Patent Law Wonkery

I take letters to the editor in the Post-Gazette to task once in a great while, and then usually because the argument or the style is so over-the-top that the piece richly deserves a public thrashing.

But today, there is a letter to the editor that deserves an airing for precisely the opposite reason:  Its apparently objective tone gives it a plausibility, a reasonableness, that would otherwise leave it untouched.

The topic:  patent law.

The letter, in full, follows.  I suspect that this was distributed to a lot of papers as part of a PR campaign, but no matter:

Patent settlements get generic drugs to market sooner

Consumers should be very concerned about pending federal legislation that threatens the next generation of life-improving drugs and therapies.

The U.S. Senate is considering a bill that would prohibit court settlements in patent disputes between brand-name pharmaceutical companies and generic manufacturers. The Federal Trade Commission opposes these settlements, arguing they can delay the entry of generic drugs to the marketplace, while in reality they often result in generic drugs entering the market years ahead of schedule.

By banning patent settlements, Congress would force companies to fight protracted legal battles that would not necessarily result in products entering the market any sooner -- and certainly would not benefit patients. In fact, the Generic Pharmaceutical Association says settlements actually help bring generic drugs to market sooner, saving millions of dollars.

The potential impact to our state is great. The bioscience industry in Pennsylvania accounts for 1,900 companies and more than 354,000 direct and industry-related jobs. The success of these bioscience companies depends on research, innovation and a dependable patent system to create new treatments to enhance people's lives.

Pennsylvanians need to let our U.S. senators know that this legislation would hurt consumers and our economy. Without the certainty that patents offer companies, investment into the next generation of treatments will dry up and our state will lose valuable jobs.

Our bioscience companies play a pivotal role in providing access to lifesaving cures and for growing our economy. However, they can only accomplish this if lawmakers make the right choices on patent protection.

Pennsylvania Bio
Wayne, Pa.
Pennsylvania Bio is a trade association representing biotechnology companies, academic institutions, biotechnology centers and related organizations.
PA jobs!  Biotech!  Who could argue?  But there is more to this story.

What Mr. Molineaux refers to as "patent settlements" are referred to in the industry (and by lawyers) as "reverse settlements."  Why "reverse"?  Because the settlements come out of lawsuits in which drug companies (generally known collectively as "Big Pharma") sue producers of generic drugs for patent infringement.  Typically, when a lawsuit is settled and money changes hands, the defendant pays the plaintiff, and the defendant agrees to stop doing whatever it was doing before.  There is a discount off of the amount of damages alleged in the lawsuit, but the plaintiff puts money in the bank.  In these patent cases, however, when the case settles, Big Pharma pays the generic company.  Why?  Because the generic company has agreed to withhold its generic drug from the market for some period of time.  Big Pharma is willing to pay -- and pay a lot -- for the right to be the exclusive supplier of what are, by definition, very high-priced drugs.

Why would this happen, and why does it concern Congress so much that there is talk of federal legislation to ban the idea?

In all of these cases, the Pharma company has a patented drug.  Like all patents, the patent on this drug will expire -- and often, it will expire sooner rather than later.  There is something of a crisis brewing in the pharmaceutical industry, in fact.  Many of the industry's big money makers are on the verge of going "off-patent," and there is a shortage of new blockbuster drugs (that is, high profit, expensive drugs) in the pipeline. 

It is undisputed that when the patent expires, anyone else is entitled to copy the chemical formula that was subject to the patent and to sell drugs based on that formula.  That legal right is what supports generic drug companies, and that legal right is what makes inexpensive generic pharmaceutical products available to consumers.

Generic drug companies are, however, just as profit-oriented as the next company, and other things being equal they would like to get into the market and sell generic equivalents *before* the patent expires or, at the very latest, the day after the patent expires.  The generic drug companies often argue that the patents owned by Pharma are invalid, and/or that the generic equivalents don't actually infringe the patents.  It's not an unreasonable argument; it is hardly uncommon for patent owners to claim that their patents cover more than the patents actually do.

However, the generic companies, like any other drug company, can only sell products that have been approved by the FDA. 

Years ago, Congress passed what's call the Hatch-Waxman statute to balance the interests of patent-owning drug companies (who want to protect their monopolies as long as they can) and the generic companies and consumers (who want to sell and buy cheap drugs).  The compromise allows a generic drug company to file an application with the FDA that claims that the proposed generic is chemically identical to an existing patented drug (so that new trials are not required) and that the patent in question is either invalid or not infringed.  If this all holds up, then the generic can come to market quickly and cheaply and best of all for the generic maker, it can come to market *before* the patent expires.  Consumers get cheap drugs sooner than they would otherwise.

Still with me?

However, if the patent owner disagrees (as the patent owner is almost always going to do), then the law allows (in fact, requires) that the patent owner sue the generic maker for patent infringement.  This is an unusual thing in the legal world; usually,  a patent owner can't sue an alleged infringer unless that infringer has actually sold or threatened to sell the infringing product.  But that isn't possible here, because the FDA is in the way.

That means that a patent infringement lawsuit is underway.  And if you suspect that this means lots of time and lots of money for lawyers, then you're right -- though you might be shocked (if you're not a patent lawyer) at just how much time and how much money is involved in the suit.  Millions.  Millions of dollars.

So what happens?  Like most lawsuits, these cases get settled.  But they get settled with "reverse" settlements:  the patent owners pay the generic companies to wait at least until the patent expires before marketing their generic equivalents.  In recent years, there have been 12-15 of these settlements per year.  From a basic economic perspective, the results are millions of dollars in increased costs for drugs paid by consumers and received by Pharma.  Consumer groups and the Federal Trade Commission have taken the position that this means that the settlements are illegal conspiracies in restraint of trade -- monopolization that is barred under the federal Sherman Act.  So far, however, the courts have not been friendly to that argument.  Which is why everyone is talking to Congress.

Meanwhile, Pharma's view is that they are entitled to protect the full terms of their patents.  The letter to the editor (remember that?!) is trying to make that point, sort of:  If Pharma can't sell its patented drugs at high prices for the full time of the patents, because it can't pay off threats by generics, then Pharma won't have enough economic incentive to invest in more new drugs. 

You can read that last point in the letter, sort of, but without the relevant background the point either doesn't make sense, or is obviously -- but incompletely -- true.  In fact this is an extremely complex issue; Pharma may, under a variety of circumstances, be right, even if it appears that consumers are suffering the consequences.  But the letter turns the whole thing into a series of slogans.  Which is no way to debate public policy.


1 Response to "Patent Law Wonkery"

Roberto said... 10/28/2010 1:04 PM

Funny, I thought this was one of your most interesting posts in a while (not that the others generally disappoint), and nothing but crickets down here in the comments...

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