Reverse Payment Settlements Return to the Supreme Court

Louisiana Wholesale Drug Co. v. Bayer AG (On Petition for a Writ of Certiorari 2011)

Ordinarily, a patent is valuable when it offers some degree of market exclusivity. Over the past decade, we have seen a number of examples where a patent holder felt it necessary to take some additional steps to secure a term of exclusivity – namely paying would-be competitors to (1) not enter the market; (2) not challenge the patent's validity, enforceability, or scope; and/or (3) delay market entry. This situation most often emerges in the pharmaceutical market between innovator companies and generic manufacturers. In several cases, the innovator company (patentee) has paid a generic challenger to give up or delay market entry. This situation is often termed a "reverse payment settlement" because the settlement payment flows in the opposite direction of what we ordinarily expect in patent litigation. (Ordinarily, to settle a patent case, an accused infringer pays a dollar amount to the patentee. In these cases, the patentee is paying a dollar amount to the accused infringer). Intricacies of the Hatch-Waxman Act provides some incentive for the reverse payment settlements. See, Christopher Holman, Do Reverse Payment Settlements Violate the Antitrust Laws?, 23 Santa Clara Computer and High Technology L.J. 489 (2007).

In this case, reverse payment settlements are being challenged as unlawful under the Sherman Act. Although paying a competitor not-to-compete would normally be seen as an antitrust violation, patentee's argue that reverse settlements are per se lawful's so long as they are closely related to the exclusionary potential of the patent.

The question now presented to the Supreme Court is:

Whether an agreement by a patent owner to pay a potential competitor not to enter the market is legal per se, as the Second and Federal Circuits have held, to be treated under the rule of reason, as the Eleventh Circuit has held, or illegal per se, as the Sixth Circuit has held?

In a friend-of-the-court brief filed by Stanford Prof. Mark Lemley, a group of 80+ professors argue that the Supreme Court should certainly hear the case and that the 2nd Circuit rule of per se legality is wrong. The professors write:

This rule [of per se legality] is based on the mistaken premise that (absent a fraudulent procurement) a patent grants full immunity from antitrust scrutiny for any and all anti-competitive effects within the exclusionary power of the patent.

A large group of state attorneys general also filed a friend-of-the-court brief arguing that a "surge in reverse payment agreements is threatening the existence of generic competition and the availability of affordable drugs to the states and their citizens."

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18 thoughts on “Reverse Payment Settlements Return to the Supreme Court

  1. Michael, I think the Hatch-Waxman provides some patent term extension clause. The official name for Hatch-Waxman is “drug price competition and patent term restoration act”. It is enacted with the purpose to balance between the competition and incentive given to the patent holders to invent in the first place. So there are some provisions that are relevant to the patent term restoration.

  2. Ned Heller, I do not think there could be some safe harbor rules. As such settlement agreement is made out of the motive to avoid competition, so both party could maximize its profit. Most of the time the law suit will be brought by DOJ or FTC. So the companies generally settlement with the DOJ or enter into a consent decree with FTC. So I do not know how much the penalty the companies have to pay, or whether the penalty is less than the profit they made. If they could make more profit even though there is penalty lurking, they may just go ahead and do it.

  3. I think the Supreme Court should hear the cases regarding the reverse payment. As we all know the incentive of hatch-waxman act is to challenge the patent for branded drugs, and the first challenger could get 180 days exclusivity marketing period, during which they could flood the market with generic drugs. The access to lower price generic drugs will definitely benefit the consumers. However, the issue is the patentee could file a motion for preliminary injunction, which will stop the generic manufacturer from selling the generic drugs, and at the same time the 180-day exclusivity period will start to run. In addition, if the patent be held valid after trial, the generic drug manufacturer has to pay damages, sometimes tremble damages. So the generic drug manufacture will have a incentive to settle. Most settlement will guarantee a period of exclusive marking of the generic version of the drug. This problem will stimulate the settlement. So even if the settlement agreement is per se illegal, as long as there is incentive to settlement, i guess the generic and branded drug manufacturers will always find ways to avoid competition.

  4. Not to mention the fact that the FTC has had it in for pay-for-delay for a while, and has presented studies indicating that these agreements intended to settle patent litigation can cost taxpayers many billions of dollars. Considering statistics showing that the SCOTUS rules on the side of the feds the vast majority of the time, I’d hazard a guess that the FTC’s arguments will carry quite a bit of weight here, and that (in the event cert is granted) the SCOTUS may rule that reverse-payment arrangements will have to be at least limited, if not stopped altogether.

  5. Ianei you also forget about the refusal to deal conspitacy that would naturally evolve in an instance such as this with companies saying we already paid and we dont care who invented it as long as we only have to pay once which is now the reason why they should pay twice. in most cases they only paid 1% or less witch represents a stolen price anyways they prefer to buy hot properties than ligitamely from me at 4% plus the involvement of the robber means they also hire a hit man for me in case there is any future problems.

  6. Ianie; the big guys dont want to associate with the little players they just want the idea for free or cheap then fight 15 or 20 year court battles that the little guys cant even afford to get involved in. couple this with disbelievers such as yourself and those who dont want to believe or have it proven and you end up with the ball of corruption that is the us patent system.

  7. ianie; im not sure if youv noticed but inventors are the only ones to create new pharmacutical experiments, diritaves and medication purposes.Wile drug companies report huge profits due to my previous creations there ability to concieve new major breakthroughs is impossible without me.These incentives need to be tied to paying compensation for previous conceptions so that justice occurs for past injustices something that you may have no conception of.Of course I also need the incentive to create new like everyone should or new companies wont form for new drugs then myself and my new business partners wont be paid.

  8. parent patents must be upheld for the full patent term or the incentive to create is destroyed.

    I’m not sure if you’ve noticed this at all, but drug companies seem to report lots of “incentive to create” on a quarterly basis.

    Even if you did take away a little of their incentive, it would still be more than worth their while to continue existing and continue creating patentable drugs.

    I’m more concerned with why you advocate strong incentives to create when you claim to be (1) the only one who does any inventing, and (2) the only one who can’t seem to squeeze a single dime out of the patent system.

  9. Extension of patent terms should be allowed where generic sales and or indegent demand has caused profit losses below normal profit markups.However the issue of compensation never paid to the correct conciever without whom the product would not exist should be sdressed first in the intrests of justice.

  10. Paying a established competitor to not enter the market after patent experation would be a price fixing conspitacy in violation of free market ethics in itself if there is no significant improvement new patent involved.Except in the instance of insignicant profit during the initial patent term.

  11. parent patents must be upheld for the full patent term or the incentive to create is destroyed. If other patentees improve the products they should have the option of negotiating the improvement with the patent patent holder or waiting to file until the expiration of the parent patent then selling or beginning manufacture or usage.

  12. Drug patents are the only situation where generic competition should infring on a patent legally and only to life threatening indegent demand limits.

  13. The issues here have an interesting legal history going back particularly to Motion Picture Patents Co. v. Universal Film Co., 243 U.S. 502 (1917).

  14. I’m down with this sickness. They’ve been asking for it for a long time now.

    I wonder however, if they rule against the pay-to-not-challenge between companies, would this spill over into affecting the potential market for individuals holding up patentees with licensed inventions by way of extortion with prior art?

  15. Since the FTC has been having fits about this practice since it started several years ago, the current Justice Dept. has joined in, there is now an alleged split between circuits, and the amount of public and private money at stake is huge [not even counting potential civil treble damages AT suits if this is held to be an AT violation], will the usual 300 to one or so odds against the Sup. Ct. finally taking cert not apply here?

  16. I’m going to stay out of this one. But I have one question. Could the government spell out some “safe harbor” rules for such payments such the a presumption of legality could be expected?

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