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Journal of Health Care Law and Policy Volume 28 Issue 1 Article 5 A Surprising Reason the Reverse-Payment Caselaw Has Not Developed Michael A. Carrier Follow this and additional works at: https://digitalcommons.law.umaryland.edu/jhclp Recommended Citation Michael A. Carrier, A Surprising Reason the Reverse-Payment Caselaw Has Not Developed, 28 J. Health Care L. & Pol'y (). Available at: https://digitalcommons.law.umaryland.edu/jhclp/vol28/iss1/5 This Article is brought to you for free and open access by the Academic Journals at DigitalCommons@UM Carey Law. It has been accepted for inclusion in Journal of Health Care Law and Policy by an authorized editor of DigitalCommons@UM Carey Law. For more information, please contact smccarty@law.umaryland.edu. DOCUMENT7 (DO NOT DELETE) 12/23/2024 1:46 PM  94 A SURPRISING REASON THE REVERSE-PAYMENT CASELAW HASNOT DEVELOPEDMICHAEL A. CARRIER* Abstract The following is a lightly edited transcript of comments provided at the Journal of Health Care Law & Policy’s Spring Symposium entitled “Prescription Drug Regulation: Affordability, Constitutionality, and Accessibility.” This event was hosted on March 7, 2024 by the University of Maryland Francis King Carey School of Law.   * Board of Governors Professor, Rutgers Law School. Copyright © 2025 Michael A. Carrier. DOCUMENT7 (DO NOT DELETE) 12/23/2024  1:46 PM 2025] REVERSE-PAYMENT CASELAW 95 INTRODUCTION The pharmaceutical industry presents important but challenging issues. Given development costs and time to reach the market, patents are crucial in the industry. At the same time, the regulations promote not only innovation but also competition. The Hatch Waxman Act is designed to lower prices by allowing generics to piggyback on brand firms’ clinical trials.1 No industry so explicitly promotes competition. And when generics enter the market, the price quickly declines. As a result, drug companies have an interest in extending their period of monopoly profits as long as possible.  PHARMACEUTICAL ANTITRUST BEHAVIOR I am going to talk about one type of delaying behavior involving settlements. But to offer context, let me introduce some of the other activities in which drug companies have engaged. One, called “product hopping,” involves a switch from one version of a drug to another to keep the generic off the market. Granted, reformulations take place all the time, and if there is a true benefit, there is no concern. But sometimes the company makes the switch only to harm the generic, for example when it pulls a profitable drug off the market or disparages its old version. Another example is a citizen petition filed with the U.S. Food and Drug Administration (“FDA”) to raise safety concerns. The problem is that most of the petitions targeting a pending generic are filed to delay entry. My empirical work has shown that the FDA denies 92% of these petitions, including 98% of last-minute petitions (within six months of the end of a patent or exclusivity period).2 A third example is the denial of samples the generic needs to show bioequivalence (which means it’s absorbed into the body at the same rate as the brand product). In some cases, the FDA requires a program called “REMS,” which stands for Risk Evaluation and Mitigation Strategies.3 For a risky drug like Thalidomide that causes birth defects, the agency wants to put restrictions on the drug’s distribution. But the brand company can think: “Aha! I don’t need to share these with the generic.” As a result, the generic is stuck at the starting line, blocked from obtaining access to the samples needed for testing. SETTLEMENTS Let me now turn to a fourth example, which is the subject of my talk: settlements. In many cases, a brand firm has a patent, and a generic is trying to enter the market. But the brand firm claims that the generic is infringing its   1. Pub. L. No. 98-417, 98 Stat. 1585 (1984).  2. Michael A. Carrier & Carl Minniti, Citizen Petitions: Long, Late-Filed, and At-Last Denied, 66 AM. UNIV. L. REV. 305, 308 (2016).  3. 21 U.S.C. § 355-1. DOCUMENT7 (DO NOT DELETE) 12/23/2024  1:46 PM 96 JOURNAL OF HEALTH CARE LAW & POLICY [VOL. 28:1 patent. The result is litigation, and most of the time, the parties settle. The vast majority of these settlements do not present concern because they are based on the strength of the patent. The brand firm is allowed to exclude potential rivals based on its patent. In contrast, if the company supplements the exclusion from the patent with a payment, that is a problem. Let’s say I am the brand firm, and you are the generic. Based on the strength of the patent, I am able to exclude you from the market for five years. That doesn’t present antitrust concern. But now let’s add an extra two years on top of that. Exclusion from the market in years six and seven is not OK because I am paying you, say, $100 million to stay off the market. One company cannot pay another to do that. What have courts done? Between 2005 and 2012, the courts said this was all fine. They highlighted the benefits of settlements and stated that the conduct fell within the “scope of the patent.”4 In other words, if you have a patent, you can do whatever you want during the patent term, including paying a competitor not to compete. These positions were simplistic, reading antitrust out of the analysis.  In 2013, the Supreme Court in FTC v. Actavis held that these types of settlements could violate antitrust law and that antitrust has a role to play even if there is a patent.5 Why? Because we cannot just assume that the patent is valid and infringed. Many of these patents do not cover the active ingredient. They cover something more secondary in nature: maybe the size of the particle or the formulation. Courts have concluded that a lot of these patents are not valid.6 If the brand firm is paying the generic to drop what could be a legitimate patent challenge, that presents significant concern. In Actavis, the Court instructed lower courts to apply antitrust law—something called the “Rule of Reason.”7 This framework calls for a burden-shifting analysis that culminates in the balancing of anticompetitive and procompetitive effects. Even though the decision provided guidance as to the analysis to apply, Chief Justice Roberts, writing in dissent, warned: “Good luck to the district courts.”8 In the years since Actavis, some courts have agreed, lamenting that the caselaw is not clear and that it is uncertain how to interpret payment and analyze   4. See Michael A. Carrier, Unsettling Drug Patent Settlements: A Framework for Presumptive Illegality, 108 MICH. L. REV. 37, 65 (2009) (citing cases).  5. FTC v. Actavis, Inc., 570 U.S. 136 (2013).  6. C. Scott Hemphill & Bhaven Sampat, Drug Patents at the Supreme Court, 339 SCI. 1386, 1387 (2013) (examining completed patent litigation on drugs first eligible for challenges between 2000 and 2008 and finding that drug companies are more likely to win on primary active-ingredient patents (92%) than on secondary patents (32%)).  7. 570 U.S. at 158–60.  8. Id. at 173 (Roberts, C.J., dissenting). DOCUMENT7 (DO NOT DELETE) 12/23/2024  1:46 PM 2025] REVERSE-PAYMENT CASELAW 97 the patent. In other words, so this theory goes, confusion in the caselaw is the result of the Supreme Court not being clear in Actavis.  PROJECT Taking another position, the project I discuss today points to a different reason why the caselaw is unclear.9 The reason is that most of the cases that involve these “reverse payment” settlements disappear because the parties settle the case after the motion to dismiss or summary judgment stages. The cases that disappear are the ones with the concerning facts, where the brand pays the generic more than $100 million or the company’s CEO says that it received billions in revenues it never expected. The cases with these smoking guns never make it to trial. As a result, the issues that need to be clarified are not because we never get a verdict resolving these issues.  EMPIRICAL FINDINGS Part of this project involves empirical work. My co-author and I looked at all of the reverse-payment cases since Actavis. By the way, they are called “reverse payment” because the brand is paying the generic to stay off the market. Usually, payment goes in the other direction, with the alleged infringer paying the patentee to enter the market. We found 37 reverse-payment cases since Actavis. Of these, 29 (78%) settled.10  In terms of the timing, about half the cases settle after the denial of summary judgment, with the other half settling in the context of a motion to dismiss ruling. We found that settlements occur in other areas of pharmaceutical antitrust law. We also learned that there are certain issues that are prominent at different stages of the process. At the motion to dismiss stage, the issue most frequently litigated is large and unjustified payment. Whether there is a large and unjustified payment is something plaintiffs are required to show after Actavis, and so it is no surprise that at the motion to dismiss stage, courts require this. If the case proceeds to summary judgment, causation becomes more important as a plaintiff must show that generic entry was delayed because of the settlement. In other words, there isn’t an independent reason that would have prevented the generic from entering the market before the settlement.  We found that the Northern District of California has presided over the most reverse-payment cases, followed by the Eastern District of Pennsylvania, the District of Massachusetts, and the Southern District of New York. We also found repeating litigants, most notably Allergan, Teva, Endo, and Lupin on the   9. Michael A. Carrier & Edward Bank, The Missing Caselaw of Reverse-Payment Settlements, 97 ST. JOHN’S L. REV. ___ (forthcoming 2025), https://papers.ssrn.com/sol3/papers.cfm?abstract_id=4909201.  10. Id. at 5. DOCUMENT7 (DO NOT DELETE) 12/23/2024  1:46 PM 98 JOURNAL OF HEALTH CARE LAW & POLICY [VOL. 28:1 defendant side and Rochester Drug, Walgreens, Rite Aid, and CVS on the plaintiff side. Let me now take a step back and point to these settlements as an unappreciated reason for the incomplete development of the case law. I consider three categories of cases. The first is large and unjustified payment, the second is causation, and the third is market power.  GREATEST LOSS: “LARGE AND UNJUSTIFIED PAYMENT” The issue of “large and unjustified payment” was essential to the Court’s ruling in Actavis.11 The Court explained why it is hard to determine if the patent is valid. I came south from New Jersey this morning, but I did not go so far south that I got to where they serve “turducken,” which is a dish consisting of turkey inside duck inside chicken. Similar issues are presented by a patent case inside an antitrust case. In a case before Actavis, the Eleventh Circuit said this is a turducken analysis because we have a complicated patent case in the middle of an antitrust case.12 The Supreme Court said we don’t want that, so let’s not figure out if the patent is valid. Instead, if the brand firm makes a large and unjustified payment to the generic, that is a proxy for patent weakness. So we don’t have to look at the patent; we can just look at the payment. That being said, we would learn from verdicts on these issues. For starters, what is “large”? Is it large in relation to the brand firm’s profits, or is it large in relation to what would induce the generic to drop its challenge? I think it is the latter, which is more consistent with what the Supreme Court said in Actavis. Nonetheless, we do not get a lot of guidance from the caselaw because these cases disappear. After large, we turn to “unjustified.” Here, we come to “side deals.” After Actavis, the brand firms wised up quickly and said they are not paying the generics to delay entering the market, but are paying them for unrelated services. “We’re paying $60 million for their promotion or backup manufacturing services,” for example. A lot of these deals don’t seem legitimate, but that is something we would learn at trial. At the motion to dismiss stage, the court is ruling that the plaintiffs have made plausible allegations, and at the summary judgment stage, the court is finding that there is an issue of fact. But in neither of these settings is a court or jury actually deciding that these side deals are a sham. And then finally, “payment.” What exactly is a payment? Here, it gets more nuanced. The initial generation of payment involved cash. In the case involving the antibiotic Cipro twenty years ago, the brand paid the generic $398 million in   11. 570 U.S. at 156–58.  12. F.T.C. v. Watson Pharms., Inc., 677 F.3d 1298, 1315 (11th Cir. 2012). DOCUMENT7 (DO NOT DELETE) 12/23/2024  1:46 PM 2025] REVERSE-PAYMENT CASELAW 99 cash.13 The issue of payment in that case is easy. We don’t see cases like that today.  Instead, we have more nuanced settlements, like those including “acceleration clauses.” An acceleration clause provides that the generic can enter earlier than it would be able to under the settlement if certain things happen. Is that anticompetitive? Is it procompetitive? The settling parties say it’s procompetitive because it encourages early generic entry. The critics raise concern because the “true” generic challenging the patent may not do so if it knows it will not be able to enjoy exclusivity itself. This harm to the true generic can be viewed as a type of benefit to the settling generic that reflects a form of payment.14 In short, whether an acceleration clause counts as payment is something on which further guidance could be helpful. Another example is a “no authorized generic” promise. The first generic to challenge a brand firm’s patent and claim that it is invalid or not infringed receives 180 days on the market to itself. This is extremely valuable for generics and in fact is where they can obtain much of their revenue. But during that 180-day period, the brand firm also can introduce its own generic, which is called an authorized generic. The introduction of such a rival would significantly reduce the true generic’s profits.15 As a result, the true generic would benefit from a brand firm’s promise not to introduce an authorized generic. So here, the brand firm is saying: “I am not going to give you any money, but I am going to promise not to enter during the 180-day period with my own generic.” That is worth a lot to the generic. Courts in the first few years after Actavis reached the right decision, which is that these clauses could constitute payment. But today the issue is more nuanced. Let’s say the brand firm says: “I am not going to allow a third party to distribute an authorized generic.” Is that the equivalent of a no-authorized-generic deal? It depends on the likelihood that the brand would introduce its own authorized generic. Most of the time, that does not happen. But the absence of a case’s continuation means this is something we lose out on.  In the big picture, the greatest loss I see from these cases settling deals with a large and unjustified payment: What is large? What is unjustified? What is payment? Those are issues that we do not have complete guidance on.  MEDIUM LOSS: CAUSATION The second category of cases addresses causation. In particular, would the generic have been able to enter the market before the settlement? One possibility   13. In re Ciprofloxacin Hydrochloride Antitrust Litig., 544 F.3d 1323, 1331 (Fed. Cir. 2008).  14. Michael A. Carrier, Payment After Actavis, 100 IOWA L. REV. 7, 37–41 (2014).  15. FTC, AUTHORIZED GENERIC DRUGS: SHORT-TERM EFFECTS AND LONG-TERM IMPACT 58–59 (2011). DOCUMENT7 (DO NOT DELETE) 12/23/2024  1:46 PM 100 JOURNAL OF HEALTH CARE LAW & POLICY [VOL. 28:1 of doing so involves an “at risk” launch. Even during the patent term, a generic can enter if it believes the patent is invalid or non-infringed. Because many of these patents do not cover the active ingredient and are likely to be invalidated, generics may plan to enter. But how likely are they in fact to enter? Well, for that we want to know the facts: How developed are the facilities to produce the drugs? What do their documents show about readiness to enter the market? The failure to reach a verdict means we’re missing information relevant to the likelihood of an at-risk launch.  Another path available to the generic is winning patent litigation. A plaintiff need not prove that it would have won litigation with 100% certainty. If it did, that would implicate the “turducken” problem of litigating a patent inside an antitrust case. But “some evidence” of invalidity could be enough.16 Where is the threshold? It would be great to know.  A third option is an alternative settlement. Let’s say we have a reverse-payment settlement by which the generic enters the market in seven years. Could the parties have agreed to a settlement without payment that would have allowed entry in five years? Evidence could show if there was a procompetitive settlement available.  Finally, the timing of FDA approval could be implicated. In some cases, the brand firm points to a lack of approval before the time for anticipated entry under the settlement to show a lack of harm. It argues: “How can there be delay if FDA approval came after the entry date?” But maybe the generic slow-walked the process because it knew it was getting paid by the brand firm to delay entry. That is another issue that would benefit from elaboration.  These issues are not quite as factual as those presented by large and unjustified payment. But there is still a lot to be gained by developing the issues at trial. SMALLEST LOSS: MARKET POWER The last issue is market power. The loss here is not as high because these are such fact-specific issues. Does the brand firm have market power? Each case is different. In many cases, the brand and generic firms make up the market because there is no substitute. In other cases, there might be therapeutic alternatives. Because the answer to this question depends so heavily on the facts of the cases, we lose less here as compared to the other two categories. We could have learned more if these cases went to verdict, but it is not quite the same loss.   16. See generally HERBERT HOVENKAMP, MARK D. JANIS, MARK A. LEMLEY, CHRISTOPHER R. LESLIE & MICHAEL A. CARRIER, IP AND ANTITRUST: AN ANALYSIS OF ANTITRUST PRINCIPLES APPLIED TO INTELLECTUAL PROPERTY LAW § 16.01[J], at 16-66.51–16-66.52 (Supp. 2023). DOCUMENT7 (DO NOT DELETE) 12/23/2024  1:46 PM 2025] REVERSE-PAYMENT CASELAW 101 CONCLUSION At the end of the day, whenever you hear that the problem with the reverse-payment caselaw is that the Supreme Court was unclear in FTC v. Actavis, consider another reason: the vast majority of cases that could shed light on Actavis are settled. As a result, we are missing guidance that would be provided by verdicts on the issues I have outlined today.  

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