Reverse Pay Settlement Agreements Create Antitrust Problems

The Court of Appeals for the Third Circuit of 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 Hatch-Waxman Act claims by consumers that the companies holding the patents for Lipitor and Effexor XR engaged in monopolistic acquisition and enforcement litigation against generic manufacturers to prevent competition. The claims arise from antitrust law, not patent law, so they remained 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 from it to the Federal Circuit. 855 F.3d 126, 134 (3d Cir. 2017). He noted that the purpose of the regulatory framework was to encourage generic drug competition, ensure public safety, and provide incentives for generic drug manufacturing. 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 Act requires manufacturers of brand-name drugs to submit a New Drug Application to the FDA. If the application is approved, a generic manufacturer may file an Abbreviated New Drug Application with a certification that it does not infringe the initial manufacturer’s patents. If the generic has the same active ingredients and is the biological equivalent of the brand name drug, it does not have to undergo the rigorous testing 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 the generic does not infringe it. If the brand name 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 period of six months to produce the generic drug before other competitors can market their versions of the drug.

But an unexpected danger of that system is that it can foster collusion between brand-name and generic manufacturers. In FTC v. Actavis, Inc.., 133 S. Ct. 2223, 2227, 186 L. Ed. 2d 343 (2013), the Supreme Court held that patent owners’ payments to infringers through “reverse payment settlement agreements” are subject to antitrust claims. In a reverse pay settlement arrangement, the brand manufacturer pays the generic manufacturer not to make the drug, allowing the brand to continue charging the higher price for the drug. This creates an antitrust conspiracy, because the generic manufacturer receives money for not competing.

In the Third Circuit cases, this is what consumers said happened: The makers of Lipitor and Effexor XR had paid generic manufacturers 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 taken into account, there was no need to transfer the case to a different court, which would cause further delays. But the appeals court held that the record did not clearly show the diversity of federal jurisdiction, requiring the trial court to determine whether federal courts have jurisdiction. In custody, the trial court dismissed the claims in the cases against the manufacturer of Lipitor and the manufacturer of Effexor XR.

The Third Circuit again reversed the district court’s decision, holding that the Lipitor plaintiffs plausibly alleged that the companies engaged in illegal reverse payment settlement arrangements. 868 F.3d 231, 253, 258 (3d Cir. 2017). The alleged illegal reverse payment settlement agreement 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, it violates antitrust law. So the matter is again before the court of first instance.