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Generic Drug Entry and Coordination among Legal

Systems: Drug Regulation, Intellectual Property Law, andAntitrust Policy
Research Fellow: Akihiko Nakagawa
Market entry of generic drugs assumes an important role as part of medical cost reductions,and raises issues that should be addressed by the three legal policy systems governing thestructure of the pharmaceutical industry: drug regulations, intellectual property law, andantitrut policy. As material for comparative law, this analysis reviews the situation in the U.S.
where legal systems of generic drug entry are the most developed and with the greatest number ofprecedent cases. Using a manner of cross-system analysis, it considers the various issues related
to generic drug entry from the perspective of coordination among these three legal systems
governing entry of generic drugs, rather than a direct analysis of the purpose for each individual
legal system. Specific issues reviewed are: drug data exclusivity period for new drug applications,
exemption from infringement for experimental use of patented drugs prior to patent expiration,legal commencement of marketing prior to patent expiration (including exhaustion), infringement
litigation that abused procedures for listing patents in the U.S. FDA’s Orange Book, andsettlement of infringement litigation accompanied by agreements of reverse payments anddelayed market entry.

anti-monopoly
law
aresupposedly
distinguishable, but it cannot be denied thatthe purposes of these legal systems share acommonality.
The
Pharmaceutical
AffairsLaw
stipulates in Article 1 its purposes are: 1) toregulate the matters necessary for securing
the quality, efficacy, and safety ofpharmaceuticals; and, 2) to take thenecessary steps for promoting research anddevelopment of pharmaceuticals and medical
devices that are highly necessary. These
purposes are common to patent law, which
promotes research and development by
granting exclusive rights for the purpose ofdevelopment of industry, and anti-monopoly
law,(*1) which indicates that high quality
products and services desired by consumers
are provided through free and fairMarket entry of generic drugs, whichtakes an important roll in medical care cost
reduction, has posed issues that should be
addressed by one or all of three policies that
stipulate the structure of the pharmaceuticalindustry: regulation of pharmaceuticals,
intellectual property law, and anti-monopoly
policy. This analysis reviews the situationin the U.S., where legal systems for market
entry of generic drugs are the most developed
and precedents have accumulated more thanelsewhere, as material of comparative law
systems, and considers various issues related
to market entry of generic drugs not throughanalyzing the purposes of individual legal
systems, but from the perspective of
coordination among them. Purposes andmeans of the pharmaceutical affairs law (theFDA Act in the U.S.), patent law, and(*1) Precedents have determined that improvement of drug safety should be considered when judging violations of anti-monopoly law, since such
improvements contribute to the public purpose under the anti-monopoly law. Especially in regard to pharmaceuticals, safety and efficacy areimportant attributes, which influence the business terms and conditions of products and services, and competitive pressures trigger acceleration ofsuch competition.The Pharmaceutical Affairs Law stipulates in Article 1 its purposes are: 1) to regulate the matters necessary for securing thequality, efficacy, and safety of pharmaceuticals; and, 2) to take the necessary steps for promoting research and development of pharmaceuticals andmedical devices that are highly necessary. These purposes are common to patent law, which promotes research and development by granting
exclusive rights for the purpose of development of industry, and anti-monopoly law,(*1) which indicates that high quality products and services
desired by consumers are provided through free and fair competition.

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IIP Bulletin 2007

market sizes, while it is dubious to apply it to
all efficacies whenever the route ofadministration or dosage is different. Fromthe perspective of anti-monopoly law, how
can new drug protect exclusivity be
evaluated? There will be no problem if
requirements are not manipulatable byapplicants and it functions in an autonomous
manner.
The second issue is exemption of
production testing by generic drug makers
prior to patent expiration of the pioneer,branded drug. The patent right is of no effectwhen a generic drug company intends tocommence marketing after patent expiration
and works with (analyzes, examines, andmanufactures) the patented invention during
the patent term to the extent necessary forsubmitting required information for a new
drug approval. This exemption from patentright effect has been enacted in both the U.S.
and Japan, and practically resolved bydecisions of the Supreme Court. The
justification reasoning remains an issue inJapan. The dominant counter-doctrine
argues that the exemption is permitting
infringement. This research points out thatreasoning for justification of a research
exemption shall not be considered as an issue
solely of patent law, but it is natural toexplain the reasoning in coordination withselling
restriction
laws
(or
the
Pharmaceutical Affairs Law in the case ofdrugs) as well as with cases of patent term
restoration(*2) which is permitted tobrand-name drug companies. Moreover, thisresearch considers evaluation of restrictionsof patent right effect from the perspectives of
the Pharmaceutical Affairs Law andanti-monopoly law. A greater number ofapplications for generic drugs indicate higher
efficacy and safety of the patented drug, or,greater ease of safety improvements andother aspects. This is desirable in regard toquickerconfirmation
functionsbycompetitors. Additionally, it is justified withrespect
topromotingresearchandcompetition.
In part II, new drug approval proceduresin the U.S. are reviewed, and three issues are
consideredwithinthesystemsofpharmaceutical regulation and patent law.
The first issue concerns new drug
product exclusivity. This system protects
data of safety and efficacy, submitted bybrand-name companies and patent holders,by prohibiting use of the information by
generic drug companies for a certain lengthof time. The subject data of new drug productexclusivity are stipulated as data of new
effective ingredients, new methods of clinicalstudy, and so on. The issue involved with therelationshipbetweenpharmaceuticalregulations and patent law arises here since
the subject data share a resemblance to a
portion of subject data under patent law.
That means the issue becomes, how patent
law
relates
toprovisions
inthepharmaceutical regulations when the patentterm benefit is restored that was lost by
regulatory procedures for new drug
marketing. There are substantial differences.
New drug product exclusivity protects rights
not by disclosing information, but byprohibiting disclosure to third parties, whilepatent law grants exclusive rights ascompensation for disclosing this information.
New drug product exclusivity requires
marketing approval as a new drug forcommencementof
exclusivity.
This
demonstrates that exclusivity is not for theprotection of investment in research anddevelopment, but for the protection of
investment in commercialization. To someextent, it is inappropriate to be concernedthat protecting the patent with both bodies oflaw may create duplicated or excessive
protection. When considering further the
purpose of protecting commercialization
investment, protection requirements will beconsidered in detail. For instance, it isrational to apply new drug productexclusivity to orphan drugs and children’s
drugs due to the narrow extent of their(*2) This refers to restoration of the length of a portion of the patent term that was not commercially exploitable due to necessary regulatory
procedures for approval prior to commercial marketing. Section 2, Article 67 of the Japanese Patent Law; 35 U.S.C. §156.

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condition that it becomes legal due to thefirst sale rule, that is to say, if a generic drug
company purchases branded drugs, dissolves
and recrystallizes the compound, and thensells them as their own generic drug
(judgment by the Tokyo High Court of the
Acyclovir case). Possible impacts from thejudgment of the Intellectual Property High
Court for the Canon Ink Tank case on the
Acyclovir case are considered here. The
judgment by the Intellectual Property High
Court of the Canon Ink Tank case adopted
the same criteria as the original decision in
the Acyclovir case (the judgment by theDistrict Court that was overturned on
appeal), and clearly criticized the production
approach theory. Precedents, however, have
one consistent, practical rationale, which isdetermining whether duplicated benefit isgenerated, that lead to a conclusion
regardless of issues such as the criteria for
production are unclear in the production
approach or that the first sale doctrine is notlegally consistent. Based on this perspective,
it is pointed out that there is no problem withrecrystallization methodology under the
Pharmaceutical Affairs Law.
Finally, new drug product exclusivity, acontentious issue also in Japan, is reviewed.
New drug product exclusivity is enforced
under the system of safety reexamination in
Japan. As mentioned previously, new drug
product exclusivity may assume different
positionsdependingonwhether
accumulating
investmentforcommercialization is adopted as the purposeof the system, or, ensuring safety. If thesystem’s purpose is to ensure drug safety, it isacceptable to permit market entry of genericdrug companies at an early stage and confirm
drug safety with a wider range of patients.
With respect to extending the period of new
drug product exclusivity, international issues
are pointed out in relation to broad scopes ofprotection and longer patent periods. A
broader scope of new drug product exclusivity
compared to Europe and the U.S. cannot bejustified from the perspective of recoveringdevelopment if generic drug companies
intend to make improvements. Moreover,regarding an evaluation from the perspectiveof the Anti-Monopoly Act, there is low
potential of an adverse impact on competitionin the market for a patented product or atechnology market when a research
exemption is permitted to generic drug
companies during the patent term.
The third issue is “legal” commencementof marketing before expiry of the patent right.
In the U.S., generic drugs can be sold during
the patent term if invalidity of the approved
patent or non-infringement of the genericdrug is certified by the applicant (so-called“Paragraph IV” certification). This systemprovidestheopportunity
toresolveinfringement litigation prior to the market
entry of the generic drug company and isrational under the Pharmaceutical Affairs
Law. The system is also preferable from theperspective of anti-monopoly law to settle
disputes among competitive companies overinvalid patents, and conform to the system ofpatent law. However, this method also
contains a significant impact for triggering
settlements by the parties; the threat of thepatent holder’s injunction lawsuit is an effete
tactic, since the lawsuit is filed prior tomarket entry by the generic drug company(i.e., the generic company cannot be orderedto suspend operations because they have notyet begun), hence the generic drug company
does not carry the risk of unrecoverable sunkcosts if it loses the lawsuit or until settlement.
On the other hand, the branded drug
company carries larger litigation risks since
additional benefits of winning are small, eventhough the brand-name company pays legal
costs and wins, but loses market share in theevent of unsuccessful litigation. Therefore,
incentives for the parties to settle become thereverse of normal infringement litigation.(*3)
In Japan, no clearly defined system
permits generic drug companies to commencemarketing during the patent term. It is,however, possible to commence marketing
lawfully during the patent term under the(*3) One opinion dominant in precedents is that this is a cause of reverse payments, mentioned later.

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stay should be permitted only once, and to
narrow the type of patents that are permitted
listings in the Orange Book. In response tothese recommendations, FDA amended
regulations regarding listed patents. The
revised FDA Act stipulated that the patents
that a branded drug company can use as
grounds of infringement litigation are limited
only to patents for which information was
submitted prior to the filing of the genericdrug company’s application, and that any
patent after filing and before any amended
applications cannot be grounds for litigation.
This revision in practice limits the 30-monthstay to occur only once. On the other hand,
the revisions granted a generic drug company
the legal means to dispute an inappropriately
listed patent. Specifically, under the revised
FDA Act drug applicants in counterclaims toinfringement litigation filed by the patent
holder can request court orders for the patentlisting company to amend or eliminate suchpatent information.
Antitrust authorities took the initiativein promoting the enactment of theabovementioned law amendments because
pharmaceutical regulations are often abusedin an anticompetitive manner. Coordination
between the Pharmaceutical Affairs Law andanti-monopoly law is well demonstrated bythis case. Permitting consecutive 30-monthstays by listing additional patents after filinginfringement litigation does nothing toeffectuate pharmaceutical review, and thepossibility of filing infringement litigation
after market approval of generic drugs still
exists. Limiting the 30-month stay to once
is justifiable.
The second case considered occurs
commonly in actual practice: settlement of
infringement litigation with reverse payment,
in which a generic drug company delays its
market entry for a certain period in exchange
for cash payment from a brand-namecompany.
This practice was initially
accompanied by an agreement for 180-day
exclusivity. 180-day exclusivity is a benefit

commercialization costs, but must be
justified from the perspective of ensuring
drug safety. In this context, it is necessary torecognize that the reexamination system
functions to grant incentive, and then clarify
the purpose of the system. If new drug
product exclusivity is extended, Japanese
drug companies will be motivated to postpone
new drug approval applications in Japan andencourages foreign drug manufacturers tofile their applications in Japan; this will
accelerate the hollowing out of clinicalstudies conducted in Japan, and Japanese
drug companies may lose benefits in theJapanese market.
In part III, U.S. cases of market entry bygeneric drugs regarded as anticompetitive
interference are considered.
In the first case, a branded drug
company abused procedures for listing
patents in the U.S. Food and Drug
Administration’s Orange Book and filed
infringement litigation for the sole purpose ofdelaying market entry by generic drug
companies. It was alleged that irrelevant andfrivolous patents were listed to stymie
competitive market entries by generic drug
companies, which was easily done since FDA
has no ability or authority to investigate theefficacy and appropriateness of any patent
listed in the Orange Book. After a patent islisted in the Orange Book, a generic drug
company is subsequently required to respondto such patent by certifying the invalidity ofthe patent or their own non-infringement, etc.
The branded drug company then files
infringement
litigation
againstsuch
certification.(*4) The approval of the genericdrug application is automatically suspended
for 30 months if infringement litigation is
filed, meaning that 30-month stays can be
enforced multiple times simply by listing
additional patents. This is clearly contrary to
the purpose of the FDA Act. The U.S. FTC
filed complaints against these cases of abuse,and concluded them with consent orders.
FTC also recommended that the 30-month(*4) Patent law creates this right, and stipulates that the mere filing of an application by a generic drug company (ANDA) is itself an act of patent
infringement. This is intended to resolve patent disputes prior to market entry of generic drug companies.

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competitive situation). Assuming patentvalidity, there is no violation of antitrust law,since reverse payment settlements cannot
restrict competition that does not exist.
However, since patent law stipulates
that a patent shall be assumed valid,
restraint of market entry by settlement ismerely another enforcement of exclusivity
based on the patent right. The contrast
between lower court judgments and legal
theory is the result of opposite stances forviewing the reverse payment situation:
whether it should be assumed the patent isvalid and infringement exists (precedent), or,whether it should be assumed the patent isinvalid and no infringement exists (theory).
With the former opinion, a presumption of
infringement is unreasonable, while thepresumption of patent effectiveness is
acceptable. Critics of the latter state thisopinion does not consider that terms ofsettlement are influenced by individual
monetary resources or risk appetite andignores the fact the settlements are triggeredby the generally adverse results of
infringement litigation that is systematicallyguaranteedbytheHatch/Waxman
Amendments.
It is difficult to evaluate these opposing
views from the perspectives of patent law and
the Pharmaceutical Affairs Law. Hence, aviable solution may be to consider
establishing rules, as are the criteria underanti-monopoly law, by comparing false
positives when a competitive act is regardedin error as anticompetitive, and false
negatives when an anticompetitive act ispermitted in error as competitive. To someextent, reverse payment settlements may
have a potential pro-competitive effect tocreate an economic condition in which
lawsuit expenses (fixed costs) will increase
resource allocation for research anddevelopment investment. However, thispro-competitive effect has a distant causal
connection and should be proven by the
respondent. At the same time, with respect togranted to the first applicant among genericdrug companies filing a “Paragraph IV”
abbreviated new drug application (“ANDA”).
If multiple companies file certifications ofpatent invalidity or non-infringement(Paragraph IV certification) against thepatent of the branded drug company,
subsequent applications will not be approved(even though the application fulfills all
substantial requirements) until 180 days
after the date the first applicant commences
marketing of the generic drug (or the datethat a final decision on patent invalidity or
non-infringement is determined for the first
applicant). This regulation is intended as anincentive to the first generic drug company
applicant that submits a Paragraph IV
ANDA in order to trigger a challenge of thelisted patent, by granting a benefit that also
offsets the legal cost burden. However, if thefirst generic drug company does notcommence marketing due to a reverse
payment
agreement
andconcludes
infringement litigation with a permanent
settlement, this intended purpose of thesystem is circumvented. Moreover, none of
the subsequent generic drug companies that
filed also can enter the market. At the outset,
violations of anti-trust law were applicable toreverse payment agreements since thesewere interim settlements (which did not
permanently resolve the patent disputes),
but subsequently fewer cases committed
violations of antitrust law due to theagreement.(*5)
Most legal theories suggest that abrand-name company engages in reverse
payment when it is not confident of thevalidity of the patent held or of infringement.
Legal theory assumes such a settlement isanticompetitive, and accepted only if thereverse payment is less than the anticipatedlegal costs. Case precedents deny suchtheories. Case precedents demonstrate that if
the patent is valid and infringement exists,
market entry of the generic drug company is
not fundamentally allowed (i.e., there is no(*5) The main reason for this trend is based on emphasizing consideration paid for the patent as a negative royalty, and because cases of simple
reverse payment not accompanied by agreements of 180-day exclusivity have become the norm.

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the point that role-sharing between themarket and the law is beneficial for further
review.

whether it is obvious or not that“anticompetitive” delays affect market entry,
assuming so seems not to be easy based only
on the fact of reverse payments, if thepossibility of the generic drug company losing
the lawsuit is considered. Therefore, it isnecessary to verify various agreements
accompanying a reverse payment as well as
the infringement litigation process until thesettlement. It should be noted that thisapproach requires proof of anticompetitiveeffect in each individual case and may
prolong case processing.
If the same issue arises in Japan, it willbe the case that delayed entry agreements
are concluded in exchange for cash payments.
This returns us to the contrast between
theory and precedent in the U.S. Japan’s
Guidelines for Patent and Know-How
Licensing
Agreementsreferto
non-contestability, although they do not take
into consideration vertical relationships anddo not include a direct statement that may beconstrued as a suggestion for reverse
payments. Assuming reverse payments area type of licensing agreement may be toconsider that a brand-name company isestablishing a license with a negative royalty
including special agreements that restrict thestarting time of the license and force a
generic drug company not to dispute patenteffectiveness. Under these conditions, thelicense would not be granted if the patent
were invalid, and the start of the license
would not need to wait until patent
expiration if the patent were valid. Eitherway, a reverse payment that permits market
entry of a generic drug company after the
expiry of patent term cannot be regarded as
an execution of a patent right under patentlaw or violates the anti-monopoly law. For
further consideration, establishment of
criteria for these judgments is required, as it
is in the case of the U.S.
This
analysisreviews
theabovementioned matters, points out that it ispreferable to evaluate these legal systems
multilaterally and simultaneously in order toregulate the structure of the pharmaceuticalindustry appropriately, and concludes with
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