Patent Challenges

The Federal Trade Commission is urging a reform-minded Congress to ban so-called reverse-payment patent settlements, creating an uncertain legal environment for companies pursuing these popular deals. To make matters even dicier, while the FTC is staunchly opposed, the courts and the Antitrust Modernization Committee, a government agency, have come out in support of to these agreements as an avenue for brand and generics companies to resolve their differences without messy litigation.

"Reverse payment" deals--in which an innovator company pays a generics maker to delay market entry--have become more common since 2005, when two appellate courts concluded that the settlements are not anticompetitive. Since then, 14 of the last 28 deals between brand and generics companies have included some sort of pay-for-delay provision.

"There was a historic divide between the FTC and the justice department," said Jesse Markham, a partner at law firm Morrison & Foerster who specializes in antitrust cases. "It's a terribly murky environment for both the brand name company and the generics company."

Under Hatch-Waxman, generics companies are encouraged to look for holes in an innovator's patent--and if they're successful, their product gets six months of marketing exclusivity before other generics can enter the picture.

"The difference between the brand's loss and the generic's gain is the money consumers save," testified FTC Commissioner Jon Leibowitz in front of the Senate Judiciary Committee. "By eliminating the potential for competition, the parties can share the consumer savings that would result if they were to compete."

Leibowitz added that generics companies win about 73 percent of patent challenges against innovator companies, citing figures showing that consumers saved more than $9 billion as a result of challenges to the patents of four blockbuster drugs. And he implored the Senate to enact legislation introduced by senators Herb Kohl (D-WI), Patrick Leahy (D-VT), Chuck Grassley (R-IA), and Charles Schumer (D-NY) that would ban reverse-payment deals.

Pay-for-delay supporters, however, argue that the deals still shave time off a brand's patent--so consumers still save money. "As long as the delay is within the scope of the patent, I think those agreements should be permitted," said Carlton Varner, an attorney at Sheppard, Mullin, Richter & Hampton, who has litigated antitrust cases in the pharmaceutical industry. "What you have is companies settling and resolving their differences instead of litigating."

In a move to be more FTC-friendly, deals are getting increasingly creative. Once recent out-of-court settlement between Barr and Shire was so novel that no money even changed hands. Reverting to a barter system, Barr got to launch generic Adderall XR (extended-release mixed amphetamine salts) before Shire lost the patent, while Shire gained European marketing rights to Barr's contraceptive technology.

"A good way to resolve litigation is to enter into some sort of win-win business situation," Markham said. "In general, it's more difficult [for the FTC] to challenge it if there's a real quid pro quo. I think you'll see a lot more of these cases--and it frustrates the FTC."

Reverse-payment deals are not free of risks, however. Bristol-Myers Squibb is still trying to claw its way out of the legal quagmire created when state attorneys general struck down its Plavix (clopidrogel) settlement with Apotex. The agreement included some unusual stipulations to Apotex, including waiving the right for BMS to seek treble damages if the deal fell through and Apotex launched a generic "at risk." As, of course, Apotex famously did.

Companies doing delay-for-pay deals will probably be on solid legal ground as long as they don't exceed the length of the patent, Varner noted. Nevertheless "it is a very unusual situation because you have the FTC and the antitrust commission at odds," he said. The FTC itself admits that it is looking for another test case to bring in front of the courts.