Pharmaceutical Patent-Antitrust: Reverse Payment Settlements and Product Hopping

Summary

Congressional attention has recently been directed towards two practices within the pharmaceutical industry. The first pertains to “reverse payment” or “pay-for-delay” settlements of patent litigation. Under this scenario, a generic firm agrees to neither challenge the brand-name company’s patents nor sell a generic version of the patented drug for a period of time. In exchange, the brand-name drug company agrees to compensate the generic firm, sometimes with substantial monetary payments over a number of years. Because the payment flows counterintuitively, from the patent owner to the accused infringer, this compensation has been termed a “reverse” payment. Although the private settlement of disputes is usually encouraged, some observers believe that these arrangements are anticompetitive.

Another widely followed practice has been termed “product hopping.” Most observers would agree that the introduction of new medicines lies in the public interest. However, some stakeholders have accused brand-name firms of releasing new, patent-protected versions of existing drugs—while simultaneously discontinuing an earlier drug that is near patent expiration—with the primary goal of delaying generic entry into the marketplace. Because the Hatch-Waxman Act presupposes the existence of a brand-name drug in order for a generic version to enter the market, product hopping can potentially delay generic competition.

Two notable judicial opinions have subjected these practices to antitrust scrutiny. In its 2013 decision in Federal Trade Commission v. Actavis, Inc., the U.S. Supreme Court held that the legality of reverse payment settlements should be evaluated under the “rule of reason” approach. Under this approach, courts consider whether conduct was reasonable by balancing the anticompetitive consequences of a challenged practice against its business justifications and potentially procompetitive impact. The 2015 decision of the U.S. Court of Appeals for the Second Circuit in New York ex rel. Schneiderman v. Actavis PLC applied the rule of reason to product hopping, concluding that this activity may indeed violate the antitrust laws.

Congress possesses a number of alternatives for addressing reverse payment settlements and product hopping. One possibility is to await further judicial developments. Another option is to stipulate antitrust standards that courts and antitrust enforcement agencies would follow in the future. Congress could also alter incentives for generic firms to settle with brand-name firms under the food and drug laws.