Second Circuit Punts on Pay for Delay Settlements

On April 29, 2010, a panel of three judges at the Second Circuit Court of Appeals gave hope to the opponents of pay-for-delay settlements, when the Court’s decision invited plaintiffs-appellants of Arkansas Carpenters Health and Welfare Fund v. Bayer AG to petition for an en banc rehearing of the case. On September 7, 2010, however, the Court denied Appellants’ petition without providing any reasoning.
Pay-for-delay settlements, also known as reverse exclusion payments, are becoming increasingly common. These agreements usually occur when a brand-name pharmaceutical manufacturer pays an allegedly infringing generic manufacturer to settle claims of patent infringement in exchange for agreeing not to enter the market. By paying the generic manufacturer more than it could have earned by entering the market, brand-name manufacturer can increase its profit by maintaining its monopoly.

The Federal Trade Commission (“FTC”) has consistently challenged these anti-competitive agreements in the courts and through testimonies before Congress. Calling them “unconscionable agreements,” FTC Chairman Leibowitz said, “these types of settlements will continue to insulate more and more drugs from competition.” FTC has estimated that pay-for-delay settlements are costing consumers and our health system at least $3.5 billion a year. American Association for Retired Persons (“AARP”) has noted that “[e]ven for those patients who are insured but who are on fixed or limited incomes, having a generic option is often the difference between having access to health care treatment and not having any treatment option at all.”

In its September ruling, the Second Circuit relied on its prior decision, In re Tamoxifen Citrate Antitrust Litig., 466 F.3d 187 (2d Cir. 2006), in which the Court dismissed an FTC order challenging a pay-for-delay settlement. The Tamoxifen Court ruled the practice legal under antitrust law, because the settlement provided the brand-name drug manufacturer no more protection from generic competition than its patent already did.

Dissenting Judge of the Cipro case, Rosemary Pooler called for “reexamination” of the Court’s decision in Tamoxifen, noting that the decision “has inspired vigorous criticism from a variety of sources” and has caused “a dramatic surge in the practice of pharmaceutical patents holders paying potential competitors to concede the validity of their patents.”

In fact, that was the exact scenario in Cipro. In 1991, Barr Labs sought to market a generic version of ciprofloxacin hydrochloride (“Cipro”) for anthrax treatment. Bayer, patent holder for Cirpo, sued Barr for infringement. After Bayer’s denial of its motion for summary judgment, it settled with Barr for about $400 million. In exchange, Barr agreed not to market its generic product during the life of the patent, a key element of the revenue exclusion payment agreement.

The plaintiffs sued Bayer and Barr, alleging violation of antitrust laws. The trial court granted summary judgment for defendants, which a three-judge panel at the Second Circuit upheld, relying on Tamoxifen. But, the Court invited the plaintiffs to request a rehearing by the full nine-judge panel.

The Court found such a rehearing may be appropriate because United States Department of Justice has urged a review of Tamoxifen decision, number of pay-for-delay settlements have substantially increased since Tamoxifen, a principal drafter of the Hatch-Waxman Act criticized the settlement practice, and Tamoxifen decision was based on an erroneous understanding that a pay-for-delay settlement with the first generic competitor would not prevent other generic competitors from attempting to file suit. The Hatch-Waxman Act advocates for consumer access to low-cost drugs by promoting generic competition and challenging invalid patents. However, the Act is silent on the legality of pay-for-delay settlements.

Now that the full Second Circuit has denied the rehearing, as Judge Pooler pointed out, “[i]t will be up to the Supreme Court or Congress to resolve” it.

So far, only the Sixth Circuit, in its 2002 Cardizem decision, has held that such agreements as “per se illegal restraint on trade.” Similar to Tamoxifen and Cipro, the Eleventh Circuit’s Schering-Plough decision in 2005 ruled in favor of the pay-for-delay settlements. When the Appeals Courts from different US Circuits arrive at differing legal standards, the US Supreme Court should resolve this inconsistency. However, the Supreme Court refused to review the split between the Sixth and Eleventh Circuits regarding these settlements. A petition for certiorari is likely to be filed with the Supreme Court for Cipro, despite the previous unsuccessful results.

FTC Chairman Leibowitz believes that “legislation would be the most effective way to stop these deals.” A bill to ban these agreements was included in the House’s health care reform proposal last fall, and a similar measure was supported by the White House. Unfortunately, the Senate kept the measure from being included in the national health reform bill enacted in March. The House then included the measure in an appropriations bill approved on July 1, 2010. But the Senate passed one appropriations bill on July 22 without the provision. On July 29, however, the Senate Appropriations Committee narrowly passed a measure, including this reform as an amendment to the FTC’s budget authorization. Legislation to ban or strictly limit these kinds of settlements remains pending in Congress in the forms of S. 369 and H.R. 1706. Supporters of the legislation hope to introduce it again before the end of the year.

In the meantime, consumers of prescription drugs can expect to pay higher prices.

Parva Fattahi
(202) 589-1834
pfattahi@dbmlawgroup.com