A Cure for Collusive Settlements: The Case for a per Se Prohibition on Pay-for-Delay Agreements in Pharmaceutical Patent Litigation

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I. INTRODUCTION

The legal standard for evaluating reverse payments in pharmaceutical infringement settlements (or "pay-for-delay" settlements) has become a highly controversial issue over the past decade and a half. (1) Under a pay-for-delay agreement, a manufacturer of a brand-name pharmaceutical will settle patent infringement litigation by making payments to a defendant generic manufacturer in exchange for the generic manufacturer refraining from entering the market. (2) These agreements have important implications for both patent law and antitrust law because they can allow a potentially invalid patent to remain in effect and restrain competition. (3) Judges, commentators and antitrust enforcement bodies have all reached widely divergent conclusions regarding the appropriate antitrust treatment for these settlements, and while academic disagreement is certain to persist, a single legal standard has been established in FTC v. Actavis (4) (previously FTC v. Watson Pharmaceuticals), which resolved a circuit split created by the United States Court of Appeals for the Third Circuit's July 2012 decision, In re K-Dur Antitrust Litigation. (5) The K-Dur decision brought to head the conflict over of pay-for-delay settlements and, in holding such agreements to be presumptively illegal, rejected precedent established by three separate courts of appeals. (6) The Supreme Court's decision in Actavis announced the "rule of reason" as the controlling liability rule for what some commentators have called "one of the most important business decisions that the court will have issued in quite some time." (7)

This Comment will examine how the particulars of the Hatch-Waxman Act, the regulatory scheme that governs generic competition in pharmaceutical industry, gives rise to reverse settlements in infringement litigation; (8) review existing analysis of the pay for delay problem in judicial decisions, in academic commentary, and amongst antitrust enforcement bodies; (9) and finally, draw upon a decision theoretic framework to propose per se illegality as the appropriate antitrust rule for pay-for-delay settlements. (10)

II. THE RECIPE FOR REVERSE PAYMENTS: OVERLAP OF ANTITRUST, PATENT LAW, AND PHARMACEUTICAL REGULATION

A. Antitrust Law and the Prohibition on Agreements to Restrain Competition

Reverse payments raise problems under Section 1 of the Sherman Act (Section 1), which prohibits "[e]very contract, combination ..., or conspiracy, in restraint of trade or commerce among the several States, or with foreign nations." (11) The rationale for antitrust enforcement is to promote "unfettered competition as the [fundamental] rule of trade." (12) This rationale

   rests on the premise that the unrestrained interaction of
   competitive forces will yield the best allocation of our economic
   resources, the lowest prices, the highest quality and the greatest
   material progress, while at the same time providing an environment
   conducive to the preservation of our democratic political and
   social institutions. (13)

Justice Hugo Black has emphasized that "even were that premise open to question, the policy unequivocally laid down by the Act is competition." (14) The most commonly accepted policy goal underlying antitrust law's reverence for competition is protecting consumers from artificially reduced output and the resulting artificial price increases. (15) Proposed goals that have received less judicial recognition include: protecting small business from larger firms, preventing transfer of wealth from consumers to producers, and promoting innovation. (16) Though these goals are frequently in harmony with each other, these secondary goals will generally yield to the question of whether a given practice tends to increase or decrease output in a given market. (17)

To this end, the Supreme Court has interpreted this broad language to apply only to "unreasonable" restraints on trade, rather than any agreement that literally restrains trade. …

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