug product exclusivity, 21 Code of Federal Regulation § 314.108(a)New chemical entity defined as “a drug that contains no active moiety that has been approved by FDA in any other application submitted under section 505(b) of the act.”Active moiety defined as “the molecule or ion, excluding those appended portions of the molecule that cause the drug to be an ester, salt (including a salt with hydrogen or coordination bonds), or other noncovalent derivative (such as a complex, chelate, or clathrate) of the molecule, responsible for the physiological or pharmacological action of the drug substance.”10 Aitken & Kleinrock, Supra11 Sherman Antitrust Act, 15 USC § 112 Aitken & Kleinrock, Supra

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brand pharmaceutical developers, or patent holders in some cases, to usually engage in one of

three types of settlement with a generic alternative manufacturer. These three settlement

structures are:

(a) a license agreement, in which the generic company obtains a "non-exclusive, royalty-bearing license" to use the brand-name company's patent prior to the patent expiration; (b) a supply agreement, which allows the generic company to market the brand-name product as a generic product under the brand-name company's NDA instead of the generic company's Abbreviated New Drug Application (ANDA); and (c) an agreement involving a payment from the brand-name company to the generic company, which typically requires the generic company to delay launching its generic product.13

The third type of agreement seems to be the subject of most contention in the ongoing

debate among scholars, practitioners, government agencies and even the circuit courts; and the

agreements most suspected of an antitrust violation. These agreements are made by a patent

holder to a patent challenger to pay the generic manufacturer not to produce the patented drug

past the period of exclusion and delay the generic version of the pharmaceutical from entering

the market.14 These arrangements are typically known as “reverse payments,” “exit payments,”

“exclusionary payments,” and “pay-for-delay arrangements.”15 These arrangements emerged

through the name-brand developers and generic drug manufacturers as a way to avoid the

transaction costs associated with intellectual property litigation.16 These arrangements have

brought the ire of the Federal Trade Commission,17 which prosecutes antitrust violations, upon

the pharmaceutical industry and allege that reverse payment settlements violate the antitrust

13 Wansheng Jerry Liu, Balancing Accessibility and Sustainability: How to Achieve the Dual Objectives of the Hatch-Waxman Act While Resolving Antitrust Issues in Phamraceudical Patent Settlement Cases, 18 Alb. L.J. Sci. & Tech. 441, 444 (2008)14 Id. at 44515 Id16 C. Scott Hemphill, Paying for Delay: Pharmeceutical Patent Settlements as a Regulatory Design Problem, 81 N.Y.U.L. Rev. 1553, 1557 (2006)17 Hereinafter “FTC”

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laws.18 The FTC takes a position that these arrangements artificially inflate the cost to the

consumer by placing and unlawful restriction on trade within the pharmaceutical industry; so

much so that not only does it file direct action against the name brand developers, the FTC

regularly files amicus briefs in most major private litigation regarding this subject.19 Legislation

regulating pharmaceutical patents has been passed which greatly affect the drug patent scheme;

however, these laws gave rise to the settlement agreements described above and the antitrust

implications of settlements have not been directly addressed by Congress.20

The Sherman Antitrust Act states that “Every contract, combination in the form of trust

or otherwise, or conspiracy, in restraint of trade or commerce among the several States, or with

foreign nations, is hereby declared to be illegal.”21 It is not too far of a logical jump to view

these reverse payments as a restraint of trade and a threat to competition. Considering the large

amount of money involved in the pharmaceutical industry, these arrangements are heavily

scrutinized and pursued by regulators because of their effect on the national and world economy.

These arrangements may not only have an effect on the economy but may affect the

availability of medications, especially in times of local and global heath crises. One of the

greatest fears in public discussion today is the threat to the world population of diseases on an

epidemic or even pandemic level. This fear is not new to the human race and has occupied a

level of awareness in society that multiple non-profit organizations as well as national and

international government organizations exist to combat the next and potentially last infections

disease.

18 C. Scott Hemphill, Paying for Delay: Pharmaceutical Patent Settlements as a Regulatory Design Problem, 81 N.Y.U.L. Rev. 1553, 1557 (2006)19 Scott Backus, Comment, Reversing Course on Reverse Payment Settlement in the Pharmaceutical Industry: Has Schering-Plough Created the Blueprint for Defensible Antitrust Violations?, 60 Okla. L. Rev. 375, 376 (2007)20 Susan Schipper, Note, The Supreme Court of the United States: Bad Medicine: FTC v. Activis, Inc. and the Missed Opportunity to Resolve the Pay-for-Delay Problem, 73 Md. L. Rev. 1240, 1245-47 (2014)21 Sherman Antitrust Act, 15 USC § 1

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While this current worry is of the Ebola virus, there have been numerous health scares

since the beginning of society. In the Middle-Ages, the government executed numerous policies

to combat the spread of the black plague, a disease which killed 38% of England’s population in

the late 1340s22. While we have technologically advanced, the policies and methods have not

evolved much in the many years organized society has functioned. Plague Doctors paid by the

state have been replaced with charitable doctor organizations and assistance from the military of

the developed world.23 It is no longer a feudal lord who enforces quarantine, but the

governments of the world at every level who restrict travel and use force when necessary to

prevent the spread of these infections.24 While no one yet has a patented cure for the Ebola virus,

many are working on it. There are cures in development that have already shown promise25 but

this begs an interesting question: do we allow a company who has a technical monopoly through

their patent to not license the antivirus for production by other manufacturers and charge

whatever the market will bear? Or do we take the utilitarian/egalitarian approach and make the

drug widely available despite the patent-holders rights to compensation for the use of their

intellectual property? If we take the first approach, to what end to we allow these companies to

exercise market power over the public? If we take the second, do we risk destroying the

motivation for innovation in the pharmaceutical realm?

With the conflict of exercising intellectual property right and antitrust liability a company

may face in exercising those rights, the subsequent sections of this paper will examine the

22 Chris Trueman, The Black Death of 1348 to 1350, http://www.historylearningsite.co.uk/black_death_of_1348_to_1350.htm23Dan Lamothe, Meet the new U.S. military force that Obama is deploying to fight Ebola, The Washington Post (Sept. 16, 2014) http://www.washingtonpost.com/news/checkpoint/wp/2014/09/16/meet-the-new-u-s-military-force-that-obama-is-deploying-to-fight-ebola/24 Adam, Nossiter, Sierra Leone to Impose 3-Day Ebola Quarantine, The New York Times (Sept. 6, 2014) http://www.nytimes.com/2014/09/07/world/africa/sierra-leone-to-impose-widespread-ebola-quarantine.html25 Maggie Fox, What Cured Ebola Patients Kent Brantly and Nancy Writebol?, NBC News (Aug. 21, 2014, 2:51 PM) http://www.nbcnews.com/storyline/ebola-virus-outbreak/what-cured-ebola-patients-kent-brantly-nancy-writebol-n186131

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http://www.historylearningsite.co.uk/black_death_of_1348_to_1350.htm


current state of these laws in the courts and prescribe which side of the scale should hold more

weight in these cases involving the pharmaceutical developers. With the advent of new

pharmaceutical compounds, drug delivery systems, and medical technologies, the law needs

more uniformity between the circuit courts as we push into new territories of healthcare.

Current State of the Law

The conflict of patent and antitrust can be summed up by the ancient paradox of what

happens when an unstoppable force meets an immovable object? This conundrum has been

pondered by Chinese philosophers of the 3rd century B.C.26, Frank Sinatra27, Batman and the

Joker28, and federal judges after the Hatch-Waxman Act. The policies and aims of the two

regimes are in conflict with each other and are both very powerful forces in the American legal

battlefield. Both bodies of law are guided by strong legal, economic, and utilitarian principles.

The following is a description of the development and current status of the legal realms relevant

to the conflict at hand.

Patent Law

From the founding of the United States, innovation has been encouraged and protected.

The Constitution authorizes Congress “[t]o promote the Progress of Science and useful Arts, by

securing for limited Times to Authors and Inventors the exclusive Right to their respective

Writings and Discoveries.”29 From Benjamin Franklin to Steve Jobs, inventors and innovators

have thrived in America and the products of their minds and hard work have been protected by

the patent law system. The driving theory behind patent law is one of incentive based in natural

26The complete works of Han Fei Tzŭ, http://www2.iath.virginia.edu/saxon/servlet/SaxonServlet?source=xwomen/texts/hanfei.xml&style=xwomen/xsl/dynaxml.xsl&doc.view=tocc&chunk.id=tpage&toc.depth=1&toc.id=d2.20&doc.lang=bilingual27 Frank Sinatra – Lyrics to “Something’s Got to Give”28 Exchange between “batman” and “the joker” in the 2008 Warner Bros. movie “The Dark Knight”29 US Const. Art. 1, Sec. 8

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law; without the protections guaranteed by a patent, an inventor would not be motivated to create

or produce new and lucrative products.30 A substantial part of the patent system is to incentivize

invention by granting a monopoly, during which the inventor may recoup development costs and

profit from the product of their mind.31 A patent is part of the body of law referred to as

intellectual property. Once a patent is granted by the Patent and Trade Office, the patentee has

“the right to exclude others from making, using, offering to sell, or selling the patented invention

within the United States or importing into the United States the patented invention.”32

Pharmaceutical patents are at a much greater risk of infringement than most other

inventions. Unlike many advanced technological patents, once the formula of a new drug is

known, it is fairly easy and inexpensive to reproduce and manufacture without the costs

associated with research and development or backwards engineering.33 As amateur chemists in

methamphetamine industry have shown us, once a chemical compound for a drug is known, the

production can be very simple to accomplish. This differs from other patents in high tech

industries where the technological ability required to make an iPhone requires complex

manufacturing facilities and highly specialized machinery. The costs of research and

development, FDA mandated trials, and regulatory filings make the right of exclusivity

protection guaranteed by patent protection critical for the further viability of advancing

pharmaceutical technology.34

30 Robert P. Merges, Peter S. Menell & Mark A. Lemley, Intellectual Property in the New Technological Age 131 (Vicki Been et al. eds., 6th ed. 2012)31 Wansheng Jerry Liu, Balancing Accessibility and Sustainability: How to Achieve the Dual Objectives of the Hatch-Waxman Act While Resolving Antitrust Issues in Phamraceudical Patent Settlement Cases, 18 Alb. L.J. Sci. & Tech. 441, 462 (2008)32 Id.33 C. Scott Hemphill, Paying for Delay: Pharmeceutical Patent Settlements as a Regulatory Design Problem, 81 N.Y.U.L. Rev. 1553, 1562-63 (2006)34 Id. at 1563-64

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To help maintain clarification in the industry, New Drug Applications35 are listed in the

“Approved Drug Products with Therapeutic Equivalence” publication also known as the “Orange

Book” maintained by the FDA.36 An NDA can cover a new drug substance (active ingredient), a

new drug product (formulation or composition), or a method of use; these patents and relevant

information to the patent such as granting date are cataloged in the Orange Book.37 The Orange

Book is critical for both the pioneer developer and the generic manufacturer. When a generic

manufacturer launches a patent infringement action against a patent holder listed in the Orange

Book, the patent holder can invoke a temporary stay against approval of the ANDA to give the

holder time to legally challenge the generic manufacturer for patent infringement.38

Additionally, when an ANDA files a clarification, it must do so under the patent listed in the

Orange Book.39 The FDA views its role in the pharmaceutical patent realm as purely ministerial,

not one of enforcement.40

Antitrust law

Antitrust law developed over the course of the 19th century in the English common law

system through a progression of a tort charge of conspiracy to a criminal doctrine of law with the

goal of restraining labor unions.41 Simultaneously, on the other side of the pond, American

businessmen were building companies and trusts into powerhouses of economic activity. Called

captains of industry by some and robber barons by others, the names Carnegie, Chase, Ford,

Rockefeller, and Vanderbilt are woven into the fabric of American history of the time.42

35 Hereinafter “NDA”36 Jacob S. Wharton, “Orange Book” Listing of Patents Under the Hatch-Waxman Act, 47 St. Louis L.J. 1027, 1030 (2003)37 Id.38 Id. at 103139 Id.40 Id. at 103041 E. Thomas Sullivan, Herbert Hovenkamp & Howard A. Shelanski, Antitrust Law, Policy and Procedure 17 (Lenni B. Benson et al. eds., 6th ed., 2009)42 http://www.gilderlehrman.org/history-by-era/gilded-age/essays/robber-barons-or-captains-industry

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Reacting to what many viewed as conspiratorial and monopolistic practices, Congress passed the

Sherman Antitrust Act in 1890 “to protect consumers from the high prices and reduced output

cause by the monopolies and cartels.”43 Unlike many of our contemporary statutes, the Sherman

Antitrust Act is very short and Congress allowed the courts to define and develop the regime of

antitrust law. While the first targets of antitrust ire were the railroads, steel, and oil companies,

practically every industry today can and will be watched by both the FTC and DOJ antitrust

division for violations of antitrust law, including and especially pharmaceuticals. In passing the

Sherman Antitrust Act, the legislature wanted to address the fear of large corporations using their

economic power to harm the economy and consumers through practices such as monopolization

of markets, price-fixing agreements, and protected territory conspiracies.44 The statutory

language was written very broadly, leaving the courts to develop the body of antitrust law.45

Many courts, including the Supreme Court, have looked at modern antitrust cases through the

lenses of its dual aims of preserving competition and economic efficiency.46

Due to the myriad of factual scenarios in which antitrust action is brought against a

pharmaceutical company, almost every aspect of antitrust law has been tried against them.

Within the realm of pharmaceuticals and antitrust, the most common charge brought against

pioneer and generic manufacturers is a horizontal restraint of trade under Section 1 of the

Sherman Antitrust Act.47 A horizontal restraint of trade occurs when two or more companies

competing in the same market have some sort of agreement that restrains trade; however, the

courts have done a lot of clarifying over the years to refine the broad language of the statute.48

43 Herbert Hovenkamp, Federal Antitrust Policy: The Law of Competition and its Practice 59 (Jesse H. Choper et al. eds. 4th ed., 2011)44 Lawrence Sullivan & Warren Grimes, The Law of Antitrust: an Integrated Handbook 5-8 (Jesse H. Chopper et al. eds. 2nd., 2006)45 Id. at 746 Nothern Pac. Ry. v. United States, 356 U.S. 1, 4 (1958)47 Sherman Antitrust Act, 15 U.S.C. § 148 See Sullivan, Supra note 41, at 163-64

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An example of a horizontal restraint of trade is if all the stores in a city agreed to not sell milk for

under an agreed upon price, especially if that price makes it economically inefficient for a

consumer to drive to the next town over to buy milk for a better price. In most modern instances,

the court will look at the effects an agreement has on competition and the economy in

determining antitrust liability of parties to an agreement accused of violating Section 1 of the

Antitrust Act. Ever since the 1950s, the courts increasingly examine economic and market data

to make determinations about possible anticompetitive effects of the contract, combination, or

conspiracy at issue in the suit.49 A horizontal restraint of trade in the context of the

pharmaceutical industry classifies both pioneer and generic drug manufacturers as direct

competitors, operating in the same market; some of the settlements have been treated as vertical

restraints of trade in which the drug market is bifurcated into pioneer and generic manufacturers

as being two different stages in the marketplace. A vertical restraint of trade occurs when two

companies in different markets make an agreement that restrains trade such as lumber distributor

keeping a black list of contractors they would not do business with because of the contractors

political or personal views. The vertical aspects of the potential antitrust violation come into

play because the generic manufacturer relies on the research and development costs of the

pioneer manufacturer; if only one generic manufacturer is allowed to produce a version of a

pioneer’s drug, this restrains the trade of other generic manufactures.50

There are two standards that the courts apply when examining a potential violation of the

antitrust statutes, per se violations and the rule of reason. Both the circuit courts as well as

numerous academics are split on which standard to apply to pharmaceutical reverse settlement

analysis; although the Supreme Court has had opportunities to address this split, it has so far

49 See Hovenkamp, Supra note 43 at 7150 See Liu, Supra note 31 at 461

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declined to do so. A court takes no extrinsic factors into the consideration when applying a per

se violation rule, if the elements of a violation are met, the defendant is in violation of the law.

A per se violation occurs when there is a class of agreement “whose nature and necessary effects

are so plainly anticompetitive that no elaborate study of the industry is needed to establish their

illegality.”51 The rationale behind a per se rule in antitrust is one of judicial economy; it is

applied when the likelihood of anticompetitive conduct harmful to competition significantly

outweighs the burdens of economic inquiry into the surrounding market landscape of a particular

case.52 Given the increasingly complex issues of antitrust litigation, the courts have consistently

moved away from using a per se rule to the point where it is rarely applied in modern antitrust

jurisprudence. Since not all restraints of trade are harmful, if the court has not specifically

classified a certain practice a per se illegal or if the court is dealing with a new industry or new

practice, the court will apply a rule of reason analysis.53 In a rule of reason analysis, the court

will look at factors such as the purpose of the agreement; the agreement’s effect on the

competition within an industry; and the general economic effects on the consumer in determining

whether a violation of antitrust law is present within the factual scenario a case presents.54

Antitrust law may be enforced by government action both through the DOJ Antitrust

division or FTC; Government enforcement of pharmaceutical antitrust violation is under the

jurisdiction of the FTC and is initially adjudicated before an administrative law judge.55

Antitrust violations may also be brought through private action of parties affected by a violation

of antitrust law such as a competing generic manufacturer56 or a commercial purchaser of

51 States v. Topco Assn., 405 U.S. 596, at 621 (1972)52 Arizona v. Maricopa Cty. Med. Society, 457 U.S. 332, 343-44 (1982)53 See Sullivan, Supra note 41, at 16554 Id.55 The Clayton Act § 1556 See e.g. Abbott Labs. V. Mylan Pharmaceuticals Inc., 37 F.Supp. 2d 1076 (N.D. Ill. 1999), aff’d, 217 F.3d 853 (Fed. Cir. 1999)

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pharmaceuticals.57 The stakes in antitrust litigation can be very high for companies criminally

under the Sherman Act58 and Civilly under the Clayton Act.59

Hatch-Waxman Act

In 1984, the Drug Price Competition & Patent Term Restoration Act60 was passed, also

known as the Hatch-Waxman Act. Senator Orrin Hatch and Representative Henry Waxman

offered the bill that was passed by Congress which amended the Federal Food, Drug, and

Cosmetic Act, 21 U.S.C. §§301-399.61 The Hatch-Waxman Act “emerged from [C]ongress’

effort to balance two conflicting policy objectives: to induce name brand pharmaceutical firms to

make the investment necessary to research and develop new drug products, while simultaneously

enable competitors to bring cheaper, generic copies of those drugs to market.”62

The greatest change brought about by this legislation was the allowance of generic

pharmaceutical manufacturers to file an Abbreviated New Drug Application63 with the FDA.64

This allowed the generic drug manufacturer to produce a generic version of a pioneer drug

relying on the research and testing done during the New Drug Application filed by the inventing

drug company.65 The generic drug manufacturer need only to prove that its version is chemically

identical, or “bioequivalent”, of the original drug.66 Most of the drugs that generic manufacturers

sought to produce were still protected by a patent. Because of this the statute requires a 57 See e.g. Louisiana Wholesale Drug Co. v. Hoechst Marion Roussel, Inc. (In re Cardizem CD Antitrust Litig.), 332 F.3d 896 (6th Cir. 2003)58 Sherman Antitrust Act, 15 U.S.C. § 1 – “Every person who shall make any contract or engage in any combination or conspiracy hereby declared to be illegal shall be deemed guilty of a felony, and, on conviction thereof, shall be punished by fine not exceeding $100,000,000 if a corporation, or, if any other person, $1,000,000, or by imprisonment not exceeding 10 years, or by both said punishments, in the discretion of the court.”59 Clayton Act, 15 U.S.C. § 15 – “Whenever the United States is hereafter injured in its business or property by reason of anything forbidden in the antitrust laws it may …, without respect to the amount in controversy, and shall recover threefold the damages by it sustained and the cost of suit”60 Drug Price Competition & Patent Term Restoration Act Pub. L. No. 98-417, 98 Stat. 1585 (1984)61 See Louisana Wholesale Drug Co., 332 F.3d at 90162 Abbott Labs. v. Young, 920 F.2d 985, 991 (D.C. Cir. 1990)63 Hereinafter “ANDA”64 See Liu, Supra note 31 at 44765 Id.66 See Liu, Supra note 31 at 448

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clarification be submitted with the ANDA stating the position of the patent covering the NDA as

“(I) that such patent information has not been filed, (II) that such patent has expired, (III) of the

date on which such patent will expire, or (IV) that such patent is invalid or will not be infringed

by the manufacture, use, or sale of the new drug.”67 Before a generic version of a drug can be

produced by the generic manufacturer, the patent for the NDA must expire or a court must render

a decision on the infringement case in favor of the ANDA applicant pursuant to a patent

infringement lawsuit under a paragraph IV clarifiaction.68

Since most pharmaceutical developments are patented and most generic manufacturers do

not want to sit around and wait for the pioneer drug manufacturer’s patent to expire, the most

common clarification in an ANDA is a paragraph IV clarification. The statute both rewards

generic manufacturers who win these suits and attempts to protect the rights of a patent holder

from the assault on their intellectual property. When a generic manufacturer files a ANDA with

a paragraph IV clarification, this is automatically considered an act of patent infringement for

which the patent holder has forty-five days to begin a patent infringement lawsuit against the

filer.69 Once a patent infringement action is filed, the NDA holder is granted an automatic thirty-

month stay on the FDA’s approval of the generic manufacturers ANDA so that the patent holder

may defend its patent in court.70 Generic drug manufacturers have sought to invalidate patents

on theories such as the patent was “procured inequitably, or inherently anticipated by the prior

art, or because the drug’s initial testing violates the public use bar.”71 To incentivize the generic

drug manufacturers to challenge the validity of the pioneer developer’s patent; the statue creates

an incentive or bounty for the generic manufacturer to mount a paragraph IV clarification

67 21 U.S.C. §355(j)(2)(A)(vii)68 See Liu, Supra note 31 at 44969 21 U.S.C. §355(j)(5)(B)(iii)70 21 U.S.C. §355(j)(5)(B)(iii)71 See Hemphill, Supra note 33 at 1565

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challenge. The first ANDA filer to obtain a paragraph IV clarification is granted a 180-day

exclusivity period;72 this creates a duopoly where only the original NDA filer and the first

ANDA filer may profit from the sale of the drug.73 Because of the balance of risk verses reward

in seeking this bounty many generic drug manufacturers will launch challenges simultaneously

to secure the right of the 180-day exclusivity for the first company to secure a paragraph IV

clarification. However, the courts have recognized this imbalance: “the Hatch-Waxman

Amendments grant generic manufacturers standing to mount a validity challenge without

incurring the cost of entry or risking enormous damages flowing from any possible

infringement.”74

With the complexity, cost, and risk of these proceedings, a practice of reverse settlements

has emerged between pioneer pharmaceutical developers and generic drug manufacturers. In a

reverse settlement, the pioneer developer gives either money or a license to another one of its

drugs to the generic manufacturer in exchange for an agreement by the generic manufacturer to

delay production of a generic alternative to a name brand drug. Two conditions must be present

for a reverse settlement to be economically advantageous to the parties: first is the gain from the

trade, in that the patentee loses more from the infringer’s early entry than the alleged infringer

gains; second is that the settlement must offer an effective means to delay entry.75

Current treatment of Reverse Settlements

There is currently a split in the circuit courts as to how to view these settlements and their

treatment in court. The minority view is that of the 6th Circuit as illustrated in Louisiana

72 21 U.S.C. §355(j)(5)(B)(iv)73 See Hemphill, Supra note 33 at 156674 In re Ciprofloxacin Hydrochloride Antitrust Litig., 261 F.Supp. 2d 188 at 251 (E.D.N.Y. 2003)75 See Hemphill, Supra note 33 at 1580 and 1582

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Wholesale Drug Co. v. Hoechst Mirion Roussel, Inc.76 That case involved an agreement between

the pioneer manufacturer Hoescht Marion Roussel, Inc. and a potential generic manufacturer

Andrex Pharmaceuticals, Inc. regarding the prescription drug Cardizem CD.77 Andrex was the

first generic manufacturer to file an ANDA seeking a paragraph IV clarification which was

tentatively granted by the FDA and would be approved when, either the court ruled on its patent

infringement action or upon the expiration of the thirty-month stay.78 Subsequent to the FDA’s

tentative approval, the two parties made an agreement on the following terms:

Andrx would not market a bioequivalent or generic version of Cardizem CD in the United States until the earliest of: (1) Andrx obtaining a favorable, final and unappealable determination in the patent infringement case; (2) HMR and Andrx entering into a license agreement; or (3) HMR entering into a license agreement with a third party. Andrx also agreed to dismiss its antitrust and unfair competition counterclaims, to diligently prosecute its ANDA, and to not "relinquish or otherwise compromise any right accruing thereunder or pertaining thereto," including its 180-day period of exclusivity. In exchange, HMR agreed to make interim payments to Andrx in the amount of $ 40 million per year, payable quarterly, beginning on the date Andrx received final FDA approval. HMR further agreed to pay Andrx $ 100 million per year, less whatever interim payments had been made, once: (1) there was a final and unappealable determination that the patent was not infringed; (2) HMR dismissed the patent infringement case; or (3) there was a final and unappealable determination that did not determine the issues of the patent's validity, enforcement, or infringement, and HMR failed to refile its patent infringement action. HMR also agreed that it would not seek preliminary injunctive relief in the ongoing patent infringement litigation.79

The plaintiffs in the case, a group of direct and indirect buyers of prescription drugs, filed an

antitrust case against the parties to the agreement.80

The court only acknowledged the patent holder’s right in so far as framing the case in the

context of the problem presented under the framework of the Hatch-Waxman Act, but observed

76 Louisiana Wholesale Drug Co. v. Hoechst Marion Roussel, Inc. (In re Cardizem CD Antitrust Litig.), 332 F.3d 896 (6th Cir. 2003)77 Id. at 89978 Id. at 90279 Id. at 90380 Id. at 899

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that the agreement present in this case went beyond taking advantage of a monopoly into the

arena of extending a patent holder’s rights to prevent competitors from entering the market.81

The conclusion reached was “that the agreement… at its core, [was] a horizontal agreement to

eliminate competition in the market…, a classic example of per se illegal restraint of trade.”82

This conclusion rendered any counter arguments, by the defendants, of procompetitive effects of

the agreement invalid.

A majority of jurisdictions tend to follow the rule set out in Schering-Plough Corp. v.

FTC;83 however, this test has not been adopted by the Supreme Court. In that case the FTC

brought a complaint before an Administrative Law Judge (ALJ) alleging that the agreements

between Schering-Plough and two of its competitors (Upsher-Smith and ESI Lederle) regarding

Schering’s drug K-Dur 20 violated federal antitrust statutes.84 The agreements between the

manufacturers involved not only the exchange of money but also quid pro quo licensing rights to

patents of other drugs held by the competitors.85 The ALJ would not apply the per se rule to the

case in favor of examining the strength of the patent and the extent of its exclusionary power.86

The ALJ determined that the arrangement was not per se illegal but the delay in entrance of

generic competitors in this case would harm competition and consumers.87

On appeal to the 11th Circuit, the court stated that the antitrust claim needed to be looked

at though the context of the existing patent.88 The anticompetitive effects of the agreement may

not extent beyond the patent’s own exclusionary power.89 In line with the 11th Circuit’s previous

81 Id. at 90882 Id.83 Schering-Plough Corp. v. FTC, 402 F.3d 1056 (11th Cir. 2005)84 Id. at 1058-6185 Id.86 Id. at 106187 Id. at 106288 Id. at 106489 Id.

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cases the court declared that the test by which these agreements would be examined would

consider: “(1) the scope of the exclusionary potential of the patent, (2) the extent to which the

agreement exceeds that scope, and (3) the resulting anticompetitive effects.”90 Recognizing the

strong public policy in favor of settlement and not finding evidence that Schering exceeded the

exclusionary power of its patent, the court set aside the ruling of the ALJ for further

proceedings.91

Proposed Approach Under Existing Precedent

The main distinction in the two approaches so far presented by the circuit courts is the

recognition as to the extent of the property rights conferred on the patent holder. The intellectual

property rights possessed by the pioneer pharmaceutical developer distinguish this problem of

antitrust law since, but for the patent, these agreements would be a textbook violation of Section

1 of the Sherman Antitrust Act. The scale of antitrust liability and intellectual property rights is

tipped to either side depending on approaches taken by differing circuit courts.

The 6th Circuit approach in Louisiana Wholesale Drug Co. all but ignores the rights of a

patent holder to license its product or exclude a competitor from producing the same product

without compensating the inventor. The court applied a per se violation rule that does not take

into account the intent behind the restraint, any claimed pro-competitive justifications, or the

restraint’s actual effects on competition.92 The opinion justifies its application of a per se

antitrust violation under the illusion that the courts have had enough experience with this type

restraint of trade that it can predict with confidence that the rule of reason will condemn the

action taken by the alleged violator.93 The difficulty with this approach is that this problem of

reverse settlement was created by relatively recent legislation compared to history of antitrust 90 Id. at 1066, quoting Valley Drug Co. v. Geneva Pharms., 344 F.3d 1294, 1312 (11th Cir. 2003)91 Id. at 107692 Louisiana Wholesale drug Co. at 90693 Id. at 906

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jurisprudence, these types of settlements did not exists before the passing of the Hatch-Waxman

Act. The Act created a complex regime that the market reacted to by coming to these settlements

to deal with the high cost of litigation and the protection of the pioneer developer’s rights

guaranteed by the granting of a patent. To further illustrate that the court does not have the

necessary experience to deal with the problem presented in this case with a per se rule, the court

does not cite any cases involving the intersection of antitrust liability and intellectual property

rights. In proceeding with its analysis while ignoring the intellectual property half of the

equation, the reasoning for application of the per se rule should be called into question. The

destruction of patent law through this approach presents a danger of a pioneer drug developer

being disincentivized from investing in innovative drugs if the court will not protect its interest

or at least examine the reasons for protecting its intellectual property.

The 11th Circuit took a much different approach to the judicial examination of the

problem reverse settlements presented to the court in Schering-Plough Corp. The court made

clear that the existence of one party’s rights conferred by a patent distinguishes these reverse

settlements from other bare forms of anticompetitive behavior.94 This distinction gave the parties

to the settlement at least a fighting chance in court to defend their right to profit from the product

of their labors while not shielding them completely from antitrust liability. The court rejected

the per se rule and the traditional rule of reason as neither were well equipped to consider the

variable of a patent holder’s rights. In the spirit of the rule of reason, a new rule was tailored to

examine the interaction between the antitrust and patent statutes created by the reverse

settlements. The first step was to define what rights the patent granted its holder.95 Next, the

extent to which the agreement exceeded the scope was taken into consideration; the exceeding

94 Schering-plough at 106495 Id. at 1066

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power exercised was then looked at for its anticompetitive effect on the market.96 The reason for

the new test was the court wanted to prevent antitrust liability from undermining the

encouragement of innovation and disclosure while protecting the market from allowing a patent

holder to exercise power beyond the scope granted by the patent.97 This approach has so far been

effective at protecting the property rights of the patent holder while curbing abusive agreements

in the market.

The reason that intellectual property holders must be given separate treatment under

antitrust law lies in the principles underlying the value of a patent. The Natural Law and Labor

Theory underpinning John Locke’s writing reasons that a man is entitled to the products of his

labor.98 The product earned by the sweat of a man’s brow creates a distinction between that

which is his and that which is held in common.99 Locke illustrates this basic principle of

property with an example of a man gathering acorns: by expending his effort to take them out of

nature; he has claimed them as his property through his effort. While the product of a person’s

mind is not as tangible as acorns gathered, it still deserves protection under the law. The grant of

a patent is establishes protection of a person’s intellectual property and recognizes that the holder

expended time, effort, and use of knowledge acquired. The patent gives the holder the right to

profit from fruits of their labor. This system promotes motivation for innovators to continue to

produce. If patent law did not exist, when an inventor saw his product on a shelf and was not

compensated for the effort expended on it, he would feel like a man who spent all day gathering

acorns only to have them taken from him without being paid for his effort. This may demoralize

the inventor from further pursuits of ingenuity. When applying these principles to the

pharmaceutical industry, one must take into account the billions of dollars spent on research and 96 Id.97 Id. at 106498 John Locke, Two Treaties of Government, in Perspectives on Property Law 36, 36 (Robert Ellickson ed.,2014)99 Id. 37

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development, educational expenses of experts hired, and the costs associated with government

administration and regulation of the market. These add up to give a pharmaceutical patent great

value.

As Milton Friedman shows, there must be an umpire to settle disputes and for that we

have a government, a system of law, and a court system to apply those laws.100 Most view

competition in markets as good for the both the country’s economic freedom and the lives of the

citizens of the country. To preserve competition and prevent monopolies or conspiracies that do

harm to the participants of the market, a regime of antitrust laws are in place.101 However, some

monopolies are results of technical conditions from which that monopoly is born through

innovation or efficiency.102 A patent grants a legal monopoly in these situations to protect labor

and continue the drive of innovators and entrepreneurs. As long as it is not abused, patent rights

should be recognized and enforced. This guarantee of the right of exclusion granted by the

patent also encourages other inventors to continually develop new products and methods. As

Ayn Rand stated, “Competition is a by-product of productive work, not its goal. A creative man

in motivated by the desire to achieve, not by the desire to beat others.”103

With the economic stakes and wild disparity of treatment for the same action, there is a

great necessity for the Supreme Court to rule on the correct test that reverse settlements are to be

judged. The relationship between patent and antitrust law is a complex balancing act, but to

preserve the rights of an inventor, antitrust should yield more to patent law that the other way

around. The best vehicle to accomplish this would be the three-part test in Schering-Plough.

100 Milton Friedman, Capitalism and Freedom, in Perspectives on Property Law 52, 52-55 (Robert Ellickson ed.,2014)101 Id. 61102 Id.103 Any Rand, “The Moratorium on Brains,” The Any Rand Letter

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The per se rule under is greatly weakened by its destruction to the property rights of the

patent holder as well as the lack of cases regarding these types of settlements to apply a per se

rule. Proponents of the per se rule often point to the social cost of these settlements, also referred

to as consumer harm.104 Many look at the anticompetitive nature by which these settlements

harm competition by keeping alternative products off the market, leading to less consumer

choice and subsequent inflated prices attributed to lack of competition. This is somewhat

comparative to the tragedy of the commons often referred to in examining property law. This is

a situation where a person exercising an individual property right harms the collective society.105

Many times these proponents offer a justification of necessity, especially when it comes to the

field of pharmaceuticals, arguing that a drug developer’s right to make a profit should not trump

the worth of a person’s life. The problem with this argument lies in the damaging of an

inventors property rights and subsequently the obliteration of their motivation to continue

coming up with newer treatments.

The 11th Circuit approach provides a much better balance between the property rights of

pioneer pharmaceutical developers and the preservation of corrective action in cases where a

patent holder is abusing the rights conferred by patent. This approach provides the patent holder

a chance in court to justify the settlement and protect the products on which they spent

considerable resources on. This test would also allow developers and generic manufactures to

avoid litigation costs and further the public policy toward settlement since a per se rule would

prevent reverse settlements and force patent infringement litigation.106 This approach has also

been adopted by the Second Circuit in In re Tamoxifen.107

104 Scott A. Backus, Comment, Reversing Course on Reverse Payment Settlements in the Pharmaceutical Inductry: Has Schering-Plough Created the Blueprint for Defensible Antitrust Violations, 60 Okla. L. Rev. 375, 405 (2007)105 Garrett Hardin, The Tragedy of the Commons, in Perspectives on Property Law 99, 99-103 (Robert Ellickson ed.,2014)106 See Backus, Supra note 104 at 408107 In re Tamoxifen Citrate Antitrust Litig., 466 F.3d 187, 205-213 (2d Cir. 2006)

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Recommendation for Additional Research for Alternative Approach

A limitation of the courts inherent in our separation of powers structure of our

government is that courts are discouraged from making legislative recommendation about the

wisdom of a particular law. The scholarly work pertaining to the Hatch-Waxman Act examines

the effects within the contexts of the legislation’s history, purpose, and the courts’ treatment of

the issues arising from it. Especially considering the economic analysis of antitrust problems, an

examination of the economic expenses of the litigation resulting from the emerging regulatory

scheme of the act and actions taken by both developing inventor and generic producer of

pharmaceuticals should be undertaken. While that research is well beyond the scope of this

paper, it would be wise to see if the Hatch-Waxman Act has accomplished its goals of bringing

down the cost of drugs to the consumer since it appears to have failed to provide solid protection

for patent holders in the pharmaceutical industry. The effect on innovation should also be

examined in further research. If the pre-Hatch-Waxman Act system was in place of traditional

patent law, would companies research alternative methods to cure the same problems? In many

cases there are multiple solutions to the same medical aliment, for examples look at medications

for high blood pressure or erectile dysfunction. How much money have pioneer drug

manufacturers paid to generic manufacturers in settlements and lawyers to defend their

intellectual property, antitrust liability, and settlements? These factors should be heavily

weighed and the repeal of the Hatch-Waxman Act should be considered.

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Christopher Snyder The Hatch-Waxman Act - Pharma Patents and Antitrust Liability

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