Pharmaceutical Patent Litigation Settlements: Implications for Competition and Innovation
Prepared for Members and Committees of Congress
Although brand-name pharmaceutical companies routinely procure patents on their innovative
medications, such rights are not self-enforcing. Brand-name firms that wish to enforce their
patents against generic competitors must commence litigation in the federal courts. Such
litigation ordinarily terminates in either a judgment of infringement, which typically blocks
generic competition until such time as the patent expires, or a judgment that the patent is invalid
or not infringed, which typically opens the market to generic entry.
As with other sorts of commercial litigation, however, the parties to pharmaceutical patent
litigation may choose to settle their case. Certain of these settlements have called for the generic
firm to neither challenge the brand-name company’s patents nor sell a generic version of the
patented drug for a period of time. In exchange, the brand-name drug company agrees to
compensate the generic firm, often with substantial monetary payments over a number of years.
Because the payment flows counterintuitively, from the patent proprietor to the accused infringer,
this compensation has been termed a “reverse” payment.
Commentators have differed markedly in their views of reverse payment settlements. Some
observers believe that they are a consequence of the specialized patent litigation procedures
established by the Hatch-Waxman Act. Others have concluded that when one competitor pays
another not to market its product, such a settlement is anti-competitive and a violation of the
Since 2003, Congress has required that litigants notify federal antitrust authorities of their
pharmaceutical patent settlements. That legislation did not dictate substantive standards for
assessing the validity of these agreements under the antitrust law, however. That determination
was left to judicial application of general antitrust principles. Facing different factual patterns,
some courts have concluded that a particular reverse payment settlement constituted an antitrust
violation, while others have upheld the agreement.
Congress possesses a number of alternatives for addressing reverse payment settlements. One
possibility is to await further judicial developments. Another option is to regulate the settlement th
of pharmaceutical patent litigation in some manner. In the 110 Congress, S. 316, the Preserve
Access to Affordable Generics Act, would have declared that certain reverse payment settlements
would be unlawful. Legislation could also establish a presumption of either legality or illegality
under the antitrust laws, along with consideration of relevant factors to be weighed by the courts.
This report will be updated as needed.
Patent Disputes Under the Hatch-Waxman Act...............................................................................2
FDA Approval Procedures........................................................................................................3
Resolution of Patent Disputes...................................................................................................5
Fundamentals of Reverse Payment Settlements..............................................................................7
Antitrust Implications of Reverse Payment Settlements...............................................................10
Issues and Observations................................................................................................................18
Author Contact Information..........................................................................................................19
he increasing costs of health care have focused congressional attention upon both the
development and public availability of prescription drugs. Congress has long recognized
that the patent system has an important role to play in the pharmaceutical industry in each 1T
respect. The Drug Price Competition and Patent Term Restoration Act of 1984, commonly 2
known as the Hatch-Waxman Act, in part reformed the patent laws to balance incentives for
innovation and competition within the pharmaceutical industry. Congress subsequently amended
this legislation on several occasions, most recently via the Medicare Prescription Drug, 3
Improvement, and Modernization Act of 2003.
Recently, congressional attention has been directed towards one aspect of the patent system, the
settlement of pharmaceutical patent litigation. Although brand-name pharmaceutical companies
commonly procure patents on their innovative products and processes, such rights are not self-
enforcing. If a brand-name drug company wishes to enforce its patents against generic 4
competitors, it must pursue litigation in the federal courts. Such litigation ordinarily terminates
in either a judgment of infringement, which typically blocks generic competition until such time
as the patent expires, or a judgment that the patent is invalid or not infringed, which typically
opens the market to generic entry.
As with other sorts of commercial litigation, however, the parties to pharmaceutical patent 5
litigation may choose to settle their case. Certain of these settlements call for the generic firm to
neither challenge the brand-name company’s patents nor sell a generic version of the patented
drug. In exchange, the brand-name drug company agrees to make cash payments to the generic 67
firm. This compensation has been termed an “exclusion” or “exit” payment or, because the
payment flows counterintuitively, from the patent proprietor to the accused infringer, a “reverse” 8
Commentators differ markedly in their views of reverse payment settlements. Some observers
believe that they result from the specialized patent litigation procedures established by the Hatch-9
Waxman Act. Others conclude that when one competitor pays another not to market its product, 10
such a settlement is anti-competitive and a violation of the antitrust laws.
1 P.L. 84-417, 98 Stat. 1585 (1984).
2 See, e.g., Laura J. Robinson, “Analysis of Recent Proposals to Reconfigure Hatch-Waxman,” 11 Journal of
Intellectual Property Law (2003), 47.
3 P.L. 108-173, 117 Stat. 2066.
4 35 U.S.C. § 281 (2006).
5 See John Fazzio, “Pharmaceutical Patent Settlements: Fault Lines at the Intersection of Intellectual Property and
Antitrust Law Require a Return to the Rule of Reason,” 11 Journal of Technology Law and Policy (2006), 1.
6 See Herbert Hovenkamp et al., “Balancing Ease and Accuracy in Assessing Pharmaceutical Exclusion Payments,” 88
Minnesota Law Review (2004), 712.
7 Valley Drug Co. v. Geneva Pharms., Inc., 344 F.3d 1294, 1309 (11th Cir. 2003).
8 See Thomas F. Cotter, “Refining the ‘Presumptive Illegality’ Approach to Settlements of Patent Disputes Involving
Reverse Payments: A Commentary on Hovenkamp, Janis & Lemley,” 87 Minnesota Law Review (2003), 1789.
9 See Kent S. Bernard & Willard K. Tom, “Antitrust Treatment of Pharmaceutical Patent Settlements: The Need for
Context and Fidelity to First Principles,” 15 Federal Circuit Bar Journal (2006), 617.
10 See Thomas F. Cotter, “Antitrust Implications of Patent Settlements Involving Reverse Payments: Defining a
Rebuttable Presumption of Illegality in Light of Some Recent Scholarship,” 71 Antitrust Law Journal (2004), 1069.
Since 2003, Congress has required that litigants notify federal antitrust authorities of their 11
pharmaceutical patent settlements. To date, Congress has not stipulated substantive standards
for assessing the validity of these agreements under the antitrust law, however. That determination
was left to judicial application of general antitrust principles. Uniformity of results has not been a 12
hallmark of this line of cases. Facing different factual patterns, some courts have concluded that 13
a particular reverse payment settlement constituted an antitrust violation, while others have 14
upheld the agreement. The judicial tendency is towards a more favorable view of reverse 15th
payment settlements, however. In the 110 Congress, one legislative proposal would have
reversed this trend: The Preserve Access to Affordable Generics Act (S. 316), introduced by
Senator Kohl on January 17, 2007, would declare that certain reverse payment settlements would
This report introduces and analyzes innovation policy issues concerning pharmaceutical patent
litigation settlements. It begins with a review of pharmaceutical patent litigation procedures under
the Hatch-Waxman Act. The report then introduces the concept of reverse payment settlements.
Next, the report analyzes the status of reverse payment settlements under the antitrust laws. The
report closes with a summary of congressional issues and alternatives.
In order to obtain patent protection, individuals and firms must prepare and submit applications to 16
the U.S. Patent and Trademark Office (USPTO) if they wish to obtain patent protection. USPTO 17
officials, known as examiners, then assess whether the application merits the award of a patent. 18
Under the Patent Act of 1952, a patent application must include a specification that so
completely describes the invention that skilled artisans are able to practice it without undue
experimentation. The Patent Act also requires that applicants draft at least one claim that
particularly points out and distinctly claims the subject matter that they regard as their 19
While reviewing a submitted application, the examiner will determine whether the claimed
invention fulfills certain substantive standards set by the patent statute. Two of the most important
patentability criteria are novelty and nonobviousness. To be judged novel, the claimed invention
must not be fully anticipated by a prior patent, publication or other knowledge within the public
11 Medicare Prescription Drug, Improvement, and Modernization Act of 2003, P.L. 173 ,117 Stat. 2066, § 1112(a).
12 See John R. Thomas, Pharmaceutical Patent Law (2005), 572-73.
13 In re Cardizem CD Antitrust Litigation, 332 F.3d 896 (6th Cir. 2003).
14 Schering-Plough Corp. v. FTC, 402 F.3d 1056 (11th Cir. 2005).
15 See James C. Burling, “Hatch-Waxman Patent Settlements: The Battle for a Benchmark,” 20-SPG Antitrust (2006),
16 35 U.S.C. § 111 (2006).
17 35 U.S.C. § 131 (2006).
18 P.L. 593, 66 Stat. 792 (1952).
19 35 U.S.C. § 112 ¶ 2 (2006).
domain.20 The sum of these earlier materials, which document state-of-the-art knowledge that is
accessible to the public, is termed the “prior art.” To meet the standard of nonobviousness, an
invention must not have been readily within the ordinary skills of a competent artisan based upon 21
the teachings of the prior art.
If the USPTO allows the application to issue as a granted patent, the owner or owners of the
patent obtain the right to exclude others from making, using, selling, offering to sell or importing 22
into the United States the claimed invention. The term of the patent is ordinarily set at twenty 23
years from the date the patent application was filed. Patent title therefore provides inventors
with limited periods of exclusivity in which they may practice their inventions, or license others
to do so. The grant of a patent permits inventors to receive a return on the expenditure of
resources leading to the discovery, often by charging a higher price than would prevail in a
competitive market. In the pharmaceutical industry, for example, the introduction of generic 24
competition often results in the availability of lower-cost substitutes for the innovative product.
A patent proprietor bears responsibility for monitoring its competitors to determine whether they
are using the patented invention. Patent owners who wish to compel others to observe their
intellectual property rights must usually commence litigation in the federal district courts.
Although the award of a patent claiming a pharmaceutical provides its owner with a proprietary
interest in that product, it does not actually allow the owner to distribute that product to the 25
public. Permission from the FDA must first be obtained. In order to obtain FDA marketing
approval, the developer of a new drug must demonstrate that the product is safe and effective.
This showing typically requires the drug’s sponsor to conduct both preclinical and clinical 26
investigations. In deciding whether to issue marketing approval or not, the FDA evaluates the
test data that the sponsor submits in a so-called New Drug Application (NDA).
Prior to the enactment of the Hatch-Waxman Act, the federal food and drug law contained no
separate provisions addressing marketing approval for independent generic versions of drugs that 27
had previously been approved by the FDA. The result was that a would-be generic drug 28
manufacturer had to file its own NDA in order to sell its product. Some generic manufacturers
could rely on published scientific literature demonstrating the safety and efficacy of the drug by
submitting a so-called paper NDA. Because these sorts of studies were not available for all drugs,
20 35 U.S.C. § 102 (2006).
21 35 U.S.C. § 103 (2006).
22 35 U.S.C. § 271(a) (2006).
23 35 U.S.C. § 154(a)(2) (2006).
24 See Jayanta Bhattacharya & William B. Vogt, “A Simple Model of Pharmaceutical Price Dynamics,” 4 Journal of
Law & Economics (2003), 599.
25 CRS Report RL30989, The U.S. Drug Approval Process: A Primer, by Blanchard Randall IV.
26 See G. Lee Skillington & Eric M. Solovy, “The Protection of Test and Other Data Required by Article 39.3 of the
TRIPS Agreement,” 24 Northwestern Journal of International Law and Business (2003), 1.
27 See Alfred B. Engelberg, “Special Patent Provisions for Pharmaceuticals: Have They Outlived Their Usefulness?,”
39 IDEA: Journal of Law and Technology (1999), 389.
28 See James J. Wheaton, “Generic Competition and Pharmaceutical Innovation: The Drug Price Competition and
Patent Term Restoration Act of 1984,” 34 Catholic University Law Review (1986), 433.
however, not all generic firms could file a paper NDA.29 Further, at times the FDA requested
additional studies to address safety and efficacy questions that arose from experience with the 30
drug following its initial approval. The result was that some generic manufacturers were forced
to prove once more that a particular drug was safe and effective, even though their products were
chemically identical to those of previously approved pharmaceuticals.
Some commentators believed that the approval of a generic drug was a needlessly costly, 31
duplicative, and time-consuming process. These observers noted that although patents on
important drugs had expired, manufacturers were not moving to introduce generic equivalents for
these products due to the level of resource expenditure required to obtain FDA marketing 32
In response to these concerns, Congress enacted the Hatch-Waxman Act, a statute that has been
described as a “complex and multifaceted compromise between innovative and generic 33
pharmaceutical companies.” Its provisions included the creation of two statutory pathways that
expedited the marketing approval process for generic drugs. The first of these consist of
Abbreviated New Drug Applications, or ANDAs. An ANDA allows an independent generic
applicant to obtain marketing approval by demonstrating that the proposed product is
bioequivalent to an approved pioneer drug, without providing evidence of safety and
effectiveness from clinical data or from the scientific literature. The second are so-called §
505(b)(2) application contains a full report of investigations of safety and effectiveness of the
proposed product. In contrast to an NDA, however, a § 505(b)(2) application typically relies, at
least in part, upon published literature providing pre-clinical or clinical data.
The availability of ANDAs and § 505(b)(2) applications often allow a generic manufacturer to
avoid the costs and delays associated with filing a full-fledged NDA. They may also allow an
independent generic manufacturer, in many cases, to place its FDA-approved bioequivalent drug 34
on the market as soon as any relevant patents expire.
As part of the balance struck between brand-name and generic firms, Congress also provided
patent proprietors with a means for restoring a portion of the patent term that had been lost while
awaiting FDA approval. The maximum extension period is capped at a five-year extension 35
period, or a total effective patent term after the extension of not more than 14 years. The scope
29 See Kristin E. Behrendt, “The Hatch-Waxman Act: Balancing Competing Interest or Survival of the Fittest?,” 57
Food & Drug Law Journal (2002), 247.
31 See, e.g., Justina A. Molzon, “The Generic Drug Approval Process,” 5 Journal of Pharmacy & Law (1996), 275
(“The Act streamlined the approval process by eliminating the need for [generic drug] sponsors to repeat duplicative,
unnecessary, expensive and ethically questionable clinical and animal research to demonstrate the safety and efficacy
of the drug product.”).
32 See Jonathan M. Lave, “Responding to Patent Litigation Settlements: Does the FTC Have It Right Yet?,” 64
University of Pittsburgh Law Review (2002), 201 (“Hatch-Waxman has also increased the generic drug share of
prescription drug volume by almost 130% since its enactment in 1984. Indeed, nearly 100% of the top selling drugs
with expired patents have generic versions available today versus only 35% in 1983.”).
33 Natalie M. Derzko, “A Local and Comparative Analysis of the Experimental Use Exception—Is Harmonization
Appropriate?,” 44 IDEA: Journal of Law and Technology (2003), 1.
34 See, e.g., Sarah E. Eurek, “Hatch-Waxman Reform and Accelerated Entry of Generic Drugs: Is Faster Necessarily
Better?,” 2003 Duke Law & Technology Review (Aug. 13, 2003), 18.
35 35 U.S.C. § 156(b) (2006).
of rights during the period of extension is generally limited to the use approved for the product 36
that subjected it to regulatory delay. This period of patent term extension is intended to
compensate brand-name firms for the generic drug industry’s reliance upon the proprietary pre-37
clinical and clinical data they have generated, most often at considerable expense to themselves.
During its development of accelerated marketing approval procedures for generic drugs, Congress
recognized that the brand-name pharmaceutical firm may be the proprietor of one or more patents
directed towards that drug product. These patents might be infringed by a product described by a
generic firm’s ANDA or § 505(b)(2) application in the event that product is approved by the FDA
and sold in the marketplace. The Hatch-Waxman Act therefore established special procedures for
resolving patent disputes in connection with applications for marketing generic drugs.
In particular, the Hatch-Waxman Act states that each NDA applicant “shall file” a list of patents
that the applicant believes would be infringed if a generic drug were marketed prior to the 38
expiration of these patents. The FDA then lists these patents in a publication titled Approved
Drug Products with Therapeutic Equivalence Evaluations, which is more commonly known as 39
the “Orange Book.” Would-be manufacturers of generic drugs must then engage in a specialized
certification procedure with respect to Orange Book-listed patents. An ANDA or § 505(b)(2)
applicant must state its views with respect to each Orange Book-listed patent associated with the
drug it seeks to market. Four possibilities exist:
(1) that the brand-name firm has not filed any patent information with respect to that drug;
(2) that the patent has already expired;
(3) that the generic company agrees not to market until the date on which the patent will
(4) that the patent is invalid or will not be infringed by the manufacture, use or sale of the 40
drug for which the ANDA is submitted.
These certifications are respectively termed paragraph I, II, III, and IV certifications.41 An ANDA
or § 505(b)(2) application certified under paragraphs I or II is approved immediately after 42
meeting all applicable regulatory and scientific requirements. An independent generic firm that
files an ANDA or § 505(b)(2) application including a paragraph III certification must, even after
36 35 U.S.C. § 156(b)(1) (2006).
37 See CRS Report RL30756, Patent Law and Its Application to the Pharmaceutical Industry: An Examination of the
Drug Price Competition and Patent Term Restoration Act of 1984 (“The Hatch-Waxman Act”), and CRS Report
RL32377, The Hatch-Waxman Act: Legislative Changes Affecting Pharmaceutical Patents, both by Wendy H. Schacht
and John R. Thomas.
38 21 U.S.C. § 355(b)(1) (2006).
39 See, e.g., Jacob S. Wharton, “‘Orange Book’ Listing of Patents Under the Hatch-Waxman Act,” 47 St. Louis
University Law Journal (2003), 1027.
40 21 U.S.C. § 355(j)(2)(A)(vii) (2006).
41 See Douglas A. Robinson, “Recent Administrative Reforms of the Hatch-Waxman Act: Lower Prices Now In
Exchange for Less Pharmaceutical Innovation Later?,” 81 Washington University Law Quarterly (2003), 829.
42 21 U.S.C. § 355(j)(5)(B)(i) (2006).
meeting pertinent regulatory and scientific requirements, wait for approval until the drug’s listed 43
The filing of an ANDA or § 505(b)(2) application with a paragraph IV certification constitutes a 44
“somewhat artificial” act of patent infringement under the Hatch-Waxman Act. The act requires
the independent generic applicant to notify the proprietor of the patents that are the subject of a 45
paragraph IV certification. The patent owner may then commence patent infringement litigation
against that applicant.
In order to encourage challenges of pharmaceutical patents, the Hatch-Waxman Act provides
prospective manufacturers of generic pharmaceuticals with a potential reward. That reward
consists of a 180-day exclusivity period awarded to the first ANDA applicant to file a paragraph 46
IV certification. Once a first ANDA with a paragraph IV certification has been filed, the FDA
cannot issue marketing approval to a subsequent ANDA with a paragraph IV certification on the
same drug product for 180 days. Because market prices could drop considerably following the
entry of additional generic competition, the first paragraph IV ANDA applicant could potentially
obtain more handsome profits than subsequent market entrants—thereby stimulating patent 47
challenges in the first instance.
As originally enacted, the Hatch-Waxman Act stipulated that the first paragraph IV certification
triggered entitlement to the 180-day generic exclusivity period. The ANDA applicant need take
no further steps whatsoever. In particular, the statute did not require the generic applicant to
pursue a favorable judgment with respect to the challenged patent, seek FDA approval of the 48
ANDA, or market its generic product once the FDA granted marketing approval. Some
commentators believed that the legislation led to abuses by certain first paragraph IV ANDA
applicants, who “parked” their period of exclusivity in order to bar generic competition, rather
than actively pursue the marketing of their own generic products. As pharmaceutical patent expert
Alfred Engelberg has asserted:
Experience has shown that the first ANDA applicant to file a patent challenge may never
trigger the start of the 180-day period, thereby blocking the FDA from granting approval to
any generic product. More often than not, the first generic challenger will enter into a
lucrative cash settlement with the patent owner that results in a judgment in favor of the
patent and prohibits the challenger from marketing a product under its ANDA until the
patent expires. Therefore, the 180-day exclusivity period never starts. And no subsequently
filed ANDA can be approved unless a final judgment adverse to the patent is obtained by one
of the subsequent applicants. But even in that circumstance, the winning party would be
43 21 U.S.C. § 355(j)(5)(B)(ii) (2006).
44 Eli Lilly & Co. v. Medtronic, Inc., 496 U.S. 1047 (1990).
45 21 U.S.C. § 355(j)(2)(B)(i) (2006).
46 21 U.S.C. § 355(j)(5)(B)(iv) (2006). Section 505(b)(2) applications do not qualify for the 180-day generic exclusivity
period. U.S. Department of Health & Human Services, FDA, Center for Drug Evaluation & Research, “Guidance for
Industry, Listed Drugs, 30-Month Stays, and Approval of ANDAs and 505(b)(2) Applications Under Hatch-Waxman,
As Amended by the Medicare Prescription Drug, Improvement, and Modernization Act of 2003,” at 5 n.14 (Oct. 2004).
47 See generally Mova Pharm. Corp. v. Shalala, 140 F.3d 1060, 1064 (D.C. Cir. 1998).
48 Thomas, supra note 12, at 356.
compelled to wait 180 days before enjoying the fruits of its victory and would not receive
any exclusivity of its own. This result is dictated by the fact that, under the language of the
statute, the 180 days of exclusivity belong solely to the first challenger and not to the first 49
When Congress amended the Hatch-Waxman Act in 2003, it responded to this concern over
“bottlenecking” by generic firms. The Medicare Prescription Drug, Improvement, and
Modernization Act (MMA) established a number of “forfeiture events” that, if triggered, cause a 50
first paragraph IV ANDA applicant to lose its entitlement to the 180-day generic exclusivity.
Among the forfeiture events are: (1) failure to market its product promptly; (2) failure to obtain
FDA approval to market the generic drug in a reasonably timely manner; and (3) all of the
certified patents that entitled the applicant to the 180-day generic exclusivity period have 51
expired. If the first paragraph IV ANDA applicant forfeits its exclusivity, then this period does
not “roll over” to the second such applicant. In that event, no generic firm enjoys exclusivity at 52
all. The possibility of forfeiture was intended “to prevent the practice of ‘parking’ the 53
exclusivity period and to force generic manufacturers to market promptly.”
As discussed previously, a generic firm’s filing of a paragraph IV ANDA may result in a patent
infringement suit brought by a brand-name drug company. In such a litigation, if the NDA holder
demonstrates that the independent generic firm’s proposed product would violate its patents, then
the court will ordinarily issue an injunction that prevents the generic drug company from
marketing that product. That injunction will expire on the same date as the NDA holder’s patents.
Independent generic drug companies commonly amend their ANDAs or § 505(b)(2) applications 54
in this event, replacing their paragraph IV certifications with paragraph III certifications.
On the other hand, the courts may decide in favor of the independent generic firm. The court may
conclude that the generic firm’s proposed product does not infringe the asserted patents, or that 55
the asserted patents are invalid or unenforceable. In this circumstance, the independent generic
firm may launch its product once the FDA has finally approved its ANDA or § 505(b)(2)
In addition to the issuance of final judgment in favor of either the brand-name drug company or
generic firm, another resolution of pharmaceutical patent litigation is possible. This legal situation
49 Alfred B. Engelberg, “Special Patent Provisions for Pharmaceuticals: Have They Outlived Their Usefulness?,” 39
IDEA: The Journal of Law and Technology (1999), 389.
50 P.L. 108-173, 117 Stat. 2066.
51 21 U.S.C. § 355(j)(5)(D)(i) (2006).
52 Thomas, supra note 12, at 366.
53 Brian Porter, “Stopping the Practice of Authorized Generics: Mylan’s Effort to Close the Gaping Black Hole in the
Hatch-Waxman Act,” 22 Journal of Contemporary Health Law and Policy (2005), 177 (citation omitted).
54 21 C.F.R. § 314.94(a)(12)(viii)(C)(1)(i) (2006).
55 Although patents enjoy a presumption of validity, 35 U.S.C. § 282 (2006), that presumption is not uncontestable.
Accused infringers may demonstrate that the patent does not meet the standards established by the Patent Act, and as a
result should not have been issued by the U.S. Patent and Trademark Office. Id. In addition, an accused infringer may
demonstrate that the patent is unenforceable on a number of grounds, among that its owner has engaged in “misuse” of
the patent. Id.
led to a number of cases with varying details, but a common core fact pattern. Upon filing a
paragraph IV ANDA, a generic firm would be sued for patent infringement as provided by the
Hatch-Waxman Act. The NDA holder and generic applicant would then settle their dispute. The
settlement would call for the generic firm to neither challenge the patent nor produce a generic
version of the patented drug, for a period of time up to the remaining term of the patent. In
exchange, the NDA holder would agree to compensate the ANDA applicant, often with
substantial monetary payments over a number of years.
Opinions about the effects of reverse payment settlements upon social welfare have varied. Some
commentators believe that such settlements are anticompetitive. They believe that many of these
agreements may amount to no more than two firms colluding in order to restrict output and share 56
patent-based profits. Such settlements are also said to eliminate the possibility of a judicial
holding of patent invalidity, which may open the market to generic competition and benefit 57
On the other hand, some commentators have found nothing inherently troublesome about reverse
payment settlements. Among their observations is that there is a general judicial policy in favor of
promoting settlement. Settlements can allow the parties to avoid the expenses of litigation,
achieve a resolution to the dispute in a timely manner, and avoid the risk of an uncertain result in 58
the courtroom. The settlement of litigation further serves the goal of resolving disputes in a 59
peaceful manner, and also preserves scarce judicial resources. Second, any settlement of
litigation between rational actors necessarily involves an exchange of benefits and obligations. As
Judge Richard Posner has explained:
[A]ny settlement agreement can be characterized as involving “compensation” to the
defendant, who would not settle unless he had something to show for the settlement. If any
settlement agreement is thus to be classified as involving a forbidden “reverse payment,” we 60
shall have no more patent settlements.
Third, certain reverse payment settlements have allowed for the introduction of generic
competition prior to the date the relevant patent expires. It is possible, for example, for the brand-
name and generic firms to “split” the remaining patent term, with the generic firm being allowed
to market a competing product prior to the running of the full patent term. Such agreements may
potentially benefit consumers, certainly in comparison to a judgment that the patent is not invalid 61
Finally, the dispute settlement procedures established by the Hatch-Waxman Act may themselves
promote the use of reverse payment settlements in pharmaceutical patent litigation. In patent
56 See John E. Lopatka, “A Comment on the Antitrust Analysis of Reverse Payment Patent Settlements: Through the
Lens of the Hand Formula,” 79 Tulane Law Review (2004), 235.
57 See Jonathan M. Lave, “Responding to Patent Litigation Settlements: Does the FTC Have It Right Yet?,” 64
University of Pittsburgh Law Review (2002), 201.
58 See generally Chris Guthrie, “Better Settle Than Sorry: The Regret Aversion Theory of Litigation Behavior,”
University of Illinois Law Review (1999), 43.
59 See Stephen McG. Bundy, “The Policy in Favor of Settlement in an Adversary System,” 44 Hastings Law Journal
60 Asahi Glass Co. v. Pentech Pharmaceuticals, Inc., 289 F. Supp. 2d 986 (N.D. Ill. 2003) (emphasis in original).
61 See Marc G. Schildkraut, “Patent-Splitting Settlements and the Reverse Payment Fallacy,” 71 Antitrust Law
Journal (2004), 1033.
litigation outside the Hatch-Waxman Act context, the accused infringer is ordinarily using or
marketing the patented technology. A judicial finding of infringement would expose the accused
infringer to an injunction, along with damages awarded for past uses and sales. As a result, the
accused infringer may well be willing to compensate the patent proprietor in order to avoid the 62
risk of such a holding.
Some observers believe that the structure of the Hatch-Waxman Act alters the traditional balance
of risks between the plaintiff-patentee and accused infringer. As explained by one federal district
[I]n creating an artificial act of infringement (the ANDA IV filing), the Hatch-Waxman
Amendments grant generic manufacturers standing to mount a validity challenge without
incurring the cost of entry or risking enormous damages flowing from infringing commercial
sales . . . . Because of the Hatch-Waxman scheme, [the generic firm’s] exposure in the patent
litigation was limited to litigation costs, but its upside—exclusive generic sales—was
immense. The patent holder, however, has no corresponding upside, as there are no 63
infringement damages to collect, but has an enormous downside—losing the patent.
As a result, some commentators believe that it is entirely predictable that the unique procedures
of the Hatch-Waxman Act have resulted in the new phenomenon of reverse payment 64
At the present time, the congressional response to pharmaceutical patent litigation settlements has
been limited. In the 2003 Medicare Prescription Drug, Improvement, and Modernization Act 65
(MMA), Congress mandated that the Department of Justice (DOJ) and the Federal Trade
Commission (FTC) receive copies of certain patent settlements agreements in the pharmaceutical
field. The filing requirement applies to agreements executed on or after January 7, 2004, between
an ANDA applicant, on one hand, and either the NDA holder or an owner of an Orange Book-66
listed patent, on the other. Such agreements trigger the statutory notification requirement if they
relate to one of three topics:
(1) The manufacture, marketing, or sale of the brand-name drug that is the listed in the
(2) The manufacture, marketing, or sale of the generic drug for which the ANDA was
(3) The 180-day generic exclusivity period as it applies to that ANDA, or to another ANDA 67
filed with respect to the same brand-name drug.
The MMA stipulates that certain agreements are not subject to this filing requirement. In
particular, agreements that solely consist of purchase orders for raw materials, equipment and
62 See Kristopher L. Reed, “A Return to Reason: Antitrust Treatment of Pharmaceutical Settlements Under the Hatch-
Waxman Act,” 40 Gonzaga Law Review (2004), 457.
63 In re Ciprofloxacin Antitrust Litigation, 261 F. Supp. 2d 188, 251 (E.D.N.Y. 2003).
64 Cotter, supra note 10.
65 P.L. 108-173, 117 Stat. 2066.
66 MMA, §1112(a)(1).
67 MMA, §1112(a)(1).
facility contracts, employment or consulting contracts, or packaging and labeling contracts do not 68
need to be submitted to the DOJ or FTC. Further, the filing obligation applies only to ANDAs
that include a paragraph IV certification. In particular, agreements with respect to § 505(b)(2)
applications need not be filed.
Although the MMA imposed a filing obligation upon certain patent settlements between
pharmaceutical firms, that legislation did not set substantive standards as to the validity of these 69
agreements. Both prior and subsequent to congressional enactment of the MMA, however,
various government and private actors asserted that certain reverse payment settlements violated
the antitrust laws. In order to resolve these claims, different courts applied general principles of 70
antitrust law. Facing different factual patterns, the courts ultimately reached varying results.
After introducing the basic concepts of antitrust law, this report next reviews several of the more
notable judicial opinions analyzing reverse payment settlements.
The primary legal mechanism for addressing conduct alleged to be anti-competitive—including
reverse payment settlements—consists of the antitrust laws. The antitrust laws are comprised of
the Sherman Act, the Clayton Act, the Federal Trade Commission Act, and other federal and state
statutes that prohibit certain kinds of anticompetitive economic conduct. Although a complete
review of the antitrust laws exceeds the scope of this report, other sources provide more 71
information for the interested reader.
Section 1 of the Sherman Act declares “[e]very contract, combination in the form of trust or
otherwise, or conspiracy, in restraint of trade . . . to be illegal.” The courts have long interpreted
this language as applying only to unreasonable restraints of trade. The determination of whether
particular conduct amounts to an unreasonable restraint of trade is commonly conducted under
the “rule of reason.” Under this approach, “the finder of fact must decide whether the questioned
practice imposes an unreasonable restraint on competition, taking into account a variety of
factors, including specific information about the relevant business, its condition before and after 72
the restraint was imposed, and the restraint’s history, nature, and effect.” The rule of reason
essentially calls upon courts to reach a judgment of reasonableness by balancing the
anticompetitive consequences of a challenged practice against its business justifications and
potentially procompetitive impact.
Other sorts of restraints are deemed unlawful per se. Per se illegality is appropriate “[o]nce
experience with a particular kind of restraint enables the Court to predict with confidence that the 73
rule of reason will condemn it.” The Supreme Court has explained that “there are certain
68 Id. at §1112(c)(1).
69 See Thomas, supra note 12, at 571.
70 See M. Elaine Johnston, et al., “Antitrust Aspects of Settling Intellectual Property Litigation,” 867 Practising Law
Institute/Patent (June 2006), 159.
71 See CRS Report RL31026, General Overview of United States Antitrust Law, by Janice E. Rubin.
72 Id. at 906 (quoting Arizona v. Maricopa City Medical Soc., 457 U.S. 332, 343 n.13 (1982)).
agreements or practices which because of their pernicious effect on competition and lack of any
redeeming virtue are conclusively presumed to be unreasonable and therefore illegal without 74
elaborate inquiry as to the precise harm they have caused or the business excuse for their use.”
Among the practices that have been judged per se violations include price fixing, group boycotts, 75
and market division.
As this report will review, the courts have differed in their approaches to reverse payment
settlements in pharmaceutical patent litigation. The Court of Appeals for the Sixth Circuit has
held that one reverse payment settlement constituted a per se violation of the antitrust laws. The
Courts of Appeals for the Second, Eleventh, and Federal Circuits have declined per se treatment
to reverse payment settlements, employing a more permissive mode of analysis based upon the 76
traditional rule of reason approach. This report next reviews the facts and holdings of significant
judgments addressing the antitrust implications of reverse payment settlements.
In In re Cardizem CD Antitrust Litigation,77 the Court of Appeals for the Sixth Circuit held that a
reverse payment settlement agreement between Hoescht Marion Roussel Inc. (HMR) and Andrx
Pharmaceuticals was per se invalid under the antitrust laws. HMR marketed the prescription drug
CARDIZEM CD® and owned several patents pertaining to that product. Andrx was the first
generic firm to file a paragraph IV ANDA pertaining to CARDIZEM CD®. HMR subsequently
sued Andrx for patent infringement as provided by the Hatch-Waxman Act.
Shortly after the FDA tentatively approved Andrx’s ANDA, HMR and Andrx agreed to an interim
settlement. Under the terms of that deal, Andrx agreed to refrain from marketing a generic version
of CARDIZEM CD® until one of three events occurred: namely, that Andrx obtained a final,
unappealable judgment in its favor with respect to its patent claims; that HMR licensed Andrx to
market a generic version of CARDIZEM CD®; or that HMR licensed a third party to do so.
Andrx further agreed to continue pursuing its ANDA at the FDA and not to relinquish or transfer
its 180-day period of generic marketing exclusivity. In exchange, HMR paid Andrx $10 million 78
Various purchasers of CARDIZEM CD® subsequently brought suit against HMR and Andrx,
alleging several violations of state and federal antitrust laws. The District Court for the Eastern
District of Michigan subsequently concluded that the HMR-Andrx agreement constituted a 79
horizontal market allocation agreement that was per se illegal under the antitrust laws.
Following an appeal, the Court of Appeals for the Sixth Circuit affirmed.
74 Northern Pacific Railroad Co. v. United States, 356 U.S. 1, 5 (1957).
75 Rubin, supra note 71.
76 See generally Larissa Burford, “In re Cardizem & Valley Drug Co.: The Hatch-Waxman Act, Anticompetitive
Actions, and Regulatory Reform,” 19 Berkeley Technology Law Journal (2004), 365; Richard D. Chaves Mosier &
Steven W. Ritcheson, “In re Cardizem and Valley Drug: A View from the Faultline Between Patent and Antitrust in
Pharmaceutical Settlements,” 20 Santa Clara Computer & High Technology Law Journal (2004), 497.
77 332 F.3d 896 (6th Cir. 2003).
78 Id. at 901-03.
79 105 F. Supp. 2d 682, 699 (E.D. Mich. 2000).
The court of appeals characterized the deal as one in which HMR and Andrx agreed to eliminate
competition in the CARDIZEM CD® market. Because Andrx was entitled to the 180-day generic
exclusivity, and because its agreement occurred prior to the 2003 amendments to the Hatch-80
Waxman Act, Andrx was able to “park” its generic exclusivity and prevent all other generic
firms from marketing. The Sixth Circuit reasoned that the HMR-Andrx agreement was
appropriately classified as a so-called horizontal agreement; that is to say, a restraint of trade
involving businesses at the same level of competition. Such agreements had long been classified 81
as antitrust violation per se, the court explained.
In reaching this conclusion, the Sixth Circuit explicitly rejected several arguments offered by
HMR and Andrx. The defendants asserted that because the courts did not have extensive
experience with reverse payment settlements, they lacked a sufficient basis for declaring them per
se illegal. The Sixth Circuit instead noted that “[w]hatever may be its peculiar problems and
characteristics, the Sherman Act, so far as price-fixing agreements are concerned, establishes one 82
uniform rule applicable to all industries alike.” Judge Oberdorfer further stated that “it is one
thing to take advantage of a monopoly that naturally arises from a patent, but another thing
altogether to bolster the patent’s effectiveness in inhibiting competitors by paying the only 83
potential competitor $40 million per year to stay out of the market.”
The first court of appeals to address reverse payment settlements, the Sixth Circuit is thus far the
only appellate court to apply a rule of illegality per se to reverse payment settlements. Subsequent
courts, facing somewhat different factual circumstances, gave these settlements less strict
antitrust oversight by applying an analysis that more closely resembled the traditional rule of
reason approach. This report next reviews these developments, which arose from judicial
opinions issued by the Eleventh and Second Circuits.
In Valley Drug Co. v. Geneva Pharmaceuticals, Inc.,84 the U.S. Court of Appeals for the Eleventh
Circuit declined to employ the per se rule employed by the Sixth Circuit. Instead, the Eleventh
Circuit adopted a more permissive method of analysis that resembles the traditional rule of
reason. The Valley Drug case involved an arrangement Abbott Laboratories had reached with two
different generic firms, Zenith Goldline Pharmaceuticals and Geneva Pharmaceuticals. Abbott
was the NDA holder of the drug HYTRIN®, prescribed for treatment of hypertension and
enlarged prostate. Abbott also owned several patents pertaining to HYTRIN®, including U.S.
Patent No. 5,504,207 (the ‘207 patent). Zenith and Geneva each filed paragraph IV ANDAs with 85
respect to HYTRIN®, resulting in patent infringement litigation.
Abbott subsequently negotiated separate settlement agreements with Zenith and Geneva. In both
agreements, the generic firm promised not to sell any pharmaceutical product containing
terazosin hydrochloride, the active ingredient in HYTRIN®, until a relevant Abbott patent
80 See supra notes 48-49 and accompanying text.
81 105 F. Supp. 2d at 907.
82 Id. at 908 (quoting United States v. Socony-Vacuum Oil Co., 310 U.S. 150, 222 (1940)).
84 344 F.3d 1294 (11th Cir. 2003).
85 Id. at 1298-99.
expired or was held invalid, or someone else introduced a generic version of this drug. Each
generic firm also promised not to transfer or sell its rights to a 180-day exclusivity under the
Hatch-Waxman Act. In return, Abbott promised to pay each generic firm a significant sum of
money each month, subject to a number of termination events, including introduction of a generic 86
version of HYTRIN® by a third party.
At trial, the district court held that the two settlement agreements constituted a horizontal market
allocation that was per se illegal under the Sherman Act. According to the district court, the
generic houses were poised to market a generic version of HYTRIN®, but simply agreed not to 87
enter the market due to their deal with Abbott.
Following an appeal, the Eleventh Circuit reversed the district court’s opinion and remanded for
further proceedings. In reaching this result, the court of appeals held that the standard of per se 88
illegality was “premature” and inappropriate. According to Judge Anderson, the district court
had not appropriately factored the existence of the ‘207 patent into the analysis. The court of
appeals explained that:
[A] patentee’s allocation of territories is not always the kind of territorial market allocation
that triggers antitrust liability, and that is so because the patent gives its owner a lawful
exclusionary right. In characterizing the Agreements as territorial market allocations
agreements, the district court did not consider that the ‘207 patent gave Abbott the right to
exclude others from making, using, or selling anhydrous terazosin hydrochloride until
October of 2014, when it is due to expire. To the extent that Zenith and Geneva agreed to
market admittedly infringing products before the ‘207 patent expired or was held invalid, the 89
market allocation characterization is inappropriate.
Rather, the court of appeals identified several factors that should be considered by the district
court on remand, including:
(1) the scope of the exclusionary potential of the patent;
(2) the extent to which the agreements exceed that scope; and
(3) the resulting anticompetitive effects.90
In its subsequent decision in Schering-Plough Corp. v. FTC,91 the Eleventh Circuit confirmed the
approach taken in Valley Drug. This case concerned the Schering-Plough Corp. (Schering) drug
K-DUR 20®, which is used to treat or prevent low potassium levels in the blood. Although the
drug’s active ingredient, potassium chloride, lies in the public domain, Schering’s U.S. Patent
September 5, 2006. When two generic firms, Upsher-Smith Laboratories (Upsher) and ESI
86 Id. at 1300-01.
87 Id. at 1301-03.
88 Id. at 1304.
89 Id. at 1305.
90 Id. at 1312.
91 402 F.3d 1056 (11th Cir. 2005).
92 Id. at 1057.
Lederle Inc. (ESI), filed paragraph IV ANDAs, Schering promptly brought suit for patent
Schering subsequently resolved its differences with Upsher and ESI via two separate agreements.
During its negotiations with Upsher, Schering refused to pay Upsher merely to “stay off the 93
market.” Schering did agree to license five of Upsher’s products, however. In addition, Upsher 94
promised not to market a generic version of K-DUR 20® prior to September 1, 2001. In
exchange, Schering promised to pay Upsher a $60 million up-front royalty, along with $10 95
million in milestone royalty payments and royalties of 10% or 15% on sales.
Under the ESI settlement, Schering agreed to allow ESI to market a generic version of K-DUR
20® on January 1, 2004. Schering also agreed to pay $5 million to cover ESI’s legal fees, as well
as $10 million if ESI received FDA approval to market its generic product by a certain date. 96
Finally, Schering obtained the right to license two generic products from ESI for $15 million.
Following a complaint by FTC counsel, the FTC Commission held that these arrangements were 97
anticompetitive under the rule of reason. Schering and Usher appealed the Commission’s
decision to the Eleventh Circuit, which reversed. Confirming its analysis under the contours laid
out in Valley Drug, the Eleventh Circuit first observed that the ‘743 patent enjoyed a statutory 98
presumption of validity. Further, under the terms of their agreements with Schering, Upsher was
able to market a generic product a full five years before the ‘743 patent’s expiration, while ESI 99
could market two years in advance.
The Eleventh Circuit next concluded that the licenses granted to Schering constituted adequate
consideration for the payments made by Schering, rather than amounting to thinly disguised
payoffs to delay the introduction of generic competition. According to Judge Fay, Schering had
long been interested in licensing those products. As a result, the Schering-Upsher and Schering-
ESI agreements were legitimate settlements within the scope of the ‘743 patent’s exclusionary 100
Finally, the court of appeals compared the scope of the ‘743 patent with that of the Schering-
Upsher and Schering-ESI agreements. Judge Fay concluded that they were commensurate, with
each specifically addressing controlled release microencapsulated potassium chloride tablets. As a
result the agreements could not be said to be overly broad, nor did they delay the entry of other 101102
generic products. As a result, the decision of the FTC was reversed.
93 Id. at 1059.
95 Id. at 1060.
96 Id. at 1060-61.
97 In re Schering-Plough Corp., Docket No. 9297 (Dec. 8, 2003) (available at 2003 WL 22989651).
98 402 F.3d at 1068.
99 402 F.3d at 1067-68.
100 Id. at 1068-72.
101 Id. at 1073.
The issue of reverse payment settlements came before the Second Circuit in In re Tamoxifen 103
Citrate Antitrust Litigation. This judicial opinion resulted from extremely complex factual and
legal circumstances. Zeneca was the owner of patent covering tamoxifen, the most widely
prescribed drug for the treatment of breast cancer. A generic firm, Barr Laboratories, filed an
ANDA that it subsequently amended to include a paragraph IV certification. Zeneca responded by
filing a charge of patent infringement in keeping with the procedures of the Hatch-Waxman Act.
In an opinion issued in 1992, the district court held that the tamoxifen patent was invalid and 104
Zeneca appealed the district court’s judgment. While the appeal was pending, Zeneca and Barr
entered into a confidential settlement agreement. As part of that deal, Barr agreed to amend its
ANDA to include a paragraph III certification and further agreed not to sell its own generic
version of tamoxifen until the patent’s expiration in 2002. In exchange, Zeneca agreed to pay Barr
$21 million and to provide Barr with a non-exclusive license to sell an “authorized generic” 105
version of tamoxifen—that is to say, an Zeneca-manufactured tamoxifen under Barr’s label.
The parties further agreed that if the tamoxifen patent were declared invalid or unenforceable, 106
then Barr could revert to its paragraph IV certification.
Pursuant to the settlement, and consistent with governing law at that time, the court of appeal
remanded the case to the district court, which then vacated its judgment of invalidity and 107
unenforceability. Following the settlement between Zeneca and Barr, three other generic
firms—Novopharm Ltd., Mylan Pharmaceutical, Inc., and Pharmachemie B.V.—filed tamoxifen 108
ANDAs with paragraph IV certifications. Zeneca once more filed charges of patent
infringement against each of these firms as allowed by the Hatch-Waxman Act. In each of these
three cases, the court refused to rely upon the vacated 1992 judgment to hold that Zeneca’s
tamoxifen patent was invalid. Further, the courts hearing the Noveopharm and Pharmachemie 109
cases upheld the validity of Zeneca’s tamoxifen patent. The Mylan case ended with a consent
order that FDA approval of the generic application would not become effective prior to the 110
expiration of the tamoxifen patent.
While those three cases were pending, the FDA granted tentative approval for Pharmachemie to
market a generic version of tamoxifen. However, Barr petitioned the FDA to recognize that Barr 111
was entitled to 180 days of generic marketing exclusivity as the first paragraph IV ANDA
103 429 F.3d 370 (2d Cir. 2005).
104 See Imperial Chem. Indus., PLC v. Barr Labs., Inc., 795 F. Supp. 619 (S.D.N.Y. 1992).
105 429 F.3d at 377. For further discussion of authorized generics, see CRS Report RL33605, Authorized Generic
Pharmaceuticals: Effects on Innovation, by John R. Thomas.
106 429 F.3d at 378.
107 Subsequent to that decision, the Supreme Court held in U.S. Bancorp Mortgage Co. v. Bonner Mall Partnership,
513 U.S. 18 (1994), that mootness by reason of settlement does not justify vacatur of a federal civil judgment. See U.S.
Philips Corp. v. Sears Roebuck & Co., 55 F.3d 592, 598 (Fed. Cir. 1995). The Supreme Court’s ruling did not have
retroactive effect, however, and as a result the tamoxifen patent remained extant.
108 429 F.3d at 378-79.
109 See Zeneca Ltd. v. Novopharm Ltd., 111 F.3d 144 (Fed. Cir. 1997); Zeneca Ltd. v. Pharmachemie B.V., 2000 WL
34335805 (D. Mass. Sept. 11, 2000).
110 Zeneca UK Ltd. v. Mylan Pharms., Inc., No. 00-2239 (W.D. Pa. 2000).
111 See supra notes 46-47 and accompanying text.
applicant. The effective result was that the FDA prevented the marketing of other generic versions
of tamoxifen until either the Zeneca patent expired, or 180 days elapsed from the date that Barr
sold its own generic version of tamoxifen. Of course, because Barr was already distributing
Zeneca’s “authorized generic,” Barr apparently had little incentive to launch its own generic 112
Consumers and consumer groups subsequently filed numerous lawsuits challenging the
settlement between Zeneca and Barr on antitrust grounds. The trial court rejected these claims, 113
however, and on appeal the Second Circuit affirmed. The Second Circuit began by observing
that although a tension existed between antitrust law and patent law, the courts have long favored
settlements of litigation. The court of appeals saw the law as well-settled that “‘where there are
legitimately conflicting [patent] claims . . ., a settlement by agreement, rather than litigation, is
not precluded by the [Sherman] Act,’ although such a settlement may ultimately have an adverse 114
effect on competition.”
In view of longstanding policies favoring the settlement of litigation, the court of appeals
concluded that “without alleging something more than the fact that Zeneca settled after it lost to
Barr in the district court that would tend to establish that the Settlement Agreement was unlawful,
the assertion that there was a bar—antitrust or otherwise—to the defendants’ settling the litigation 115
at the time that they did is unpersuasive.” The Second Circuit largely based its conclusion upon
the fact that the outcome of patent litigation was unpredictable. That the 1992 judgment had
found the tamoxifen patent invalid was, by itself, not of great moment: “That Zeneca had
sufficient confidence in its patent to proceed to trial rather than find some means to settle the case 116
first should hardly weigh against it.” While holding that the reasonableness of the settlement 117
must be judged at the time the agreement was concluded, the court of appeals further observed
that federal district courts in the later lawsuits disagreed with the 1992 judgment and upheld the 118
The Second Circuit next declined to condemn the existence of reverse payments in a
pharmaceutical patent settlement as an antitrust violation per se. Agreeing with the analysis of the
Eleventh Circuit in the Schering-Plough case that the Hatch-Waxman changed the relative risk
profiles of the patent holder and accused infringer, the court of appeals found “no sound basis for
categorically condemning reverse payments employed to lift the uncertainty surrounding the 119
validity and scope of the holder’s patent.”
The court of appeals further disagreed with the plaintiffs’ contention that the Zeneca-Barr
settlement was unlawful because “[t]he value of the consideration provided to keep Barr’s
product off the market . . . greatly exceeded the value Barr could have realized by successfully
defending its trial victory on appeal and entering the market with its own competitive generic
112 429 F.3d at 379-80.
113 In re Tamoxifen Citrate Antitrust Litigation, 277 F.Supp.2d 121(E.D.N.Y. 2003).
114 Id. at 386 (quoting Standard Oil Co. v. United States, 283 U.S. 163, 171 (1931)).
115 Id. at 389.
116 Id. at 389.
117 Id. at 388.
119 Id. at 391.
product.”120 To the contrary, the Second Circuit reasoned, it may well make economic sense for
the patent proprietor to pay its generic rival more than its expected earnings. The reason, of
course, is that the total profits of the patent holder and generic firm in a competitive market would
be less than the supracompetitive profits earned by the patentee alone, and that the patent
proprietor might find it sensible to pay a portion of that difference to the generic firm. The
Second Circuit further held that “so long as the patent litigation is neither a sham nor otherwise
baseless, the patent holder is seeking to arrive at a settlement in order to protect that to which it is
presumptively entitled: a lawful monopoly over the manufacture and distribution of the patented 121
The Second Circuit’s analysis continued with a review of the terms of the Zeneca-Barr settlement
agreement. Citing Schering-Plough, the court of appeals framed the question as “whether the 122
‘exclusionary effects of the agreement’ exceed the ‘scope of the patent’s protection.’” The court
of appeals characterized the tamoxifen patent as a compound patent, rather than one directed
towards a more limited formulation. As a result, although the settlement precluded Barr from
manufacturing any generic form of tamoxifen, so too did Zeneca’s compound patent. The
settlement agreement therefore did not restrain the marketing of non-infringing products, the 123
The Second Circuit further explained that the Zeneca-Barr settlement also allowed Barr to
introduce a authorized generic market into the tamoxifen market. Although the price difference
between the Zeneca and Barr products was modest, this consumer benefit nonetheless occurred
almost nine years before Zeneca’s patent was due to expire. As a result, the settlement agreement
produced more competition than would have occurred had the parties not settled and Zeneca had 124
prevailed on appeal. As a result, the Second Circuit affirmed the trial court’s conclusion that the
Zeneca-Barr settlement did not violate the antitrust laws.
In In re Ciprofloxacin Hydrochloride Antitrust Litigation,125 the Federal Circuit agreed with the
Second and Eleventh Circuits that reverse payment settlements should be analyzed under the rule
of reason to determine whether they impose an unreasonable restraint on competition or not. That
litigation involved a patent claiming ciprofloxacin hydrochloride, the active ingredient in the
antibiotic CIPRO®. That patent is owned by Bayer AG and Bayer Corp. (collectively “Bayer”).
When a generic firm, Barr Labs., Inc. (“Barr”), filed a paragraph IV ANDA, Bayer responded by
bringing suit for patent infringement under the provisions of the Hatch-Waxman Act on January
resale or make quarterly payments to Barr of $49.1 million. Bayer paid Barr a total of $398 127
million under this agreement.
120 Id. at 391-92.
121 Id. at 392.
122 Id. at 397 (quoting Schering-Plough, 402 F.3d at 1076).
123 Id. at 398.
124 Id. at 399-400.
125 ___ F.3d ___ (Fed. Cir. Oct. 15, 2008) (Case No. 2008-1097).
126 Id., slip op. at 3-5. Other generic drug companies associated with Barr also concluded agreements with Bayer. Id.
127 Id. at 5 n.5.
In 2000 and 2001, purchasers of Cipro and several advocacy groups brought antitrust action
claiming that the agreements violated the antitrust law. The district court rejected these 128
arguments, and on appeal the Federal Circuit affirmed. The Federal Circuit initially concluded
that a rule of per se illegality was inappropriate because the courts could not confidently predict
that reverse payment settlements had an anticompetitive effect with limited potential for
procompetitive benefit. As a result, the court of appeals concluded that rule of reason was the 129
appropriate mode of analysis.
Applying the rule of reason, the Federal Circuit confirmed that the plaintiffs had failed to
demonstrate that the settlements agreements violated the antitrust laws. The court of appeals
reasoned that the scope of the Bayer-Barr agreement did not exceed that of Bayer’s patent. As a
result, Bayer’s rights as a patentee allowed it to exclude generic firms from profiting from its 130
invention. The court of appeals further concluded that, in the absence of evidence of fraud
before the USPTO or sham litigation, the court need not consider the validity of the patent in its
antitrust analysis. Judge Prost observed that a patent is presumed valid, and held that a
“settlement is not unlawful if it serves to protect that to which the patent holder is legally 131
entitled—a monopoly over the manufacture and distribution of the patented invention.”
In upholding the settlement, the Federal Circuit cited with favor the district court’s observation
that no evidence demonstrated that it blocked other generic firms from challenging Bayer’s
patent. Indeed, Judge Prost observed, the patent survived subsequent challenges by four other 132
generic manufactures. Finally, the court of appeals also cited “a long-standing policy in the law 133
in favor of settlements” in support of its conclusion.
In the absence of explicit congressional guidance, the federal courts have applied general
principles of antitrust law to reach varying results with respect to pharmaceutical patent litigation
settlements. It is significant that the different cases considered by these courts have each involved
their own, distinct set of facts. Nonetheless, the difference between the per se rule on one hand,
and alternative approaches similar to the rule of reason on the other, have arguably contributed to
different judicial outcomes.
Several options are available for Congress. One possibility is to await further judicial
developments. While the United States Supreme Court has not yet addressed pharmaceutical
litigation patent settlements, it is possible that the highest Court may do so in the future. Supreme
Court review would resolve the arguable split among the courts of appeal with respect to this
issue. Continuing case law developments in the lower courts could also lead to an informed
consensus on the antitrust consequences of reverse payment settlements.
128 Id. at 6-8.
129 Id. at 11.
130 Id. at 14.
131 Id. at 21-22.
132 Id. at 24.
133 Id. at 14.
Another option is to regulate the settlement of pharmaceutical patent litigation in some manner.
For example, S. 316, the Preserve Access to Affordable Generics Act, proposed to outlaw such
agreements. In particular, that bill would amend the Clayton Act to provide in part:
It shall be unlawful under this Act for a person, in connection with the sale of a drug product,
to directly or indirectly be a party to any agreement resolving or settling a patent
infringement claim [in] which—(A) an ANDA filer receives anything of value; and (B) the
ANDA filer agrees not to research, develop, manufacture, market, or sell the ANDA product 134
for any period of time.
This proposed legislation would effectively make reverse payment settlements a per se antitrust
violation, as the Sixth Circuit concluded in the Cardizem CD case.
Other alternatives are also possible. Legislation could establish a presumption of either legality or
illegality under the antitrust laws, along with consideration of relevant factors to be weighed by
the courts. Such factors might include the scope of the asserted patent, the legitimacy of the
litigation position of the two parties, the size of the payment made by the patent holder, and
whether the settlement allows the generic firm to market a competing product prior to the patent’s 135
expiration. Such legislation could effectively codify the antitrust treatment of settlements of
pharmaceutical patent litigation by the Second and Eleventh Circuits, or instead provide
somewhat more stringent oversight of reverse payment settlements.
The settlement of pharmaceutical patent litigation forms an important issue because such
litigation is itself important to our public health system. Our patient population relies upon brand-
name drug companies to develop new medicines, but it also relies upon generic firms to increase
access to such medications once they have been developed. The Hatch-Waxman Act provides for
patent litigation between these two traditional rivals as a primary vehicle through which these
competing demands are mediated. When concluded in a manner that comports with antitrust
principles, such settlements may further the public policy goals of encouraging the labors that
lead to medical innovation, but also distributing the fruits of those labors to consumers.
John R. Thomas
This report was funded in part by a grant from the John D. and Catherine T. MacArthur Foundation.
134 S. 316, § 3.
135 See Thomas, supra note 12, at 584-87.