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August 25, 2016 by Mindee J. ReubenDownload PDF

Does Actavis Extend to Pay-for-Delay Settlements That Don't Involve A Cash Buyout?Mindee J. Reuben

In FTC v. Actavis, Inc., 133 S. Ct. 2223, 2245 (2013), the Supreme Court ruled that a reverse payment settlement agreement, pursuant to which a brand-name manufacturer pays a generic manufacturer to delay bringing its generic to market, is subject to antitrust scrutiny under the rule of reason standard. Actavis, 13 S. Ct. at 2237. The Supreme Court was concerned about such “pay-for-delay” agreements for several reasons, including, among other things, that two competitors were dividing the market between themselves to the detriment of the consumer. Id. at 2235. Whether the rule in Actavis extends to pay-for-delay settlements that do not involve a cash component is an open question in most jurisdictions, although it may be addressed by the Supreme Court in the near term.

By way of background, the Drug Price Competition and Patent Term Restoration Act of 1984, informally known as the Hatch-Waxman Act, was designed to facilitate the entry of generic drugs into the marketplace. The Act facilitates such entry by simplifying and abbreviating the process associated with bringing a generic drug to market.

When submitting a new drug application (“NDA”) to the FDA for consideration, a drug manufacturer (the brand-name manufacturer) must identify all patents related to the new, brand-name drug. When a generic drug manufacturer applies for approval to produce and market a generic version of an approved brand-name drug, it must certify, as part of its abbreviated new drug application (“ANDA”), that the generic drug will not infringe the brand-name drug’s patents. The generic drug manufacturer may, among other options, provide a “Paragraph IV” certification that the brand-name drug patents are either invalid or will not be infringed by the generic drug.

The submission of an ANDA with a Paragraph IV certification almost always results in litigation by the brand-name drug manufacturer to protect its patents. The institution of patent litigation triggers a 30-month stay of the FDA approval process for the generic. Conversely, if the generic manufacturer prevails on its patent challenge, it is rewarded with a 180-day period during which only the challenger and the patent holder (if it has an approved generic) – and no other generic – can bring their generic to market. The value of the 180-day market exclusivity period has been noted as possibly being worth several hundred million dollars. FTC v. Actavis, Inc., 133 S. Ct. 2223, 2245 (2013) (citing Hemphill, Paying for Delay: Pharmaceutical Patent Settlement as a Regulatory Design Problem, 81 N.Y.U.L. Rev. 1553, 1579 (2006)).

At least two Circuits have extended the rule in Actavis to permit challenges to reverse payment settlement agreements where the consideration did not involve cash but an “unexplained large transfer of value from the patent holder to the alleged [patent] infringer ….” King Drug Co. of Florence, Inc. v. SmithKline Beecham Corp., 791 F3d 388, 403 (3d Cir. 2015). The Third Circuit has held that a settlement under which a brand-name manufacturer agreed to permit the generic manufacturer to market its chewable generic over three years before the patent expired and to forego marketing its own authorized generic version of the tablet form of the drug – in a market estimated to be worth $2 billion annually – was subject to antitrust scrutiny under Actavis. In 2016, the First Circuit reached the same result in a case where the settlement agreement required the generic manufacturer to delay marketing its generic in exchange for the name brand manufacturer agreeing, among other things, not to market its generic at all. Rochester Drug Co-Operative, Inc. v. Warner Chilcott Co. (In re Loestrin 24 Fe Antitrust Litig.), 814 F.3d 538 (1st Cir. 2016).

The parties to the settlement in King Drug – both the brand-name and generic manufacturers – filed a joint writ of certiorari with the Supreme Court to address the question of whether the Third Circuit’s decision in King Drug is inconsistent with Actavis and other case law because a patentee’s grant of an exclusive license is specifically permitted under the patent laws. Opponents of the settlement contend that the drug manufacturers are simply substituting high value, non-monetary consideration for the cash component of the settlement in Actavis, and the settlement should be subject to challenge under the antitrust laws.

The writ is still pending. In June 2016, the Supreme Court invited the Solicitor General to file a submission regarding whether the Supreme Court should review the Third Circuit decision, making King Drug the case to watch regarding pay-for-delay litigation. (The First Circuit decision was remanded to the District Court and motions to dismiss are pending.) In the meantime, at least two district courts outside of the Third and First Circuits – the Northern District of California and the Southern District of New York – have adopted the reasoning of King Drug. Stay tuned.