Will Pay-for-Delay Go Away?
As primary races heat up around the country, healthcare reform has once again made its way to the forefront of American political discourse. Although the solution for nationwide affordable healthcare has proven to be divisive, Americans generally agree that healthcare is one of the most important issues going into 2020 election.[1] With a focus on reducing bloat and lowering costs across the industry, it is no surprise that the pharmaceutical industry has drawn criticism from many politicians in recent months. One pharmaceutical practice known as “pay-for-delay” has come under particular scrutiny from primary candidates.[2]
In 1984, the Hatch-Waxman Act created a pathway for generic drug manufacturers to enter the pharmaceutical market, with the goal of increasing consumer accessibility to lower-priced drugs. Hatch-Waxman also rebalanced the risk of patent litigation in favor of generic drug manufacturers.[3] Before Hatch-Waxman, the patentee (branded drug manufacturer) could only sue the infringer (generic drug manufacturer) once the infringer had begun to “make, use or sell an allegedly infringing product.”[4] The trigger for infringement in that instance required up-front investment on the generic’s behalf to manufacture and market a product, despite the underlying “risk of an infringement action and exposure to significant damages.”[5] Since Hatch-Waxman, generic manufacturers can engage in patent litigation without exposing themselves to such risk.[6] Hatch-Waxman “introduced a process unique to pharmaceuticals by which the potential generic entrant would commit an “act of infringement” by sending a notice challenging the patent that it anticipated infringing with its not-yet-approved or marketed product.”[7] This current regime presents a win-win for generic drug manufacturers contemplating patent litigation against branded drug companies.[8] The generic either wins litigation and begins selling its drug immediately, or it loses and enters the market on the same date it would have without litigation.[9] Disadvantaged by Hatch-Waxman, branded drug companies began entering into settlement agreements with generics where the former paid the latter large sums to delay entry into the pharmaceutical market.[10] These agreements became known as “reverse-payment settlements” or “pay-for-delay” agreements.[11]
The curtailment of pay-for-delay settlements has been one of the Federal Trade Commission’s top priorities in recent years.[12] The FTC views these payments as anticompetitive and detrimental to consumers who have paid “$3.5 billion in higher drug costs every year” as a result.[13] In June 2013, the FTC finally made ground in FTC v. Actavis, Inc., subjecting such reverse payments to antitrust scrutiny under the rule of reason analysis.[14] Though Actavis subjects reverse payment agreements to antitrust scrutiny, the case only represents an incremental win for the FTC who advocated for a “quick look” antitrust approach, which would have made such payments presumptively anticompetitive.[15] Despite the holding in Actavis, it seems that the FTC’s position has strengthened with the recent passing of Assembly Bill 824 (“AB 824”) in California.[16]
AB 824 is the first piece of legislation nationwide to render pay for delay agreements presumptively anticompetitive.[17] The newly enacted California law declares any reverse payment settlement presumptively illegal when the generic manufacturer obtains “anything of value” and does not attempt to immediately sell the product at issue.[18] The act allows the state of California to collect the greater of $20 million, or three times the value of the alleged payment in civil penalties from the defendants.[19] The FTC will certainly be monitoring its effectiveness in the coming years and looking to it as an example of pro-consumer reform. It will be interesting to see if the legislation translates into lower drug prices and influences other states around the country.
Footnotes
