Prof. David W. Opderbeck Seton Hall University Law School Gibbons Institute of Law, Science & Technology

FDA new drug approval process requires multiple phases of clinical testing (NDA) Hatch-Waxman Act seeks to balance pharmaceutical innovation and generic competition

Potential generic competitor may file ANDA One option challenges validity / infringement of pioneer’s patent (paragraph IV) First paragraph IV filer entitled to 180-day generic exclusivity period upon launch of generic Pioneer may respond to paragraph IV certification with an infringement suit

“Reverse payment” settlement: paragraph IV cases are being settled with payments from the patent owner to the generic. Variations include: No generic entry until patent expires Delayed generic entry before patent expiration First paragraph IV filer retains (or does not retain) 180-day exclusivity period Ancillary agreements for related or unrelated products

FTC: settlements in which generic receives value for delay are presumptively anticompetitive; “a matter of pressing national concern.”

DOJ: prior view (2006) “not necessarily impermissible.” Current view (2009) (2 nd Cir. Brief Barr litigation)  Evaluate under rule of reason  “[s]ettlements involving a payment in exchange for an agreement to withdraw a validity challenge and limit competition are presumptively unlawful.”  D may rebut the presumption if “there is no reason to find that the settlement does not provide a degree of competition reasonably consistent with the parties’ contemporaneous evaluations of their prospects of litigation success.”  But: “[i]t is neither necessary nor appropriate to determine whether the patent holder would likely have prevailed in the patent infringement litigation....”; do not a want a mini-trial on validity

DOJ: Current view (2009) (2 nd Cir. Brief Barr litigation)  Payment commensurate with patent holder’s avoided litigation costs is generally acceptable  Payment “greatly in excess of litigation costs” suspect Delay until patent expiration invalid Delay until some time prior to expiration: “defendants can overcome the presumption by showing that avoiding the Paten Act’s procedures for excluding alleged infringers did not depart from the balance struck in the Patent Act” – that the delay “reasonably reflected [the parties’] contemporaneous evaluations of the likelihood that a judgment in the patent litigation would have resulted in generic competition before patent expiration.”

Second Circuit: presumptively lawful; public policy favors settlement “the patent holder is seeking to arrive at a settlement in order to protect that to which it is presumably entitled: a lawful monopoly over the manufacture and distribution of the patented product.”

Sixth Circuit: per se unlawful “[t]here is simply no escaping the conclusion that the Agreement... was, at its core, a horizontal agreement to eliminate competition in the market for Cardizem CD throughout the entire United States, a classic example of a per se illegal restraint of trade.”

Eleventh Circuit: exclusionary zone test, mixed signals about presumptive legality Valley Drug: “[g]iven the asymmetries of risk and large profits at stake, even a patentee confident in the validity of its patent might pay a potential infringer a substantial sum in settlement.”  But, a settlement that extends beyond the patent’s “exclusionary zone” is invalid

Eleventh Circuit: exclusionary zone test, mixed signals about presumptive legality Schering-Plough: “examination of: (1) the scope of the exclusionary potential of the patent; (2) the extent to which the agreement exceeded that scope; and (3) the resulting anticompetitive effects.”  “[r]everse payments are a natural by-product of the Hatch-Waxman process” Andrx: if paragraph IV filer had no real intent to market the product, “this dynamic would exceed the scope of the exclusion intended by the... patent.” (12(b)(6) motion)

Federal Circuit: presumptively lawful “the essence of the Agreements was to exclude the defendants from profiting from the patented invention. This is well within Bayer’s rights as the patentee.”

“Preserve Access to Affordable Generics Act,” S. 369 (111 th Cong.); “Protecting Consumer Access to Generic Drugs Act of 2009,” H.R (111 th Cong.). Unlawful for ANDA filer to receive anything of value in return for agreement “not to research, develop, manufacture, market, or sell the ANDA product for any period of time.”

Hovenkam, Janis & Lemley: test based on zone of patent exclusion; prohibition on payments in excess of litigation costs: “(1) that the ex ante likelihood of prevailing in its infringement lawsuit is significant, and (2) that the size of the payment is no more than the expected value of litigation and collateral costs attending the lawsuit.” Cotter: no scrutiny of merits of litigation, no payments in excess of defendant’s potential loss at trial (D’s potential loss at trial presumably equals D’s potential profits from selling the generic)

Hemphill: “a settlement should be accorded a presumption of illegality as an unreasonable restraint of trade if the settlement both restricts the generic firm’s ability to market a competing drug and includes compensation from the innovator to the generic firm.” Crane: “the optimal rule would permit exit payment settlements when the ex ante likelihood of success of the patentee’s infringement suit is high and prohibit them when the ex ante probability is low.”

None of the existing proposals examine the effects of a given settlement within a particularized product market The assumption that pharmaceutical product markets are essentially monopolies (with patent protection) or duopolies (with generic competition) is unfounded. Reverse payment settlements can be analyzed, in some ways, like other IP licenses

Three factor analysis: (1) The likely change in product market concentration resulting from the agreement. (2) The probability that the patent will be held to be valid and infringed. (3) The amount of the reverse settlement payment in light of any information asymmetries in the bargaining process.

Assess market structure: (1) The likely difference in product market concentration resulting from the agreement. (∆HHI)  HHI: a measure of market concentration used in merger analysis and for antitrust analysis of exclusive IP licenses – sum of the squares of each competitor’s market share in the relevant product market before and after the proposed merger (or exclusive license)  Relevant product market definition: Therapeutic choices available to the doctor -- Expert testimony from physicians, pharmacists, third party payors, and other sources can help establish which products are therapeutic substitutes. Possibly also cross-price elasticity of demand

Assess market structure: Where ∆HHI is relatively small, no further scrutiny is required (consistent with Merger Guidelines) – the patent at issue is not significant and resolution of the litigation should be left to private bargaining Where ∆HHI is relatively large, proceed to step (2) – the potential exclusionary zone of the patent at issue is significant and the probability of litigation success is important

(2) The probability that the patent will be held to be valid and infringed. Contra the DOJ, a full “mini-trial” would not be required. In other settlement contexts implicating non-named-party interests, courts routinely evaluate the likelihood of success in the underlying litigation Class actions Derivative suits

Steps (1) and (2) result in the “Settlement Index” SI = ∆HHI * pE Settlement Index = change in Herfindahl- Hirschman Index multiplied by the probability of patent enforcement

SI = ∆HHI * pE Unique approach: weighs both product market structure and exclusionary power of the patent Higher SI values represent an increasing likelihood that any increased concentration in market is due to a valid patent; Lower SI values represent greater likelihood that increase in market concentration is due to a weak patent, and consequently settlement is more likely anticompetitive as a matter of antitrust policy and/or deviates from the purposes of the Hatch-Waxman Act. Flexible administration by courts and agencies; ability to develop “safety zones”

For agreements in a middle zone of the SI, examine: (3) The amount of the reverse settlement payment in light of any information asymmetries in the bargaining process.

Safe Harbor: Over 1000 Heightened Scrutiny: Presumptive Illegality: 0 – 500