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This is the first guest post that DDL has had by a law student in its five+ year history.  We weren’t sure at first, when the offer to post was made, but once we read it, our concerns vanished.  Heck, it’s probably better written than half the stuff we throw out there.
So all of what follows – and all credit or blame therefor – belongs to Brenna Jenny, a Harvard Law 3L whom we now know is a dedicated fan of the blog.
The most topical constitutional issue implicated by the pharmaceutical industry has been the intersection between off-label promotion and the First Amendment.  While we continue to await the Second Circuit’s decision in United States v. Caronia, a new constitutional consideration has been receiving increased attention: the Takings Clause.  In a recent article in Food and Drug Law Journal, Professor Richard Epstein argues that the Biologics Price Competition and Innovation Act of 2009 (“Biosimilars Act”) raises Fifth Amendment concerns.  66 Food & Drug L.J. 285 (2011).  Professor Epstein’s argument may have force against other legislative fixes Congress would seek to apply to the pharmaceutical industry, such as Representative Bobby Rush’s (D-IL) recent proposal (HR 3995) to ban all reverse payment settlements between brand and generic drug manufacturers.
First some background on the Biosimilars Act.  In order to facilitate FDA approval of “biosimilar” biological products (the analogue to generic drugs in the Hatch-Waxman context), the Biosimilars Act allows the FDA to rely on the pioneer’s biologics license application (:BLA”) when determining whether a new entrant’s product is “highly similar” to the existing version.  (The FDA earlier this month released some much-anticipated draft guidance on this, and other, topics).  As under Hatch-Waxman, the second-comer is allowed to introduce far less clinical data than the innovator, and this shortcut allows the copycat product to make it to market sooner, with lower cost.  The Biosimilars Act mirrors the quid pro quo created in the Hatch-Waxman Act:  although innovators lose on one hand (the trade secrets disclosed in their applications are used by the FDA in approving a competitor’s products) they gain on the other (the innovator not only is granted a twelve-year period of exclusivity, but the filing of a biosimilar application is considered an artificial act of infringement, allowing the innovator to file suit and litigate any patent claims before the biosimilar reaches the market.)
Companies choosing to file BLAs after the passage of the Biosimilars Act can be seen as “opting in” to this quid pro quo, agreeing to allow the FDA to indirectly use their intellectual property in exchange for the benefits provided by the Act.  But Professor Epstein maintains that applicants who filed BLAs before passage of the Act:

had investment-backed expectations – based in statute, FDA regulations, and longstanding FDA practice – that their data would not be used or relied on by the agency, directly or indirectly, for the purpose of approving competitors.  Taking these trade secrets for the benefit of a competitor thus requires just compensation in order to avoid a constitutional violation.

The term “investment-backed expectations” alludes to the Supreme Court case Penn Central Transportation Co. v. New York, in which the Court held that regulatory interference with the investment-backed expectations of property owners is a critical factor weighing in favor of compensation.  438 U.S. 104 (1978).
Despite universal agreement that patents are property, whether patents fall within the protection of the Takings Clause is actually an unsettled issue.  Although a 2006 Federal Circuit decision held that patent infringement by the government is not a cognizable Fifth Amendment violation, Zoltek Corp. v. United States, 442 F.3d 1345, 1352 (Fed. Cir. 2006), Congress should not feel liberated from the constraints of the Takings Clause when regulating the intellectual property of the pharmaceutical industry.  Just four years prior to Zoltek, the Supreme Court insisted that “courts must be cautious before adopting changes that disrupt the settled expectations of the inventing community,” because “[f]undamental alterations … risk destroying the legitimate expectations of inventors in their property.”  Festo v. Shoketsu Kinzoku Kogyo Kabushiki Co., 535 U.S. 722, 739 (2002).  This language directly reflects the Court’s discussion of investment-backed expectations in Penn Central.
Therefore, when Congress acts in ways that significantly alter the “legitimate expectations of inventors in their” patents, it does so at least under the shadow of the Fifth Amendment.  A recent legislative proposal regarding reverse payment settlements modifies the ability of patent holders to craft settlements, threatening to trigger the Takings Clause.  Reverse payment settlements have been a hot topic recently, as the FTC and DOJ have found themselves stalled at an utter impasse with the courts over how to treat them.  The FTC in particular has begged Congress to step in and act.
What are these settlements and why do they create such an uproar?  Reverse payment settlements occur when a generic drug company seeks to enter the market before the expiration of a patent.  Citing either patent invalidity or non-infringement, the generic manufacturer, pursuant to the Hatch-Waxman Act, must notify the branded company of its intention to enter.  The branded company then has an opportunity to invoke a thirty-month stay, during which it can litigate the patent claims.  Many of these cases end in settlement, which may involve a payment from the branded company to the generic, with an agreement that the generic will not enter the market until a pre-determined date (prior to the patent’s expiration).  The FTC and DOJ have argued that these settlements are nothing but a smoke screen for a branded company to buy off generic competition by sharing a portion of its monopoly profits.
Although the FTC and the DOJ have passionately insisted these settlements violate antitrust laws, and should be deemed presumptively illegal, courts have consistently been unpersuaded.  Both the Federal Circuit and the Second Circuit (and arguably the Eleventh Circuit as well, although its case law is subject to differing interpretations) have granted reverse payment settlements significant room to thrive:  as long as the branded company’s suit against the generic is not a “sham,” and the resulting settlement meets a few low hurdles, such as allowing other generic companies to subsequently challenge the patent and not restricting the marketing of non-infringing products, the court settlement does not violate antitrust laws.  Arkansas Carpenters Health & Welfare Fund v. Bayer AG, 604 F.3d 98, 106 (2d Cir. 2010). Citing a patent’s presumption of validity, courts have tended to view these settlements as falling within the bounds of a patent holder’s property rights.
Previous congressional proposals, including one introduced last year by Senator Kohl (S. 27), would have granted the FTC and DOJ’s requests and made reverse payment settlements presumptively illegal.  Rep. Bobby Rush’s bill goes a step further: any settlement involving a generic drug filer receiving something of value and agreeing not to research, develop, or sell a drug that is the subject of an infringement claim would be an “unfair method of competition,” in violation of section 5 of the FTC Act.
This bill takes an arrow out of the proverbial patent holder’s quiver of property rights, and a segment of settlement options is now off the table.  When considering reverse payment settlements, several courts have approvingly cited Judge Posner’s insistence that a patent holder “is entitled to defend the patent’s validity in court, to sue alleged infringers … whatever its private doubts … and to settle the suit to avoid risking the loss of the rights.  No one can be certain that he will prevail in a patent suit.”  Asahi Glass Co., Ltd. v. Pentech Pharmaceuticals, Inc., 289 F. Supp. 2d 986, 993 (N.D. Ill. 2003).  Some opinions have even gone so far as to say that reverse payment settlements are a “natural consequence” of the Hatch-Waxman Act.  King Drug Co. of Florence, Inc. v. Cephalon, Inc., 702 F. Supp. 2d 514, 529 (E.D. Pa. 2010).  When patent holders filed under the previous regulatory regime, their disclosure provided them with a right to exclude, by settlement if necessary, and courts have recognized this right.  Rep. Rush’s bill would alter those expectations.  Given the near infamous expense and uncertainty associated with patent litigation, it is no small change to hamstring a patent holder’s terms of settlement when his property is challenged.
To be sure, patent holders certainly cannot have an investment-backed expectation of engaging in monopolization.  But although antitrust law prohibits patent misuse, HR 3995 raises concerns that the government is leveraging antitrust law to take away property rights which patent holders possess under Hatch-Waxman.  Courts that have addressed reverse payment settlements have drawn a line around activities taken within the patent’s zone of the right to exclude and segregated them – as valid exercises of a property right – from the reach of antitrust law.  As the Federal Circuit has pointed out, patents are inherently anticompetitive, and there is a certain degree of anticompetitive behavior which antitrust law cannot touch.  In re Ciprofloxacin Hydrochloride Antitrust Litig., 544 F.3d 1323, 1333 (Fed. Cir. 2008).  By redefining “unfair method of competition,” HR 3995 seeks to expand the boundary line of what antitrust law can reach, and correspondingly what will no longer fall within the property rights of a patent holder’s right to exclude.  If Congress simply changed the scope of the property right, without invoking antitrust, patent holders may have a real claim to a taking under Penn Central.  The question posed by Rep. Rush’s bill is not whether it is good policy to redefine an “unfair method of competition,” in order to ban reverse payment settlements, but rather whether the government can use antitrust law as an end-run around a takings inquiry.  As Congress continues to contemplate if, and how, it wishes to step in and change courts’ treatment of reverse payment settlements, it should be aware that the pharmaceutical industry may have valid constitutional claims to raise about its methods.