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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

You think?

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

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

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

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

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

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

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