After the Supreme Court refused to hear the Federal Trade Commission v. Schering-Plough case, Senators Herb Kohl (D-WI), Patrick Leahy (D-VT), Chuck Grassley (R-IA) and Charles Schumer (D-NY) have introduced legislation to explicitly prohibit brand-name drug manufacturers from using pay-off agreements to keep cheaper generic equivalents off the market.

In 2005, two appellate court decisions overturned FTC’s long-standing position against this practice and upheld settlements that include such pay-offs. The current decision in Schering-Plough makes it very difficult (if not impossible) for parties challenging patent settlements to do so based on the terms of the settlement itself (i.e., the inclusion of a reverse payment). Plaintiffs will need to show that the generic company’s product did not infringe on a valid patent – a very difficult path to go.

The Supreme Court dismissal of the FTC’s latest appeal spurred the introduction of the “Preserve Access to Affordable Generics Act” (S. 3582) in which Section 5 of the Federal Trade Commission Act (15 U.S.C. 45) would be amended to include:

It shall be considered an unfair method of competition affecting commerce under subsection (a)(1) for a person, in connection with the sale of a drug product, to directly or indirectly be a party to any agreement resolving or settling a patent infringement claim in which (a) an ANDA filer receives anything of value; and (b) the ANDA filer agrees not to research, develop, manufacture, market, or sell the ANDA product for any period of time.

Nothing in this subsection shall prohibit a resolution or settlement of patent infringement claim in which the value paid by the NDA holder to the ANDA filer as a part of the resolution or settlement of the patent infringement claim includes no more than the right to market the ANDA product prior to the expiration of the patent that is the basis for the patent infringement claim.

A recent FTC report found that in the six months following the 2005 court decisions, there were three settlement agreements in which the generic company received compensation and agreed to a restriction on its ability to market the product. Additionally, the FTC found that at least seven settlement agreements made in 2006 included a pay-off from the brand manufacturer in exchange for a promise by the generic company to delay entry into the market. According to a study released by Pharmaceutical Care Management Association (PCMA), health plans and consumers could save $26.4 billion over the next five years by using the generic versions of 14 popular drugs that are scheduled to lose their patent protections before 2010.

But is a restraint on settlements really in anyone’s best interest? Our legal system likes settlement. It even encourages it. Do we want companies to instead be forced to fight legal battles to the death?

The question comes down to whether an agreement between a pharmaceutical patent holder and a would-be generic competitor, in which the patent holder makes a substantial payment to the challenger for the purpose of delaying the challenger’s entry into the market, is an unreasonable restraint of trade. Unfortunately, things are never so simple. What really constitutes an unreasonable restraint of trade?

Generic-drug companies regularly make legal challenges to brand-name companies’ patents in the hopes of getting their generic versions on the market more quickly. They have little to lose. For the cost of a lawsuit, the generic company gets a shot at millions (perhaps billions) of dollars in revenue. The threat of a lawsuit claiming that the brand-name drug companies patent is invalid is close to being held at gunpoint since a jury may find the patent invalid and the drug company will be left twisting in the wind.

The Act as introduced does not take into account the fact that often the issues are muddy waters without a clear right or wrong answer. Patent invalidity suits often come down to a nuanced, battle of experts trying to decide what some hypothetical person skilled in the art would or would not have found obvious a decade or two ago. Having these matters put in front of a jury can feel a lot like a game of Russian roulette. Therefore, the drug company will often decide to resolve the dispute out of court, with the generic companies agreeing to give up their claims in exchange for cash settlements. The generic versions of the drugs then enter the market when the patents expire. But, the alternative would be for the companies to continue legal battles through endless appeals.

The Preserve Access to Affordable Generics Act would seem to remove incentives to settle disputes and cause more resources to be devoted to litigation.

See the text of S. 3582 here.

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