Authorities in the European Union and the United States have recently taken a tougher stance against reverse payments – patent settlements whereby, according to many competition experts, dominant drug companies buy off potential rivals.

The European Commission seems poised to crack down on these controversial settlements. Enforcement agencies in the US now want to do the same, but it is unclear if they will be able to do so.

At the heart of every reverse payment is a patent infringement suit: A company that owns a patent on a blockbuster drug files an infringement action against competitors who want to bring generic versions of the drug to market. The suit is settled, but not in the usual manner, with the alleged infringers paying some money to the wronged patentee. In a reverse payment, the patentee pays the alleged infringers – and the sum can be astronomical. In return, the alleged infringers postpone making or selling a generic version of the patented drug.

In one US settlement, for instance, Bayer AG, which at the time owned a patent on the hugely popular antibiotic Cipro, paid $398 million to resolve a case against four alleged infringers. The infringers agreed not to bring any generic version of Cipro to the market for six years, until Bayer’s patent on the drug expired.

Paying large sums to accused infringers might seem peculiar, but the settlements are extremely profitable for all the parties involved. The patentee keeps its monopoly on the drug, enabling it to sell the drug at a far higher price than if a generic version were on the market. Even after buying off the competition, the patentee comes out way ahead. Alleged infringers also benefit, because the reverse payments they receive greatly exceed the money they could make by selling low-margin generic drugs.

By keeping drug prices high, however, reverse settlements impose extra costs on all those who pay for these drugs. The Federal Trade Commission recently estimated [pdf] that in the United States alone, the extra costs will be at least $35 billion over the next ten years.

“From an antitrust perspective, reverse payments clearly raise an enormous problem … considering that billions of dollars are being shifted between consumers and producers,” said Columbia Law School professor C. Scott Hemphill.

For years, European authorities apparently turned a blind eye towards these deals. “I don’t believe there were any investigations involving reverse payments,” said Sean Gates, a partner in the Los Angeles office of Morrison & Foerster.

Then, in July, the European Commission came out with the final version of its Pharmaceutical Sector Inquiry Report (IPW, Public Health, 8 July 2009). The report examined, among other things, why there were delays in bringing generic drugs to the European market. One reason, according to the report, were patent infringement settlements in which the defendants agreed to delay making or selling generic drugs.

In response to these findings, the Commission announced it would intensify its oversight of the pharmaceutical industry – including the industry’s use of reverse payments.

The Commission quickly made good on its promise. On the same day it issued its report, the Commission launched a formal antitrust investigation of Les Laboratoires Servier and at least four generic drug makers, to see if agreements between these companies wrongfully hindered the manufacture and sale of generic perindopril, a popular cardiovascular medicine originally developed by Les Laboratoires Servier.

The Commission is looking into whether Servier violated Articles 81 and 82 of the EC Treaty (respectively, the rules on restrictive business practices and abuse of a dominant market position). The Commission also is examining whether Article 81 was violated by some generic drug makers (including Teva Pharmaceuticals and subsidiaries of Mylan Inc. and Unichem Laboratories).

The Commission’s recent actions haven’t changed the law in Europe. “However, it has changed the terms of the debate,” said Stephen Whitfield, an associate in the London office of Taylor Wessing.

The European Commission now seems ready and willing to crack down on reverse payments. “[P]harmaceuticals companies which believe that they have entered into anticompetitive settlement agreements, or customers which believe that they have suffered loss as a result of such agreements, may be able to submit a confidential complaint to the Commission and find a receptive audience,” Whitfield said.

The situation in the US is far more muddled. “The most recent court opinions – from the 2nd, 11th and Federal Circuit Courts of Appeal – broadly say that these [reverse payment] settlements don’t raise antitrust concerns. But [a somewhat older case from] the 6th Circuit says these settlements do raise antitrust concerns,” Hemphill said.

In re Ciprofloxacin Hydrocholoride Antitrust Litigation [pdf] (Fed. Cir. 2008), In re Tamoxifen Citrate Antitrust Litigation [pdf] (2d Cir. 2006) and Schering-Plough Corp. v. FTC [pdf] (11th Cir. 2005) all hold that settlements of patent infringement suits – including reverse payment settlements – are “within the exclusionary zone of the patent” and thus permissible under antitrust law. These settlements can be challenged under antitrust law only if the lawsuit being settled is a sham, the plaintiff’s underlying patent was procured by fraud on the patent office, or the settlement restricts a defendant from selling goods or services that clearly do not infringe the plaintiff’s patent. This standard essentially immunizes the vast majority of reverse payments from antitrust challenge.

The 6th Circuit takes a very different approach to reverse payments. In re Cardizem CD Antitrust Litigation [pdf], 332 F.3d 896 (6th Cir. 2003) holds that these settlements are per se violations of Section 1 of the Sherman Antitrust Act.

The situation in the courts may soon get more complicated, because the 2nd Circuit is reconsidering its interpretation of the law. Instead of simply following precedent, a three-judge panel in In re Ciprofloxacin Hydrocholoride Antitrust Litigation is taking a fresh look at how antitrust law applies to reverse payments. (Part of this lawsuit was split off and decided by the Federal Circuit in 2008, which is why the case names are the same.)

If the 2nd Circuit decides to alter its stance on reverse payments, part of the reason may be the Justice Department’s recent change of heart on this issue.

Under the Bush administration, the Justice Department expressed some concerns about reverse payments, but asserted these settlements were not presumptively unlawful. Under the Obama administration, the agency is taking a very different view. In June, the agency filed an amicus brief for the 2nd Circuit’s Ciprofloaxcin case, asserting that reverse payments presumptively violate Section 1 of the Sherman Antitrust Act – and that it is extremely difficult for drug companies to refute this presumption whenever the reverse payment is far larger than the patentee’s avoided litigation costs.

The Justice Department’s new position essentially ends a split between US antitrust authorities over how to deal with reverse payments. The Federal Trade Commission has long claimed that these settlements violate antitrust law. “The new Justice Department stance seems to adopt much of the FTC’s reasoning,” said Prof. Michael Carrier of Rutgers Law School in New Jersey.

The two federal antitrust authorities in the US now agree that reverse payments are presumptively illegal. However, the agencies still need to convince the courts. And that may not happen anytime soon, according to some experts.

“This is like the 100 Years War,” said David Balto, a solo antitrust attorney in Washington, DC. “Our grandchildren will be discussing this issue.”