False Claims Act Lawsuit Takes Aim at ‘Reverse Payment Settlement’ Agreements

As we have covered extensively on this blog, there is no shortage of ways in which pharmaceutical companies and healthcare companies can conspire to cheat American taxpayers. Over the next two posts, we will explore a novel False Claims Act concept that takes aim at the notion of ‘reverse payment settlement’ agreements, which are commonly executed between competing pharmaceutical companies in anticipation of an expiring patent.

In today’s post, we will explore how these contracts work to manipulate the pharmaceutical drug market. In tomorrow’s post, we will review the facts and allegations of U.S. ex rel. Radice v. Astellas Pharma, Inc., et al., which was unsealed in May 2015, to reveal first-impression allegations of False Claims Act liability upon companies engaging in these agreements.

What is a reverse payment settlement agreement?

Reverse payment settlement agreements have been a controversial topic for decades, prompting those in the antitrust and free market communities to insist on their illegality. By contrast, pharmaceutical companies – strangely finding themselves on the same side of the argument – contend that a reverse payment settlement agreement is a fair and legal way to preserve profits and uphold branding rights.

So, how do these agreements work? To get a better understanding of the issue, it helps to understand the background approval process for branded drugs (i.e., the first of their kind on the market) and follow-up generics. When a patented drug is looking to enter the U.S. market for the first time, it must go through an extensive, costly, time-intensive, and deferential approval process with the FDA. If approved, the drug enjoys a lengthy stay on the market as the only drug of its kind for the duration of the patent. Once the patent is set to expire, generic drug makers can essential copy the formula, complete a bioequivalence test (to ensure the generic is biologically identical to the original), and begin selling the drug at reduced prices to patients and insurance companies looking to save money on prescription drugs.

These fast-tracked generic procedures began to prove problematic for the branded pharmaceutical companies who were required to spend substantially more time and money to get their drug on the American market than the generic company. Problem was, well-settled patent laws prevented the brands from preventing the generics’ entry onto the market, and any attempt to block the generic drugs using other legal avenues (i.e., antitrust) would prove futile because the lack of patent created a damages/lack of infringement problem for the branded petitioner.

Alas, the concept of a reverse settlement payment was born, and pharmaceutical companies began paying generic companies a sum of money to “hold off” on marketing and selling their generic products for a period of five to ten years after the patent had expired. A notion that may seem to make sense to the pharmaceutical companies involved has created anxiety for those in the antitrust and fair trade realms. And now, a thoughtful relator has taken aim at the arrangement using the False Claims Act as ammunition.

In tomorrow’s post, we will explore how one recent case may finally put reverse payment settlements to bed for good, much to the relief of those patients, insurers, and government agencies required to foot the bill for this possibly unlawful anti-competition agreement.