C3 Patent and Intellectual Property Law

Sep102010 | Steve O'Donnell

Reverse settlements still ok for now.

In a reverse settlement, at least in the pharmaceutical context, a patent owner agrees to license the patent or pays off a generic company to drop their patent challenge.

There are regulatory issues that make pharmaceutical patent litigation different than other cases. If a generic company wants to enter the market for a patented drug it needs to file a certification with the FDA regarding the patent, one such common certification is under “paragraph IV.” With a paragraph IV certification, the generic is alleging that the patent is unenforceable. When they do that, the patent holder has a chance to file a lawsuit for a technical act of patent infringement (meaning it’s really not an infringement yet, but the statute says it is). If they do that, then the FDA puts everything on hold until either the case ends, or 30 months, whichever comes first.

If this litigation goes to it’s conclusion and the generic company wins, then the patent holder potentially loses years of patent exclusivity and the huge stacks of cash that comes with a patented drug. The generic victor in this situation will have the 180 days of exclusivity as I noted, but then a flood of other generics is virtually guaranteed, which will erode profits.

With the billions of dollars at stake, it’s hard to imagine that someone wouldn’t come up with a clever innovation. You know, necessity being the mother of all invention, or something like that.

Increasingly we’re seeing reverse settlements. In these settlements, the generic company agrees to drop the lawsuit, typically in exchange for the ability to enter the market under a license. In that way, the patent holder is happy because they get to hold onto their exclusivity and the generic is happy because they’re guaranteed entry into the market, often for a longer time then the 180 days marketing exclusivity that they could have received from the FDA.

The FTC and the class action plaintiff’s bar has been arguing that these settlements are anticompetitive, and I have to agree with them. The drug companies argue that the settlements are pro-competitive because they ensure that a generic will enter the market. However, even if a generic enters the market, it’s still not an open marketplace, it’s an oligopoly (a market controlled by a small number of businesses). Accordingly, the generic keeps its price fairly close to the brand name drug, after all, there is no real competition to drive the price lower.

This battle between the FTC/lawmakers and the pharmaceutical industry has been going on for a couple years and the pharmaceutical industry appears to be winning. Just the other day, the 2nd Circuit refused a full rehearing  of a case concerning one such settlement.

What do you think should happen? Should these settlements be barred? If so, doesn’t that go against the strong bias we have towards equitable settlements? I think it’s clear that the settlements are anti-competitive, but patents themselves are anti-competitive and most recognize that they’re generally beneficial. Maybe the statute should incentivize a second generic challenging after a reverse settlement. Right now the 180 day generic exclusivity is only available to the first challenger, maybe changing that would mitigate the impact of reverse settlements. I’m not sure what the answer is, but I’d love to hear some ideas.