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| IP Newsletter | Spring 2014 |
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PATENT |
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Pharmaceutical Industry Update: Caution Needed in Reverse Payment Settlements |
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Let's consider this scenario: Company A sues Company B for patent infringement. Then they settle under terms in which Company B agrees not to produce the patented pharmaceutical products in exchange for a substantial sum of money. Because the settlement requires the patentee to pay the alleged infringer, rather than the other way around, this type of settlement agreement, typical in the pharmaceutical field, is often called a "reverse payment" settlement agreement. Not surprisingly, the Korean Supreme Court recently ruled that such settlements may violate the fair trade laws.1
Coincidently, the Korea Fair Trade Commission ("KFTC") had announced in March 2014 that it plans to require pharmaceutical companies to report settlements of drug patent disputes. |
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Applying Fair Trade Laws to Reverse Payment Settlements |
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While this decision, the first reverse payment case in Korea, talks in generalities, it provides a glimpse into how reverse payments would be judged in the future. First, patent rights do not shield these settlements from the scrutiny of the fair trade laws. Instead, the settlements should be analyzed under the "rule of reason," whereby a court must weigh the settlement's possible pro-competitive benefits against its potential anticompetitive effects. Second, reverse payments are not unlawful per se – that is, the KFTC needs more evidence than merely the existence of such an agreement; for example, collusion and anti-competitive effects must be proven. The court explained that each settlement will be judged "case-by-case," by considering the totality of the circumstances — for example, the settlement duration, the value of the economic benefits provided under the agreement, litigation costs, and any justifiable reason for providing the economic benefits. |
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Reverse Payments in the Context of the Korean Patent Linkage System |
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Reverse payment settlements must also be looked at in context of the patent linkage system that Korea is implementing in the wake of the Korea-U.S. Free Trade Agreement. The patent linkage system, similar to that of the U.S. Hatch-Waxman Act, is intended to streamline the introduction of generic drugs upon expiration of a patent. At the same time, the linkage system permits a generic manufacturer, who believes that a patent is invalid or when the drug is about to go off patent protection, to file a generic application seeking approval of its generic alternative. If the patentee believes otherwise, it may file a patent infringement lawsuit against the generic company. Once the generic company wins the right to produce and begins marketing, it will have one-year of the exclusivity during which time no other generic company may enter the market.2 A reverse payment settlement would delay the first generic company's commercial entry (or conceivably any other generic), benefiting the originator to maintain its exclusive or larger market share for the duration of the settlement agreement. |
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Larger Legal Implications to the Korean Pharmaceutical Industry |
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Including the recent Supreme Court ruling and the regulations implemented by the patent linkage system, the rules of engagement between originators and generics over the Korean pharmaceutical market are being drawn up. It is predicted that patent disputes — and, potentially, settlements — between originators and generics may become more prevalent. Among others, the pharmaceutical industry should note the following: |
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| 1. |
A large settlement payment disproportionate to litigation risk can raise red flags. Based on a "rule of reason," the Courts are likely to question settlements that include any of the following type of provisions: (i) cash payments from the patentee, except for reasonable litigation costs; (ii) supply purchase agreements; (iii) cross licensing; (iv) payments by the patentee for co-development projects; (v) compensation to the generic company for marketing/distribution agreements; and (vi) promises not to launch an authorized generic product. |
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Settlement talks may commence much sooner in the drug life cycle. A generic company, without an imminent threat of infringement allegation, may challenge the validity of a patent covering a drug at any time in Korea. The standing requirement for the challenger is minimal — mere proof that the challenger engages in pharmaceutical activities is sufficient. Thus, generic drug companies are likely to challenge a listed patent well in advance of the filing date of its generic application. In case of early patent skirmishes, the parties may likewise be compelled to discuss settlement sooner as well. |
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Additional regulations related to the full implementation of the patent linkage system are still to come. The Ministry of Food and Drug Safety will soon announce, among others, the rules for determining generic exclusivity. According to the proposed regulations, generic exclusivity is awarded to one who has (i) filed the first generic approval application; (ii) filed a trial or litigation before filing its generic approval application; and (iii) received a favorable decision in the trial or litigation as a direct party.3 The current regulations, however, do not include specific rules on exclusivity. For instance, the mechanisms for triggering the exclusivity clock; "patent-based" or "product-based" exclusivity; and rules regarding waiver or relinquishment of exclusivity have yet to be determined. |
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With the confluence of the new developments, both originators and generics are entering an untested and complicated legal and regulatory terrain. Pharmaceutical companies are advised to conduct careful analysis of the potential exposures and gains before engaging in patent disputes. |
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1 See Supreme Court Decision Nos. 2012 Du 24498 and 2012 Du 27794, both rendered on February 27, 2014.
2 The proposed length of the exclusivity, which will be implemented starting March 15, 2015, is one year.
3 Many issues have yet to be resolved regarding generic exclusivity. We will follow up with additional information as the generic exclusivity rules become clearer. |
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