Academics on FTC v. Actavis

This morning the Supreme Court hears argument in FTC v. Actavis (previously FTC v. Watson), in which the Court will decide when a brand-name pharmaceutical company may offer a "reverse payment" settlement to a generic company in exchange for the generic dropping a patent challenge and staying out of the market. Brand-name companies can use this strategy without triggering an endless stream of generic settlements because the first generic to file a "paragraph IV" certification challenging the brand's patents gets 180 days of market exclusivity before the FDA will approve another generic (unless forfeited), which gives a second generic less incentive to challenge the patents and thus less leverage in extracting a settlement.

This case comes from the 11th Cir., which said these settlements are lawful "absent sham litigation or fraud in obtaining the patent." In another case, In re K-Dur, the 3d Cir. applied stricter antitrust scrutiny, holding that such settlements are subject to "quick look rule of reason analysis" that treats "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 FTC has endorsed this approach. Another option is to go further than the 3d Cir. and declare such payments per se illegal.

On the FTC's side, 118 law, economics, and business professors (with counsel Michael Carrier and Mark Lemley) endorse the 3d Cir. "quick look" approach, emphasizing that challenging weak patents was part of the Hatch-Waxman bargain, that reverse payments are "powerful" evidence of invalidity, and that reverse payments are not necessary to encourage settlement. (By the way, if any readers know the record for number of professors to sign a single amicus brief, I'm curious! 118 is a lot.)

On the pharma side, 8 legal academics say these payments are a normal part of Hatch-Waxman and the patent right, 2 more law profs say a "quick look" is inadequate to understand the complex issue of market definition, 19 economists say reverse payments are infrequent and are necessary to promote settlement in cases of asymmetric litigation stakes, and 7 econ and law profs say that petitioners fail to show that drug patents reduce consumers' access to drugs or that the patents at issue in reverse-payment settlements are not valuable.

Two days ago in Science, Scott Hemphill and Bhaven Sampat (both at Columbia), whose empirical work on reverse-payment settlements is heavily cited by both sides, offered new empirical evidence related to this case. They note that since the 1984 Hatch-Waxman Act, branded firms have increased patenting, especially by filing "secondary" patents on things such as new formulations (as opposed to "primary" patents on the active ingredient). Hemphill and Sampat offer two interesting results: First, by doing new empirical analysis on a dataset of settlements with evidence of payment, they found that 89% of the patents at issue in such settlements were secondary patents. Second, by analyzing a dataset of litigation over 277 pharmaceutical patents, they found that generics are more likely to win on secondary patents: of cases litigated to completion, the branded firm won 92% of cases on active-ingredient patents but only 32% of cases on secondary patents (this was also true for pre-2006 cases, when settlements were less common).

Hemphill and Sampat argue that their results strongly support the FTC in this case: "Far from offering generic entry earlier than under the presumed likely outcome, a brand win, reverse payment settlements usually limit early entry on patents that would otherwise result in a generic firm win. There is therefore serious concern that settlement unduly delays generic entry, harming consumers and potentially distorting R&D incentives." I'll be at the argument this morning—it will be interesting to see if the Justices agree!