Senate Bill Limiting Reverse Payment Settlements

Reverse payment settlements occur when a brand-name drug manufacturer makes a "reverse" payment to settle a patent dispute with a generic drug manufacturer. In exchange for this payment, the generic drug manufacture agrees to delay its entry into the drug market. These payments are called "reverse" payments because it is the patent-holder/plaintiff that is making a payment to the alleged patent-infringer/defendant.

The FTC has challenged these payments as anticompetitive, with mixed results. See Schering-Plough Corp. v. FTC, 402 F.3d 1056 (11th Cir. 2005) (reversing FTC's ruling that reverse payment settlement agreement was unlawful under Sherman Act). During the Bush administration, the DOJ disagreed with the FTC's position -- a rare split between the two federal agencies charged with enforcing the antitrust laws. The DOJ under the Obama administration, however, has realligend itself with the FTC's position. See DOJ's brief in In re Ciproflaxin Hydrochloride Antitrust Litigation (2nd Circuit). This blog has followed this issue here and here and here.

On October 15, 2009, the Senate Judiciary Committee passed the Preserve Access to Affordable Generics Act, S. 369. The bill originally outlawed all reverse-payment settlements. But the bill was later amended to create a rebutable presumption that reverse-payment settlements were anticompetitive. To overcome this presumption, the drug manufacturer would have to prove by "clear and convincing evidence" that the deal promotes competition. Opponents of the bill argue that the standard for rebutting the presumption should be reduced to the "preponderance of the evidence."

The bill raises some interesting questions. How would these shifting burdens differ from the structured rule of reason analysis that the DOJ has already advocated for analyzing reverse-payment settlements? How would a drug company prove that such a deal was procompetitive? Would it be enough to prove that the reverse-payment was commensurate with the avoided litigation cost? How much in excess of the avoided litigation costs is too much? What role would the underlying merits of the patent dispute play in such an analysis? Would the court have to hold a "little trial" on the patent dispute before deciding the antitrust issue? How does the regulatory framework of the Hatch Waxman Act affect the competitive analysis?

DOJ Proposes Structured Rule of Reason Analysis for RPM

Christine A. Varney, the Assistant Attorney General of the U.S. Department of Justice, gave a speech in which she proposed a “structured rule of reason analysis” for analyzing resale price maintenance. See Christine A. Varney, “Antitrust Federalism: Enhancing Federal/State Cooperation,” Remarks as Prepared for the National Association of Attorneys General (October 7, 2009).

As noted elsewhere on this blog, the law of resale price maintenance has changed dramatically in the last two years. The Supreme Court's 2007 decision that RPM is no longer per se illegal raises the question of how RPM should be analyzed under the rule of reason--a question which no court had the chance to answer during the previous 100 years when RPM was per se illegal. Some courts are addressing the issue now, such as the Eastern District of Pennsylvania case involving retail giant Babies "R" Us. See McDonough et al. v. Toys “R” Us, Inc. et al., No. 06-242, 2009 WL 2055168 (E.D. Pa. July 15, 2009) (certifying class action).

In a speech to the National Association of Attorneys General, Ms. Varney suggested a "structured rule of reason analysis" which creates a presumption of illegality if certain structural conditions are present in the market. Those structural conditions would exist when RPM was used: "(1) by a manufacturer cartel to identify members that are cheating on a price-fixing agreement; (2) when used to organize a retailer cartel by coercing manufacturers to eliminate price cutting; (3) when used by a dominant retailer to protect it from retailers with 'better distribution systems and lower cost structures,' thereby forestalling innovation in distribution; and (4) when used by a manufacturer with market power to give retailers an incentive not to sell the products of smaller rivals or new entrants."

Under Varney's proposal, if a plaintiff established a prima facie case that one of these four structural conditions existed, then the burden of proof "would shift to the defendant to demonstrate either that its RPM policy is actually--not merely theoretically--procompetitive or that the plaintiff's characterizations of the marketplace were erroneous."

In her address to the states Attorneys General, Varney noted that states may not be limited by the per se rule. She explained: "In the wake of Leegin, many states are reevaluating their legal oversight over RPM arrangements and considering whether state law may treat them as per se illegal." As previously noted on this blog, Maryland has already acted on this issue by amending its antitrust laws to specifically state that RPM is per se illegal under Maryland law despite Leegin.