Is the Hatch-Waxman Act Flawed and Should the Supreme Court Fix It?

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During the recent oral argument before the United States Supreme Court in the so-called "pay-for-delay" case before it, Justice Antonin Scalia suggested that the Hatch-Waxman Act "made a mistake," and he questioned whether the Court should "overturn understood antitrust" laws to "patch up a mistake Hatch-Waxman made." What was the mistake Justice Scalia was referring to and should the Supreme Court "patch up" this mistake?

Justice Scalia's comments came in the case of Federal Trade Commission v. Actavis. Oral argument was heard on March 25, 2013, and an opinion is expected by the Supreme Court by the end of its term in late June.

The case before the Court
In FTC v. Actavis, the FTC had challenged a settlement between a brand-name drug manufacturer and generic manufacturers as a violation of the antitrust laws. Under the settlement, the generic manufacturers were allowed to enter the market five years before the expiration of the patent. In addition, the brand-name manufacturer made payments to the generic companies. These payments are so-called "reverse payments" in that they were being made by the plaintiff in a patent infringement action to the alleged infringers. The FTC contended that such "reverse payments" are prima facie evidence of an anticompetitive effect. The FTC contends that such payments are a quid pro quo for the generic manufacturers staying out of the market longer than they might otherwise in a settlement without a reverse payment. In that regard, the FTC contends that a settlement without a reverse payment passes antitrust muster because the interests of the generic manufacturers are aligned with those of the consumer. In the non-reverse payment settlement, both the consumer and the generic manufacturer have an interest in the generic entering the market as soon as possible. The negotiated entry date reflects each opposing party's assessment of the strength and validity of the challenged patent. To the FTC, the reverse payment from the brand-name manufacturer to the generic manufacturer disrupts the alignment of the generic manufacturer with the consumer. The generic manufacturer is now willing to be bought off with some of the brand-name manufacturer's monopoly profits to delay the generic drug's entry into the market longer than it would in a non-reverse payment settlement. (Hence, such reverse payments are also called "pay-for-delay" settlements.)

Many litigants, and some courts, have contended that an unintended consequence of the Hatch-Waxman Act was to foster such reverse payments. This is undoubtedly the "mistake" in the Hatch-Waxman Act that Justice Scalia was referring to.

Unintended consequences of the Hatch-Waxman Act

Prior to Hatch-Waxman, passed in 1984, a generic drug manufacturer had to engage in clinical trials of its own prior to submitting an application to the Food and Drug Administration for approval to market its generic version of a brand-name pharmaceutical. Such clinical trials were deemed acts of infringement and could subject the generic to damage claims resulting from such trials.

The Hatch-Waxman Act was designed, in part, to encourage generics to enter the market. It did so by allowing a generic to largely "ride-on-the-back" of the brand-name manufacturer. It did not have to engage in separate studies of the safety and efficacy of the drug.  It merely submitted an Abbreviated New Drug Application that certified that the conditions of use had been previously approved; that the active ingredient was the same as previously approved; that the route of administration, dosage and strength were the same as the brand drug; and that the generic was the bioequivalent to the brand drug. Along with the ANDA, the generic submitted a certification under the Hatch-Waxman Act regarding the patent of the brand drug. The most pertinent certification for the reverse payment litigation is the so-called "paragraph IV certification," which stated that either the original patent was invalid or the patent would not be infringed by the manufacture, use or sale of the generic. Under the Act, a paragraph IV certification is deemed an act of infringement requiring the patent holder to sue within 45 days or lose the right to do so.

Critics assert that the "flaw" or "mistake" made by Hatch-Waxman is that the foregoing scheme shifts the risks in the infringement litigation from the generic to the brand-name manufacturer. Previously, the generic could face significant damages allegedly caused by the clinical trials. Hatch-Waxman eliminated that risk for the generic. The brand-name manufacturer, however, faces the risk that the patent could be found invalid. Hence, the "flaw" or "mistake" in Hatch-Waxman is that it encourages reverse payments from the patent holder to the generic.

Antitrust implications
During oral argument, Justice Scalia asked whether the Court should "overturn understood antitrust laws just to … patch up a mistake that Hatch-Waxman made." It is likely that the "understood antitrust laws" that he was referring to was the "scope-of-patent" test adopted by the Eleventh Circuit in the case on appeal to the Supreme Court. The Eleventh Circuit had held that if the reverse payments from the brand-name manufacturer to the generic manufacturer were made for entry by the generic before the expiration of the patent then the settlement was immune from antitrust attack as within the "scope of the patent."

The FTC in its appeal to the Supreme Court seeks to change that rule, asking the Court to conclude that the fact of a reverse payment should be prima facie evidence of an anticompetitive effect, shifting the burden to the defendants to establish a procompetitive justification for the payment.  

A problem with the FTC's approach, however, is that it may be hard to contain to just the settlement of infringement actions between brand-name and generic drug manufacturers. Many patent infringement actions may involve what amounts to "reverse" payments. For example, suppose that the patent holder believes that it has been damaged by the infringer in the potential amount of $100 million. However, it decides to settle the infringement litigation for only $50 million. Such "forgiveness" of some of the potential damages is certainly something of value transferred to the infringer by the patent holder. That transfer could be deemed a reverse payment.

There is a possibility that the Court will adopt neither the FTC's approach nor the Eleventh Circuit’s approach. Rather, it will apply a traditional Rule of Reason framework to reverse payment settlements, which would require the plaintiff to establish a prima facie case of anticompetitive effect caused by the settlement but based on grounds other than just the fact of a reverse payment.

Whether the outcome of the case, it has a potential to shape the contours of brand-name infringement litigation against generic drug manufacturers that could also alter the framework of the Hatch-Waxman Act, whether intentionally or not. Whether the Court decides to address the "mistake" identified by Justice Scalia is also up in the air.

Jeffery M. Cross is a partner in the litigation practice group at Freeborn & Peters where he primarily focuses on the areas of antitrust and trade regulation. With nearly 40 years of extensive trial experience, Mr. Cross has represented a variety of corporations and businesses throughout the country on such diverse issues as securities fraud, contracts, real estate, environmental regulations, libel and slander, false advertising and commercial code. He also currently serves as an adjunct professor of antitrust law at the John Marshall School of Law in Chicago. Jeffery can be reached at (312) 360-6430 or jcross@freeborn.com.

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