Reverse payment settlement agreements create antitrust problems
The Third Circuit Court of Appeals in In re: Lipitor Antitrust Litigation., 868 F.3d 231 (3d Cir. 2017) and 855 F.3d 126 (3d Cir. 2017), has held that the district court erred in dismissing the class action lawsuits. The case involved consumer claims under the Hatch-Waxman Act that the companies that own the Lipitor and Effexor XR patents engaged in monopoly acquisition and compliance litigation against generic manufacturers to avoid competition. The claims arise under antitrust law, not patent law, so they correctly stayed in the Third Circuit Court of Appeals instead of being decided in the Federal Circuit Court of Appeals.
The allegations of fraudulent acquisition and enforcement of patents did not arise under patent law, the Third Circuit held, denying motions to transfer the Hatch-Waxman cases to the Federal Circuit. 855 F.3d 126, 134 (3d Cir. 2017). The purpose of the regulatory framework, he noted, was to encourage generic drug competition, ensure public safety and provide incentives for the manufacture of generic drugs. Congress sought to encourage generic drug manufacturers to challenge weak patents by enacting the Drug Price Competition and Patent Term Restoration Act (known as the Hatch-Waxman Act).
The law requires brand name drug manufacturers to submit a new drug application to the FDA. If the application is approved, a generic manufacturer can file an abbreviated New Drug Application with a certification that it does not infringe the manufacturer’s initial patents. If the generic has the same active ingredients and is the biological equivalent of the brand name drug, it does not need to undergo the rigorous testing that is required for the brand name drug.
There is no patent infringement if, in fact, the patent has expired, is invalid, or for some other reason will not be infringed by the generic. If the brand manufacturer disagrees, you can file a patent infringement lawsuit against the generic manufacturer; the FDA will not approve the generic for at least 30 months. The first generic manufacturer to file the Abbreviated New Drug Application has an exclusive six-month period to produce the generic drug before other competitors can market their versions of the drug.
But an unexpected danger with such a system is that it can encourage collusion between brand-name and generic manufacturers. On FTC v. Actavis, Inc., 133 S. Ct. 2223, 2227, 186 L. Ed. 2d 343 (2013), the Supreme Court held that payments from patent holders to infringers through “reverse payment arrangements” are subject to antitrust claims. In a reverse payment settlement arrangement, the brand manufacturer pays the generic manufacturer not to produce the drug, allowing the brand to continue to charge the higher price for the drug. This creates an antitrust conspiracy, because the generic manufacturer is getting paid for not competing.
In the Third Circuit cases, here’s what consumers said happened: The makers of Lipitor and Effexor XR had paid generic makers not to compete with brand-name products. The Third Circuit first held that the antitrust charges arose under competition law, not patent law. Although patent law would have to be considered, the case did not have to be transferred to another court, which would lead to further delays. But the appeals court held that the record did not clearly show federal diversity jurisdiction, requiring the trial court to determine whether federal courts have jurisdiction. On remand, the lower court dismissed the complaints in the cases against the manufacturer of Lipitor and the manufacturer of Effexor XR.
The Third Circuit reversed the district court again, and held that the Lipitor plaintiffs filed a plausible claim that the companies engaged in illegal reverse payment settlement agreements. 868 F.3d 231, 253, 258 (3d Cir. 2017). The alleged illegal reverse payment arrangement occurred when the company that makes Lipitor pays the generic manufacturer that lacks a valid claim for damages. When the patent holder and the generic manufacturer make a deal to avoid competition, the antitrust law is violated. So the matter is back in the court of first instance.
