Reverse Payment Agreements

Earlier this week, the U.S. Court of Appeals for the Third Circuit held that reverse payment agreements or exclusion agreements between brands and the first generic under the Hatch-Waxman Act should be prima facie evidence of an unreasonable restraint of trade. The action was a class proceeding brought by wholesalers and retailers of the drug K-Dur against Schering, In Re: K-Dur Antitrust Litigation.

The decision also considered the issue of class certification.

The Court discussed the background of reverse payment settlements:

A 2010 analysis by the FTC found that reverse payment settlements cost consumers $3.5 billion annually. FTC, Pay-for-Delay: How Drug Company Pay-Offs Cost Consumers Billions 2 (2010), available at The FTC estimates that about one year after market entry an average generic pharmaceutical product takes over ninety percent of the patent holder’s unit sales and sells for fifteen percent of the price of the name brand product. This price differential means that consumers, rather than generic producers, are typically the biggest beneficiaries of generic entry. [references removed]

Other courts in the United States have reached different conclusions on the legality of the agreements as identified in the decision:

Neither this court nor the Supreme Court has yet weighed in on the legality of reverse payment settlements. However, five other circuits have addressed the question. Two of those courts – the first two to consider the question – concluded that such agreements should be subject to strict antitrust scrutiny, at least where the settling parties attempted to manipulate the 180-day exclusivity period to block all potential generic competition. The three courts to address the question of reverse payments more recently have reached a contrary result, ruling that such agreements are permissible so long as they do not exceed the potential exclusionary scope of the patent.

The Court criticized previous rulings which presumed the underlying patent was valid when analyzing reverse payment agreements and held:

That goal [of the Hatch-Waxman Act to encourage challenges to weak patents] is undermined by application of the scope of the patent test which entitles the patent holder to pay its potential generic competitors not to compete. As one commentator has noted, this approach nominally protects intellectual property, not on the strength of a patent holder’s legal rights, but on the strength of its wallet. … Thus while such a rule might be good policy from the perspective of name brand and generic pharmaceutical producers, it is bad policy from the perspective of the consumer, precisely the constituency Congress was seeking to protect.

In remanding the proceeding to the lower court, the Court set out the following test to be applied to such agreements:

Specifically, the finder of fact must treat any payment from a patent holder to a generic patent challenger who agrees to delay entry into the market as prima facie evidence of an unreasonable restraint of trade, which could be rebutted by showing that the payment (1) was for a purpose other than delayed entry or (2) offers some pro-competitive benefit.

The regulatory situation in Canada is significantly different than in the United States. Canada has the Patented Medicine (Notice of Compliance) Regulations which in some ways provide a similar approval process for generic versions of patented drugs but the regulations do not provide a 180-day exclusivity period for the first generic as discussed more fully by my colleagues Geoff Mowatt and Ron Dimock in their paper for the CBA entitled, “Reverse Payment Settlements In Pharmaceutical Litigation: What Are They and Do They Occur in Canada?

Some discussion of this week’s decision is available from the WSJ Law Blog and Thomson Reuters.