Actavis Case Shows Weak Patents Are System-Wide

Last week the Supreme Court heard arguments in FTC v. Actavis (transcript here). This case concerns a topic not normally covered on Patent Progress – pharmaceutical patents. Pharmaceutical patents are often held up as a poster child of the success of the patent system. Drugs have a high cost of invention and usually have a low cost of copying. Without patent protection it would be hard for pharmaceuticals to justify research and development costs. However, pharmaceutical companies still find ways to game the patent system. This case concerns brand drug manufacturers paying generic companies to drop cases challenging the validity of their patents (called “reverse payments” because the patent holder is paying the alleged infringer). FTC v. Actavis will mostly be resolved on antitrust grounds, but there is an issue of greater importance to the patent system as a whole – the ability to remove weak patents from the system.

In 2003, Congress passed the Hatch-Waxman Act to encourage generic companies to challenge weak patents. This act streamlined the process by which a generic company can challenge patents and incentivized challenges by granting a period of exclusivity to the first generic company to challenge a brand drug’s patent for invalidity or non-infringement. Recognizing that a good deal of pharmaceutical patents may be invalid, Congress created an incentive for patent challenges by granting a 6-month period of exclusivity to the first generic firm to challenge the patent.

At first, the system worked well, with numerous challenges by generic firms to brand name patents. And when the cases actually went to trial the generic firm prevailed over 73% of the time.  But then both the branded and generic firms realized they would be better off settling the patent litigation and agreeing to a substantial delay in generic entry. In exchange for the delay in entry the generic firm gets to share in the monopoly profits of the brand name firm. Clever pharmaceutical companies have found a way to game the regulatory system to protect weak patents.

Weak patents are a problem across all industries. The amicus brief Public Patent Foundation (PPF) filed in this case provide some harrowing statistics. The US Patent and Trademark Office (PTO) grants 78% of all original patent applications as opposed to 61% granted by Japan and 55% granted by the European Union. A study of patents filed in the US and corresponding foreign patent offices found that only 72.5% of the patents issued in the US were issued by the European Patent Office and only 44.5% were issued by the Japanese Patent Office. The PTO also has incentives to issue rather than deny patents. The PTO receives roughly ten times as much money from issuing a patent than it does from denying it. The examiners are incentivized to approve patents due to their strict time quotas because it takes less time to approve a patent than it does to make and support a rejection.

The courts provide a necessary clearing function for removing the bad patents issued by the PTO. The statistics cited by the PPF show that 30% of all issued patents reviewed by courts lacked novelty, and 40% of the remaining patents were found invalid for being obvious. The American Antitrust Institute (AAI) and 118 professors also wrote to the Supreme Court to protect this clearing function. The AAI states: “patent policy not only permits legal challenges to weak patents; it affirmatively encourages those challenges.”

The Hatch-Waxman Act was meant to further support the role of legal challenges in protecting the patent system from weak and undeserved patents. A clever loophole turned that effort on its head and is instead protecting these patents.

During oral arguments, the Justices seemed aware of the problem with weak patents. Justice Scalia recognized that there is a problem with reverse payments, but assigned responsibility to a mistake in the Hatch-Waxman Act. Justice Kagan was concerned that generics have an incentive to make reverse payment agreements instead of challenging patents that have a reasonable chance of being defeated. Justice Sotomayor brought up the concern of the Second Circuit that the weaker the patent the greater the inducement of the patent holder to pay off the generic company (the Second Circuit ultimately allowed a reverse payment).

FTC v. Actavis will likely prove important both in deciding how much antitrust law can be used to protect the patent system from weak patents and how Congress and regulators should deal with the misuse of patent rights.

David Balto thanks Matthew Lane for his research and assistance on this post.

David Balto

David Balto

David Balto is a public interest antitrust lawyer in Washington, DC.  He has over 15 years of government antitrust experience as a trial attorney in the Antitrust Division of the Department of Justice and in several senior level positions at the Federal Trade Commission. David was the Policy Director of the Bureau of Competition of the Federal Trade Commission (1998-2001) and attorney advisor to Chairman Robert Pitofsky (1995-1997). He was a senior advisor in all aspects of the FTC’s merger and non- merger enforcement program and helped litigate the challenges to the Staples/Office Depot, Drug Wholesalers, and Heinz/Beechnut mergers, the Intel monopolization case, and the challenges to anticompetitive conduct by several pharmaceutical companies.