Protecting Profits

It was an awkward situation, to put it mildly.

The year was 1992, and AstraZeneca International was on the verge of losing its rights to a major blockbuster drug--Tamoxifen citrate. London-based AstraZeneca earned millions of dollars each year on sales of Tamoxifen, one of the most prescribed cancer drugs in the world. To protect its valuable monopoly, AstraZeneca previously had sued Barr Laboratories, seeking to stop the New Jersey-based firm from producing a generic version of the drug.

Filed in November 1987, that lawsuit backfired. Finding that AstraZeneca had wrongfully withheld important information from the patent office, a federal court in Manhattan struck down the company's patent on the drug in April 1992.

AstraZeneca responded by buying off its opponent. In a 1993 settlement, made while AstraZeneca appealed to the Federal Circuit, the company agreed to pay Barr $21 million. In return Barr agreed not to produce a generic version of Tamoxifen until AstraZeneca's patent expired in 2002. Barr also agreed to ask the Federal Circuit to vacate the district court judgment, thus restoring the Tamoxifen patent to AstraZeneca.

The settlement was a win for both parties. AstraZeneca got its patent back and removed the danger of competition that would cut into sales--and profits--for its blockbuster drug. Barr received more money than it was likely to earn if it had won its lawsuit and produced a low-priced generic.

The Tamoxifen deal is far from unique. In recent years, there has been an explosion of settlement agreements where brand-name drug companies pay alleged infringers large sums of money to postpone making generic versions of blockbuster drugs.

Courts and legal experts remain sharply divided over the legality of these so-called "exclusion payments" or "reverse payments." But all agree the stakes are high, with billions of dollars on the line.

"This is of critical importance to ?? 1/2 the pharmaceutical industry, to consumers ?? 1/2 and to large corporations trying to manage their health care costs," says W. Scott Simmer, a health care litigator at Robins, Kaplan, Miller & Ciresi.

Settling In

Drug companies first started using exclusion payments in the late 1990s, but the practice ended when the FTC filed some antitrust enforcement actions in 2000. Between 2000 and 2004, there were no known patent litigation settlements that involved exclusion payments.

The legal landscape suddenly shifted in March 2005 when the 11th Circuit issued its decision in Schering Plough Corp. v. FTC. That ruling upheld the legality of exclusion payments Schering-Plough made to two rivals. The court held that such payments violate antitrust laws only if they are part of a deal to improperly extend the scope of a patent (by, for instance, forbidding a competitor from manufacturing an unrelated product).

The landscape shifted even further in August 2006 with the 2nd Circuit's ruling in In re Tamoxifen Citrate Antitrust Litigation. The class action suit alleged AstraZeneca's exclusion payment to Barr was an illegal restraint of trade. The 2nd Circuit threw out the suit, which was filed on behalf of consumers and medical benefit providers, ruling that although a trial court had struck down AstraZeneca's patent, the company was entitled to settle the ongoing appeal of that verdict by means of an exclusion payment.

Pharmaceutical companies have pounced on these rulings, using exclusion payments to settle almost two dozen infringement suits since March 2005. And those numbers are expected to rise.

"In the current legal climate, there is every reason to expect the upsurge in such settlements to continue and early entry of generics ?? 1/2 to decline," FTC Commissioner Jon Leibowitz told the Senate Judiciary Committee in early 2007.

Pharmaceutical Peculiarity

In issuing their rulings, both the 2nd and 11th Circuits noted that patent suits concerning pharmaceuticals are not like ordinary patent suits.

A defendant in a typical patent-infringement suit has a lot on the line. If the alleged infringer loses, it may have to cease marketing its now-established product or service, as well as pay treble damages. The typical plaintiff risks only the exclusive right to practice the invention, which already has been undermined by the defendant's actions.

Because the downside risk is so much greater for alleged infringers than for patentees, it makes sense that litigation settlements usually include substantial payments from defendants to patentees. If the payment went in the other direction, it would look quite suspicious--as if the patentee was attempting to either restrain competition or protect a dubious patent.

The situation changes when drug patents are involved. Federal laws provide that the patent holder should sue an infringing generic drug maker as soon as that drug maker seeks FDA approval to market the generic. If the generic manufacturer loses this suit, it gives up little more than its litigation costs and the chance to market the drug. By contrast, the patentee risks losing the exclusive rights to a product that might be earning it billions of dollars per year.

Because the downside risk for drug patentees is so much greater than for alleged infringers, it makes economic sense for patentees to settle infringement suits by paying large sums of money to alleged infringers. That, at least, is the view of the 2nd and 11th Circuits.

However, not everyone agrees with that analysis.

Antitrust Questions

If the 2nd and 11th Circuit decisions become the law of the land, the result will be disaster, according to many experts. "Virtually every pharmaceutical patent case will be resolved by a reverse payment," says Paul Slater, an antitrust attorney at Sterling & Slater.

This will keep drug prices far higher than if there were real competition, adding billions of dollars to health care costs. "That's not good for consumers, especially at a time when medical benefits are becoming so expensive," Simmers says.

Critics, however, can't agree on what to do about exclusion payments. Some say the government should deem these payments per se violations of antitrust law. The FTC and 6th Circuit have adopted this view. The Senate Judiciary Committee also backs this idea and recently approved a bill that would explicitly prohibit exclusion payments. The House may soon introduce similar legislation.

Others think exclusion payments should be subject to a tough, case-by-case analysis.

"There should be a presumption of illegality ?? 1/2 that would put the burden on the drug companies to show a high likelihood that the patent owner would have prevailed if the case had gone to trial," says Thomas Cotter, who teaches patent and antitrust law at the University of Minnesota.

Unless Congress acts, many observers expect the Supreme Court to step in and resolve the circuit court split over how to handle exclusion payments. There is simply too much at stake--for the U.S. economy, pharmaceutical innovation and the health care system--for the High Court to ignore the problem.

"Whether we view [exclusion payments] as antitrust violations or not has enormous consequences," says C. Scott Hemphill, who teaches patent and antitrust law at Columbia University.

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Steven Seidenberg

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