The U.S. Federal Trade Commission (FTC) is concerned about the recent use of anti-competitive drug patent deals in light of recent court rulings, which may spur drug companies to step up a practice of paying generic rivals to keep alternatives off the market.

The FTC has filed a series of lawsuits challenging patent settlement agreements between major drugmakers and their generic rivals. The agency contends that in some cases those settlements stifle competition because drugmakers are paying generics to stay out of the market.

Under federal law, drugmakers are allowed to seek U.S. Food and Drug Administration approval for generic versions of brand-name drugs before a drug’s patent expires. They must certify that the patent is invalid or will not be infringed by the new generic version.

In March, a federal appeals court overturned the FTC’s challenge to a patent settlement between Schering-Plough Corp. and Upsher-Smith Laboratories and American Home Products, now Wyeth. The FTC had issued a finding that the settlement illegally kept cheaper versions of Schering-Plough’s blood pressure drug K-Dur off the market but the appeals court said the companies were within their rights to use their patents to lock competitors out of the market.

The 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 high hurdle to get over indeed.

Interestingly, under the applicable rules for appealing FTC administrative actions, respondents are entitled to choose which circuit court will hear their appeal. Bet you can imagine that anyone caught in similar administrative litigation would choose to bring its appeal in the Eleventh Circuit.

Currently, the FTC is seeking certiorari from the Supreme Court in Schering-Plough, and stated in its petition that the Eleventh Circuit’s decision “could seriously impede the Commission’s law enforcement efforts.”

In the FTC’s Petition for Certiorari from the Supreme Court in Schering-Plough, the questions presented are:

1. 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.

2. Whether the court of appeals grossly misapplied the pertinent “substantial evidence” standard of review, by summarily rejecting the extensive factual findings of an expert federal agency regarding matters within its purview.

Download the FTC’s Petition for Certiorari here.

In November another federal appeals court upheld a lower court decision to throw out a similar case that private parties had filed against Barr Pharmaceuticals Inc. and AstraZeneca.

The patent settlement challenged in that case involved AstraZeneca’s Novaldex. Novaldex (tamoxifen citrate) is a drug sold by AstraZeneca that is used to treat breast cancer. The tamoxifen litigation involves an agreement between Imperial Chemical Industries, PLC (an affiliate of AstraZeneca) and Barr Laboratories to settle patent infringement litigation relating to Imperial’s patent for tamoxifen (the ‘516 patent).

Imperial sued Barr for infringement of the ‘516 patent, and the patent was found unenforceable after trial. Imperial appealed but Barr and Imperial reached a settlement agreement during the appeal and moved jointly to vacate the judgment of the district court. Under the agreement, Imperial licensed Barr to sell Novaldex, and Barr (which was the first ANDA filer) agreed not to pursue final approval of its ANDA prior to the expiration of the ‘516 patent.

It is worth noting that in subsequent litigation AstraZeneca obtained three decisions upholding its Tamoxifen patent in cases against other generic companies.

The Second Circuit court upheld the district court’s decision granting the defendants’ motion to dismiss the antitrust case. The Second Circuit panel emphasized that settlements are pro-competitive, and dismissed the views of the plaintiffs (and the FTC in Schering-Plough) that there is something inherently anticompetitive about reverse payments.

The court stated that because the Hatch-Waxman Act permitted generic companies to challenge patents without putting themselves at risk for significant damages, generic companies are in a strong position to demand a large premium in order to settle high-stakes cases. This is true even where the branded manufacturer may be reasonably confident of victory but wishes to avoid the litigation burden and uncertainty.

The plaintiffs in Tamoxifen have filed a petition for re-hearing en banc, and the FTC has submitted an amicus brief supporting the petition. In evaluating the petition for re-hearing, we expect the Second Circuit to focus, among other things, on (1) whether the “sham” standard used by the court was proper, and (2) whether dismissal at the pleading stage was appropriate.

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