Under Scrutiny: Reverse Payment Agreements

Under Scrutiny: Reverse Payment Agreements

A Reverse Payment Agreement (RPA) is an interesting point of interface between competition law and intellectual property law. One crucial issue in this regard is whether RPAs can trigger antitrust provisions. This issue had been dealt with previously here.

The judgment of the United States Court of Appeals for the 11th circuit in Federal Trade Commission v. Watson Pharmaceuticals Inc., Solvay Pharmaceutical Inc., Par Pharmaceutical Companies Inc. and Paddock Laboratories Inc. (available here) highlights the latest position of US law in relation to the treatment of RPAs through the dual lens of antitrust law and intellectual property law.  Delivered by a three-judge bench, the judgment crystallizes the tests for evaluating whether antitrust provisions should be triggered in situations involving RPAs.

In a RPA, also known as the ‘pay for delay’ agreement, a patent holder pays the allegedly infringing generic drug company to delay entering the market until a specific date, thereby protecting their patent monopoly against a judgment that the patent is invalid or would not be infringed by the generic competitor.

The present case involves a patent over AndroGel, a topical gel that treats the symptoms of low testosterone in men, said patent expiring in 2020. Soon after the patent was granted and listed in the Orange Book, the patentee received notices for Abbreviated New Drug Application (ANDA) seeking FDA approval on the generic versions of the drug from two generic manufacturers, namely, Watson and Paddock. The Patentee filed an infringement suit and an automatic 30-month stay on the grant of FDA approval came into effect. While the infringement suit was still pending, the stay expired and FDA approval was duly granted to the generic manufacturers. In the wake of such a situation the parties decided to enter into a patent litigation settlement before the pronouncement of the decision of the pending infringement suit.

Under the settlement terms the generic manufacturers agreed that they would promote the branded drug and not market their products until 2015 in return for a specific share of the patentee’s profits. The case decided by the United States Court of Appeals for the 11th Circuit arose when the settlement agreements ending the infringement suit were reported to the Federal Trade Commission (FTC), who in turn filed an antitrust lawsuit against Solvay, Watson, Par, and Paddock, claiming that the agreements are unlawful and in restraint of trade.  The District Court held that the antitrust claim was not sufficiently pleaded and did not entertain the suit. The FTC appealed the District Court's decision to dismiss the antitrust lawsuit.

The issue decided by the Court of Appeal was whether the RPAs triggered the application of antitrust provisions such as Section 5(a) of the FTC Act. The FTC argued that RPAs are a mechanism to extend the already existing monopoly and such an arrangement which delays the generic entry causes loss to the public, who has to continue paying for a patent which may be found to be invalid.

In dismissing FTC’s appeal, the Court of Appeal followed the tests laid down in its previous judgments (Valley Drug Co. v. Geneva Pharmaceuticals, Inc. and Schering-Plough Corp. v. FTC where the RPA was held not to be anti-competitive) and opined that:

A contract in restraint of trade differs from a reverse payment agreement for in the latter one party has the lawful exclusionary right which should necessarily be considered. Patents by their very nature cripple competition and the anticompetitive effect is already present.  Parties should be immune to the antitrust attack, if the anticompetitive effects fall within the scope of the exclusionary potential of the patent. But if restraints are created beyond that scope, competition law provisions will be attracted.

The Court of Appeal also undertook the following analysis to evaluate whether the settlement agreement contains provisions that restrict competition beyond the scope of exclusionary potential of the patent:

  1. Examine the scope of the exclusionary potential of the patent;
  2. Examine the scope to which the agreement exceeds that scope; and
  3. Examine the resulting anti-competitive effects.

This issue of RPAs and antitrust is not res integra. In addition to the above mentioned judgment, it has also been extensively dealt in Andrx Pharmaceutical v. Elan Corp. and Re Cardizam CD Antitrust Litigation. In my opinion, the judgment is sound because the bench has acknowledged the rights of the patentee and considered the high cost of litigation. It successfully arrives at a balance between the pro-exclusivity tenets of patent law and pro-competition tenets of antitrust law. In my opinion, the court appropriately addressed the possible situation of consumers paying for a product whose underlying patent may be found invalid, by emphasizing the fact that other generic companies could still file their ANDAs and launch an attack against the patent.

Mahima Rathi is a B.Sc., LL.B (IPR) Hons. Candidate at National Law University, Jodhpur