Bender and Fein: Restricting Patent Settlements Would Raise Prices for Consumers, Government

Posted April 25, 2013 at 1:35pm

As former Justice Department political appointees in distinctly different administrations — Clinton (Bender) and Reagan (Fein) — we often disagree on legal matters, both politically and philosophically. But when it comes to the importance of the constitutional right to settle legal disputes in the high-stakes world of pharmaceutical-patent-infringement litigation, our views are the same.

In advocating settlements, we are in good company. Years before his election as president, lawyer Abraham Lincoln wrote: “Discourage litigation. Persuade your neighbors to compromise whenever you can. Point out to them how the nominal winner is often a real loser — in fees, expenses, and waste of time.”

There is good reason why settlements continue to be seen as a vital part of our adversarial legal system and the way in which the vast majority of legal disputes are resolved in this country. Settlements provide certainty to the parties, put an early end to potentially costly litigation, help relieve crowded court dockets and allow the parties to expend valuable resources elsewhere.

Settlements are of particular importance in patent-infringement litigation, especially for pharmaceutical products, where it can cost hundreds of millions of dollars to develop a new drug. A valid drug patent enables the drug innovator to recoup its investment and profit from the exclusive right to sell the new drug for a limited time without generic competition. The failure of a patent can make — or break — a company’s fortunes. Patent cases are notoriously expensive, unpredictable and time-consuming. It is not surprising that parties very frequently agree to settle their differences without litigating the issues to an uncertain conclusion.

Nearly 30 years ago, Congress enacted the Hatch-Waxman Act to promote the entrance of less expensive generic drugs into the marketplace by encouraging makers of generic drugs to challenge the validity of questionable drug patents. It is widely agreed that the act has been a tremendous boon to consumers, who have greatly benefited from lower-priced pharmaceuticals.

It is also widely agreed that the success of the act is in large part attributable to the resolution of some of these lawsuits via settlements. Approximately 25 percent to 30 percent of pharmaceutical patent litigation cases end in a settlement agreement between the brand drugmaker and generic drugmaker in which the latter is permitted to enter a market before the patent term expires and may receive other consideration as part of the settlement, such as a licensing agreement. In every one of these settlements, consumers gain access to the lower-priced generic before the end of the patent term. The generic equivalent for Lipitor, the most popular patented drug of all time, entered the market five years early through this type of settlement.

Nonetheless, some in Congress are now arguing for a virtual ban on patent settlements if they contain any form of consideration flowing to the generic-drug manufacturer. They want the law to presume that all such settlements are illegal and want to place an often prohibitive burden on the parties to prove that they have a right to settle.

Restricting patent settlements would dissuade generic drugmakers from challenging patents, result in protracted litigation when challenges are made and produce higher prices for consumers and the federal government by excluding generic competition before patent terms end. The proposal is also an inappropriate restriction on the presumptive constitutional right of parties to decide whether to litigate or settle cases without undue government interference.

The two of us often have somewhat divergent views about the proper role of the government in the marketplace and the power of Congress under the Constitution to perform that role. But we share a strong belief that the constitutional guarantee of due process of law encompasses the fundamental interest of parties in being able to resolve their differences through settlement rather than litigation.

The long-standing public policy in favor of permitting and encouraging settlements is a wise one. The policy in favor of settlements should be respected, save for those limited circumstances where government demonstrates a compelling reasoning for preventing the parties from reaching a mutually acceptable settlement agreement. This is not one of those situations.

Paul Bender is a professor of law and former dean at the Sandra Day O’Connor School of Law at Arizona State University. He was principal deputy solicitor general of the United States, 1993-1996. He is of counsel to the law firm of Meyer, Klipper & Mohr PLLC. Bruce Fein was associate deputy attorney general of the United States, 1981-1983, and special assistant to the assistant attorney general for antitrust, 1975-1976, and serves as president of Bruce Fein & Associates Inc.