Pay-for-Delay Deals After FTC v Actavis: Is a “Presumption of Invalidity” Next or a Complete Ban?

On July 23, 2013, the Senate Judiciary Committee’s Subcommittee on Antitrust, Competition Policy and Consumer Rights held a hearing titled “Pay-for-Delay Deals: Limiting Competition and Costing Consumers.” The hearing was held in the wake of the June 17, 2013 decision in FTC v Actavis, Inc., where the U.S. Supreme Court held that “pay-for-delay” settlements (also known as “reverse payment” or “exclusion payment” settlements) between brand and generic drug manufacturers may violate antitrust laws, even if the settlement agreement falls within the scope of the patent. The subcommittee hoped to gain further insight as to whether the Senate should go beyond the Supreme Court’s Actavis ruling and consider legislation creating a presumption that all these settlements are invalid or go even further and ban them outright.

Supreme Court’s Rule-of-Reason Scrutiny

According to the Supreme Court, under the “scope-of-the-patent” test, “absent sham (patent) litigation or fraud in obtaining the patent, a reverse [pay-for-delay] payment settlement is immune from antitrust attack so long as its anticompetitive effects fall within the scope of the exclusionary potential of the patent.” In its June decision, the Supreme Court found no basis to support the scope-of-the-patent standard. Instead, the Court ruled that pay-for-delay agreements are appropriately subject to “rule-of-reason” scrutiny, the standard applied to most antitrust actions, under which the court considers evidence that the agreement harms consumers (drug purchasers).

 Background

Under the Hatch-Waxman Act, a generic drug manufacturer must file an abbreviated new drug application (ANDA) with the FDA in order to introduce a generic version of a branded drug. The Act then allows the brand drug manufacturer, when it is protected by a patent, to file a patent infringement suit against the generic manufacturer who filed the ANDA. The core concern with these pay-for-delay settlements is that the brand manufacturer pays its potential generic competitor to abandon a patent challenge and delay entering the market with a lower cost generic product. The “relevant competitive harm,” according to the Supreme Court in Actavis, is that these agreements will allow the brand manufacturer to “prevent the risk of competition” by splitting monopoly profits with the generic applicant.

 Senate Bill 214

S. 214, the Preserve Access to Affordable Generics Act, introduced February 4, 2013, goes beyond the Supreme Court’s rule-of-reason scrutiny and would allow the Federal Trade Commission (FTC) to bring an antitrust action with a presumption that the pay-for-delay agreements are invalid. The parties to the agreement would then have to demonstrate (by clear and convincing evidence) that the procompetitive benefits of the agreement outweigh the anticompetitive effects on the consumer.

Key Testimony

Edith Ramirez, Chairwoman of the FTC, focused her subcommittee testimony on the Supreme Court’s ruling, its impact on the FTC’s pay-for-delay enforcement agenda, and her support for S. 241. She testified that the Court’s decision in Actavis confirms that these settlements harm competition and consumers. She vowed that the FTC will continue to aggressively prosecute these anticompetitive agreements. She stated her belief that passage of S. 214 would help the FTC by allowing it to begin its prosecution with a presumption of invalidity.  She feels that this presumption would reduce FTC time and effort in each case by putting the burden on the brand and generic drug manufacturers to rebut the presumption.

Robert G. Romasco, President of AARP; Michael Russo, Federal Program Director, U.S. Public Interest Research Group (PRIG); and Michael A. Carrier, Distinguished Professor, Rutgers University School of Law all testified in support of legislation that would create a presumption of invalidity.  However, Diane E. Bieri, partner at Arnold & Porter LLP, appearing before the subcommittee on behalf of the Pharmaceutical Research and Manufacturers of America (PhRMA), testified that S. 214’s presumption of invalidity is unnecessary and inconsistent with long-standing principles of antitrust and patent law.

Jonathan M. Orszag, Senior Managing Director, Compass Lexecon, LLC, and a member of President Bill Clinton’s National Economic Counsel, testified in support of the Supreme Court’s rule-of-reason scrutiny. According to Orszag, it would “make economic sense for the courts hearing these [patent infringement] cases to make an initial inquiry into two fundamental questions: First, is there easily obtained and interpreted evidence that the patent is very strong? Second, is the reverse payment consistent with the expected litigation costs of the brand manufacturer, inclusive of the costs of bearing the litigation risk (i.e., the benefits of reduced uncertainty that the branded manufacturer obtains from settling)?”  Orszag concludes that “if the patent is very strong, then whatever the reason for the settlement, it cannot likely reduce competition.” Likewise, according to Orszag, “the basis for suspicion about the settlement also crumbles if the payment does not exceed the patent holder’s expected litigation costs plus the benefits of reduced uncertainty that the patent holder obtains from settling the litigation.”

Last, but certainly not least, was the impressive testimony of Sumanth Addanki, PhD, Senior Vice President, NERA Economic Consulting. According to Addanki, “. . . the fact of a so-called reverse payment does not convey much information about whether a given settlement is actually better for consumers than the alternative of litigating the patent. For reasons thoroughly discussed in the economic literature, a patentee may well make a ‘reverse payment’ and still agree to an entry date that is better for consumers because it is earlier than the expected outcome under the litigation alternative: risk aversion, divergent views about the strength of the patent or future market developments or the time value of money are some of the factors that can engender this outcome.” Addanki suggested that passage of S. 214 was an overreach, stating in his prepared testimony that “S. 214 in its current form needs to be modified in three respects if it is to lead to the right economic outcomes. First, a reverse payment does not necessarily imply any anticompetitive effect, so the presumption of anticompetitive effects should be dropped. Second, the relevance of the underlying patent suit to any competitive analysis of a given settlement of that suit needs to be recognized explicitly and given due weight in the analysis prescribed by the bill. Finally, and perhaps most important, the bill needs to acknowledge the importance of the monopoly power screen and give due weight to that screen in the analysis of any settlement.”

An Outright Ban?

None of the subcommittee witnesses would take the bait of Committee Chairman Sen. Amy Klobuchar (D-Minn), who seemed interested in gaining support for an outright ban of these pay-for-delay agreements, rather than the mere presumption of invalidity contained in S. 214.