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Drugs giants' payments to delay market arrival of generic product rivals should be viewed as anti-competitive as a default, US court rules

Out-Law News | 23 Jul 2012 | 11:01 am | 2 min. read

Payments that large pharmaceutical companies sometimes pay to manufacturers of 'generic' drugs to delay the launch of those products should be viewed as illegal infringements on competition law unless they are shown to be otherwise, the US Court of Appeals has said.

The Court said that lower courts in the US had been wrong to rule that branded drugs manufacturers could legitimately pay generics companies to delay bringing their products to market 'as long as competition is restrained only within the scope of the patent', subject to some limited exceptions. The basis of such a finding was flawed, it said.

District courts should automatically look upon those "reverse payment" deals as anti-competitive unless they can be shown to be otherwise under certain criteria, the Court of Appeal said.

"We will direct the District Court to apply a quick look rule of reason analysis based on the economic realities of the reverse payment settlement rather than the labels applied by the settling parties," the Court said in its ruling. "Specifically, the finder of fact must treat any payment from a patent holder to a generic patent challenger who agrees to delay entry into the market as prima facie evidence of an unreasonable restraint of trade, which could be rebutted by showing that the payment was for a purpose other than delayed entry or offers some pro-competitive benefit."

"This second possible defense attempts to account for the – probably rare – situations where a reverse payment increases competition. For example, a modest cash payment that enables a cash-starved generic manufacturer to avoid bankruptcy and begin marketing a generic drug might have an overall effect of increasing the amount of competition in the market," it said.

The Court of Appeal said that the lower courts had made the mistaken assumption that patents protecting branded drugs were always valid, when this was not always the case. It said the courts' interpretation of the reverse payment deals gave extra power to patent holders in relation to the "burden of proof" in patent cases than they should get.

The Court of Appeals said that the US Supreme Court had already recognised in a number of cases "that valid patents are a limited exception to a general rule of the free exploitation of ideas" and that, as such, "the public interest supports judicial testing and elimination of weak patents."

US Congress "drew a careful line between patent protection and the need to provide incentives for competition in the pharmaceutical industry" when it drafted the US Hatch–Waxman Act, the Court of Appeals ruled. The Court said that Congress' objectives in doing so provided support for its own findings.

"The judicial preference for settlement, while generally laudable, should not displace countervailing public policy objectives or, in this case, Congress's determination – which is evident from the structure of the Hatch-Waxman Act and the statements in the legislative record – that litigated patent challenges are necessary to protect consumers from unjustified monopolies by name brand drug manufacturers," the Court said.

"We also emphasize that nothing in the rule of reason test that we adopt here limits the ability of the parties to reach settlements based on a negotiated entry date for marketing of the generic drug: the only settlements subject to antitrust scrutiny are those involving a reverse payment from the name brand manufacturer to the generic challenger," it added.

The lower courts had wrongly assumed that generics manufacturers would be sufficiently "motivated" to challenge "weak" patents even if initial challenges had failed, the Court said. In added that in any case "a monopolist drug manufacturer" might be able to "pay off whole series of challengers" from its "high profit margins" rather than risk losing its patent protection through court battles.

"The position in the EU is quite different, both because we don't have similar provisions to the Hatch-Waxman Act and there is no case law that pay for delay is automatically anti competitive," competition law expert Natasha Pearman of Pinsent Masons, the law firm behind Out-Law.com, said.

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