Business Litigation - Friday, July 30, 2010 8:29 - 0 Comments

A Look At Reverse Settlements In Pharmaceutical Patent Cases

In Ciprofloxacin Hydrochloride Antitrust Litigation, the Second Circuit Court of Appeals recently indicated that it is willing to reexamine its prior case law with respect to “reverse settlements” which arise in the context of pharmaceutical patent disputes. In a “reverse settlement,” a branded drug manufacturer files a patent infringement suit against a competitor who seeks federal approval to market a generic version of the same drug patented by the branded manufacturer. But in so doing, the Plaintiff-branded manufacturer risks that a court might invalidate the patent on its successful pharmaceutical product – the very patent that it has sued to enforce. Thus, in many cases the Plaintiff-branded manufacturer settles its claim against the Defendant-generic competitor by paying the competitor to delay its entry into the market. This practice harms consumers because it keeps cheaper generic drugs off the market.

Reverse settlements, also characterized as “pay for delay” settlements, were criticized by President Obama during his campaign when he promised to “ensure that the law effectively prevents anticompetitive agreements that artificially retard the entry of generic pharmaceuticals onto the market.” California Representative Henry Waxman has stated, “As coauthor of the Hatch-Waxman Act, I can tell you that I find these type[s] of reverse payment collusive arrangements appalling.”

Now the Second Circuit has begun to weigh in. In Ciprofloxacin, purchasers of the antibiotic Cipro sued Cipro’s manufacturer, Bayer, as well as generic manufacturer Barr Laboratories, for violating antitrust laws by entering into a reverse settlement as described above. The Plaintiffs alleged that Bayer settled its patent infringement case against Barr by paying off Barr in exchange for Barr’s agreement to withhold release of its generic version of Cipro.

The Department of Justice Antitrust Division joined the Ciprofloxacin Plaintiffs to argue that reverse settlement agreements in the pharmaceutical industry should be treated as “presumptively unlawful” under Section 1 of the Sherman Act. This represented a marked departure from the longstanding Department of Justice position under the Bush Administration, which essentially turned a blind eye to reverse settlements.

In an opinion released April 28, 2010, the Second Circuit noted that “there are compelling reasons to revisit [precedent]” with respect to reverse settlements, including the substantial increase in the number of reverse settlements in pharmaceutical patent cases, as well as the federal government’s recent about-face on the legality of reverse settlements. The Court invited the Ciprofloxacin Plaintiffs and the government to petition for an in banc hearing to consider whether prior precedent condoning reverse settlements should be overturned.

This U-turn by the federal government with respect to reverse settlements, not to mention the potential for reversal of Second Circuit precedent, represent a most interesting development in antitrust law. We expect that reverse settlements will receive increased scrutiny from the Department of Justice and also the Federal Trade Commission going forward. If the Second Circuit reverses Ciprofloxacin, we foresee that reverse settlements will be the subject of increased litigation in the federal courts. If you need additional information on this subject contact Archie Grubb at 800-898-2034 or by email at Archie.Grubb@beasleyallen.com.