Bill Introduced in House Prohibits Reverse Settlement Agreements

On March 25, 2009, Bobby Rush (D-Ill) of the House of Representatives introduced legislation (H.R. 1706) that would prohibit brand-name drug companies from compensating generic drug companies to delay the entry of a generic drug into the market. The Protecting Consumer Access to Generic Drugs Act of 2009 seeks to limit the widely adopted practice of reverse payment settlements in the pharmaceutical drug industry. The full text of the Act can be found here.

Reverse payment settlements occur when a patent on a name-brand drug expires, effectively ending the brand-name’s exclusive right to make, use, and sell a patented drug. Once the patent expires, generic drug makers are allowed to sell the same drug without paying any royalties to the patent owner, resulting in a lower-priced generic drug compared to the price of the name-brand drug. The lower-priced generic drug typically outsells the name-brand drug digging into the profits of the name-brand drug companies.

In order to prevent the sudden loss of profits resulting from the expiration of a drug patent, name-brand drug companies enter into agreements in which the generics receive large payments in return for a delaying the entry of the drug into the market. Critics of these agreements argue that it delays cheaper drugs from entering the market, resulting in a gain for both the generic and name-brand drug companies at the expense of the public.

The Federal Circuit, which is the appeals court for all patent-related cases, has found nothing legally inappropriate about these agreements. The controlling law is currently the Hatch-Waxman Act, rewards the first generic drug company to surmount a successful patent infringement suit against a name-brand drug company with 180 days of exclusive marketing rights. In order to avoid costly and lengthy patent litigation, name-brand drug companies often pay the generic companies to settle the litigation in what has become known as reverse settlement agreements.

A carefully crafted agreement can camouflage the payments made to the generic drug companies, making it seem as if the payment is not for a delayed entry to market. For example, a study published last May by the FTC indicates that in several agreements struck in 2007, the brand-name drug maker agreed not to sponsor its own cheaper “authorized generic” during the exclusivity period once the generic maker did launch the drug. Other forms of compensation include royalties through licensing agreements, or an agreement by the generic drug maker to withdraw the patent challenge and wait until the name-brand company’s patent expires.

In an attempt to fill this apparent gap in enforcement, the FTC has filed anti-trust suits against a number of drug companies (both name-brand and generic), including Bayer AG, Cephalon Inc., Watson Pharmaceuticals Inc., Par Pharmaceutical Cos. Inc., and Paddock Laboratories to name only a few. But these lawsuits have largely been unsuccessful since the agreements apparently do not run afoul of any antitrust laws either. The newly-elected Obama administration has appointed Jon Leibowitz as the FTC commissioner, a strong opponent of reverse payment agreements. However, it seems that legislation is needed to fill in the gaps of both patent and antitrust laws.

The Protecting Consumer Access to Generic Drugs Act of 2009 is the latest attempt to fill this legal void. This current bill would make reverse payment an unfair and deceptive act or practice and an unfair method of competition under the Federal Trade Commission Act. It would also give the FTC the power to make rules enforcing the law as it develops. The bill is likely to face heavy, and I mean heavy, opposition from the pharmaceutical drug industry. In fact, there have been several attempts to pass legislation regarding reverse payments but all have failed due mostly to successful lobbying by the pharmaceutical industry.