Pay-for-Delay Contracts

It sounds shady: The manufacturer of a name-brand pharmaceutical product pays a potential competitor not to sell a generic version of the drug, thereby protecting its monopoly. Is this really legal? Some courts have said that it is, at least under certain conditions. But breaking ranks with several recent decisions from U.S. Circuit Courts of Appeal, the Third Circuit, in In Re K-Dur Antitrust Litigation, 2012 U.S. App. LEXIS 14527 (3d Cir. 7/16/12), has determined that, when a patent-holding drug manufacturer makes payments to potential generic competitors to keep them out of the marketplace, that fact alone serves as prima facie evidence of violation of U.S. antitrust laws.

The Set-Up

The name-brand drug company involved was Schering-Plough Corp., manufacturer of the brand-name drug K-Dur 20. Two generic manufacturers of would-be competing products sought FDA approval of their drugs by means of an Abbreviated New Drug Application (ANDA).

An ANDA speeds up a generic drug's approval process by allowing the FDA to rely on its own prior determination that the drug the generic mimics is safe and effective. See Drug Price Competition and Patent Term Restoration Act (Hatch-Waxman Act) Pub. L. No. 98-417, 98 Stat. 1585 (1984). To take advantage of the ANDA procedure, a generic drug manufacturer must prove that its product will not infringe on the patents of the name-brand drug by showing one of four things concerning the patent for the listed drug: “(I) that such patent information has not been filed, (II) that such patent has expired, (III) [by certifying] 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 for which the application is submitted.” 21 U.S.C. ' 355(j)(2)(A)(vii).

The first generic drug manufacturer to file an ANDA will be granted a 180-day market exclusivity period if it successfully brings its product to market. 21 U.S.C. ' 355(j)(5)(B)(iv). During this period, no other generic manufacturer may sell its competing product. Of importance to this case (and many other reverse-payment cases) is the fact that, even if the first filer does not take its product to market, no other potential generic manufacturer will be awarded that 180-day exclusivity window; only the first filer is eligible to claim this benefit. 21 U.S.C. ' 355(j)(5)(D)(iii).

Upsher-Smith Laboratories, the first-filer seeking to manufacture a generic version of K-Dur 20, provided a paragraph IV certification to Schering-Plough in November 1995, certifying that its generic would not infringe Schering-Plough's patent. Schering-Plough then sued Upsher for patent infringment in the U.S. District Court for the District of New Jersey. That lawsuit's filing triggered a 30-month automatic stay in FDA approval of the generic product, in accordance with ' 355(j)(5)(B)(iii)(I). The companies, however, resolved the matter by entering into a so-called “pay-for-delay” or “reverse payment” agreement, whereby the generic manufacturer agreed to discontinue its challenge to the patent and its attempts to market a generic version of K-Dur 20. In exchange, Schering-Plough made several concessions to Upsher-Smith, including agreeing to pay the would-be generic marketer $60 million. A second settlement in a similar action, involving the K-Dur 20 patent but a different potential generic manufacturer, was also reached.

Drug Purchasers Object

Due to the lack of availability of generic alternatives to the high-priced K-Dur 20, several plaintiffs who claimed they were forced to pay too high a price for K-Dur 20 brought a class-action suit against Schering-Plough and Upsher-Smith. They claimed violations of the Sherman Antitrust Act occurred when the defendants settled their action with a reverse-payment agreement. (The Sherman Act provides, in pertinent part, that “[e]very 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 declared to be illegal.” 15 U.S.C. ' 1.) The District Court, on recommendation of a Special Master, applied a presumption that Schering's patent was valid. Under its analysis, a pay-for-delay agreement is subject to antitrust scrutiny only if: 1) the settlement exceeds the scope of the patent; or 2) the underlying patent infringement suit was objectively baseless. Neither of these circumstances applied to the K-Dur 20 settlement, so the district court granted the defendant's motions for summary judgment. An appeal to the Third Circuit Court of Appeals followed.

Next month, we will see how the Third Circuit's analysis of the lawfulness of reverse-payment agreements differs from that of most courts that have recently addressed the practice, and how this new decision throws into doubt the validity of pay-for-delay agreements.

Janice Inman is Editor-in-Chief of this newsletter.

It sounds shady: The manufacturer of a name-brand pharmaceutical product pays a potential competitor not to sell a generic version of the drug, thereby protecting its monopoly. Is this really legal? Some courts have said that it is, at least under certain conditions. But breaking ranks with several recent decisions from U.S. Circuit Courts of Appeal, the Third Circuit, in In Re K-Dur Antitrust Litigation, 2012 U.S. App. LEXIS 14527 (3d Cir. 7/16/12), has determined that, when a patent-holding drug manufacturer makes payments to potential generic competitors to keep them out of the marketplace, that fact alone serves as prima facie evidence of violation of U.S. antitrust laws.

The Set-Up

The name-brand drug company involved was Schering-Plough Corp., manufacturer of the brand-name drug K-Dur 20. Two generic manufacturers of would-be competing products sought FDA approval of their drugs by means of an Abbreviated New Drug Application (ANDA).

An ANDA speeds up a generic drug's approval process by allowing the FDA to rely on its own prior determination that the drug the generic mimics is safe and effective. See Drug Price Competition and Patent Term Restoration Act (Hatch-Waxman Act) Pub. L. No. 98-417, 98 Stat. 1585 (1984). To take advantage of the ANDA procedure, a generic drug manufacturer must prove that its product will not infringe on the patents of the name-brand drug by showing one of four things concerning the patent for the listed drug: “(I) that such patent information has not been filed, (II) that such patent has expired, (III) [by certifying] 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 for which the application is submitted.” 21 U.S.C. ' 355(j)(2)(A)(vii).

The first generic drug manufacturer to file an ANDA will be granted a 180-day market exclusivity period if it successfully brings its product to market. 21 U.S.C. ' 355(j)(5)(B)(iv). During this period, no other generic manufacturer may sell its competing product. Of importance to this case (and many other reverse-payment cases) is the fact that, even if the first filer does not take its product to market, no other potential generic manufacturer will be awarded that 180-day exclusivity window; only the first filer is eligible to claim this benefit. 21 U.S.C. ' 355(j)(5)(D)(iii).

Upsher-Smith Laboratories, the first-filer seeking to manufacture a generic version of K-Dur 20, provided a paragraph IV certification to Schering-Plough in November 1995, certifying that its generic would not infringe Schering-Plough's patent. Schering-Plough then sued Upsher for patent infringment in the U.S. District Court for the District of New Jersey. That lawsuit's filing triggered a 30-month automatic stay in FDA approval of the generic product, in accordance with ' 355(j)(5)(B)(iii)(I). The companies, however, resolved the matter by entering into a so-called “pay-for-delay” or “reverse payment” agreement, whereby the generic manufacturer agreed to discontinue its challenge to the patent and its attempts to market a generic version of K-Dur 20. In exchange, Schering-Plough made several concessions to Upsher-Smith, including agreeing to pay the would-be generic marketer $60 million. A second settlement in a similar action, involving the K-Dur 20 patent but a different potential generic manufacturer, was also reached.

Drug Purchasers Object

Due to the lack of availability of generic alternatives to the high-priced K-Dur 20, several plaintiffs who claimed they were forced to pay too high a price for K-Dur 20 brought a class-action suit against Schering-Plough and Upsher-Smith. They claimed violations of the Sherman Antitrust Act occurred when the defendants settled their action with a reverse-payment agreement. (The Sherman Act provides, in pertinent part, that “[e]very 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 declared to be illegal.” 15 U.S.C. ' 1.) The District Court, on recommendation of a Special Master, applied a presumption that Schering's patent was valid. Under its analysis, a pay-for-delay agreement is subject to antitrust scrutiny only if: 1) the settlement exceeds the scope of the patent; or 2) the underlying patent infringement suit was objectively baseless. Neither of these circumstances applied to the K-Dur 20 settlement, so the district court granted the defendant's motions for summary judgment. An appeal to the Third Circuit Court of Appeals followed.

Next month, we will see how the Third Circuit's analysis of the lawfulness of reverse-payment agreements differs from that of most courts that have recently addressed the practice, and how this new decision throws into doubt the validity of pay-for-delay agreements.

Janice Inman is Editor-in-Chief of this newsletter.