Hearing Questions Whether Pay-for-Delay Legislation Needed After Actavis Ruling

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By Tony Dutra

The Supreme Court's recent decision on reverse payment drug settlements helped curb anticompetitive deals, but there is still a question whether Congress can do more, according to senators and stakeholders speaking at a July 23 hearing in the Senate.

At the hearing, the chairman of the Federal Trade Commission said such patent settlements are harmful to consumers and government programs such as Medicare, and vowed that FTC would continue its scrutiny of such patent deals.

The hearing, titled “Pay-for-Delay Deals: Limiting Competition and Costing Consumers” was held by the Senate Judiciary Committee's Subcommittee on Antitrust, Competition Policy and Consumer Rights. Its primary purpose was to discuss the Preserve Access to Affordable Generics Act (S. 214), a bill that would make pay-for-delay settlements between brand name and generic drug companies presumptively illegal.

There was no consensus either within the subcommittee or among the hearing witnesses of the necessity of going further than the high court's ruling--to treat each pay-for-delay deal on its own merits with a typical antitrust rule-of-reason analysis.

Supreme Court Says Rule of Reason Appropriate

Under the Hatch-Waxman Drug Price Competition and Patent Term Restoration Act, a drugmaker wishing to introduce a generic version of a drug files an abbreviated new drug application, or ANDA, with the Food and Drug Administration. Hatch-Waxman allows the brand name maker of the drug, when covered by a patent, to initiate a patent infringement lawsuit upon the filing of the ANDA.

A reverse settlement or pay-for-delay deal resolves the infringement lawsuit. Each deal includes a payment by the patent-owning, branded maker to the generic maker and an agreement by the latter to stop the patent challenge and stay off the market for a period of time, usually until a short time prior to the expiration of the patent. Under Hatch-Waxman, the FTC has the authority to review the antitrust implications of the deal.

Before 2005, the FTC found most of the deals anticompetitive, but from that point on, circuit courts upheld the deals using what is known as the “scope-of-the-patent” standard: Settlement deals are presumptively legal unless the exclusionary potential of the patent underlying the drug is expanded in time or scope. The FTC consistently disagreed with that approach and finally won a case in the U.S. Court of Appeals for the Third Circuit, creating a circuit split.

The Supreme Court agreed to hear a case that came out of the Eleventh Circuit to resolve the split. The court's June 17 majority opinion held that these reverse payment deals may violate antitrust laws regardless of whether the agreement falls within the scope of the patent (11 PLIR 771, 6/21/13). The court rejected the government's request that the deals are presumptively illegal, however.

Bill's Presumption of Invalidity

S. 214 goes that next step. It creates a new section of the Federal Trade Commission Act, 15 U.S.C. §44, et seq., to allow the FTC to bring a lawsuit in circumstances involving a pay-for-delay deal with the presumption of illegality.

To rebut the illegality presumption, the parties must “demonstrate by clear and convincing evidence that the procompetitive benefits of the agreement outweigh the anticompetitive effects of the agreement.”

The same bill was reported out of the Senate Judiciary Committee in 2011 (9 PLIR 933, 7/22/11), but did not get a full Senate vote. Its primary sponsor, Sen. Herb Kohl (D-Wis.), retired, and Sen. Amy J. Klobuchar (D-Minn.) picked up the cause, reintroducing it on Feb. 4 along with Sen. Chuck Grassley (R-Iowa).

After the Supreme Court's Actavis decision, both senators vowed to continue fighting for progress on S. 214.

Klobuchar is chairman of the antitrust subcommittee and presided over the hearing. Grassley attended as well, as did Sens. Richard Blumenthal (D-Conn), Alan S. Franken (D-Minn.), and Michael S. Lee (R-Utah).

Ramirez Would Like Bill to Go Forward

The first witness was Edith Ramirez, chairman of FTC, who said that pay-for-delay deals “undermine the goals and spirit of the Hatch-Waxman Act.”

She cited a Jan. 17 FTC report that showed the increasing occurrence of reverse payment settlements--40 of the 140 total settlements in fiscal year 2012--and an earlier report that said the deals cost consumers $3.5 billion per year (9 PLIR 464, 4/15/11). She further noted the direct impact on the federal government's budget, since Medicare and Medicaid pay the higher prices when no generic product is available.

The Supreme Court's decision was “an important milestone,” Ramirez said, “but the commission's work is not over.” She pointed to both the time and effort that the FTC will have to undergo to argue the Actavis case back at district court, and she said the commission is equally engaged in a reverse payment case in the U.S. District Court for the Eastern District of Pennsylvania involving Cephalon Inc. and the narcolepsy drug Provigil.

Throughout her questioning by the senators, Ramirez maintained that the FTC could only be helped by passage of S. 214. But she repeatedly defined that help in terms of the reduction in time and effort that would be required of her staff if they could begin each case with the burden on the drug companies to present their arguments for procompetitive effects.

Lee Skeptical of Bill

Ramirez faced tough questions only from Lee, and his opposition continued into the second panel of witnesses as well:

• Robert G. Romasco, president of AARP, Washington;

• Diane E. Bieri of Arnold & Porter, Washington;

• Michael A. Carrier, professor at the Rutgers University School of Law, Camden, N.J.;

• Jonathan M. Orszag, senior managing director of Compass Lexecon LLC, West Palm Beach, Fla.;

• Michael Russo, federal program director of U.S. PIRG, Washington; and

• Sumanth Addanki, senior vice president at NERA Economic Consulting, White Plains, N.Y.

 

Lee argued that shifting the presumption to prove a procompetitive settlement was in direct contradiction to the presumption of validity of a patent under 35 U.S.C. §282. He particularly rejected the use of the term “pay-for-delay” and preferred to say that the intent of the parties in these deals is to “pay for resolution of uncertainty” in the outcome of the litigation.

Carrier, though, pointed out that the litigation defense often has two parts--invalidity and noninfringement. And “there is a procedural presumption of noninfringement,” he said.

Carrier further argued that the patents often being litigated in these cases are not drawn to the active ingredient in the drug at issue, but are rather patents on methods of use. Such patents are more likely to be found invalid, he said.

Differences on How to Read the Past

Romasco, Carrier, and Russo were clearly in favor of S. 214, and Bieri--who was appearing on behalf of the Pharmaceutical Research and Manufacturers of America--was most adamantly against it.

Economists Orszag and Addanki argued forcefully that the rule-of-reason analysis on a case-by-case basis was proper.

Klobuchar sought to disrupt their reasoning by pointing to the period prior to 2005 when settlement deals were common but none had a pay-for-delay component because of the FTC's scrutiny.

Carrier agreed, saying that the period between 2000 to 2004 was a “great national experiment … that showed settlement was completely possible without reverse payments.”

The economists insisted, though, that one could not infer from that fact that, had such deals been possible prior to 2004, they would have been anti-consumer. As Bieri summarized, “We don't know how many cases would have settled during 2000-2004 and brought generics to market sooner.”

Hatch-Waxman 'Twisted Beyond Recognition.'

Franken sought to add consideration of a bill he sponsored--the Fair and Immediate Release of Generic Drugs Act (S. 504)--to the conversation.

Hatch-Waxman gives 180 days of exclusivity to the first generic company--a “first applicant” under 21 U.S.C. §355(j)(5)(iv)--to file an ANDA for the right to sell a generic version of a patented drug. If the branded drug company settles with that first applicant, the 180-day period does not kick in until the date on which the first generic drug is introduced. That leaves no incentive for other generic drugmakers to challenge the patent in the face of a settlement deal.

Under S. 504, a second generic drug firm could share the Hatch-Waxman exclusivity, and so, according to Franken, it would “reduce the incentive to enter into these [pay-for-delay] agreements in the first place.”

Carrier agreed. The bill “goes to the reason why in this one provision Hatch-Waxman has been twisted beyond recognition.” He said the provision's purpose was to make the introduction of a generic happen more quickly, and it has had the reverse effect when the generic agrees to stay off the market.

No to a Per Se Ban

At points in the hearing, the questioning turned from whether the incremental advantage of S. 214 was enough to justify it following the Supreme Court's decision to the possibility of going even further--to change S. 214 so that it created an outright ban on pay-for-delay deals. Kohl's bills in prior Congresses began with such a per se ban, but he compromised with colleagues ultimately to get the bill out of the Senate Judiciary Committee.

Nevertheless, Klobuchar expressed interest in reviving the per se ban option, though she appeared to have little support from either her colleagues or the witnesses.

Even her most ardent supporter, Carrier, said, “No one is saying here that these [deals] are per se illegal.”

Addanki at one point said, though, “Presumptions have a way of morphing into per se rules.” Several participants disagreed with that assessment, but Addanki maintained that, if balance was the goal, countering the imbalance of a scope-of-the-patent standard with a presumption of validity is “an overreach in the other direction.”

Klobuchar insisted that her and Grassley's bill was “a way to even the playing field” and “a reasonable compromise.”

And Carrier summed up the bill's supporters' argument best by first giving praise to the Supreme Court.

“Right now, we have the rule of reason, which is tons better than the scope of the patent,” he said. “But presumptive illegality gets us closer to the direction … where we'll see other types of settlements that are good for consumers.”


Witness testimony is available at http://www.judiciary.senate.gov/hearings/hearing.cfm?id=f4106739eddbae64611e52656baee009.