Senate Moves to Clarify Tension between Patent and Antitrust Law

Patent law limits competition, keeping prices high in order to foster innovation. Antitrust law promotes competition, keeping prices low to benefit consumers. The following “reverse payment” scenario illustrates the tension between the two:

Branded Drug Company sells a patented drug. Generic Drug Company files an application to bring a competing generic drug to market. Branded sues Generic for patent infringement. A settlement is reached where Branded pays Generic to delay entering the market, a so-called “reverse payment.” Branded maintains its patent, and continues to monopolize the market for the patented drug.

The question at the heart of the reverse payment scenario is whether drug patents are truly property. According to both pharmaceutical companies and the U.S. Court of Appeals for the Eleventh Circuit, less competition and higher prices are the natural result of the “permissible monopoly” created by patents, and thus there is nothing wrong with reverse payments. Lawyers for the federal government disagree, arguing that patents are not true property rights, but rather a right to “try to exclude.” The Federal Trade Commission (FTC) has thus determined that “collusion by pharmaceutical manufacturers is contrary to free competition, to the interests of consumers, and to the principles underlying antitrust law.” The Department of Justice (DOJ), which did not oppose the settlements during the Bush administration, now considers these deals to be straightforward violations of antitrust law, and thus “presumptively unlawful.”

Regardless of who is correct, the decade long battle reached an important point on October 13th, when the Senate Judiciary Committee voted 12 to 7 to approve its draft legislation, the Preserve Access to Affordable Generics Act of 2009. The bill makes it unlawful for a person, in connection with the sale of a drug product, to be a party to any agreement resolving or settling a patent infringement claim in which: (1) an abbreviated new drug (generic) application filer receives anything of value; and (2) such filer agrees not to research, develop, manufacture, market, or sell the generic product for any period.

The Judiciary Committee bill specifically cites the appellate court decision approving reverse payments, and points out that several settlements since that decision have resulted in generic companies receiving compensation to keep cheaper drugs off the market. According to an FTC study released in June, consumers, insurance companies, and the federal government have spent an extra $3.5 billion for prescription drugs every year because of such settlements.

As expected, the Senate’s reverse payment legislation is strongly opposed by both generic and branded drug companies. These companies argue that parties need to be able to negotiate such agreements, given the uncertainties of litigation, and that reverse payment legislation will result in more cases going to trial rather than settling. The result, they say, could be less predictable litigation costs, less generic drug filings, and less generic drugs for consumers.

Although courts are reluctant to oppose reverse payments, both Democrats in Congress and the Obama Administration seem eager to score political points by slamming pharmaceutical companies as responsible for the high cost of healthcare. With the DOJ and FTC aligned on the issue, it is increasing likely that the recently approved Senate Judiciary bill will end the era of reverse payments between branded and generic drug companies.

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