Order Code RL33717
CRS Report for Congress
Received through the CRS Web
Pharmaceutical Patent Litigation Settlements:
Implications for Competition and Innovation
November 3, 2006
John R. Thomas
Visiting Scholar
Resources, Science, and Industry Division
Congressional Research Service ˜ The Library of Congress

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Pharmaceutical Patent Litigation Settlements:
Implications for Competition and Innovation
Summary
Although brand-name pharmaceutical companies routinely procure patents on
their innovative medications, such rights are not self-enforcing. Brand-name firms
that wish to enforce their patents against generic competitors must commence
litigation in the federal courts. Such litigation ordinarily terminates in either a
judgment of infringement, which typically blocks generic competition until such time
as the patent expires, or a judgment that the patent is invalid or not infringed, which
typically opens the market to generic entry.
As with other sorts of commercial litigation, however, the parties to
pharmaceutical patent litigation may choose to settle their case. Certain of these
settlements have called for the generic firm to neither challenge the brand-name
company’s patents nor sell a generic version of the patented drug for a period of time.
In exchange, the brand-name drug company agrees to compensate the generic firm,
often with substantial monetary payments over a number of years. Because the
payment flows counterintuitively, from the patent proprietor to the accused infringer,
this compensation has been termed a “reverse” payment.
Commentators have differed markedly in their views of reverse payment
settlements. Some observers believe that they are a consequence of the specialized
patent litigation procedures established by the Hatch-Waxman Act. Others have
concluded that when one competitor pays another not to market its product, such a
settlement is anti-competitive and a violation of the antitrust laws.
Since 2003, Congress has required that litigants notify federal antitrust
authorities of their pharmaceutical patent settlements. That legislation did not dictate
substantive standards for assessing the validity of these agreements under the
antitrust law, however. That determination was left to judicial application of general
antitrust principles. Facing different factual patterns, some courts have concluded
that a particular reverse payment settlement constituted an antitrust violation, while
others have upheld the agreement.
Congress possesses a number of alternatives for addressing reverse payment
settlements. One possibility is to await further judicial developments. Another
option is to regulate the settlement of pharmaceutical patent litigation in some
manner. For example, one proposal would declare that certain reverse payment
settlements constitute acts of unfair competition. Legislation could also establish a
presumption of either legality or illegality under the antitrust laws, along with
consideration of relevant factors to be weighed by the courts.
This report will be updated as needed.

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Contents
Patent Disputes Under the Hatch-Waxman Act . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
Patent Fundamentals . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
FDA Approval Procedures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
Resolution of Patent Disputes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
Generic Exclusivity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
Fundamentals of Reverse Payment Settlements . . . . . . . . . . . . . . . . . . . . . . . . . . 9
Antitrust Implications of Reverse Payment Settlements . . . . . . . . . . . . . . . . . . . 12
Sixth Circuit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
Eleventh Circuit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
Second Circuit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
This report was funded in part by a grant from the John D. and Cathertine T.
MacArthur Foundation.

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Pharmaceutical Patent Litigation
Settlements: Implications for Competition
and Innovation
The increasing costs of health care have focused congressional attention upon
both the development and public availability of prescription drugs. Congress has
long recognized that the patent system has an important role to play in the
pharmaceutical industry in each respect. The Drug Price Competition and Patent
Term Restoration Act of 1984,1 commonly known as the Hatch-Waxman Act,2 in part
reformed the patent laws to balance incentives for innovation and competition within
the pharmaceutical industry. Congress subsequently amended this legislation on
several occasions, most recently via the Medicare Prescription Drug, Improvement,
and Modernization Act of 2003.3
Recently, congressional attention has been directed towards one aspect of the
patent system, the settlement of pharmaceutical patent litigation. Although brand-
name pharmaceutical companies commonly procure patents on their innovative
products and processes, such rights are not self-enforcing. If a brand-name drug
company wishes to enforce its patents against generic competitors, it must pursue
litigation in the federal courts.4 Such litigation ordinarily terminates in either a
judgment of infringement, which typically blocks generic competition until such time
as the patent expires, or a judgment that the patent is invalid or not infringed, which
typically opens the market to generic entry.
As with other sorts of commercial litigation, however, the parties to
pharmaceutical patent litigation may choose to settle their case.5 Certain of these
settlements call for the generic firm to neither challenge the brand-name company’s
patents nor sell a generic version of the patented drug. In exchange, the brand-name
drug company agrees to make cash payments to the generic firm. This compensation
has been termed an “exclusion”6 or “exit”7 payment or, because the payment flows
1 P.L. 84-417, 98 Stat. 1585 (1984).
2 See, e.g., Laura J. Robinson, “Analysis of Recent Proposals to Reconfigure Hatch-
Waxman,” 11 Journal of Intellectual Property Law (2003), 47.
3 P.L. 108-173, 117 Stat. 2066.
4 35 U.S.C. § 281 (2006).
5 See John Fazzio, “Pharmaceutical Patent Settlements: Fault Lines at the Intersection of
Intellectual Property and Antitrust Law Require a Return to the Rule of Reason,” 11 Journal
of Technology Law and Policy (2006), 1.
6 See Herbert Hovenkamp et al., “Balancing Ease and Accuracy in Assessing Pharmaceutical
(continued...)

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CRS-2
counterintuitively, from the patent proprietor to the accused infringer, a “reverse”
payment.”8
Commentators differ markedly in their views of reverse payment settlements.
Some observers believe that they result from the specialized patent litigation
procedures established by the Hatch-Waxman Act.9 Others conclude that when one
competitor pays another not to market its product, such a settlement is anti-
competitive and a violation of the antitrust laws.10
Since 2003, Congress has required that litigants notify federal antitrust
authorities of their pharmaceutical patent settlements.11 To date, Congress has not
stipulated substantive standards for assessing the validity of these agreements under
the antitrust law, however. That determination was left to judicial application of
general antitrust principles. Uniformity of results has not been a hallmark of this line
of cases.12 Facing different factual patterns, some courts have concluded that a
particular reverse payment settlement constituted an antitrust violation,13 while others
have upheld the agreement.14 The judicial tendency is towards a more favorable view
of reverse payment settlements, however.15 To date, one legislative proposal would
reverse this trend: The Preserve Access to Affordable Generics Act (S. 3582),
introduced by Senator Kohl on June 27, 2006, would declare that certain reverse
payment settlements constitute acts of unfair competition.
This report introduces and analyzes innovation policy issues concerning
pharmaceutical patent litigation settlements. It begins with a review of
pharmaceutical patent litigation procedures under the Hatch-Waxman Act. The
report then introduces the concept of reverse payment settlements. Next, the report
6 (...continued)
Exclusion Payments,” 88 Minnesota Law Review (2004), 712.
7 Valley Drug Co. v. Geneva Pharms., Inc., 344 F.3d 1294, 1309 (11th Cir. 2003).
8 See Thomas F. Cotter, “Refining the ‘Presumptive Illegality’ Approach to Settlements of
Patent Disputes Involving Reverse Payments: A Commentary on Honvekamp, Janis &
Lemley,” 87 Minnesota Law Review (2003), 1789.
9 See Kent S. Bernard & Willard K. Tom, “Antitrust Treatment of Pharmaceutical Patent
Settlements: The Need for Context and Fidelity to First Principles,” 15 Federal Circuit Bar
Journal (2006), 617.
10 See Thomas F. Cotter, “Antitrust Implications of Patent Settlements Involving Reverse
Payments: Defining a Rebuttable Presumption of Illegality in Light of Some Recent
Scholarship,” 71 Antitrust Law Journal (2004), 1069.
11 Medicare Prescription Drug, Improvement, and Modernization Act of 2003, P.L. 173 ,117
Stat. 2066, § 1112(a).
12 See John R. Thomas, Pharmaceutical Patent Law (2005), 572-73.
13 In re Cardizem CD Antitrust Litigation, 332 F.3d 896 (6th Cir. 2003).
14 Schering-Plough Corp. v. FTC, 402 F.3d 1056 (11th Cir. 2005).
15 See James C. Burling, “Hatch-Waxman Patent Settlements: The Battle for a Benchmark,”
20-SPG Antitrust (2006), 41.

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analyzes the status of reverse payment settlements under the antitrust laws. The
report closes with a summary of congressional issues and alternatives.
Patent Disputes Under the Hatch-Waxman Act
Patent Fundamentals
In order to obtain patent protection, individuals and firms must prepare and
submit applications to the U.S. Patent and Trademark Office (USPTO) if they wish
to obtain patent protection.16 USPTO officials, known as examiners, then assess
whether the application merits the award of a patent.17 Under the Patent Act of
1952,18 a patent application must include a specification that so completely describes
the invention that skilled artisans are able to practice it without undue
experimentation. The Patent Act also requires that applicants draft at least one claim
that particularly points out and distinctly claims the subject matter that they regard
as their invention.19
While reviewing a submitted application, the examiner will determine whether
the claimed invention fulfills certain substantive standards set by the patent statute.
Two of the most important patentability criteria are novelty and nonobviousness. To
be judged novel, the claimed invention must not be fully anticipated by a prior patent,
publication or other knowledge within the public domain.20 The sum of these earlier
materials, which document state-of-the-art knowledge that is accessible to the public,
is termed the “prior art.” To meet the standard of nonobviousness, an invention must
not have been readily within the ordinary skills of a competent artisan based upon the
teachings of the prior art.21
If the USPTO allows the application to issue as a granted patent, the owner or
owners of the patent obtain the right to exclude others from making, using, selling,
offering to sell or importing into the United States the claimed invention.22 The term
of the patent is ordinarily set at twenty years from the date the patent application was
filed.23 Patent title therefore provides inventors with limited periods of exclusivity
in which they may practice their inventions, or license others to do so. The grant of
a patent permits inventors to receive a return on the expenditure of resources leading
to the discovery, often by charging a higher price than would prevail in a competitive
market. In the pharmaceutical industry, for example, the introduction of generic
16 35 U.S.C. § 111 (2006).
17 35 U.S.C. § 131 (2006).
18 P.L. 593, 66 Stat. 792 (1952).
19 35 U.S.C. § 112 ¶ 2 (2006).
20 35 U.S.C. § 102 (2006).
21 35 U.S.C. § 103 (2006).
22 35 U.S.C. § 271(a) (2006).
23 35 U.S.C. § 154(a)(2) (2006).

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competition often results in the availability of lower-cost substitutes for the
innovative product.24
A patent proprietor bears responsibility for monitoring its competitors to
determine whether they are using the patented invention. Patent owners who wish
to compel others to observe their intellectual property rights must usually commence
litigation in the federal district courts.
FDA Approval Procedures
Although the award of a patent claiming a pharmaceutical provides its owner
with a proprietary interest in that product, it does not actually allow the owner to
distribute that product to the public. Permission from the FDA must first be
obtained.25 In order to obtain FDA marketing approval, the developer of a new drug
must demonstrate that the product is safe and effective. This showing typically
requires the drug’s sponsor to conduct both preclinical and clinical investigations.26
In deciding whether to issue marketing approval or not, the FDA evaluates the test
data that the sponsor submits in a so-called New Drug Application (NDA).
Prior to the enactment of the Hatch-Waxman Act, the federal food and drug law
contained no separate provisions addressing marketing approval for independent
generic versions of drugs that had previously been approved by the FDA.27 The
result was that a would-be generic drug manufacturer had to file its own NDA in
order to sell its product.28 Some generic manufacturers could rely on published
scientific literature demonstrating the safety and efficacy of the drug by submitting
a so-called paper NDA. Because these sorts of studies were not available for all
drugs, however, not all generic firms could file a paper NDA.29 Further, at times the
FDA requested additional studies to address safety and efficacy questions that arose
from experience with the drug following its initial approval.30 The result was that
some generic manufacturers were forced to prove once more that a particular drug
24 See Jayanta Bhattacharya & William B. Vogt, “A Simple Model of Pharmaceutical Price
Dynamics,” 4 Journal of Law & Economics (2003), 599.
25 CRS Report RL30989, The U.S. Drug Approval Process: A Primer, by Blanchard Randall
IV.
26 See G. Lee Skillington & Eric M. Solovy, “The Protection of Test and Other Data
Required by Article 39.3 of the TRIPS Agreement,” 24 Northwestern Journal of
International Law and Business (2003), 1.
27 See Alfred B. Engelberg, “Special Patent Provisions for Pharmaceuticals: Have They
Outlived Their Usefulness?,” 39 IDEA: Journal of Law and Technology (1999), 389.
28 See James J. Wheaton, “Generic Competition and Pharmaceutical Innovation: The Drug
Price Competition and Patent Term Restoration Act of 1984,” 34 Catholic University Law
Review (1986), 433.
29 See Kristin E. Behrendt, “The Hatch-Waxman Act: Balancing Competing Interest or
Survival of the Fittest?,” 57 Food & Drug Law Journal (2002), 247.
30 Id.

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was safe and effective, even though their products were chemically identical to those
of previously approved pharmaceuticals.
Some commentators believed that the approval of a generic drug was a
needlessly costly, duplicative, and time-consuming process.31 These observers noted
that although patents on important drugs had expired, manufacturers were not
moving to introduce generic equivalents for these products due to the level of
resource expenditure required to obtain FDA marketing approval.32
In response to these concerns, Congress enacted the Hatch-Waxman Act, a
statute that has been described as a “complex and multifaceted compromise between
innovative and generic pharmaceutical companies.”33 Its provisions included the
creation of two statutory pathways that expedited the marketing approval process for
generic drugs. The first of these consist of Abbreviated New Drug Applications, or
ANDAs. An ANDA allows an independent generic applicant to obtain marketing
approval by demonstrating that the proposed product is bioequivalent to an approved
pioneer drug, without providing evidence of safety and effectiveness from clinical
data or from the scientific literature. The second are so-called § 505(b)(2)
applications, which are sometimes still referred to as “paper NDAs.” Like an NDA,
a § 505(b)(2) application contains a full report of investigations of safety and
effectiveness of the proposed product. In contrast to an NDA, however, a §
505(b)(2) application typically relies, at least in part, upon published literature
providing pre-clinical or clinical data.
The availability of ANDAs and § 505(b)(2) applications often allow a generic
manufacturer to avoid the costs and delays associated with filing a full-fledged NDA.
They may also allow an independent generic manufacturer, in many cases, to place
its FDA-approved bioequivalent drug on the market as soon as any relevant patents
expire.34
As part of the balance struck between brand-name and generic firms, Congress
also provided patent proprietors with a means for restoring a portion of the patent
31 See, e.g., Justina A. Molzon, “The Generic Drug Approval Process,” 5 Journal of
Pharmacy & Law (1996), 275 (“The Act streamlined the approval process by eliminating
the need for [generic drug] sponsors to repeat duplicative, unnecessary, expensive and
ethically questionable clinical and animal research to demonstrate the safety and efficacy
of the drug product.”).
32 See Jonathan M. Lave, “Responding to Patent Litigation Settlements: Does the FTC Have
It Right Yet?,” 64 University of Pittsburgh Law Review (2002), 201 (“Hatch-Waxman has
also increased the generic drug share of prescription drug volume by almost 130% since its
enactment in 1984. Indeed, nearly 100% of the top selling drugs with expired patents have
generic versions available today versus only 35% in 1983.”).
33 Natalie M. Derzko, “A Local and Comparative Analysis of the Experimental Use
Exception–Is Harmonization Appropriate?,” 44 IDEA: Journal of Law and Technology
(2003), 1.
34 See, e.g., Sarah E. Eurek, “Hatch-Waxman Reform and Accelerated Entry of Generic
Drugs: Is Faster Necessarily Better?,” 2003 Duke Law & Technology Review (Aug. 13,
2003), 18.

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term that had been lost while awaiting FDA approval. The maximum extension
period is capped at a five-year extension period, or a total effective patent term after
the extension of not more than 14 years.35 The scope of rights during the period of
extension is generally limited to the use approved for the product that subjected it to
regulatory delay.36 This period of patent term extension is intended to compensate
brand-name firms for the generic drug industry’s reliance upon the proprietary pre-
clinical and clinical data they have generated, most often at considerable expense to
themselves.37
Resolution of Patent Disputes
During its development of accelerated marketing approval procedures for
generic drugs, Congress recognized that the brand-name pharmaceutical firm may be
the proprietor of one or more patents directed towards that drug product. These
patents might be infringed by a product described by a generic firm’s ANDA or §
505(b)(2) application in the event that product is approved by the FDA and sold in
the marketplace. The Hatch-Waxman Act therefore established special procedures
for resolving patent disputes in connection with applications for marketing generic
drugs.
In particular, the Hatch-Waxman Act states that each NDA applicant “shall file”
a list of patents that the applicant believes would be infringed if a generic drug were
marketed prior to the expiration of these patents.38 The FDA then lists these patents
in a publication titled Approved Drug Products with Therapeutic Equivalence
Evaluations, which is more commonly known as the “Orange Book.”39 Would-be
manufacturers of generic drugs must then engage in a specialized certification
procedure with respect to Orange Book-listed patents. An ANDA or § 505(b)(2)
applicant must state its views with respect to each Orange Book-listed patent
associated with the drug it seeks to market. Four possibilities exist:
(1) that the brand-name firm has not filed any patent information with respect to
that drug;
(2) that the patent has already expired;
(3) that the generic company agrees not to market until the date on which the
patent will expire; or
35 35 U.S.C. § 156(b) (2006).
36 35 U.S.C. § 156(b)(1) (2006).
37 See CRS Report RL30756, Patent Law and Its Application to the Pharmaceutical
Industry: An Examination of the Drug Price Competition and Patent Term Restoration Act
of 1984 (“The Hatch-Waxman Act”); and CRS Report RL32377, The Hatch-Waxman Act:
Legislative Changes Affecting Pharmaceutical Patents, both by Wendy H. Schacht and John
R. Thomas.
38 21 U.S.C. § 355(b)(1) (2006).
39 See, e.g., Jacob S. Wharton, “‘Orange Book’ Listing of Patents Under the Hatch-Waxman
Act,” 47 St. Louis University Law Journal (2003), 1027.

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(4) that the patent is invalid or will not be infringed by the manufacture, use or
sale of the drug for which the ANDA is submitted.40
These certifications are respectively termed paragraph I, II, III, and IV certifications.41
An ANDA or § 505(b)(2) application certified under paragraphs I or II is approved
immediately after meeting all applicable regulatory and scientific requirements.42 An
independent generic firm that files an ANDA or § 505(b)(2) application including a
paragraph III certification must, even after meeting pertinent regulatory and scientific
requirements, wait for approval until the drug's listed patent expires.43
The filing of an ANDA or § 505(b)(2) application with a paragraph IV
certification constitutes a “somewhat artificial” act of patent infringement under the
Hatch-Waxman Act.44 The act requires the independent generic applicant to notify
the proprietor of the patents that are the subject of a paragraph IV certification.45 The
patent owner may then commence patent infringement litigation against that
applicant.
Generic Exclusivity
In order to encourage challenges of pharmaceutical patents, the Hatch-Waxman
Act provides prospective manufacturers of generic pharmaceuticals with a potential
reward. That reward consists of a 180-day exclusivity period awarded to the first
ANDA applicant to file a paragraph IV certification.46 Once a first ANDA with a
paragraph IV certification has been filed, the FDA cannot issue marketing approval
to a subsequent ANDA with a paragraph IV certification on the same drug product
for 180 days. Because market prices could drop considerably following the entry of
additional generic competition, the first paragraph IV ANDA applicant could
potentially obtain more handsome profits than subsequent market entrants–thereby
stimulating patent challenges in the first instance.47
40 21 U.S.C. § 355(j)(2)(A)(vii) (2006).
41 See Douglas A. Robinson, “Recent Administrative Reforms of the Hatch-Waxman Act:
Lower Prices Now In Exchange for Less Pharmaceutical Innovation Later?,” 81 Washington
University Law Quarterly (2003), 829.
42 21 U.S.C. § 355(j)(5)(B)(i) (2006).
43 21 U.S.C. § 355(j)(5)(B)(ii) (2006).
44 Eli Lilly & Co. v. Medtronic, Inc., 496 U.S. 1047 (1990).
45 21 U.S.C. § 355(j)(2)(B)(i) (2006).
46 21 U.S.C. § 355(j)(5)(B)(iv) (2006). Section 505(b)(2) applications do not qualify for the
180-day generic exclusivity period. U.S. Department of Health & Human Services, FDA,
Center for Drug Evaluation & Research, “Guidance for Industry, Listed Drugs, 30-Month
Stays, and Approval of ANDAs and 505(b)(2) Applications Under Hatch-Waxman, As
Amended by the Medicare Prescription Drug, Improvement, and Modernization Act of
2003,” at 5 n.14 (Oct. 2004).
47 See generally Mova Pharm. Corp. v. Shalala, 140 F.3d 1060, 1064 (D.C. Cir. 1998).

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As originally enacted, the Hatch-Waxman Act stipulated that the first paragraph
IV certification triggered entitlement to the 180-day generic exclusivity period. The
ANDA applicant need take no further steps whatsoever. In particular, the statute did
not require the generic applicant to pursue a favorable judgment with respect to the
challenged patent, seek FDA approval of the ANDA, or market its generic product
once the FDA granted marketing approval.48 Some commentators believed that the
legislation led to abuses by certain first paragraph IV ANDA applicants, who
“parked” their period of exclusivity in order to bar generic competition, rather than
actively pursue the marketing of their own generic products. As pharmaceutical
patent expert Alfred Engelberg has asserted:
Experience has shown that the first ANDA applicant to file a patent challenge
may never trigger the start of the 180-day period, thereby blocking the FDA from
granting approval to any generic product. More often than not, the first generic
challenger will enter into a lucrative cash settlement with the patent owner that
results in a judgment in favor of the patent and prohibits the challenger from
marketing a product under its ANDA until the patent expires. Therefore, the 180-
day exclusivity period never starts. And no subsequently filed ANDA can be
approved unless a final judgment adverse to the patent is obtained by one of the
subsequent applicants. But even in that circumstance, the winning party would
be compelled to wait 180 days before enjoying the fruits of its victory and would
not receive any exclusivity of its own. This result is dictated by the fact that,
under the language of the statute, the 180 days of exclusivity belong solely to the
first challenger and not to the first winner.49
When Congress amended the Hatch-Waxman Act in 2003, it responded to this
concern over “bottlenecking” by generic firms. The Medicare Prescription Drug,
Improvement, and Modernization Act (MMA) established a number of “forfeiture
events” that, if triggered, cause a first paragraph IV ANDA applicant to lose its
entitlement to the 180-day generic exclusivity.50 Among the forfeiture events are: (1)
failure to market its product promptly; (2) failure to obtain FDA approval to market
the generic drug in a reasonably timely manner; and (3) all of the certified patents
that entitled the applicant to the 180-day generic exclusivity period have expired.51
If the first paragraph IV ANDA applicant forfeits its exclusivity, then this period does
not “roll over” to the second such applicant. In that event, no generic firm enjoys
exclusivity at all.52 The possibility of forfeiture was intended “to prevent the practice
of ‘parking’ the exclusivity period and to force generic manufacturers to market
promptly.”53
48 Thomas, supra note 12, at 356.
49 Alfred B. Engelberg, “Special Patent Provisions for Pharmaceuticals: Have They Outlived
Their Usefulness?,” 39 IDEA: The Journal of Law and Technology (1999), 389.
50 P.L. 108-173, 117 Stat. 2066.
51 21 U.S.C. § 355(j)(5)(D)(i) (2006).
52 Thomas, supra note 12, at 366.
53 Brian Porter, “Stopping the Practice of Authorized Generics: Mylan’s Effort to Close the
Gaping Black Hole in the Hatch-Waxman Act,” 22 Journal of Contemporary Health Law
and Policy (2005), 177 (citation omitted).

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CRS-9
Fundamentals of Reverse Payment Settlements
As discussed previously, a generic firm’s filing of a paragraph IV ANDA may
result in a patent infringement suit brought by a brand-name drug company. In such
a litigation, if the NDA holder demonstrates that the independent generic firm’s
proposed product would violate its patents, then the court will ordinarily issue an
injunction that prevents the generic drug company from marketing that product. That
injunction will expire on the same date as the NDA holder’s patents. Independent
generic drug companies commonly amend their ANDAs or § 505(b)(2) applications
in this event, replacing their paragraph IV certifications with paragraph III
certifications.54
On the other hand, the courts may decide in favor of the independent generic
firm. The court may conclude that the generic firm’s proposed product does not
infringe the asserted patents, or that the asserted patents are invalid or
unenforceable.55 In this circumstance, the independent generic firm may launch its
product once the FDA has finally approved its ANDA or § 505(b)(2) application.
In addition to the issuance of final judgment in favor of either the brand-name
drug company or generic firm, another resolution of pharmaceutical patent litigation
is possible. This legal situation led to a number of cases with varying details, but a
common core fact pattern. Upon filing a paragraph IV ANDA, a generic firm would
be sued for patent infringement as provided by the Hatch-Waxman Act. The NDA
holder and generic applicant would then settle their dispute. The settlement would
call for the generic firm to neither challenge the patent nor produce a generic version
of the patented drug, for a period of time up to the remaining term of the patent. In
exchange, the NDA holder would agree to compensate the ANDA applicant, often
with substantial monetary payments over a number of years.
Opinions about the effects of reverse payment settlements upon social welfare
have varied. Some commentators believe that such settlements are anticompetitive.
They believe that many of these agreements may amount to no more than two firms
colluding in order to restrict output and share patent-based profits.56 Such
settlements are also said to eliminate the possibility of a judicial holding of patent
invalidity, which may open the market to generic competition and benefit
consumers.57
54 21 C.F.R. § 314.94(a)(12)(viii)(C)(1)(i) (2006).
55 Although patents enjoy a presumption of validity, 35 U.S.C. § 282 (2006), that
presumption is not uncontestable. Accused infringers may demonstrate that the patent does
not meet the standards established by the Patent Act, and as a result should not have been
issued by the U.S. Patent and Trademark Office. Id. In addition, an accused infringer may
demonstrate that the patent is unenforceable on a number of grounds, among that its owner
has engaged in “misuse” of the patent. Id.
56 See John E. Lopatka, “A Comment on the Antitrust Analysis of Reverse Payment Patent
Settlements: Through the Lens of the Hand Formula,” 79 Tulane Law Review (2004), 235.
57 See Jonathan M. Lave, “Responding to Patent Litigation Settlements: Does the FTC Have
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On the other hand, some commentators have found nothing inherently
troublesome about reverse payment settlements. Among their observations is that
there is a general judicial policy in favor of promoting settlement. Settlements can
allow the parties to avoid the expenses of litigation, achieve a resolution to the
dispute in a timely manner, and avoid the risk of an uncertain result in the
courtroom.58 The settlement of litigation further serves the goal of resolving disputes
in a peaceful manner, and also preserves scarce judicial resources.59 Second, any
settlement of litigation between rational actors necessarily involves an exchange of
benefits and obligations. As Judge Richard Posner has explained:
[A]ny settlement agreement can be characterized as involving “compensation”
to the defendant, who would not settle unless he had something to show for the
settlement. If any settlement agreement is thus to be classified as involving a
forbidden “reverse payment,” we shall have no more patent settlements.60
Third, certain reverse payment settlements have allowed for the introduction of
generic competition prior to the date the relevant patent expires. It is possible, for
example, for the brand-name and generic firms to “split” the remaining patent term,
with the generic firm being allowed to market a competing product prior to the
running of the full patent term. Such agreements may potentially benefit consumers,
certainly in comparison to a judgment that the patent is not invalid and infringed.61
Finally, the dispute settlement procedures established by the Hatch-Waxman
Act may themselves promote the use of reverse payment settlements in
pharmaceutical patent litigation. In patent litigation outside the Hatch-Waxman Act
context, the accused infringer is ordinarily using or marketing the patented
technology. A judicial finding of infringement would expose the accused infringer
to an injunction, along with damages awarded for past uses and sales. As a result,
the accused infringer may well be willing to compensate the patent proprietor in
order to avoid the risk of such a holding.62
Some observers believe that the structure of the Hatch-Waxman Act alters the
traditional balance of risks between the plaintiff-patentee and accused infringer. As
explained by one federal district court:
57 (...continued)
It Right Yet?,” 64 University of Pittsburgh Law Review (2002), 201.
58 See generally Chris Guthrie, “Better Settle Than Sorry: The Regret Aversion Theory of
Litigation Behavior,” University of Illinois Law Review (1999), 43.
59 See Stephen McG. Bundy, “The Policy in Favor of Settlement in an Adversary System,”
44 Hastings Law Journal (1992), 1.
60 Asahi Glass Co. v. Pentech Pharmaceuticals, Inc., 289 F. Supp. 2d 986 (N.D. Ill. 2003)
(emphasis in original).
61 See Marc G. Schildkraut, “Patent-Splitting Settlements and the Reverse Payment Fallacy,”
71 Antitrust Law Journal (2004), 1033.
62 See Kristopher L. Reed, “A Return to Reason: Antitrust Treatment of Pharmaceutical
Settlements Under the Hatch-Waxman Act,” 40 Gonzaga Law Review (2004), 457.

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[I]n creating an artificial act of infringement (the ANDA IV filing), the Hatch-
Waxman Amendments grant generic manufacturers standing to mount a validity
challenge without incurring the cost of entry or risking enormous damages
flowing from infringing commercial sales . . . . Because of the Hatch-Waxman
scheme, [the generic firm’s] exposure in the patent litigation was limited to
litigation costs, but its upside–exclusive generic sales–was immense. The patent
holder, however, has no corresponding upside, as there are no infringement
damages to collect, but has an enormous downside–losing the patent.63
As a result, some commentators believe that it is entirely predictable that the unique
procedures of the Hatch-Waxman Act have resulted in the new phenomenon of
reverse payment settlements.64
At the present time, the congressional response to pharmaceutical patent
litigation settlements has been limited. In the 2003 Medicare Prescription Drug,
Improvement, and Modernization Act (MMA),65 Congress mandated that the
Department of Justice (DOJ) and the Federal Trade Commission (FTC) receive
copies of certain patent settlements agreements in the pharmaceutical field. The
filing requirement applies to agreements executed on or after January 7, 2004,
between an ANDA applicant, on one hand, and either the NDA holder or an owner
of an Orange Book-listed patent, on the other.66 Such agreements trigger the statutory
notification requirement if they relate to one of three topics:
(1) The manufacture, marketing, or sale of the brand-name drug that is the listed
in the ANDA;
(2) The manufacture, marketing, or sale of the generic drug for which the ANDA
was submitted; or
(3) The 180-day generic exclusivity period as it applies to that ANDA, or to
another ANDA filed with respect to the same brand-name drug.67
The MMA stipulates that certain agreements are not subject to this filing
requirement. In particular, agreements that solely consist of purchase orders for raw
materials, equipment and facility contracts, employment or consulting contracts, or
packaging and labeling contracts do not need to be submitted to the DOJ or FTC.68
Further, the filing obligation applies only to ANDAs that include a paragraph IV
certification. In particular, agreements with respect to § 505(b)(2) applications need
not be filed.
63 In re Ciprofloxacin Antitrust Litigation, 261 F. Supp. 2d 188, 251 (E.D.N.Y. 2003).
64 Cotter, supra note 10.
65 P.L. 108-173, 117 Stat. 2066.
66 MMA, §1112(a)(1).
67 MMA, §1112(a)(1).
68 Id. at §1112(c)(1).

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Although the MMA imposed a filing obligation upon certain patent settlements
between pharmaceutical firms, that legislation did not set substantive standards as to
the validity of these agreements.69 Both prior and subsequent to congressional
enactment of the MMA, however, various government and private actors asserted
that certain reverse payment settlements violated the antitrust laws. In order to
resolve these claims, different courts applied general principles of antitrust law.
Facing different factual patterns, the courts ultimately reached varying results.70
After introducing the basic concepts of antitrust law, this report next reviews several
of the more notable judicial opinions analyzing reverse payment settlements.
Antitrust Implications of Reverse Payment
Settlements
The primary legal mechanism for addressing conduct alleged to be anti-
competitive–including reverse payment settlements–consists of the antitrust laws.
The antitrust laws are comprised of the Sherman Act, the Clayton Act, the Federal
Trade Commission Act, and other federal and state statutes that prohibit certain kinds
of anticompetitive economic conduct. Although a complete review of the antitrust
laws exceeds the scope of this report, other sources provide more information for the
interested reader.71
Section 1 of the Sherman Act declares “[e]very contract, combination in the
form of trust or otherwise, or conspiracy, in restraint of trade . . . to be illegal.” The
courts have long interpreted this language as applying only to unreasonable restraints
of trade. The determination of whether particular conduct amounts to an
unreasonable restraint of trade is commonly conducted under the “rule of reason.”
Under this approach, “the finder of fact must decide whether the questioned practice
imposes an unreasonable restraint on competition, taking into account a variety of
factors, including specific information about the relevant business, its condition
before and after the restraint was imposed, and the restraint’s history, nature, and
effect.”72 The rule of reason essentially calls upon courts to reach a judgment of
reasonableness by balancing the anticompetitive consequences of a challenged
practice against its business justifications and potentially procompetitive impact.
Other sorts of restraints are deemed unlawful per se. Per se illegality is
appropriate “[o]nce experience with a particular kind of restraint enables the Court
69 See Thomas, supra note 12, at 571.
70 See M. Elaine Johnston, et al., “Antitrust Aspects of Settling Intellectual Property
Litigation,” 867 Practising Law Institute/Patent (June 2006), 159.
71 See CRS Report RL31026, General Overview of United States Antitrust Law, by Janice
E. Rubin.
72 Id. at 906 (quoting Arizona v. Maricopa City Medical Soc., 457 U.S. 332, 343 n.13
(1982)).

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to predict with confidence that the rule of reason will condemn it.”73 The Supreme
Court has explained that “there are certain agreements or practices which because of
their pernicious effect on competition and lack of any redeeming virtue are
conclusively presumed to be unreasonable and therefore illegal without elaborate
inquiry as to the precise harm they have caused or the business excuse for their
use.”74 Among the practices that have been judged per se violations include price
fixing, group boycotts, and market division.75
As this report will review, the courts have differed in their approaches to reverse
payment settlements in pharmaceutical patent litigation. The Court of Appeals for
the Sixth Circuit has held that one reverse payment settlement constituted a per
se violation of the antitrust laws. The Courts of Appeals for the Second and Eleventh
Circuits have declined per se treatment to reverse payment settlements, employing
a more permissive mode of analysis based upon the traditional rule of reason
approach.76 This report next reviews the facts and holdings of significant judgments
addressing the antitrust implications of reverse payment settlements.
Sixth Circuit
In In re Cardizem CD Antitrust Litigation,77 the Court of Appeals for the Sixth
Circuit held that a reverse payment settlement agreement between Hoescht Marion
Roussel Inc. (HMR) and Andrx Pharmaceuticals was per se invalid under the
antitrust laws. HMR marketed the prescription drug CARDIZEM CD® and owned
several patents pertaining to that product. Andrx was the first generic firm to file a
paragraph IV ANDA pertaining to CARDIZEM CD®. HMR subsequently sued
Andrx for patent infringement as provided by the Hatch-Waxman Act.
Shortly after the FDA tentatively approved Andrx’s ANDA, HMR and Andrx
agreed to an interim settlement. Under the terms of that deal, Andrx agreed to refrain
from marketing a generic version of CARDIZEM CD® until one of three events
occurred: namely, that Andrx obtained a final, unappealable judgment in its favor
with respect to its patent claims; that HMR licensed Andrx to market a generic
version of CARDIZEM CD®; or that HMR licensed a third party to do so. Andrx
further agreed to continue pursuing its ANDA at the FDA and not to relinquish or
73 Id.
74 Northern Pacific Railroad Co. v. United States, 356 U.S. 1, 5 (1957).
75 Rubin, supra note 71.
76 See generally Larissa Burford, “In re Cardizem & Valley Drug Co.: The Hatch-Waxman
Act, Anticompetitive Actions, and Regulatory Reform,” 19 Berkeley Technology Law
Journal (2004), 365; Richard D. Chaves Mosier & Steven W. Ritcheson, “In re Cardizem
and Valley Drug: A View from the Faultline Between Patent and Antitrust in
Pharmaceutical Settlements,” 20 Santa Clara Computer & High Technology Law Journal
(2004), 497.
77 332 F.3d 896 (6th Cir. 2003).

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transfer its 180-day period of generic marketing exclusivity. In exchange, HMR paid
Andrx $10 million per quarter.78
Various purchasers of CARDIZEM CD® subsequently brought suit against
HMR and Andrx, alleging several violations of state and federal antitrust laws. The
District Court for the Eastern District of Michigan subsequently concluded that the
HMR-Andrx agreement constituted a horizontal market allocation agreement that
was per se illegal under the antitrust laws.79 Following an appeal, the Court of
Appeals for the Sixth Circuit affirmed.
The court of appeals characterized the deal as one in which HMR and Andrx
agreed to eliminate competition in the CARDIZEM CD® market. Because Andrx
was entitled to the 180-day generic exclusivity, and because its agreement occurred
prior to the 2003 amendments to the Hatch-Waxman Act,80 Andrx was able to “park”
its generic exclusivity and prevent all other generic firms from marketing. The Sixth
Circuit reasoned that the HMR-Andrx agreement was appropriately classified as a so-
called horizontal agreement; that is to say, a restraint of trade involving businesses
at the same level of competition. Such agreements had long been classified as
antitrust violation per se, the court explained.81
In reaching this conclusion, the Sixth Circuit explicitly rejected several
arguments offered by HMR and Andrx. The defendants asserted that because the
courts did not have extensive experience with reverse payment settlements, they
lacked a sufficient basis for declaring them per se illegal. The Sixth Circuit instead
noted that “[w]hatever may be its peculiar problems and characteristics, the Sherman
Act, so far as price-fixing agreements are concerned, establishes one uniform rule
applicable to all industries alike.”82 Judge Oberdorfer further stated that “it is one
thing to take advantage of a monopoly that naturally arises from a patent, but another
thing altogether to bolster the patent’s effectiveness in inhibiting competitors by
paying the only potential competitor $40 million per year to stay out of the market.”83
The first court of appeals to address reverse payment settlements, the Sixth
Circuit is thus far the only appellate court to apply a rule of illegality per se to reverse
payment settlements. Subsequent courts, facing somewhat different factual
circumstances, gave these settlements less strict antitrust oversight by applying an
analysis that more closely resembled the traditional rule of reason approach. This
report next reviews these developments, which arose from judicial opinions issued
by the Eleventh and Second Circuits.
78 Id. at 901-03.
79 105 F. Supp. 2d 682, 699 (E.D. Mich. 2000).
80 See supra notes 48-49 and accompanying text.
81 105 F. Supp. 2d at 907.
82 Id. at 908 (quoting United States v. Socony-Vacuum Oil Co., 310 U.S. 150, 222 (1940)).
83 Id.

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Eleventh Circuit
In Valley Drug Co. v. Geneva Pharmaceuticals, Inc.,84 the U.S. Court of
Appeals for the Eleventh Circuit declined to employ the per se rule employed by the
Sixth Circuit. Instead, the Eleventh Circuit adopted a more permissive method of
analysis that resembles the traditional rule of reason. The Valley Drug case involved
an arrangement Abbott Laboratories had reached with two different generic firms,
Zenith Goldline Pharmaceuticals and Geneva Pharmaceuticals. Abbott was the NDA
holder of the drug HYTRIN®, prescribed for treatment of hypertension and enlarged
prostate. Abbott also owned several patents pertaining to HYTRIN®, including U.S.
Patent No. 5,504,207 (the ‘207 patent). Zenith and Geneva each filed paragraph IV
ANDAs with respect to HYTRIN®, resulting in patent infringement litigation.85
Abbott subsequently negotiated separate settlement agreements with Zenith and
Geneva. In both agreements, the generic firm promised not to sell any
pharmaceutical product containing terazosin hydrochloride, the active ingredient in
HYTRIN®, until a relevant Abbott patent expired or was held invalid, or someone
else introduced a generic version of this drug. Each generic firm also promised not
to transfer or sell its rights to a 180-day exclusivity under the Hatch-Waxman Act.
In return, Abbott promised to pay each generic firm a significant sum of money each
month, subject to a number of termination events, including introduction of a generic
version of HYTRIN® by a third party.86
At trial, the district court held that the two settlement agreements constituted a
horizontal market allocation that was per se illegal under the Sherman Act.
According to the district court, the generic houses were poised to market a generic
version of HYTRIN®, but simply agreed not to enter the market due to their deal
with Abbott.87
Following an appeal, the Eleventh Circuit reversed the district court’s opinion
and remanded for further proceedings. In reaching this result, the court of appeals
held that the standard of per se illegality was “premature” and inappropriate.88
According to Judge Anderson, the district court had not appropriately factored the
existence of the ‘207 patent into the analysis. The court of appeals explained that:
[A] patentee’s allocation of territories is not always the kind of territorial market
allocation that triggers antitrust liability, and that is so because the patent gives
its owner a lawful exclusionary right. In characterizing the Agreements as
territorial market allocations agreements, the district court did not consider that
the ‘207 patent gave Abbott the right to exclude others from making, using, or
selling anhydrous terazosin hydrochloride until October of 2014, when it is due
to expire. To the extent that Zenith and Geneva agreed to market admittedly
84 344 F.3d 1294 (11th Cir. 2003).
85 Id. at 1298-99.
86 Id. at 1300-01.
87 Id. at 1301-03.
88 Id. at 1304.

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infringing products before the ‘207 patent expired or was held invalid, the market
allocation characterization is inappropriate.89
Rather, the court of appeals identified several factors that should be considered by
the district court on remand, including:
(1) the scope of the exclusionary potential of the patent;
(2) the extent to which the agreements exceed that scope; and
(3) the resulting anticompetitive effects.90
In its subsequent decision in Schering-Plough Corp. v. FTC,91 the Eleventh
Circuit confirmed the approach taken in Valley Drug. This case concerned the
Schering-Plough Corp. (Schering) drug K-DUR 20®, which is used to treat or
prevent low potassium levels in the blood. Although the drug’s active ingredient,
potassium chloride, lies in the public domain, Schering’s U.S. Patent 4,863,743
claims an extended-release coating used in K-DUR 20®. The ‘743 patent expired
on September 5, 2006.92 When two generic firms, Upsher-Smith Laboratories
(Upsher) and ESI Lederle Inc. (ESI), filed paragraph IV ANDAs, Schering promptly
brought suit for patent infringement.
Schering subsequently resolved its differences with Upsher and ESI via two
separate agreements. During its negotiations with Upsher, Schering refused to pay
Upsher merely to “stay off the market.”93 Schering did agree to license five of
Upsher’s products, however. In addition, Upsher promised not to market a generic
version of K-DUR 20® prior to September 1, 2001.94 In exchange, Schering
promised to pay Upsher a $60 million up-front royalty, along with $10 million in
milestone royalty payments and royalties of 10% or 15% on sales.95
Under the ESI settlement, Schering agreed to allow ESI to market a generic
version of K-DUR 20® on January 1, 2004. Schering also agreed to pay $5 million
to cover ESI’s legal fees, as well as $10 million if ESI received FDA approval to
market its generic product by a certain date. Finally, Schering obtained the right to
license two generic products from ESI for $15 million.96
89 Id. at 1305.
90 Id. at 1312.
91 402 F.3d 1056 (11th Cir. 2005).
92 Id. at 1057.
93 Id. at 1059.
94 Id.
95 Id. at 1060.
96 Id. at 1060-61.

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Following a complaint by FTC counsel, the FTC Commission held that these
arrangements were anticompetitive under the rule of reason.97 Schering and Usher
appealed the Commission’s decision to the Eleventh Circuit, which reversed.
Confirming its analysis under the contours laid out in Valley Drug, the Eleventh
Circuit first observed that the ‘743 patent enjoyed a statutory presumption of
validity.98 Further, under the terms of their agreements with Schering, Upsher was
able to market a generic product a full five years before the ‘743 patent’s expiration,
while ESI could market two years in advance.99
The Eleventh Circuit next concluded that the licenses granted to Schering
constituted adequate consideration for the payments made by Schering, rather than
amounting to thinly disguised payoffs to delay the introduction of generic
competition. According to Judge Fay, Schering had long been interested in licensing
those products. As a result, the Schering-Upsher and Schering-ESI agreements were
legitimate settlements within the scope of the ‘743 patent’s exclusionary power.100
Finally, the court of appeals compared the scope of the ‘743 patent with that of
the Schering-Upsher and Schering-ESI agreements. Judge Fay concluded that they
were commensurate, with each specifically addressing controlled release
microencapsulated potassium chloride tablets. As a result the agreements could not
be said to be overly broad, nor did they delay the entry of other generic products.101
As a result, the decision of the FTC was reversed.102
Second Circuit
The issue of reverse payment settlements came before the Second Circuit in In
re Tamoxifen Citrate Antitrust Litigation.103 This judicial opinion resulted from
extremely complex factual and legal circumstances. Zeneca was the owner of patent
covering tamoxifen, the most widely prescribed drug for the treatment of breast
cancer. A generic firm, Barr Laboratories, filed an ANDA that it subsequently
amended to include a paragraph IV certification. Zeneca responded by filing a charge
of patent infringement in keeping with the procedures of the Hatch-Waxman Act.
In an opinion issued in 1992, the district court held that the tamoxifen patent was
invalid and unenforceable104
97 In re Schering-Plough Corp., Docket No. 9297 (Dec. 8, 2003) (available at 2003 WL
22989651).
98 402 F.3d at 1068.
99 402 F.3d at 1067-68.
100 Id. at 1068-72.
101 Id. at 1073.
102 Id.
103 429 F.3d 370 (2d Cir. 2005).
104 See Imperial Chem. Indus., PLC v. Barr Labs., Inc., 795 F. Supp. 619 (S.D.N.Y. 1992).

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Zeneca appealed the district court’s judgment. While the appeal was pending,
Zeneca and Barr entered into a confidential settlement agreement. As part of that
deal, Barr agreed to amend its ANDA to include a paragraph III certification and
further agreed not to sell its own generic version of tamoxifen until the patent’s
expiration in 2002. In exchange, Zeneca agreed to pay Barr $21 million and to
provide Barr with a non-exclusive license to sell an “authorized generic” version of
tamoxifen–that is to say, an Zeneca-manufactured tamoxifen under Barr’s label.105
The parties further agreed that if the tamoxifen patent were declared invalid or
unenforceable, then Barr could revert to its paragraph IV certification.106
Pursuant to the settlement, and consistent with governing law at that time, the
court of appeal remanded the case to the district court, which then vacated its
judgment of invalidity and uneforceability.107 Following the settlement between
Zeneca and Barr, three other generic firms–Novopharm Ltd., Mylan Pharmaceutical,
Inc., and Pharmachemie B.V.–filed tamoxifen ANDAs with paragraph IV
certifications.108 Zeneca once more filed charges of patent infringement against each
of these firms as allowed by the Hatch-Waxman Act. In each of these three cases,
the court refused to rely upon the vacated 1992 judgment to hold that Zeneca’s
tamoxifen patent was invalid. Further, the courts hearing the Noveopharm and
Pharmachemie cases upheld the validity of Zeneca’s tamoxifen patent.109 The Mylan
case ended with a consent order that FDA approval of the generic application would
not become effective prior to the expiration of the tamoxifen patent.110
While those three cases were pending, the FDA granted tentative approval for
Pharmachemie to market a generic version of tamoxifen. However, Barr petitioned
the FDA to recognize that Barr was entitled to 180 days of generic marketing
exclusivity111 as the first paragraph IV ANDA applicant. The effective result was that
the FDA prevented the marketing of other generic versions of tamoxifen until either
the Zeneca patent expired, or 180 days elapsed from the date that Barr sold its own
generic version of tamoxifen. Of course, because Barr was already distributing
105 429 F.3d at 377. For further discussion of authorized generics, see CRS Report
RL33605, Authorized Generic Pharmaceuticals: Effects on Innovation, by John R. Thomas.
106 429 F.3d at 378.
107 Subsequent to that decision, the Supreme Court held in U.S. Bancorp Mortgage Co. v.
Bonner Mall Parternership, 513 U.S. 18 (1994), that mootness by reason of settlement does
not justify vacatur of a federal civil judgment. See U.S. Philips Corp. v. Sears Roebuck &
Co., 55 F.3d 592, 598 (Fed. Cir. 1995). The Supreme Court’s ruling did not have retroactive
effect, however, and as a result the tamoxifen patent remained extant.
108 429 F.3d at 378-79.
109 See Zeneca Ltd. v. Novopharm Ltd., 111 F.3d 144 (Fed. Cir. 1997); Zeneca Ltd. v.
Pharmachemie B.V., 2000 WL 34335805 (D. Mass. Sept. 11, 2000).
110 Zeneca UK Ltd. v. Mylan Pharms., Inc., No. 00-2239 (W.D. Pa. 2000).
111 See supra notes 46-47 and accompanying text.

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Zeneca’s “authorized generic,” Barr apparently had little incentive to launch its own
generic product.112
Consumers and consumer groups subsequently filed numerous lawsuits
challenging the settlement between Zeneca and Barr on antitrust grounds. The trial
court rejected these claims, however, and on appeal the Second Circuit affirmed.113
The Second Circuit began by observing that although a tension existed between
antitrust law and patent law, the courts have long favored settlements of litigation.
The court of appeals saw the law as well-settled that “‘where there are legitimately
conflicting [patent] claims . . ., a settlement by agreement, rather than litigation, is
not precluded by the [Sherman] Act,’ although such a settlement may ultimately have
an adverse effect on competition.”114
In view of longstanding policies favoring the settlement of litigation, the court
of appeals concluded that “without alleging something more than the fact that Zeneca
settled after it lost to Barr in the district court that would tend to establish that the
Settlement Agreement was unlawful, the assertion that there was a bar–antitrust or
otherwise–to the defendants’ settling the litigation at the time that they did is
unpersuasive.”115 The Second Circuit largely based its conclusion upon the fact that
the outcome of patent litigation was unpredictable. That the 1992 judgment had
found the tamoxifen patent invalid was, by itself, not of great moment: “That Zeneca
had sufficient confidence in its patent to proceed to trial rather than find some means
to settle the case first should hardly weigh against it.”116 While holding that the
reasonableness of the settlement must be judged at the time the agreement was
concluded,117 the court of appeals further observed that federal district courts in the
later lawsuits disagreed with the 1992 judgment and upheld the tamoxifen patent.118
The Second Circuit next declined to condemn the existence of reverse payments
in a pharmaceutical patent settlement as an antitrust violation per se. Agreeing with
the analysis of the Eleventh Circuit in the Schering-Plough case that the Hatch-
Waxman changed the relative risk profiles of the patent holder and accused infringer,
the court of appeals found “no sound basis for categorically condemning reverse
payments employed to lift the uncertainty surrounding the validity and scope of the
holder’s patent.”119
The court of appeals further disagreed with the plaintiffs’ contention that the
Zeneca-Barr settlement was unlawful because “[t]he value of the consideration
112 429 F.3d at 379-80.
113 In re Tamoxifen Citrate Antitrust Litigation, 277 F.Supp.2d 121(E.D.N.Y. 2003).
114 Id. at 386 (quoting Standard Oil Co. v. United States, 283 U.S. 163, 171 (1931)).
115 Id. at 389.
116 Id. at 389.
117 Id. at 388.
118 Id.
119 Id. at 391.

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provided to keep Barr’s product off the market . . . greatly exceeded the value Barr
could have realized by successfully defending its trial victory on appeal and entering
the market with its own competitive generic product.”120 To the contrary, the Second
Circuit reasoned, it may well make economic sense for the patent proprietor to pay
its generic rival more than its expected earnings. The reason, of course, is that the
total profits of the patent holder and generic firm in a competitive market would be
less than the supracompetitive profits earned by the patentee alone, and that the
patent proprietor might find it sensible to pay a portion of that difference to the
generic firm. The Second Circuit further held that “so long as the patent litigation
is neither a sham nor otherwise baseless, the patent holder is seeking to arrive at a
settlement in order to protect that to which it is presumptively entitled: a lawful
monopoly over the manufacture and distribution of the patented product.”121
The Second Circuit’s analysis continued with a review of the terms of the
Zeneca-Barr settlement agreement. Citing Schering-Plough, the court of appeals
framed the question as “whether the ‘exclusionary effects of the agreement’ exceed
the ‘scope of the patent’s protection.’”122 The court of appeals characterized the
tamoxifen patent as a compound patent, rather than one directed towards a more
limited formulation. As a result, although the settlement precluded Barr from
manufacturing any generic form of tamoxifen, so too did Zeneca’s compound patent.
The settlement agreement therefore did not restrain the marketing of non-infringing
products, the court reasoned.123
The Second Circuit further explained that the Zeneca-Barr settlement also
allowed Barr to introduce a authorized generic market into the tamoxifen market.
Although the price difference between the Zeneca and Barr products was modest, this
consumer benefit nonetheless occurred almost nine years before Zeneca’s patent was
due to expire. As a result, the settlement agreement produced more competition than
would have occurred had the parties not settled and Zeneca had prevailed on
appeal.124 As a result, the Second Circuit affirmed the trial court’s conclusion that
the Zeneca-Barr settlement did not violate the antitrust laws.
Issues and Observations
In the absence of explicit congressional guidance, the federal courts have
applied general principles of antitrust law to reach varying results with respect to
pharmaceutical patent litigation settlements. It is significant that the different cases
considered by these courts have each involved their own, distinct set of facts.
Nonetheless, the difference between the per se rule on one hand, and alternative
120 Id. at 391-92.
121 Id. at 392.
122 Id. at 397 (quoting Schering-Plough, 402 F.3d at 1076).
123 Id. at 398.
124 Id. at 399-400.

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approaches similar to the rule of reason on the other, have arguably contributed to
different judicial outcomes.
Several options are available for Congress. One possibility is to await further
judicial developments. While the United States Supreme Court has not yet addressed
pharmaceutical litigation patent settlements, it is possible that the highest Court may
do so in the future. Supreme Court review would resolve the arguable split among
the courts of appeal with respect to this issue. Continuing case law developments in
the lower courts could also lead to an informed consensus on the antitrust
consequences of reverse payment settlements.
Another option is to regulate the settlement of pharmaceutical patent litigation
in some manner. For example, S. 3582, the Preserve Access to Affordable Generics
Act, proposes to declare such agreements an act of unfair competition. In particular,
that bill would amend the Federal Trade Commission Act to provide in part:
It shall be considered an act of unfair competition affecting commerce . . . for a
person, in connection with the sale of a drug product, to directly or indirectly be
a party to any agreement resolving or settling a patent infringement claim in
which – (A) an ANDA filer receives anything of value; and (B) the ANDA filer
agrees not to research, develop, manufacture, market, or sell the ANDA product
for any period of time.
This proposed legislation would effectively make reverse payment settlements a per
se antitrust violation, as the Sixth Circuit concluded in the Cardizem CD case.
Other alternatives are also possible. Legislation could establish a presumption
of either legality or illegality under the antitrust laws, along with consideration of
relevant factors to be weighed by the courts. Such factors might include the scope
of the asserted patent, the legitimacy of the litigation position of the two parties, the
size of the payment made by the patent holder, and whether the settlement allows the
generic firm to market a competing product prior to the patent’s expiration.125 Such
legislation could effectively codify the antitrust treatment of settlements of
pharmaceutical patent litigation by the Second and Eleventh Circuits, or instead
provide somewhat more stringent oversight of reverse payment settlements.
The settlement of pharmaceutical patent litigation forms an important issue
because such litigation is itself important to our public health system. Our patient
population relies upon brand-name drug companies to develop new medicines, but
it also relies upon generic firms to increase access to such medications once they
have been developed. The Hatch-Waxman Act provides for patent litigation between
these two traditional rivals as a primary vehicle through which these competing
demands are mediated. When concluded in a manner that comports with antitrust
principles, such settlements may further the public policy goals of encouraging the
labors that lead to medical innovation, but also distributing the fruits of those labors
to consumers.
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125 See Thomas, supra note 12, at 584-87.

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