Pharmaceutical Patent Settlements: Issues in
Innovation and Competitiveness
John R. Thomas
Visiting Scholar
February 15, 2013
Congressional Research Service
7-5700
www.crs.gov
R42960
CRS Report for Congress
Pr
epared for Members and Committees of Congress

---

Pharmaceutical Patent Settlements: Issues in Innovation and Competitiveness

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 therefore 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 owner 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. The Supreme Court agreed to hear a reverse
payment settlement case, Federal Trade Commission v. Watson Pharmaceuticals, Inc., on
December 7, 2012, and may possibly issue a ruling that provides a nationally uniform judicial
approach to these agreements.
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 unenacted proposal from
the 112th Congress, H.R. 3995, would have declared that certain reverse payment settlements
violate the antitrust laws. Another possibility, proposed by S. 27 in the 112th Congress but not
enacted, would establish a presumption of either legality or illegality under the antitrust laws,
along with consideration of relevant factors to be weighed by the courts. Still another unenacted
proposal from the 112th Congress, S. 1882, would have introduced reforms to the food and drug
laws that would have reduced incentives for generic firms to settle with brand-name companies.
Any of these, or other proposals, may be revisited by policymakers during the 113th Congress.

Congressional Research Service

---

Pharmaceutical Patent Settlements: Issues in Innovation and Competitiveness

Contents
Introduction ...................................................................................................................................... 1
Patent Disputes Under the Hatch-Waxman Act ............................................................................... 2
Patent Fundamentals .................................................................................................................. 2
FDA Approval Procedures ......................................................................................................... 3
Resolution of Patent Disputes.................................................................................................... 4
Generic Exclusivity ................................................................................................................... 5
Fundamentals of Reverse Payment Settlements .............................................................................. 6
Antitrust Implications of Reverse Payment Settlements ................................................................. 9
General Antitrust Standards ....................................................................................................... 9
Judicial Approaches to Reverse Payment Settlements ............................................................ 10
Issues and Observations ................................................................................................................. 12

Contacts
Author Contact Information........................................................................................................... 13

Congressional Research Service

---

Pharmaceutical Patent Settlements: Issues in Innovation and Competitiveness

Introduction
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, in part reformed both the patent and food and drug laws in order to balance
incentives for innovation and competition within the pharmaceutical industry.2
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. 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 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” or “exit” payment or, because the
payment flows counterintuitively, from the patent proprietor to the accused infringer, a “reverse”
payment.”3 Some observers have also termed these settlements as “pay-for-delay” agreements.4
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.5 Others conclude that when one competitor pays another not to market its product,
such a settlement is anti-competitive and presumptively a violation of the antitrust laws.6
Since 2003, Congress has required that litigants notify federal antitrust authorities of their
pharmaceutical patent settlements.7 To date, Congress has not stipulated substantive standards for
assessing the validity of these agreements under the antitrust law, however. That determination

1 P L. 84-417, 98 Stat. 1585 (1984).
2 See CRS Report R41114, The Hatch-Waxman Act: Over a Quarter Century Later, by Wendy H. Schacht and John R.
Thomas.
3 See Alan Devlin & Michael Jacobs, “Anticompetitive Innovation and the Quality of Innovation,” 27 Berkeley
Technology Law Journal (2012), 1.
4 See Alyssa L. Brown, “Modest Proposals for a Complex Problem: Patent Misuse and Incremental Changes to the
Hatch-Waxman Act as Solutions to the Problem of Reverse Payment Settlements,” 41 University of Baltimore Law
Review (2012), 583.
5 See Henry N. Butler and Jeffrey Paul Jarosch, “Policy Reversal on Reverse Payments: Why Courts Should Not
Follow the New DOJ Position on Reverse-Payment Settlements of Pharmaceutical Patent Litigation,” 96 Iowa Law
Review (2010), 57.
6 See Michael A. Carrier, “Unsettling Drug Patent Settlements: A Framework for Presumptive Illegality,” 108
Michigan Law Review (2009), 37.
7 See Medicare Prescription Drug, Improvement and Modernization Act of 2003, P.L. 108-173, 117 Stat. 2066.
Congressional Research Service
1

---

Pharmaceutical Patent Settlements: Issues in Innovation and Competitiveness

was left to judicial application of general antitrust principles. Uniformity of results has not been a
hallmark of this line of cases. Facing different factual patterns, some courts have concluded that a
particular reverse payment settlement constituted an antitrust violation, while others have upheld
the agreement.8 The announcement of the Supreme Court on December 7, 2012, that it would
hear argument in the case of Federal Trade Commission v. Watson Pharmaceuticals, Inc.9 may
potentially lead to a uniform standard of antitrust treatment of reverse payment settlements by the
judiciary.
A number of bills were introduced in the 112th Congress pertaining to reverse payment
settlements although none were enacted. The Preserve Access to Affordable Generics Act (S. 27)
would have created a rebuttable presumption that certain reverse payment settlements were
illegal. The Protecting Consumer Access to Generic Drugs Act of 2012 (H.R. 3995) would have
rendered certain reverse payment settlements illegal per se. Finally, the FAIR Generics Act (S.
1882) would have introduced reforms to the Hatch-Waxman Act that would have reduced
incentives for generic firms to settle with brand-name companies. Some policymakers may wish
to revisit these legislative proposals during the 113th Congress.
This report introduces and analyzes innovation and competition policy issues associated with
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 analyzes the status of reverse payment settlements
under the antitrust laws. The report closes with a summary of congressional issues and possible
alternatives.
Patent Disputes Under the Hatch-Waxman Act
Patent Fundamentals
Inventors must prepare and submit applications to the U.S. Patent and Trademark Office
(USPTO) if they wish to obtain patent protection.10 USPTO officials, known as examiners, then
assess whether the application merits the award of a patent.11 A patent application must include a
specification that so completely describes the invention that skilled artisans are able to practice it
without undue experimentation. Applicants must also draft at least one claim that particularly
points out and distinctly claims the subject matter that they regard as their invention.12
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

8 See Michael A. Carrier, “Why the ‘Scope of the Patent’ Test Cannot Solve the Drug Patent Settlement Problem,” 16
Stanford Technology Law Review (2012), 1.
9 2012 WL 4758105.
10 35 U.S.C. §111.
11 35 U.S.C. §131.
12 35 U.S.C. §112.
Congressional Research Service
2

---

Pharmaceutical Patent Settlements: Issues in Innovation and Competitiveness

domain.13 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.14
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.15 The term of the patent is ordinarily set at twenty
years from the date the patent application was filed.16 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
competition often results in the availability of lower-cost substitutes for the innovative product.
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 often 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. 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. 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).17
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. The result was that a would-be generic drug
manufacturer had to file its own NDA in order to sell its product. 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. 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. The result was that some generic manufacturers were forced to

13 35 U.S.C. §101.
14 35 U.S.C. §103.
15 35 U.S.C. §271.
16 35 U.S.C. §154(a)(2).
17 See FDA, Drugs: Development & Approval Process (Drugs): How Drugs Are Developed and Approved (April 23,
2010) (available at http://www.fda.gov/drugs/developmentapprovalprocess/howdrugsaredevelopedandapproved/
default.htm).
Congressional Research Service
3

---

Pharmaceutical Patent Settlements: Issues in Innovation and Competitiveness

prove once more that a particular drug was safe and effective, even though their products were
chemically identical to those of previously approved pharmaceuticals.18
Some commentators believed that the approval of a generic drug was a needlessly costly,
duplicative, and time-consuming process. 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.19
In response to these concerns, Congress enacted the Hatch-Waxman Act, a complex statute that
sought compromise between brand-name and generic pharmaceutical companies.20 Its provisions
included the creation of an expedited marketing approval pathway for generic drugs termed an
Abbreviated New Drug Application, or ANDA. 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 availability of ANDAs often
allows 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.21
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 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. 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. 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.22
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 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.23

18 See Colleen Kelly, “The Balance Between Innovation and Competition: The Hatch-Waxman Act, the 2003
Amendments, and Beyond,” 66 Food and Drug Law Journal (2011), 417.
19 See Matthew Avery, “Continuing Abuse of the Hatch-Waxman Act by Pharmaceutical Patent Holders and the
Failure of the 2003 Amendments,” 60 Hastings Law Journal (2008), 171.
20 See Timothy A. Cook, “Pharmaceutical Patent Litigation Settlements: Balancing Patent & Antitrust Policy Through
Institutional Choice,” 17 Michigan Telecommunications and Technology Law Review (2011), 417.
21 See Michael R. Herman, “The Stay Dilemma: Examining Brand and Generic Incentives for Delaying the Resolution
of Pharmaceutical Patent Litigation,” 111 Columbia Law Review (2011), 1788.
22 See Ann Kotze, “Reining in Patent Term Extensions for Related Pharmaceutical Products Post-Photocure and Ortho-
McNeil,” 106 Northwestern University Law Review (2012), 1419.
23 See Linda P. Nussbaum and John D. Radice, “Where Do We Go Now? The Hatch-Waxman Act Twenty-Five Years
(continued...)
Congressional Research Service
4

---

Pharmaceutical Patent Settlements: Issues in Innovation and Competitiveness

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.24 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.”25 Would-be manufacturers of generic drugs must then engage in a specialized
certification procedure with respect to Orange Book-listed patents. An ANDA 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
(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.26
These certifications are respectively termed paragraph I, II, III, and IV certifications. An ANDA
certified under paragraphs I or II is approved immediately after meeting all applicable regulatory
and scientific requirements. An independent generic firm that files an ANDA including a
paragraph III certification must, even after meeting pertinent regulatory and scientific
requirements, wait for approval until the brand-name drug’s listed patent expires.27
The filing of an ANDA with a paragraph IV certification constitutes a “somewhat artificial” act of
patent infringement under the Hatch-Waxman Act.28 The act requires the independent generic
applicant to notify the proprietor of the patents that are the subject of a paragraph IV certification.
The patent owner may then commence patent infringement litigation against that applicant.29
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.30 Once a first ANDA with a paragraph IV certification has been filed, the FDA

(...continued)
Later: Successes, Failures, and Prescriptions for the Future,” 41 Rutgers Law Journal (2009), 229.
24 21 U.S.C. §355(b)(1).
25 See Ian Hastings, “Dynamic Innovation Inefficiency in Pharmaceutical Patent Settlements,” 13 North Carolina
Journal of Law & Technology (2011), 31.
26 21 U.S.C. §355(j)(2)(A)(vii).
27 See Emily Michiko Morris, “The Myth of Generic Pharmaceutical Competition Under the Hatch-Waxman Act,” 22
Fordham Intellectual Property Media & Entertainment Law Journal (2012), 245.
28 Eli Lilly & Co. v. Medtronic, 496 U.S. 1047 (1990). The act of infringement is “somewhat artificial” in that the
generic drug company has merely filed a paragraph IV ANDA with the FDA, rather than actually making, using, or
selling a competing product in the marketplace.
29 See Morris, supra.
30 21 U.S.C. §355(j)(5)(B)(iv).
Congressional Research Service
5

---

Pharmaceutical Patent Settlements: Issues in Innovation and Competitiveness

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 may potentially
obtain more handsome profits than subsequent market entrants—thereby stimulating patent
challenges in the first instance.31
Following 2003 amendments to the Hatch-Waxman Act,32 in some circumstances a first
paragraph IV ANDA applicant may lose its entitlement to the 180-day generic exclusivity period.
The Medicare Prescription Drug, Improvement, and Modernization Act (MMA) established a
number of “forfeiture events” that, if triggered, result in a relinquishment of generic exclusivity.
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.
The possibility of forfeiture was intended “to prevent the practice of ‘parking’ the exclusivity
period and to force generic manufacturers to market promptly.”33
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 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 in this event, replacing their
paragraph IV certifications with paragraph III certifications.34
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. In this circumstance, the independent generic
firm may launch its product once the FDA has finally approved its ANDA.35
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

31 See Scott Hemphill & Mark A. Lemley, “Earning Exclusivity: Generic Drug Incentives and the Hatch-Waxman
Act,” 77 Antitrust Law Review (2011), 947.
32 P.L. 108-173, 117 Stat. 2066.
33 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).
34 21 C.F.R. §314.94(a)(12)(viii)(A).
35 21 U.S.C. §355(j)(5)(B)(iii).
Congressional Research Service
6

---

Pharmaceutical Patent Settlements: Issues in Innovation and Competitiveness

exchange, the NDA holder would agree to compensate the ANDA applicant, often with
substantial monetary payments over a number of years.36
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. 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.37
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.38 Settlements can allow the parties to avoid the expenses of litigation,39
achieve a resolution to the dispute in a timely manner, and avoid the risk of an uncertain result in
the courtroom. The settlement of litigation further serves the goal of resolving disputes in a
peaceful manner, and also preserves scarce judicial resources.40 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.41
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 divide the remaining patent term between them, 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.42
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

36 See C. Scott Hemphill, “Paying for Delay: Pharmaceutical Patent Settlement as a Regulatory Design Problem,” 81
New York University Law Review (2006), 1560.
37 See Carrier, supra.
38 See Cory J. Ingle, “Reverse Payment Settlements: A Patent Approach for Defending the Argument for Illegality,” 7
I/S: A Journal of Law and Policy for the Information Society (2012), 503 (identifying this policy).
39 The American Intellectual Property Law Association estimated the average cost of patent infringement litigation at
$6,018,000 per side for a case worth more than 25 million dollars. See AIPLA Report of the Economic Survey I-153-54
(2011).
40 See Alex Corona, “Stuck in Neutral: The Future of Reverse Payments Agreements in Hatch-Waxman Litigation,” 7
Seton Hall Circuit Review (2010), 201.
41 Asahi Glass Co. v. Pentech Pharmaceuticals, Inc., 289 F. Supp. 2d 986 (N.D. Ill. 2003) (emphasis in original).
42 See Corona, supra.
Congressional Research Service
7

---

Pharmaceutical Patent Settlements: Issues in Innovation and Competitiveness

accused infringer may well be willing to compensate the patent proprietor in order to avoid the
risk of such a holding.43
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:
[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.44
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.45
At the present time, congressional action on pharmaceutical patent litigation settlements has been
limited. In the 2003 Medicare Prescription Drug, Improvement, and Modernization Act (MMA),46
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.47 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 drug 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.48
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.49 The FTC reported that during FY2012 (October 1,

43 See Scott Bergeson, “A Vaccine Approach to the Reverse Payment Illness,” 18 Richmond Journal of Law and
Technology (2012), 14.
44 In re Ciprofloxacin Antirust Litigation, 261 F. Supp. 2d 188, 251 (E.D.N.Y. 2003).
45 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 Antirust Law Journal (2004), 1069.
46 P.L. 108-173, 117 Stat. 2066.
47 MMA, §1112(a)(1).
48 Ibid.
49 Ibid. at §1112(c)(1).
Congressional Research Service
8

---

Pharmaceutical Patent Settlements: Issues in Innovation and Competitiveness

2011, to September 30, 2012), the agency received “140 final resolutions of patent disputes
between a brand and a generic, of which 40 settlements may involve pay-for-delay payments.”50
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. 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. After
introducing the basic concepts of antitrust law, this report next reviews several judicial opinions
that address reverse payment settlements.
Antitrust Implications of Reverse Payment
Settlements
General Antitrust Standards
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.51
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.”52 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.53
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 to predict with confidence that the

50 See Agreements Filed with the Federal Trade Commission under the Medicare Prescription Drug, Improvement, and
Modernization Act of 200, Overview of Agreements Filed in FY2012: A Report by the Bureau of Competition
(available at http://www.ftc.gov/os/2013/01/130117mmareport.pdf), 1.
51 See, e.g., Federal Trade Commission, FTC Guide to the Antitrust Laws (available at http://www.ftc.gov/bc/antitrust/).
52 State Oil Co. v. Khan, 522 U.S. 3, 10 (1997).
53 See Meredith Bateman, “In re K-Dur Antitrust Litigation—Reverse Payments: Against Prices, Purchasers, and
Policy,” 15 Tulane Journal of Technology and Intellectual Property (2012), 293.
Congressional Research Service
9

---

Pharmaceutical Patent Settlements: Issues in Innovation and Competitiveness

rule of reason will condemn it.” 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.”54
Among the practices that have been judged per se violations are price fixing, group boycotts, and
market division.55
In some circumstances, courts apply an antitrust standard that falls between the per se illegality
standard and the rule of reason. The so-called “quick look” or “truncated rule of reason” approach
applies when the plaintiff demonstrates that the defendant has engaged in practices similar to
those previously held to be subject to per se treatment. In these circumstances, the defendant must
then demonstrate that the practice has pro-competitive justifications in order to avoid liability for
an antitrust violation.56
Judicial Approaches to Reverse Payment Settlements
The courts have differed in their antitrust approaches to reverse payment settlements in
pharmaceutical patent litigation.57 The first two appellate courts to address this issue, from the
District of Columbia and Sixth Circuits, subjected such agreements to strict antitrust scrutiny.58
The Sixth Circuit opinion in In re Cardizem CD Antitrust Litigation is representative of this
approach.59 There the Court of Appeals held that a reverse payment settlement agreement between
Hoescht Marion Roussel Inc. and Andrx Pharmaceuticals was per se invalid. 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 of
Appeals explained.
Despite this early precedent, three subsequent Courts of Appeals to consider the matter—from the
Second, Eleventh, and Federal Circuits—reached a different result, ruling that reverse payment
settlements were permissible so long as they do not authorize arrangements that exceed the scope
of the patent.60 One representative case, Valley Drug Co. v. Geneva Pharmaceuticals, Inc.,61
involved agreements Abbott Laboratories reached with two different generic firms, Zenith
Goldline Pharmaceuticals and Geneva Pharmaceuticals. 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. The Eleventh Circuit reversed on appeal, concluding that the standard of per se
illegality was “premature” and inappropriate. Instead, the Court of Appeals remanded the matter

54 Northern Pacific Railroad Co. v. United States, 356 U.S. 1, 5 (1957).
55 See Leegin Creative Leather Products, Inc. v. PSKS, Inc., 551 U.S. 877 (2007).
56 See California Dental Association v. FTC, 526 U.S. 756 (1999).
57 See Einer Elhauge & Alex Krueger, “Solving the Patent Settlement Puzzle,” 91 Texas Law Review (2012), 283.
58 See In re Cardizem CD Antirust Litig., 332 F.3d 896 (6th Cir. 2003); Andrx Pharms. Inc. v. Biovail Corp., 256 F.3d
799 (D.C. Cir. 2001).
59 332 F.3d 896 (6th Cir. 2003).
60 See In re Ciprofloxacin Hydrochloride Antitrust Litigation, 544 F.3d 1323 (Fed. Cir. 2008); Schering-Plough Corp.
v. FTC; In re Tamoxifen Citrate Antitrust Litig., 466 F.3d 187 (2d Cir. 2006); Valley Drug Co. v. Geneva Pharms.,
Inc., 344 F.3d 1294 (11th Cir. 2003).
61 344 F.3d 1294 (11th Cir. 2003).
Congressional Research Service
10

---

Pharmaceutical Patent Settlements: Issues in Innovation and Competitiveness

for a determination of whether any part of the agreement went beyond the protections afforded by
the brand-name firm’s patent and, if so, to apply antitrust scrutiny only to those portions of the
agreement. Under this “scope of the patent” approach, reverse payment settlements are permitted
so long as (1) the commercial arrangement dictated by the settlement does not extend beyond the
scope of the patent; (2) the patent holder’s claim of infringement was not objectively baseless;
and (3) the patent was not obtained by defrauding the USPTO.
On July 16, 2012, the Court of Appeals for the Third Circuit addressed the antitrust status of
reverse payments settlements in K-Dur Antitrust Litigation.62 The Third Circuit rejected the scope
of the patent test, explaining that “that test improperly restricts the application of antitrust law and
is contrary to the policies underlying the Hatch-Waxman Act and a long line of Supreme Court
precedent on patent litigation and competition.”63 The Third Circuit believed that courts following
the scope of the patent test had placed too much weight on the presumption of validity accorded
to granted patents. This presumption was merely a procedural device, not a substantive right of
the patent holder, the Court of Appeals explained.64
The Court of Appeals also recognized the judicial preference for private settlements, but reasoned
that this practice should not displace congressional goals underlying the Hatch-Waxman Act—
including the invalidation of improvidently granted patent through litigation.65 In the view of the
Third Circuit, the scope of the patent test essentially prevented antitrust authorities from
reviewing settlement agreements involving weak or narrow patents that would not have blocked
generic competition. 66 In place of the scope of the patent test, the Third Circuit adopted a “quick
rule of reason” test that presumed that reverse payments were anticompetitive. However, the
parties to the agreement could rebut that conclusion by demonstrating that the payments were for
a purpose other than delayed entry or offered some pro-competitive benefit.67
Perhaps due to its awareness of the arguably conflicting standards developed by the lower courts,
the Supreme Court agreed to hear a reverse payment settlement case, Federal Trade Commission
v. Watson Pharmaceuticals, Inc., on December 7, 2012.68 The issue presented to the Supreme
Court is:
Whether reverse-payment agreements are per se lawful unless the underlying patent
litigation was a sham or the patent was obtained by fraud (as the court below held), or
instead are presumptively anticompetitive and unlawful (as the Third Circuit has held).

FTC v. Watson Pharmaceuticals, Inc. provides the Supreme Court with the opportunity to issue a
ruling that provides a nationally uniform judicial approach to these agreements.

62 686 F.3d 197 (3rd Cir. 2012).
63 Ibid. at 214.
64 Ibid. at 214-15.
65 Ibid. at 217-18.
66 Ibid. at 217.
67 Ibid. at 218.
68 2012 WL 4758105.
Congressional Research Service
11

---

Pharmaceutical Patent Settlements: Issues in Innovation and Competitiveness

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. In view of this landscape, several options are available for Congress. One possibility
is to await further judicial developments. Supreme Court review of the issue in FTC v. Watson
Pharmaceuticals, Inc. may potentially resolve the arguable split among the courts of appeal with
respect to this issue.
Another option is to regulate the settlement of pharmaceutical patent litigation in some manner. A
number of bills were introduced in the 112th Congress pertaining to reverse payment settlements,
although none were enacted. These bills, as well as others, may be introduced in the 113th
Congress.
The Preserve Access to Affordable Generics Act, S. 27, would have declared that certain reverse
payment settlements constitute acts of unfair competition. In particular, that bill would have
amended the Federal Trade Commission Act to provide that an agreement “shall be presumed to
have anticompetitive effects and be unlawful if—(i) an ANDA filer receives anything of value;
and (ii) the ANDA filer agrees to limit or forego research, development, manufacturing,
marketing, or sales of the ANDA product for any period of time.” That presumption would not
apply if the parties to the agreement demonstrated by clear and convincing evidence that the
procompetitive benefits of the agreement outweighed the anticompetitive effects of the
agreement. S. 27 included a list of factors to be weighed by the courts in such circumstances.69
Another bill, The Protecting Consumer Access to Generic Drugs Act of 2012, H.R. 3995, would
have declared unlawful “any agreement resolving or settling a patent infringement claim in
which—(1) an ANDA filer receives anything of value; and (2) the ANDA filer agrees not to
research, develop, manufacture, market, or sell, for any period of time, the drug that is to be
manufactured under the ANDA involved and is the subject of the patent infringement claim.”
However, agreements were not unlawful if the ANDA filer received no more than the right to
market the drug prior to the expiration of any intellectual property rights and the waiver of a
patent infringement claim for damages based on any earlier marketing of such generic drug.70
Finally, the Fair and Immediate Release of Generics Act, S. 1882, would have made a number of
changes to the Hatch-Waxman Act in order to discourage reverse payments settlements. In
particular, S. 1882 would have granted any generic firm the right to share the 180-day regulatory
exclusivity if it wins a patent challenge in the district court or is not sued for patent infringement
by the brand company.71 The legislation would have also obligated generic firms to abide by any
deferred entry date agreed to in their settlements with brand-name firms, even if relevant patents
were struck down previously.72 Finally, brand-name firms would have been required to make a
decision to enforce their patents within 45 days of being notified of a patent challenge by a
generic firm under the Hatch-Waxman Act.73

69 S. 27 at §3.
70 H.R. 3995 at §2.
71 S. 1882 at §2.
72 Ibid. at §3(a).
73 Ibid. at §3(b).
Congressional Research Service
12

---

Pharmaceutical Patent Settlements: Issues in Innovation and Competitiveness

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.

Author Contact Information

John R. Thomas

Visiting Scholar
jrthomas@crs.loc.gov, 7-0975


Congressional Research Service
13

---