California Supreme Court Shows How Pharma 'Pay For Delay' Can Violate Antitrust Laws

from the antitrust dept

For many years now, we’ve been talking about the problematic practice of “pay for delay” in the pharma industry. This involved patent holders paying generic pharmaceutical makers some amount of money to not enter the market in order to keep their own monopoly even longer. There’s a complex process behind all of this, which often involves the larger pharmaceutical company first suing a generic maker, and then “settling” by agreeing to pay a sum of money to the generic maker. But, part of the “settlement” is that the generic drugmaker stays out of the market for longer than they otherwise would have needed to do so. Not surprisingly, the rise of such pay for delay, or “reverse payment” deals, came as a result of the Hatch-Waxman Act from 1984, which was supposed to encourage generic drugs to enter the market. But, because Congress does a really crappy job understanding game theory, those behind the bill failed to realize they were actually setting up incentives for the reverse (we’ll get to how and why in a moment).

Either way, there have been a number of anti-trust lawsuits filed over these practices and finally, in 2013, in a case against Actavis, the Supreme Court ruled that these kinds of deals may violate antitrust laws, and the FTC had every right to use antitrust law against drugmakers. Late last year, the FTC finally put those powers to use (meanwhile, over in Europe, regulators have been going after the same practice).

And yet, even with the Supreme Court weighing in, all is not yet settled. Here in California, there was a separate case, revolving around pharma giant Bayer and the making of its super popular drug Cipro. There were a few different issues raised in this case, focusing mainly on whether California’s state antitrust law could also be used against these deals (rather than just federal antitrust law) and also what “test” had to be used to determine if these deals violated the law (and, as part of that, whether you could presume that any such pay for delay deal must violate antitrust law).

The ruling itself [pdf] is a bit dense, but says that, yes, California’s antitrust law does apply, and Bayer’s efforts may violate antitrust law. But, in the process, it does a pretty good job laying out just how ridiculous the Hatch-Waxman Act was in terms of the incentives it actually set up, compared to the stated purpose of the bill:

The Hatch-Waxman Act illustrates the law of unintended consequences. Congress wrote into the act a substantial incentive for generics to enter markets earlier by offering a 180-day exclusivity period to the first generic filer, and only that filer, to challenge a patent…. The theory was that a generic would be more likely to challenge dubious patents if offered the carrot of an enormously valuable six-month period in which only it and the brand could produce a drug…. Otherwise, ?free rider? problems might arise: every generic would have an incentive to hold back and let some other generic be the one to shoulder the risk and litigation costs associated with challenging a patent.

In other words, somewhat incredibly, Hatch and Waxman basically decided the best way to encourage more non-monopoly-covered drugs on the market was… to grant them more monopolies. Ugh. What is it with politicians falsely assuming that everyone needs a government granted monopoly to do anything?

And, as with most government-granted monopolies, things don’t quite go according to plan:

This solution may well have encouraged more generics to file patent challenges, but not without creating a series of new problems. In other settings, a patentee might have little incentive to buy off a challenger in order to preserve its monopoly and continue reaping monopoly profits, for the simple reason that paying off the first challenger would simply encourage another challenger, and then another, and then another…. Two features of the Hatch-Waxman Act change this dynamic. First, the 180-day exclusivity period created a bottleneck; no one else could receive FDA approval until after its expiration…. Second, other generics tempted to challenge a patent in the wake of a settlement with the first-filing generic would have to wait out an automatic 30-month stay the brand could obtain just by opposing their requests for FDA approval….

This legal regime means that, regardless of the degree of likely validity of a patent, the brand and first-filing generic have an incentive to effectively establish a cartel through a reverse payment settlement….

In other words, since Hatch-Waxman gives one generic company its own monopoly, the incentives are for the patent holder to figure out a way to pay off that company to not actually make use of that monopoly, thus allowing the original pharma company to keep its monopoly even longer.

Hey, how about we don’t deal with the problems of government granted monopolies by piling more government granted monopolies on top of them? Just a thought…

And, because of all of these issues, it also can be used to block challenge to the validity of a pharma patent:

Rather than expend litigation costs on either side, the brand and generic can reach a settlement that reflects the likely validity or invalidity of the patent (stronger patent, smaller settlement; weaker patent, bigger settlement), grants the generic a share of monopoly profits, and leaves the brand the sole manufacturer of the product.

It is likely for this reason that reverse payment settlements, practically unheard of before the Hatch-Waxman Act, have proliferated in the years since its enactment…. This is probably not what Congress intended.

You think?

Either way, that question on the validity of the patent comes into play in the analysis of how antitrust law applies. After all, patents are technically an exception to antitrust law, since they’re a government sanctioned monopoly. But what about an invalid patent?

Courts thus must reconcile the two bodies of law, making ?an adjustment between the lawful restraint on trade of the patent monopoly and the illegal restraint prohibited broadly by? antitrust law….

At the extremes, this is easy. If a patent were known to be invalid, a private agreement nevertheless giving it effect would be plainly illegal…. Conversely, if a patent were known to be valid, an agreement foreclosing competition no more than the statutory monopoly would not restrain trade beyond what federal law permitted, and the rights patent law affords the patentee would supersede any state law prohibition. Difficulties emerge when we move from a hypothetical patent known to be determinately valid or invalid to the real world, where validity may be unclear. When assessing the antitrust implications of an agreement arising from a patent, the truth about the patent?s validity cannot always be known. The issue is how antitrust and patent law should accommodate each other under these conditions of uncertainty.

The ruling notes the importance of being able to regularly test the validity of patents to make sure bad patents don’t stay in place, robbing the public domain (as well as the public of such benefits). Thankfully, the court recognizes that giving a government granted monopoly has tremendous costs, so they shouldn’t just be given out willy-nilly:

Patents carry with them a frequent cost?monopoly premiums the public must bear…. The willingness to pay that cost depends upon a quid pro quo: ? ” ‘the public interest in granting patent monopolies? exists only to the extent that ‘the public is given a novel and useful invention? in ‘consideration for its grant.? ” … Accordingly, patent policy does not support unquestioned protection of every inventor?s rights, but instead favors ?eliminating unwarranted patent grants so the public will not ‘continually be required to pay tribute to would-be monopolists without need or justification.’ ” … Vigorous testing for validity is thus desirable in order to weed out patents that shield a monopoly without offering corresponding public benefits.

And, in the end, the California Supreme Court notes that while it need not follow the lead of the federal Supreme Court in determining if patent law pre-empted antitrust law, the reasoning makes sense. As for which “test” to apply to see whether there is antitrust here, the Court notes that rather than hard-and-fast rules and buckets, the distinctions may be a bit more fuzzy than some assume. So rather than choosing one of the three big “rules” — “rule of reason,” “per se” or “quick look” — the Court notes that there’s more of a “sliding scale.” Instead, it looks at the overall situation to determine if these practices violated antitrust law. The overall analysis is long and detailed, but the court recognizes that what’s going on here and how these efforts can certainly harm the public, creating an “anticompetitive effect.” It lays out a basic process for determining whether or not these agreements are anticompetitive, but rejects the idea that all such pay to delay deals must be anticompetitive (which would have been a nicer standard). Either way, this ruling certainly will make life more difficult for pharmaceutical companies looking to do pay to delay deals, meaning that it’s good for the public and their health.

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Companies: bayer

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Comments on “California Supreme Court Shows How Pharma 'Pay For Delay' Can Violate Antitrust Laws”

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Anonymous Coward says:

“Congress does a really crappy job understanding game theory, those behind the bill failed to realize they were actually setting up incentives for the reverse”

Really, or do you grossly underestimate the nefarious political chess game mentality of some members of Congress. This is the ideal situation where they can give associates (perhaps even ones with brown envelopes) a deal but LOOK like they are watching out for the public. Hatch is one shrewd dude.

Anonymous Coward says:

‘Congress does a really crappy job understanding game theory, those behind the bill failed to realize they were actually setting up incentives for the reverse’

considering the screw ups they make, taking into account how honest and intelligent those in Congress are meant to be, is there anything that the members have done that has actually done the intended job of protecting, looking out for or enhancing the lives of the ones who put them into office, or is every single decision a complete fuck up? working on the assumption that the latter is correct, why do the people never see through what is being done against them (while supposedly being done for them) and do something themselves, even if it is only changing their votes?? i know everyone gets caught up in the frenzy of election rallies but neither sense nor common sense ever seems to enter the equation! is it any wonder why the USA has the most resources, the best brains both in the business and the inventive fields, yet are trailing behind so many other nations that are so much worse off! it is quite frightening really that the politicians never seem to think that the best way forward is one without gunfire and aggression but by using brains and implementing positive laws that are to the benefit of everyone, not just the ‘chosen few’ like the pharma and entertainment industries. relinquishing control of the actually item or service can usually prove to be far more profitable than holding everything back, afraid that there will be an iota of whatever it is, leak out! just think what our lives would be like now if the things that we use all the time or have been used and improved on now had been locked away, controlled and ‘only rented, not bought’, as the various industries do today. we would have a far different existence than the one we have. i wonder if the next and the next and the next generations will say that or look at the C20-C21 as being a most stupid time in Earth’s existence!! i suspect the latter!!

Anonymous Coward says:

This is why we need Watson

Imagine if Watson, the supercomputer used to play Jeopardy, was programmed with all of the laws and legal jargon that is our legal system.
It could point out where laws directly contradict each other, where rights are being violated or ignored and where there seems to be an agenda in the ways laws are written.
It could interpret things in plain English and explain even the most complex laws in such a way, that visitors wouldn’t be confused about what they can and can’t do in a country.

Atkray (profile) says:

” Accordingly, patent policy does not support unquestioned protection of every inventor‘s rights, but instead favors ―eliminating unwarranted patent grants so the public will not ‘continually be required to pay tribute to would-be monopolists without need or justification.’ ”

That should be on the top of every patent application in bold. and again with a box next to it with a “I have read and understand” clause by the signature.

I suspect more than a few maximalists are freaking out over that bit.

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