"Pay-for-Delay" Pharma Deals

Sometimes the law really is an ass. The more statutory schemes bury difficult policy questions under complex procedures, the more they trip over themselves. Such is the case with judicial rulings parsing the Hatch-Waxman Act of 1984, enacted to cut consumers' drug costs by encouraging generic drugmakers to challenge brand-name pharmaceutical patents.

Hatch-Waxman was a compromise that attempted to preserve monopoly profits that are legal while expediting patent litigation that threatened those profits. Under special rules, a generic drugmaker certifies that an established patent is either invalid or not infringed, and the patent holder then defends its validity in court. Hatch-Waxman rewards the first challenger to file (should their challenge succeed) with a period of marketing exclusivity for the generic.

At first, the scheme worked - coincidentally revealing the weaknesses of many drug patents. The Federal Trade Commission found that generic challengers prevailed in 73 percent of the patent cases initiated between 1992 and 2000. A later study showed that accused infringers enjoyed a 75 percent success rate in 2002 - 04 Federal Circuit decisions with a final ruling on a drug patent claim. The former president of a generics trade organization reported that successful challenges to Prozac, Zantac, Taxol, and Plantinol alone saved consumers more than $9 billion.

But there was a problem. After generics were introduced, branded manufacturers typically lost about 90 percent of their sales. And as generics flooded into the market, prices for their products fell by about 85 percent, to roughly 15 percent of what the branded manufacturers had been charging. What to do?

Rather than compete, the drug com-panies devised agreements variously called reverse payment, exclusion payment, or pay-for-delay settlements that split monopoly profits for the duration of an untested patent. The payments are "reverse" because it's the brand manufacturer that sues the generic for infringement, and then pays a sum of money for an agreement not to compete.

In 2001 and 2003, the D.C. Circuit and the Sixth Circuit reviewed the same reverse payment agreement in separate litigation, finding it per se illegal. But three years later the Second Circuit ruled, 2 - 1, that absent a showing of fraud or that the patent litigation was baseless, the agreements were permitted "within the scope of the patent." (In re Tamoxifen Citrate Antitrust Litig., 466 F.3d 187, 212 - 213 (2d Cir. 2006).)

That opened the door to a surge of pay-for-delay agreements. According to the Federal Trade Commission, 14 reverse payment deals were reached in 2007, 16 in 2008, 19 in 2009, 31 in 2010, and 28 in 2011. An FTC analysis published in 2010 found that reverse payments cost consumers about $3.5 billion each year.

"As a coauthor, I can tell you that I find these type of reverse payment collusive arrangements appalling," Senator Orrin Hatch said in congressional hearings. "We did not wish to encourage situations where payments were made to generic firms not to sell generic drugs and not to allow multisource generic competition."

This conflict - and more - is about to play out before the California Supreme Court in a marathon case challenging a pay-for-delay deal between the Bayer Corporation and Barr Laboratories, Inc. In 1997 Barr agreed to a consent judgment affirming the validity of Bayer's Cipro patent in return for $398 million. Consumer plaintiffs contend in court filings that that amount was 3.3 to 4 times higher than the profits Barr could reasonably have expected to gain through competition. Simply put, Bayer made Barr an offer it couldn't refuse.

Because the California plaintiffs brought their class action under the state's Cartwright Act and Unfair Competition Law (UCL), the case is the trailing piece of a dispute already adjudicated in favor of pharmaceutical defendants in the Second and Federal circuits. But in July the Third Circuit - home to dozens of drug corporations - raised the stakes, adopting a "quick look rule of reason" analysis that rejected Tamoxifen. "[W]e cannot agree with those courts that apply the scope of the patent test," the appellate court ruled. "In our view, that test improperly restricts the application of antitrust law and is contrary to the policies underlying the Hatch-Waxman Act and a long line of Supreme Court precedent on patent litigation and competition." (In re K-Dur Antitrust Litig., 686 F.3d 197, 214 (3d Cir. 2012).)

In re Cipro Cases I & II now holds center stage, partly because the Fourth District Court of Appeal's October 2011 opinion affirming summary judgment for Bayer applied the Tamoxifen standard - even though under the Cartwright Act, the court could have gone its own way. (See In re Cipro Cases I & II, 200 Cal. App. 4th 442 (2011).) The California Supreme Court granted review last February. (The cases are pending as No. S198616.)

In an amicus brief supporting review by California's highest court, Stanford Law School's Mark A. Lemley contended that the Fourth District had affirmed a ruling that "would shield many anti-competitive agreements from the reach of antitrust law, causing great harm to competition, to consumers, and (by unjustifiably raising the costs of needed medicines) to public health."

Lemley, who has since joined the plaintiffs' legal team, says the lower courts mistakenly confused a presumption of validity in patent challenges with a finding of validity. Even more upsetting to plaintiffs, the Fourth District also ruled that claims under the Cartwright Act and UCL are preempted by federal law.

"Preemption was a surprise," says Joseph R. Saveri, co-lead counsel for the plaintiffs class and principal at the Joseph Saveri Law Firm in San Francisco. "The issue had been mentioned in briefing or oral argument, but was not a focus for either side." In court pleadings, Saveri contends that the appellate court "confused the concepts of exclusive federal juridical jurisdiction and Supremacy Clause preemption, and in doing so issued a ruling that has the potential to wreak havoc in the California courts." He says the ruling could foreclose a whole range of claims brought in state court, including those involving commercial disputes that touch on federal rights or issues.

Merits briefs by Bayer and Barr Laboratories assert that an unbroken line of cases in the federal appellate courts bolster "scope of the patent" analysis, creating a conflict with Cartwright Act and UCL claims. The Third Circuit opinion in K-Dur, however, undermines those contentions by explicitly rejecting the "scope of the patent" standard. With a clear split in the circuit courts, K-Dur defendants in August filed a cert petition with the U.S. Supreme Court.

Cipro could reach oral argument in the California Supreme Court by year's end. Amici for plaintiffs include the California Attorney General's Office, the U.S. Department of Justice and the FTC, the American Medical Association, the American Antitrust Institute (AAI), and a broad range of consumer groups. But after 15 years of defending pay-for-delay in court, big pharma has moved on to more sophisticated deals, such as agreements not to compete with their own branded "authorized generic" for a specified time.

"Cipro was an old-school pay-for-delay deal," says Joshua P. Davis, a professor at University of San Francisco School of Law and author of a 2010 AAI amicus brief in the case. "There have been a thousand variations since then. With so much money at stake, the amount of creativity can be astounding."

But Saveri insists his case remains relevant. "Pay-for-delay deals are not obsolete," he says, "even if the drug companies have come up with different flavors that may be even more virulently anti-competitive. We still think it's important to put the law back in its proper place."

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