[Senate Hearing 113-279]
[From the U.S. Government Publishing Office]


                                                        S. Hrg. 113-279
 
    PAY-FOR-DELAY DEALS: LIMITING COMPETITION AND COSTING CONSUMERS 

=======================================================================

                                HEARING

                               before the

                       SUBCOMMITTEE ON ANTITRUST,
                 COMPETITION POLICY AND CONSUMER RIGHTS

                                 of the

                       COMMITTEE ON THE JUDICIARY
                          UNITED STATES SENATE

                    ONE HUNDRED THIRTEENTH CONGRESS

                             FIRST SESSION

                               __________

                             JULY 23, 2013

                               __________

                          Serial No. J-113-23

                               __________

         Printed for the use of the Committee on the Judiciary

                               ----------

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                       COMMITTEE ON THE JUDICIARY

                  PATRICK J. LEAHY, Vermont, Chairman
DIANNE FEINSTEIN, California         CHUCK GRASSLEY, Iowa, Ranking 
CHUCK SCHUMER, New York                  Member
DICK DURBIN, Illinois                ORRIN G. HATCH, Utah
SHELDON WHITEHOUSE, Rhode Island     JEFF SESSIONS, Alabama
AMY KLOBUCHAR, Minnesota             LINDSEY GRAHAM, South Carolina
AL FRANKEN, Minnesota                JOHN CORNYN, Texas
CHRISTOPHER A. COONS, Delaware       MICHAEL S. LEE, Utah
RICHARD BLUMENTHAL, Connecticut      TED CRUZ, Texas
MAZIE HIRONO, Hawaii                 JEFF FLAKE, Arizona
            Bruce A. Cohen, Chief Counsel and Staff Director
                 David Young, Republican Chief of Staff
                                 ------                                

   Subcommittee on Antitrust, Competition Policy and Consumer Rights

                   AMY KLOBUCHAR, Minnesota, Chairman
CHUCK SCHUMER, New York              MICHAEL S. LEE, Utah, Ranking 
AL FRANKEN, Minnesota                    Member
CHRISTOPHER A. COONS, Delaware       LINDSEY GRAHAM, South Carolina
RICHARD BLUMENTHAL, Connecticut      CHUCK GRASSLEY, Iowa
                                     JEFF FLAKE, Arizona
                 Craig Kalkut, Democratic Chief Counsel
               Bryson Bachman, Republican General Counsel



                            C O N T E N T S

                              ----------                              

                    STATEMENTS OF COMMITTEE MEMBERS

                                                                   Page

Klobuchar, Hon. Amy, a U.S. Senator from the State of Minnesota..     1
Lee, Hon. Mike, a U.S. Senator from the State of Utah............     3
Grassley, Hon. Chuck, a U.S. Senator from the State of Iowa......     4
    prepared statement...........................................    53

                               WITNESSES

Witness List.....................................................    51
Ramirez, Hon. Edith, Chairwoman, Federal Trade Commission, 
  Washington, DC.................................................     5
    prepared statement...........................................    55
Romasco, Robert G., President, AARP, Washington, DC..............    19
    prepared statement...........................................    68
Bieri, Diane E., Partner, Arnold & Porter, LLP, Washington, DC...    21
    prepared statement...........................................    74
Carrier, Michael A., Professor, Rutgers University School of Law, 
  Camden, NJ.....................................................    23
    prepared statement...........................................    87
Orszag, Jonathan M., Senior Managing Director, Compass Lexecon, 
  LLC, West Palm Beach, FL.......................................    24
    prepared statement...........................................    89
Russo, Michael, Federal Program Director, U.S. PIRG, Washington, 
  DC.............................................................    26
    prepared statement...........................................    98
Addanki, Professor Sumanth, Ph.D., Senior Vice President, Nera 
  Economic Consulting, White Plains, NY..........................    28
    prepared statement...........................................   105

                       SUBMISSIONS FOR THE RECORD

Leahy, Hon. Patrick, a U.S. Senator from the State of Vermont, 
  prepared statement.............................................   108
Vitter, Hon. David, prepared statement...........................   109
American Medical Association, James, L. Madara, MD, statement....   110
Academy of Managed Care Pharmacy, Edith A. Rosato, Chief 
  Executive Officer, Alexandria, Virginia, statement.............   111
Antitrust Insights: a publication of the National Economic 
  Research Associates (NERA), perspective........................   112
Consumers Union, George P. Slover, statement.....................   120
Wal-Mart, E. Ivan Zapien, letter to Hon. Amy Klobuchar, July 24, 
  2013...........................................................   127


    PAY-FOR-DELAY DEALS: LIMITING COMPETITION AND COSTING CONSUMERS

                              ----------                              


                         TUESDAY, JULY 23, 2013

                                       U.S. Senate,
                                Committee on the Judiciary,
                                                    Washington, DC.
    The Committee met, pursuant to notice, at 10:01 a.m., Room 
226, Dirksen Senate Office Building, Hon. Amy Klobuchar, 
Chairman of the Subcommittee, presiding.
    Present: Senators Franken, Blumenthal, Grassley, and Lee.

 OPENING STATEMENT OF HON. AMY KLOBUCHAR, A U.S. SENATOR FROM 
 THE STATE OF MINNESOTA, CHAIRMAN, SUBCOMMITTEE ON ANTITRUST, 
            COMPETITION POLICY, AND CONSUMER RIGHTS

    Senator Klobuchar. Good morning, everyone. Welcome to 
today's hearing. We're going to examine the pay-for-delay 
settlement agreements. We welcome our witness and Federal Trade 
Commission Chairwoman Ramirez, who is appearing before our 
Subcommittee for the second time this year. So, we thank you 
for that.
    Last year, analysts estimated that our country spent $325 
billion on prescription drugs and they predict that drug sales 
will rise by more than four percent in the year 2014. Generic 
drugs, which can cost as much as 90 percent lower than brand-
name drugs, help rein in the costs.
    For example, a brand-name drug that costs $300 per month 
might be sold as a generic for as little as $30 per month, but 
for several years, pay-for-delay deals have robbed consumers of 
cost-saving generic drugs. At the very core, these deals 
involve collusion between brand and generic competitors to keep 
generic competition off the market.
    Let's be very clear about what these deals are all about. A 
brand-name drug company pays--they pay--their generic 
competitor cash or another form of payment. In exchange, the 
generic delays its entry into the marketplace. That is why we 
call them pay for delay.
    So the brand company wins because it gets to maintain its 
monopoly, and the generic company wins because they get paid 
more than they would have if they came to market. But American 
consumers and American taxpayers lose out on lower-cost generic 
drugs to the tune of billions of dollars each year, $3.5 
billion according to the Federal Trade Commission.
    Now, this wasn't always the case. From 2000 to 2004, after 
courts found these agreements to be illegal, there wasn't a 
single pay-for-delay deal among the settlements entered into 
between brand and generic companies, not one, so pharmaceutical 
litigation can be settled without these cash sweeteners to 
delay generic competition.
    It wasn't until 2005 when two Circuit Courts said these 
deals were not subject to antitrust scrutiny that we began to 
see dozens of pay-for-delay deals each year, directly related 
to those Circuit Court decisions.
    The effect of these court decisions has been blunt. Last 
year, the number of pay-for-delay settlements ballooned 40 
percent over the previous year. The FTC identified 40 pay-for-
delay deals involving 31 different brand-name drugs, with 
combined annual U.S. sales of more than $8.3 billion.
    These pay-for-delay deals are about more than drug 
companies and their lawsuits, they are about real people and 
they're about quality health care. Take Karen Winkler, for 
example. She suffers from multiple sclerosis and was prescribed 
the drug Profedil, which helps combat fatigue. Because a pay-
for-delay agreement kept generic competition off the market for 
six years, the drug cost her $500 per month, even with 
insurance. As a result, she would skip pills or skip dosages.
    In 2011, she had to stop taking it altogether, against her 
doctor's orders, because it got too expensive. Meanwhile, the 
CEO of the company that made the drug had this to say about the 
pay-for-delay deal: ``We were able to get six more years of 
patent protection. That's $4 billion in sales that nobody 
expected.''
    Unfortunately, that $4 billion came out of consumers' 
pockets, including Karen's. This issue is also about taxpayers 
and the federal budget. Medicare is the largest buyer of 
prescription drugs. If pay-for-delay deals limit generic entry, 
then taxpayers get stuck with the bill for higher-priced brand-
name drugs.
    The Supreme Court's decision in FTC v. Actavis was a 
turning point. The court finally said what we have been saying 
for years, that pay-for-delay settlements harm consumers and 
deserve to be scrutinized under the antitrust laws.
    The court said that the payments may provide ``strong 
evidence that the patentee seeks to induce the generic 
challenger to abandon its claim with a share of its monopoly 
profits that would otherwise be lost in the competitive 
market.''
    While this was a major step forward, there is still work 
that needs to be done. That is why Senator Grassley and I have 
introduced bipartisan legislation to further combat pay-for-
delay agreements that keep cheaper generic drugs off the 
market.
    Our bill would make these back-room sweetheart deals 
between brand-name and generic drug companies presumptively 
illegal. It does not make every agreement illegal, but it does 
require that drug companies prove to a judge that a deal in 
question is not anti-competitive. That is a measured approach 
that strikes the right balance to ensure that companies will 
have the ability to settle cases. They just can't do so without 
payments to delay competition and harm consumers.
    So today we will hear from Chairwoman of the FTC, who has 
shown a steadfast commitment to fight for consumers and lower-
cost drugs by challenging pay-for-delay agreements all the way 
to the Supreme Court. American consumers are counting on you to 
fight these deals so that consumers have access to affordable 
generic drugs.
    Ms. Ramirez, we look forward to hearing from our second 
panel, where I think we will have a lively debate about pay-
for-delay deals, the need for legislation, and the contours of 
the Supreme Court's decision.
    With that, I turn to our Ranking Member, Senator Lee, for 
his opening remarks. I know that Senator Grassley is going to 
make a few remarks, and Senator Franken, you're welcome to as 
well.
    Senator Lee.

  OPENING STATEMENT OF HON. MIKE LEE, A U.S. SENATOR FROM THE 
                         STATE OF UTAH

    Senator Lee. Thank you, Madam Chair.
    Pharmaceutical patents are extremely valuable and it's for 
good reason that they're valuable. On average, it takes 10 
years and $1 billion to develop and gain FDA approval for a new 
drug. The intellectual property in that new drug allows 
developers and researchers to recoup their enormous investment.
    Those drugs that gain approval and for which there is 
market demand have the potential not only to defray the initial 
outlays, but also to make their owners sizable profits as a 
reward for the risk undertaken in the process of securing both 
the patent and, later, the FDA approval.
    Both this recoupment of investment and these profits are 
jeopardized by lawsuits that are filed by generics who seek to 
invalidate drug patents so that they can enter the market. Our 
laws incentivize these lawsuits by generics by granting the 
first generic challenger a period of dual exclusivity with the 
brand-name manufacturer.
    Faced with even the remote prospect of losing their 
valuable patent, not to mention the substantial litigation 
costs, some brand-name manufacturers have chosen to settle 
lawsuits filed by generics instead of litigating to the merits 
of the issue of patent validity.
    In some instances, these settlements involve the patent 
owner paying the challenger generic company millions of dollars 
and allowing it to enter the market before the expiration of 
the patent, all in exchange for simply dropping its lawsuit 
challenging the patent.
    These patent settlements, or reverse settlements as they're 
sometimes called, are the subject of today's hearing. Opponents 
of reverse settlements have for several years argued that 
they're anti-competitive and that they should be subject either 
to a rule of per se invalidity or to a presumption of 
illegality.
    Proponents of the agreements, on the other hand, have 
argued that the agreements can never properly be considered 
anti-competitive since the patent involved grants the owner a 
period of monopoly and the settlements do not extend or expand 
the term of that monopoly.
    Both sides have found support in Circuit Court decisions, 
leading the Supreme Court to grant certiorari in a case 
presenting this very issue. In its recent ruling in Activist, 
the court rejected both sides' arguments as extreme because in 
the court's view reverse settlements may sometimes be anti-
competitive and sometimes not, a one-size-fits-all rule would 
be improper. Rather, the court held that courts should analyze 
reverse settlements on a case-by-case basis using what in 
antitrust law has long been called the Rule of Reason.
    Federal courts have nearly a century of experience in 
applying the Rule of Reason to cases and controversies brought 
before them. Proper judicial administration of this approach 
protects consumer welfare, the touchstone of all of our 
antitrust laws.
    In the event some pharmaceutical manufacturers are entering 
into patent settlements to shield a weak patent from scrutiny 
and to divide among themselves an invalid patent's unjustified 
monopoly, the Rule of Reason will ensure such agreements do not 
stand.
    At the same time, the Rule of Reason comports with an 
objective, evidence-based approach to antitrust law. It ensures 
that social policies or other priorities apart from consumer 
welfare are not imported into antitrust analysis.
    Where reverse settlements have pro-competitive effects by 
allowing generics to enter the market for a brand-name drug 
before the expiration of a properly granted patent, the Rule of 
Reason will wisely stay the government's hand. The Rule of 
Reason thus benefits consumers, both by protecting against high 
prices and by respecting intellectual property and preserving 
the innovation that leads to important advances in science and, 
in particular, in health care.
    Any proposal with respect to reverse settlements must 
therefore be weighed against the proven ability of the Rule of 
Reason to balance and effectuate both of these important 
policies. I look forward to hearing from the witnesses, and I 
thank them for being here today.
    Senator Klobuchar. Thank you very much, Senator Lee.
    Senator Grassley.

 OPENING STATEMENT OF HON. CHARLES E. GRASSLEY, A U.S. SENATOR 
                     FROM THE STATE OF IOWA

    Senator Grassley. Yes. This is a very important hearing 
that we're having to learn more about pay-for-delay agreements. 
I think they harm drug competition. This is an issue I've been 
working on for a long time, and I'm surely pleased to have a 
teammate in Senator Klobuchar so that we can stop these abusive 
deals. We should be doing all we can to see that the American 
consumer has access to lower-priced drugs and do it in a way to 
get those lower prices as soon as possible.
    The reality is that these deals between brand-name and 
generic pharmaceutical companies delay the entry of generic 
medicines into the marketplace, and I don't see how these 
agreements are competitive on how they--or how they benefit the 
consumer. In my opinion, they only end up keeping drug costs 
artificially high for consumers and the taxpaying public.
    Further, these agreements threaten the long-term 
sustainability of federal health programs, particularly 
Medicare and Medicaid, so I commend the Federal Trade 
Commission for being vigilant in this area. I urge the 
Commission to continue protecting the American consumer by 
continuing to take action against drug companies engaged in 
anti-competitive agreements.
    Madam Chair, I have a written statement from Senator Vitter 
that I would like--that he'd like to have entered into the 
record. Senator Vitter also agrees that pay-for-delay 
settlements are a problem and would like to see Congress do 
something about it. I think he has ideas, but they're not 
dissimilar from what you and I are trying to accomplish.
    Senator Klobuchar. Very good. I appreciate your leadership 
on this issue, and Senator Vitter's statement will be included 
in the record.
    [The prepared statement of Senator Vitter appears as a 
submission for the record.]
    [The prepared statement of Senator Grassley appears as a 
submission for the record.]
    Senator Klobuchar. Senator Franken.
    Senator Franken. I'll save my opening for my question 
period. I think it will have more power.
    [Laughter.]
    Senator Klobuchar. Thank you.
    Senator Blumenthal, if you want to----
    Senator Blumenthal. As so frequently happens, I'm going to 
follow Senator Franken's lead, without seeking to emulate his 
sense of humor.
    [Laughter.]
    Senator Blumenthal. But I just want to thank you, Madam 
Chairman, for having this hearing, and to our Ranking Member as 
well. This hearing is critical to our health care system and to 
American competitiveness.
    Thank you very much.
    Senator Klobuchar. Well, thank you very much.
    I would like to now introduce a distinguished witness on 
our first panel. Ms. Edith Ramirez is the Chairwoman of the 
Federal Trade Commission. She was sworn in as Commissioner of 
the FTC on April 5, 2010, and was designated as Chairwoman by 
President Obama on March 4 of this year.
    Prior to joining the Commission, Ms. Ramirez was a partner 
in private practice in Los Angeles, representing clients in 
intellectual property, antitrust, and unfair competition suits.
    Ms. Ramirez, if you could rise.
    [Whereupon, the witness was duly sworn.]
    Senator Klobuchar. Thank you. Please begin with your 
statement.

  STATEMENT OF HON. EDITH RAMIREZ, CHAIRWOMAN, FEDERAL TRADE 
                           COMMISSION

    Chairwoman Ramirez. Chairman Klobuchar, Ranking Member Lee, 
and Members of the Subcommittee, thank you for inviting me to 
testify today about the Federal Trade Commission's effort to 
stop anti-competitive pay-for-delay patent settlements among 
pharmaceutical companies. As Members of this Committee are well 
aware, these agreements not only raise substantial antitrust 
concerns but also undermine the goals and spirit of the Hatch-
Waxman Act, which seeks to prevent weak patents from blocking 
the development of lower-cost generic drugs.
    Stopping these anti-competitive patent settlements has been 
a top bipartisan priority at the Commission for many years. The 
reason the Commission has been so concerned about these 
settlements is that there is so much at stake for consumers.
    FTC economists have found that, on average, these 
settlements cost consumers $3.5 billion each year, and 
taxpayers ultimately bear a significant portion of this burden 
because of the increased costs to Medicare, Medicaid, and other 
government health programs.
    The FTC has taken aggressive action to combat these harmful 
agreements, beginning in 2000 with our administrative 
litigation against Schering-Plough. That case ended up before 
the 11th Circuit, which adopted the overly permissive scope of 
the patent test, effectively immunizing pay-for-delay 
settlements from antitrust scrutiny. Even though the Commission 
lost that case and other courts also adopted the scope of the 
patent test, we continued to investigate and litigate pay-for-
delay cases.
    The Commission's ongoing efforts culminated before the 
Supreme Court this spring in the Actavis case, where the Court 
considered the Commission's challenged patent settlements 
involving Solvay's billion-dollar testosterone replacement 
drug, Androgel.
    The Commission alleged that Solvay agreed to pay three 
generic manufacturers hundreds of millions of dollars to 
abandon their patent challenges and delay roll-out of a generic 
version for nine years, until 2015.
    Applying the scope of the patent test, the 11th Circuit had 
affirmed the District Court's dismissal of our case because the 
settlements did not prevent competition beyond the challenged 
patent's expiration date.
    Soon after the 11th Circuit ruling, the Third Circuit 
rejected the scope of the patent test in a private case 
involving another brand-name drug and held pay-for-delay 
agreements presumptively unlawful. This created a Circuit Court 
split that set the stage for the Supreme Court's review of the 
issue.
    The Actavis decision was a significant victory for American 
consumers, taxpayers, and competition. The Supreme Court made 
clear that pay-for-delay agreements between brand and generic 
drug companies are subject to antitrust scrutiny.
    Although the Court did not declare reverse payment 
settlements to be presumptively illegal, it did find that 
reverse payment settlements have the potential for genuine 
anti-competitive effects because they permit a brand-name drug 
company to eliminate the risk of competition, maintain a 
monopoly, and share the benefits of that monopoly with its 
potential competitor.
    In light of the Supreme Court's decision, federal courts 
must now consider antitrust claims, challenge reverse payment 
settlements, and decide them under a Rule of Reason standard. 
The Supreme Court ruled that courts must assess the drug 
company's justifications for the payments, including whether 
the payments were for something other than purchasing 
protection from potential competition. The Court was also clear 
that the anti-competitive effects of a reverse payment 
settlement can typically be determined without litigating the 
underlying patent claim.
    The Actavis decision is an important milestone, but the 
Commission's work is far from over. Harmful pay-for-delay 
settlements will not suddenly disappear, but there is now a 
path forward to stop them. To that end, we will continue to 
focus our resources on investigating and challenging those 
anti-competitive settlements likely to cause the most consumer 
harm.
    These efforts will begin with our two pending pay-for-delay 
cases, Actavis and the Cephalon case pending in federal court 
in Philadelphia in which we will seek to prove that the 
agreements at issue violate the antitrust laws.
    We will also continue to review the pharmaceutical patent 
settlements filed with the agency pursuant to the Medicare 
Modernization Act and report to Congress and the public on 
trends and developments, as well as investigate those 
settlements we believe violate the law.
    In addition to enforcement work, we will look for 
opportunities to utilize the Commission's extensive experience 
and expertise in this area by filing amicus briefs in private 
litigation in order to assist courts that are deciding pay-for-
delay matters.
    We believe that all of these efforts, together with a 
strong statement made by the Supreme Court in Actavis, will 
provide a significant deterrent effect. I look forward to 
continuing work with the Members of this Committee on how best 
to use the antitrust laws to promote the interests of consumers 
and gaining access to lower-cost generic drugs.
    I am happy to answer any questions that you may have. Thank 
you.
    [The prepared statement of Chairwoman Ramirez appears as a 
submission for the record.]
    Senator Klobuchar. Thank you very much, Madam Chairwoman.
    Earlier this year, the FTC released its annual report, as 
we mentioned, on pay-for-delay agreements that showed that in 
FY 2012 there were 140 settlements between brand and generic 
firms, and 40 of them involved pay for delay.
    Now, you mentioned pursuing some of the cases, or the one 
that was in court in Philadelphia and some other ones. Just to 
make clear, what is the Commission now going to do in light of 
the Supreme Court decision with the 40 pay-for-delay 
agreements?
    Chairwoman Ramirez. Chairman Klobuchar, the top priority 
for the agency will be to continue to press forward with two 
pending litigation matters in this area, as I mentioned, the 
Actavis case and the Cephalon case, so those will be the top 
priority. Our aim will be to prevail in those matters and show 
that the agreements at issue are in fact violative of the 
antitrust laws.
    In addition, we intend to press forward with pending 
investigations that we have, as well as review settlements that 
have been previously filed with the agency pursuant to the 
Medicare Modernization Act and review them in light of the 
Actavis decision by the Supreme Court, as well as continue to 
vigilantly monitor any new agreements that are filed with the 
agency.
    In addition, we do also aim to, as appropriate, file amicus 
briefs in connection with private litigation matters involving 
pay-for-delay settlements.
    Senator Klobuchar. Right. That's a lot and I assume that 
these are very complex agreements. Are you going to put 
additional resources in light of--how are you going to handle 
that, given sequestration and everything else?
    Chairwoman Ramirez. This issue has been a top priority for 
the agency for many years, and we're going to continue to 
devote as many resources as necessary to achieve our aim to put 
an end to these practices.
    Senator Klobuchar. Would it be easier to do if the bill 
that Senator Grassley and I passed to make things clearer?
    Chairwoman Ramirez. I want to emphasize that the Actavis 
decision was an important step forward and it has strengthened 
our ability to tackle these complaints. At the same time, these 
lawsuits are resource intensive and time consuming.
    Litigating one of these suits to judgment can take many 
years. I do believe that the legislation that you have 
proposed, that you and Senator Grassley have sponsored, would 
create more of a bright-line rule and also create more of a 
deterrent effect and it could help further our effort to stop 
these practices.
    Senator Klobuchar. Yes. That's our focus here. Generic and 
brand-name companies--we're going to hear from them on the next 
panel--argue that pay-for-delay deals can be pro-competitive 
because the settlement may allow for entry for one to two years 
before the patent expires, and if the case was litigated to 
completion and the generic company lost, it would be five to 10 
years until the patent expires.
    What's your response to the criticism? Isn't generic 
competition one or two years prior to the patent expiring 
better than waiting until the patent expires?
    Chairwoman Ramirez. The issue that we're concerned about 
here is that a reverse payment has the potential to ``eliminate 
the risk of competition.'' That was the language that the 
Supreme Court used, and I agree with that. So the issue here is 
that a payment will distort the competitive process and lead to 
delayed entry of generic competition that otherwise would have 
existed absent the reverse payment.
    Senator Klobuchar. Exactly. I mean, I was just struck by 
the fact that there were settlements before, but not with the 
pay-for-delay element, until those Circuit Court cases came 
out.
    Chairwoman Ramirez. Absolutely. Let me also emphasize that 
in our review of these settlements, we find that the vast 
majority of settlements in the pharmaceutical industry between 
pharmaceutical companies do not involve reverse payments, so 
the position that the FTC has taken does not impede the ability 
of these firms to settle.
    Senator Klobuchar. Exactly.
    Chairwoman, drug companies say that having the ability to 
settle patent litigation is critical to promoting their ability 
to innovate and develop the next great miracles of modern 
medicine. What is your response? I assume it's along the lines 
of what you just said, that the vast majority of these 
settlements don't involve the pay-for-delay.
    Chairwoman Ramirez. Absolutely. The Supreme Court 
recognized this in the Actavis decision. What we are trying to 
stop are anti-competitive settlements. We're not trying to 
impede settlement of disputes that do not violate the antitrust 
laws.
    Senator Klobuchar. And do you think that limiting pay-for-
delay settlements unreasonably restrains the ability of branded 
and generic firms to settle cases, and therefore taxes 
innovation?
    Chairwoman Ramirez. I don't. Again, what we're trying to 
promote is competition. We want to promote innovation. We want 
to prevent any type of reverse payment settlement that would 
distort the competitive process.
    Senator Klobuchar. Exactly.
    Then one last thing on a little different topic. While 
we're on this topic of pay-for-delay, another area where patent 
and antitrust law intersects is patent trolls. Last month, I 
sent a letter to the full Commission calling on it to approve 
your proposal for a 6(b) study to examine the unfair 
competition posed by patent trolls. What is the status of the 
Commission's review of the 6(b) proposal, and how soon do you 
think they can get the study under way?
    Chairwoman Ramirez. I agree that a study would be a 
valuable mechanism that could be used to evaluate both the 
harms and efficiencies of patent assertion entity. The agency 
is in the process of evaluating whether such a study would be 
valuable. If the Commission determines that it is, then we're 
going to proceed expeditiously.
    Senator Klobuchar. Okay. I liked your quote when you talked 
about this and the need for the study. You said that the use of 
patent trolls ``allows operating companies to exploit the lack 
of transparency in patent ownership to win a tactical advantage 
that could not be gained with a direct attack.''
    Could you talk about the harm that that does to consumers 
and competition? We're going to be having a hearing on a 
related matter on standards next week on this Subcommittee.
    Chairwoman Ramirez. We are concerned with examining the 
increased litigation activity of patent assertion entities that 
there may be significant tax on competition by virtue of their 
exploiting flaws in the patent system. So it's an issue that 
does raise complicated questions and I want to make sure that 
I'm not condemning all patent assertion activities. That's why 
I believe that a study would be appropriate so that we can more 
fully understand the competitive impact of these activities.
    Senator Klobuchar. Okay. Thank you. I just want to again 
thank you for your work. When that court decision came out I 
couldn't help but think of all the work that it's going to be 
for lawyers, but also work for the FTC, which is already 
strapped with some of the resource issues we have.
    I'm not here to talk about that; I'm more trying to figure 
out how we can (1) help consumers, and (2) make this work the 
best possible. To me, it's passing this bipartisan legislation 
to make it clearer what the rule is. Again, we're not including 
all settlements between pharmaceuticals and generics, we are 
just simply looking at these pay-for-delay settlements, as you 
so well point out.
    So, thank you very much, and I will turn it over to Senator 
Lee.
    Senator Lee. Thank you very much for joining us today, 
Madam Chairwoman. I appreciate your testimony and your insight 
on these issues.
    I want to talk just a little bit about our use of the term 
``pay for delay'' today. This causes me some concern that we 
use this term this broadly because in your testimony you used 
the term pay for delay to refer to a whole category of reverse 
settlements among pharmaceutical manufacturers without 
qualifying that term further.
    Now, it is my understanding that these settlements do not 
extend the term of the patent, but in fact most of the time 
they end up shortening of the patent by allowing the generic 
manufacturer to enter the market before the generic 
manufacturer would otherwise be able to enter the market, 
assuming that the patent itself is valid.
    In fact, it would make no sense for a brand-name 
manufacturer to make such an attempt, to attempt to extend the 
length of the patent on the underlying drug, because in order 
for that to work, in order for that to be effective, they would 
have to settle with every possible potential competitor out 
there who might choose to enter the market on that drug once 
the patent term expires, and doing that is not something that's 
allowed under our patent law and would present, plainly, anti-
competitive impacts which would create actionable antitrust 
problems. So, that's really not a possibility.
    So, with respect to the reverse settlements that we're 
discussing today, one can argue that the agreements delay the 
entry of the market--of the generic into the market if, and 
only if, we assume that the generic is entitled to enter the 
market immediately, that is, prior to the expiration of the 
patent.
    But to assume that requires us to assume at the outset that 
the patent is, in fact, invalid. So do you agree that none of 
the agreements that we're talking about today extend, first of 
all, the terms of the patent beyond the life of the patent?
    Chairwoman Ramirez. I agree with that.
    Senator Lee. Okay.
    Chairwoman Ramirez. But I don't agree with the rest of your 
assertions.
    Senator Lee. Okay. So why is it then appropriate to use the 
term pay for delay with respect to a reverse settlement that 
applies to a drug, the patent attached to which is, in fact, 
valid? How is that paying for delay if the generic is not 
entitled to enter the market prior to the expiration of the 
patent term?
    Chairwoman Ramirez. I believe that pay for delay is an 
accurate characterization of these types of anti-competitive 
reverse payment settlements, and the reason is that a reverse 
payment allows a brand to, as the Supreme Court put it, 
eliminate the risk of competition and induce a generic to agree 
to a date of entry that would not otherwise have taken place in 
the absence of a particular payment.
    So our position does not assume that there would be 
immediate generic entry, it merely raises a concern from an 
antitrust perspective about the way that a reverse payment can 
distort that negotiation process and the normal competitive 
process.
    Senator Lee. Right. But if you assume the patent's 
validity, then you would agree that the generic manufacturer is 
not going to be able to enter the market until the end of the 
patent term, right?
    Chairwoman Ramirez. Correct. But your assumption is, in 
fact, that the patent is valid. The objective of the Hatch-
Waxman Act is--one of them is to incentivize generic companies 
to challenge weak patents in order to introduce lower-cost 
generic drugs. So one can't assume that the patent is 
necessarily valid, and that's precisely what the concern is, 
that the payment will, in fact, induce a generic challenger to 
abandon a claim of invalidity and a claim of non-infringement, 
and that's what raises the competitive concern.
    Senator Lee. But our legal system in the world of 
intellectual property, our laws, creates a statutory 
presumption as to the patent's validity. Would you agree with 
that statement?
    Chairwoman Ramirez. I agree with that.
    Senator Lee. Okay. So if, in fact, our laws create a 
statutory presumption of the patent's validity, then why are 
you so quick to assume that all of these so-called reverse 
settlements can appropriately be described as pay for delay?
    Chairwoman Ramirez. Well----
    Senator Lee. Wouldn't they just as appropriately be 
described--or more appropriately be described--as pay for 
resolution of uncertainty as to the patent's validity? I mean, 
we do, in fact, have this presumption and if that presumption 
is valid, if it's called for by law, I don't know why you would 
want to presume the opposite. I think you have to presume that 
the patent is invalid in order, legitimately, to call it pay 
for delay.
    Chairwoman Ramirez. I disagree. I'm not presuming--I'm not 
making any particular assumption as between those two. The 
concern--and I'm not--I'm also not saying that every single 
reverse payment settlement is in fact anti-competitive, rather 
that there is a category of them, and I believe there is a 
tendency for these types of settlements to, in fact, likely 
lead to anti-competitive consequences.
    So the concern here is a payment that is intended to, 
again, induce a generic patent challenger to abandon a claim 
and to delay its entry into the market.
    Senator Lee. Okay. Okay. So----
    Chairwoman Ramirez. And the inquiry is precisely to 
ascertain--the inquiry that we would engage in is to ascertain 
whether the reverse payment was in fact for purposes of delay, 
as opposed to for other legitimate--other legitimate reasons.
    Senator Lee. Right. Okay. Okay.
    So the use of the term ``pay for delay'' then refers to the 
fact that you could, in some circumstances, have some of these 
that are collusive. Perhaps the patent is invalid and what 
they're paying for is something nefarious, it's something that 
they're not entitled to.
    Chairwoman Ramirez. What they're paying for is delayed 
generic entry. These types of payments permit and incentivize 
the brand-name firm and the generic firm to split monopoly 
profits. It's advantageous and more profitable for them to do 
that than to simply proceed with the litigation.
    Senator Lee. Okay. And if you're presuming that such a 
thing could happen but you're not presuming that it's always 
the case with all of these reverse settlements in this context, 
isn't that an appropriate occasion to use the Rule of Reason 
analysis?
    Chairwoman Ramirez. I agree with the holding of the Supreme 
Court. I mean, we're fine testing these settlements under the 
Rule of Reason. At the same time, I believe that litigating 
these cases can be costly and time consuming, and I also 
believe that a bright-line rule, such as one that was proposed 
by the legislation that Chairman Klobuchar and Senator Grassley 
are proposing, would create more of a deterrent effect.
    Again, my concern is that these types of payments, which 
are unusual and only seen in the pharmaceutical context, and 
even within that context are only a small minority of 
settlement agreements, these elevate the antitrust risks and 
pose a significant detriment to competition. So that's the 
concern and that's why I believe that while the Rule of Reason 
standard is an appropriate test and we intend to apply that 
going forward, I do believe that declaring them to be 
presumptively invalid would also further help us to put a stop 
to these types of settlements.
    Senator Lee. My time's expired. Thank you very much.
    Senator Klobuchar. Thank you very much, Senator Lee. And 
just to make clear, as the Chairwoman has stated, this bill 
that Senator Grassley and I have that has bipartisan support 
would not affect the vast majority of the drug settlements, and 
even for the pay-for-delay settlements it creates a presumption 
that they are invalid and illegal, which can be overcome if the 
pharmaceuticals and generics are able to prove that somehow the 
pro-competitive benefits outweigh the anti-competitive harm. So 
while we call it a bright-line rule, which it is because it 
says they're presumptively illegal, it does have some 
exemptions that can be proven in court.
    So that's how it works, because we are aware of all these 
unique characteristics of these agreements. We just feel that 
right now the Supreme Court has opened the doors, which is 
great, but we still have a reason to want to make clear what 
the presumption is here instead of putting it as a burden on 
the FTC.
    Chairwoman Ramirez. Yes. Thank you for that.
    Senator Klobuchar. Yes. I thought you'd like that answer, 
Chairwoman Ramirez.
    Senator Franken.
    Senator Franken. Thank you, Madam Chairwoman, for your work 
on this. I will be, in the next panel, asking Professor Carrier 
about sort of this very issue. In his brief, I believe, to the 
Court--the Supreme Court, he said that figure approaches 75 
percent in litigation that these patents, when they're 
challenged, turn out to be invalid. But I'll ask in the next 
panel.
    I've really enjoyed working with the Chairwoman on this 
legislation to bring down prescription drug costs for Minnesota 
Senators--seniors and Senators.
    [Laughter.]
    Senator Franken. It's an issue that we both care about 
deeply. I'm proud to sponsor the Klobuchar-Grassley Preserve 
Access to Affordable Generics Act. It's a good bipartisan bill 
and I know that you've taken great care--both of you, great 
care--and effort in drafting it. I am also--I'm grateful for 
your support, Madam Chair, for the Franken-Vitter Fair Generics 
Act.
    What our bill would do is fairly simple. It provides 
subsequent filers with an exclusivity period if the first filer 
relinquishes that privilege in a pay-for-delay deal. Making 
this change to the law will diminish the incentive for patent 
holders to enter into these pay-for-delay agreements in the 
first place, and fewer pay-for-delay deals will result in more 
prescription drugs on the market, which in turn will drive down 
prices.
    Chairwoman Ramirez, the FTC reported that in Fiscal Year 
2012 there were 40, as we have heard, pay-for-delay settlement 
agreements. That's a record high. In your view, what accounts 
for the increase in these deals, and do you anticipate that 
they will remain prevalent in the coming years unless Congress 
and the FTC acts?
    Chairwoman Ramirez. I think there are two main reasons why 
we've seen a steady rise in these types of settlements over the 
years. The first, is that there is an incentive for the brand-
name manufacturer and the generic manufacturer to split 
monopoly profits, so that's one powerful incentive in which the 
two firms end up gaining at the expense of consumers.
    Second, I also believe that the scope of the patent test, 
which had been adopted by a number of courts over the years, 
led to an overly permissive standard that encouraged these 
types of settlement agreements. My hope is that with the strong 
statement that's been made by the Supreme Court, that in and of 
itself will prove to be a strong deterrent against these types 
of settlements.
    We certainly intend to enforce the law aggressively under 
the standard that's been set by the Supreme Court, so my hope 
is that the combination of those things will help put an end to 
these types of settlements.
    Senator Franken. In the Actavis case, as we've heard, the 
court said that pay-for-delay agreements need to be analyzed on 
a case-by-case basis, or a middle-ground approach. As the FTC 
begins litigating cases under the Actavis decision, what kinds 
of evidence will it use to show that pay-for-delay agreements 
are anti-competitive in particular cases, and what sorts of 
things will the FTC look for in the patent settlements that are 
filed with the Commission?
    Chairwoman Ramirez. I believe that the Supreme Court 
provided some useful guidance in the Actavis decision. The 
kinds of issues that we're going to be addressing are: Is there 
a payment or other form of compensation, what is the size of 
that payment, what's the purpose of the payment, is there a 
legitimate justification for the payment? We're also going to 
be examining the competitive effects of any such agreement. So 
those are the issues that we would be looking at and litigating 
under the Rule of Reason standard that's been set out by the 
Court.
    Senator Franken. Would it consider pay-for-delay--whether 
the pay-for-delay settlements have a disproportionate effect on 
seniors? Is that----
    Chairwoman Ramirez. That's certainly a concern of ours and 
one of the reasons that we're seeking to put an end to pay-for-
delay agreements because, to the extent that seniors do share a 
disproportionate burden when it comes to drug charges, they 
clearly are impacted. So that's a concern of ours and certainly 
one of the reasons that we are trying to combat these.
    Senator Franken. Thank you.
    Thank you, Madam Chair.
    Senator Klobuchar. Thank you very much, Senator Franken, 
and thank you for your work in this area.
    Senator Grassley.
    Senator Grassley. Yes. And thank you, Madam Chairwoman, for 
coming to help us with this important issue.
    Supporters of pay-for-delay settlements claim that 
legislation to establish a presumption of illegality for these 
kinds of settlements is ``unnecessary and inconsistent with 
longstanding principles of antitrust and patent law.''
    So, Chairwoman, do you believe that pay-for-delay 
legislation like the Klobuchar-Grassley bill is ``unnecessary 
and inconsistent with longstanding principles of antitrust and 
patent law''? Why or why not?
    Chairwoman Ramirez. I don't agree with that statement. As 
I've indicated, we see the Actavis decision as a victory for 
American consumers and we're pleased to move forward, seeking 
to put a stop to anti-competitive reverse payment settlements 
under the Rule of Reason that the Supreme Court has set forth.
    At the same time, my view is that it is, again, resource 
intensive, time consuming to litigate these cases to judgment, 
and I believe that the proposed legislation that declares 
reverse payment settlements, anti-competitive reverse payment 
settlements to be presumptively invalid, but at the same time 
allows settling parties to overcome that presumption, would be 
a quicker way of putting an end to these types of settlements.
    Senator Grassley. On another point, in your written 
testimony you state that ``the Medicare Modernization Act is 
purely a notice and filing provision. Alone, it does not grant 
the agencies the power to deny or block settlements. With the 
Actavis decision, the MMA's filing requirement is more likely 
to serve its intended purpose of preventing anti-competitive 
agreements from escaping antitrust scrutiny.''
    As you probably know, I worked hard to make sure that this 
notice and filing provision was included in that legislation. 
We wanted to deter drug companies from entering into anti-
competitive pay-for-delay settlements, and also empower the FTC 
with the knowledge of when these kinds of problematic 
settlements could be occurring.
    So, Madam Chairwoman, with the statement from your written 
testimony that I just quoted, are you saying that the MMA 
filing and notice requirement is not a sufficient enough 
deterrent to anti-competitive behavior? And before you answer, 
if so, are there any improvements to this provision that you 
would suggest? Are you suggesting that we consider giving the 
FTC Commission greater ability to block or delay settlements 
that are seen to be potentially abusive?
    Chairwoman Ramirez. Let me simply clarify that the 
statement that you quoted from the written testimony merely 
states that the MMA provisions under which pharmaceutical 
companies are required to file settlements with the antitrust 
agencies didn't alter the substantive antitrust standards.
    It's an important provision and it allows us to actually 
see what firms are doing when we review these agreements. So 
it's an absolutely important provision and our point was merely 
that now that we have the Actavis decision we are going to be 
in a position to more effectively combat those settlements that 
we believe to be anti-competitive.
    Senator Grassley. So then there don't need to be any 
changes in MMA from your point of view?
    Chairwoman Ramirez. Not with respect to what you're 
quoting, that's correct.
    Senator Grassley. Okay.
    Given the rate at which pay-for-delay settlements have 
increased, what do you think is the best approach to address 
the problem? How does FTC plan to move forward with respect to 
the Supreme Court's decision in that case, and are there any 
FTC policies that you believe need to be changed in response to 
the Court's ruling?
    Chairwoman Ramirez. I believe that the Supreme Court itself 
has sent a very strong message to industry indicating, again, 
that these settlements are subject to antitrust scrutiny. We 
intend to vigorously apply the standard that has been set forth 
by the Supreme Court and, as I mentioned, my aim is to prevail 
in the two pending lawsuits that the FTC has involving pay-for-
delay settlements.
    In addition, we're going to be reviewing settlements that 
have been previously filed with us pursuant to the MMA--
reviewing them in light of the Actavis decision, also trying to 
be as vigilant as possible when it comes to the filing of new 
agreements, and submitting amicus briefs where appropriate in 
connection with private lawsuits.
    So we intend to be very active in this area, and we believe 
that the combination of our enforcement and other efforts, 
along with the strong message that's been sent by the Supreme 
Court, my hope is that that will end up being a deterrent, 
hopefully putting an end to these types of anti-competitive 
agreements.
    Senator Grassley. You might be aware or you might not be 
aware that I worked closely with the FTC and Chairman Lebowitz 
on this issue. I look forward to working with you. According to 
the 2010 Federal Trade Commission report entitled ``Pay For 
Delay: How Drug Companies Payoffs Cost Consumers Billions,'' 
these settlements cost consumers approximately $35 billion over 
10 years. The report recommended that Congress pass legislation 
to protect these anti-competitive agreements.
    Do you plan to make pay-for-delay settlements a priority at 
the Federal Trade Commission under your leadership?
    Chairwoman Ramirez. Combating pay-for-delay settlements has 
been a priority for over 15 years at the Commission. It 
continues to be a priority and we're going to put whatever 
resources we need to in order to seek to put a stop to these.
    Senator Grassley. Yes. I will yield back my time. Thank 
you, Madam Chairwoman.
    Senator Klobuchar. Thank you very much, Senator Grassley.
    Senator Blumenthal.
    Senator Blumenthal. Thank you, Madam Chairwoman. Again, my 
thanks to you and to the Chairwoman and Senator Grassley for 
their bill, which I would anticipate joining. I'll be 
interested in hearing from the next panel about the arguments 
opposed to this measure, but I think it's a good pro-consumer 
measure and I would expect that I will be joining in support of 
it as a co-sponsor.
    Let me understand a little bit more about the process that 
will follow the FTC investigation under this bill. As I 
understand it, the FTC can then initiate action, either in 
Federal District Court or before an administrative judge, if it 
finds that there is no justification for this pay for delay or 
compensation for delay. Perhaps you could enlighten us as to 
how the FTC will choose between those two fora, the District 
Court or the administrative judge.
    Chairwoman Ramirez. It can depend on a number of factors. 
We often proceed administratively, but we do have the ability 
to move forward in federal court. So it depends on the 
circumstances of the case. It may also depend on the type of 
relief that the agency would be seeking.
    Senator Blumenthal. And how would that determine the 
outcome, the type of relief?
    Chairwoman Ramirez. For instance, if the agency were to 
seek equitable monetary relief we would want to proceed in 
federal court.
    Senator Blumenthal. As State Attorney General, I was among 
the States that frequently dealt with abuses and misuses of 
patents, so I have seen firsthand the difference that it can 
make, the very grave harm that it can do to consumers not only 
in terms of delaying the availability of a drug, but also the 
affordability. So I feel very strongly that your determination 
is welcome, and I want to thank you for it.
    Can you give us examples of circumstances where a pay-for-
delay agreement might be justified through the FTC 
investigation process? Are there such circumstances, if any, 
when you can anticipate some payment would be exempted from the 
presumption against it?
    Chairwoman Ramirez. Sure. And the Supreme Court spoke to 
this in the Actavis decision. So, for instance, if a payment 
merely reflects anticipated litigation costs that would be 
avoided, that would be one instance where we would not conclude 
that the payment was for anti-competitive purposes.
    Senator Blumenthal. And if that claim were made, how would 
you determine whether in fact it was factually justified, the 
magnitude of the payment, the nature of the agreement? What 
would you look to?
    Chairwoman Ramirez. It would be a fact-specific 
determination, so we would be looking very closely, comparing, 
yes, the size of the payment in relation to anticipated future 
litigation expenses. That would certainly be a key factor, but 
we would be looking again closely at all of the relevant facts.
    Senator Blumenthal. And aside from litigation costs, can 
you anticipate or describe other circumstances that might 
justify these types of payment?
    Chairwoman Ramirez. There may be services that might be 
provided that are entirely independent of any desire to make a 
payment to induce abandoning a patent challenge in order to 
delay generic entry, so in that circumstance a payment may be 
justified. But again, all of this would depend very much on the 
specifics of any particular case, so it is an intensive--fact-
intensive inquiry.
    Senator Blumenthal. Would it be lengthy?
    Chairwoman Ramirez. These do take time to evaluate, yes.
    Senator Blumenthal. But presumably they could be put on a 
fairly fast track if the presumption indicated that they should 
be, in effect, barred or pursued through legal means?
    Chairwoman Ramirez. I can assure you that we're going to be 
pursuing and evaluating these agreements and pursuing pending 
investigations as expeditiously as possible. At the same time, 
we want to be careful only to move forward with regard to anti-
competitive agreements that do cause serious harm.
    Senator Blumenthal. In your experience, are these pay-for-
delay agreements increasing in number and importance? I know 
the number is 100 out of 140 did not involve, over the recent 
past, pay-for-delay kinds of settlements, but in your 
experience are they increasing? Should we be more and more 
concerned about them?
    Chairwoman Ramirez. Yes. Over the course of the time that 
we have been examining these settlement agreements, we have 
seen a steady increase. In Fiscal Year 2012 we saw 40 reverse 
payment settlements that are potentially anti-competitive, so 
we have seen a steady increase. And again, our hope is that now 
that there's a standard that's been set by the Supreme Court, 
that will create a deterrent effect.
    Senator Blumenthal. Thank you.
    Thank you very much.
    Senator Klobuchar. Thank you very much, Madam Chairwoman. 
We appreciate your testimony.
    Do you have anything more? Senator Lee, okay.
    Senator Lee. Just to follow up on where we were a few 
minutes ago, so suppose, as I understand as has happened on a 
couple of occasions, you have had a reverse payment settlement 
in one of these scenarios and that settlement allows the 
generic manufacturer to enter the market prior to the 
expiration of the patent term, thereby introducing competition, 
but in a subsequent challenge to the validity of the patent 
there was in fact a finding that the patent was valid.
    In that circumstance it appears that you actually 
introduced competition earlier and there appear to have been 
some price-moderating influences as a result of that earlier 
entry. Wouldn't you have to concede that then in that 
circumstance you've got pro-competitive effects?
    Chairwoman Ramirez. When a brand-name manufacturer has a 
strong patent it is likely to prevail in litigation. That's 
absolutely fine with us. As you've noted, it's absolutely 
appropriate for the manufacturer of a pioneer drug to recoup 
its investment if it has a strong patent that withstands 
scrutiny and is deemed to be valid. That's an absolute fine 
result from an antitrust perspective.
    The concern that we have, again, is evaluating agreements 
from the time that they're entered into whether the objective 
is, in fact, to eliminate the risk of competition and induce a 
generic patent challenger to abandon the patent challenge when 
we don't know what the outcome would have been and to agree to 
a delayed roll-out of a generic product. So that's what the 
concern is.
    Senator Lee. Okay. And again, is it your position that Rule 
of Reason analysis is itself inadequate to the degree that it 
makes this legislation necessary?
    Chairwoman Ramirez. I don't believe the Rule of Reason 
standard is inadequate. My point in backing the proposed 
legislation is simply to say that--that in my view--because of 
the significant concern that these types of agreements raise, 
in my view it would be appropriate to have a presumption which 
can then be rebutted because it would create greater clarity 
and it would create more of a deterrent effect and would help 
the agency more quickly eliminate anti-competitive reverse 
payment settlements.
    Senator Lee. Okay. Thank you.
    Senator Klobuchar. Thank you very much. I would just note 
again for the record, when you have a CEO talking about the 
fact that we were ``able to get six more years of patent 
protection, that's $4 billion in sales that nobody expected.''
    To me, when you look at the numbers and the change since 
those Circuit Court decisions, this is more than just about 
some patent litigation, this was about a deliberate effort to 
delay these drugs onto the market to increase profits on the 
backs of consumers.
    That's why we are trying to do something that's reasonable, 
that will still not upset the market with innovation, which I 
don't think it will in any way, and we're focused on this very 
narrow category that I know the FTC has been focused on of 
these pay-for-delay deals. Narrow as it may be in a litigation 
standpoint, it's not narrow for the consumers that have been 
having to foot the bill. So, thank you very much, Madam 
Chairwoman.
    Now we will bring up our second panel. Thank you.
    Chairwoman Ramirez. Thank you.
    Senator Klobuchar. All right. I'd like to introduce the 
distinguished witnesses on our somewhat large second panel, and 
we'll start with Mr. Robert Romasco. He is the president of 
AARP. Before becoming president, he served as board secretary 
and treasurer and chairs the organization's Audit and Finance 
Committee. Mr. Romasco was previously the president and chief 
executive officer at J.C. Penney Direct Marketing Services.
    Next, we have Ms. Diane Bieri. She is a partner at Arnold & 
Porter, working with the firm's health care and antitrust 
practice groups. She's also worked for the Pharmaceutical 
Research and Manufacturers of America as their executive vice 
president and general counsel.
    Next, we have Mr. Michael Carrier, that I believe Senator 
Franken referred to, who is a professor at the Rutgers 
University School of Law and a leading authority in antitrust, 
copyright, and patent law. He is a member of the Board of 
Advisors at the American Antitrust Institute and a past chair 
of the Executive Committee of the Antitrust and Economic 
Regulations Section of the Association of American Law.
    Next, we have Mr. Jonathan Orszag. I know your brother and 
I was at his wedding. He is a senior--I assume you were there.
    Mr. Orszag. So was I.
    Senator Klobuchar. Okay. That's good. I was a little 
nervous to ask that, but I'm glad you were there. That's a good 
thing. Is a senior managing director and member of the 
Executive Committee at the economic consulting firm Compass 
Lexecon, LLC. Previously he served as an economic policy 
advisor to President Clinton's National Economic Council, and 
also served as the assistant to the U.S. Secretary of Commerce. 
Additionally, Mr. Orszag is a Senior Fellow at the Center for 
American Progress and a Fellow at the University of Southern 
California's Center for Communication Law and Policy.
    Next, Mr. Mike Russo. He is the U.S. Public Interest 
Research Group's Federal program director. From 2010 to 2012, 
he was U.S. policy analyst for health care, and prior to that 
he served as CALPER's health care advocate. Mr. Russo has 
authored and co-authored numerous reports on health care 
policy.
    Finally, Mr. Sumanth Addanki is currently the senior vice 
president of NERA Economics, where he specializes in antitrust, 
intellectual property, and the evaluation of commercial 
damages. He has analyzed the competitive consequences of 
mergers in a wide range of industries and addressed the 
liabilities involving predatory pricing and monopolization. 
Thanks to all of you for appearing at our Subcommittee's 
hearing to testify today. I ask you to rise so I can administer 
the oath.
    [Whereupon, the witness was duly sworn.]
    Senator Klobuchar. Thank you very much.
    Mr. Romasco, if you could begin with your opening 
statement.

STATEMENT OF ROBERT G. ROMASCO, PRESIDENT, AARP, WASHINGTON, DC

    Mr. Romasco. Thank you, Chairman Klobuchar, Ranking Member 
Lee. On behalf of AARP's more than 37 million members, we thank 
you for holding this hearing on pay-for-delay agreements.
    My name is Rob Romasco. I am a member of AARP's all-
volunteer board of directors and I am honored to serve as 
AARP's president.
    Older Americans use prescription drugs more than any other 
segment of the U.S. population. These drugs play a critical 
role in their health and financial security. Two-thirds of 
people 65 and older report using three or more prescription 
drugs within the past month, 40 percent used five or more. 
Unfortunately, retail prices for brand-name drugs continue to 
rise faster than inflation.
    In contrast, generic prescription drugs are considerably 
less expensive. In fact, retail prices are actually falling. 
Generic drugs have proven to be one of the safest, most 
effective ways for consumers to lower their prescription drug 
costs. They have been essential to the recent slowdown in 
health care spending.
    AARP believes that eliminating pay-for-delay agreements 
will result in additional savings for consumers and taxpayers. 
Pay-for-delay agreements provide financial benefits to 
prescription drug manufacturers at the expense of consumers.
    The Federal Trade Commission estimates that pay-for-delay 
agreements cost consumers and taxpayers $3.5 billion a year. If 
nothing changes, that's $35 billion over the next 10 years. The 
FTC has found pay-for-delay agreements keep generics off the 
market for an average of nearly 17 months longer than patent 
settlement agreements without such payments. In the meantime, 
consumers must pay brand-name drug prices, typically 80 to 85 
percent higher than generics.
    This substantially raises the costs for consumers, 
businesses, and taxpayer-funded health programs such as 
Medicare and Medicaid. Putting an end to these agreements will 
not only save consumers and taxpayers money, but will also help 
prevent patients, including older Americans, from foregoing 
needed medications because of the high cost of brand-name 
drugs.
    Researchers have found that the cost is one of the primary 
reasons why older adults do not fill prescriptions, skip doses, 
or take smaller doses. When people do this, they ultimately use 
more expensive urgent care and expensive inpatient hospital 
services later on. This results in extra health care costs, 
estimated to be as much as $290 billion each and every year, 
not to mention the toll on the individuals' health and lives.
    Unfortunately, pay-for-delay agreements are increasing. 
Given that the pharmaceutical faces an unprecedented number of 
patent expirations, this trend will continue and is likely to 
accelerate.
    Several of the top 10 leading medicines, including Nexium, 
Celebrex, and Crestor, are set to lose patent protections over 
the next few years. A recent report by AARP's Public Policy 
Institute examined events as the popular anti-cholesterol drug, 
Lipitor, first faced generic contribution, including a reported 
pay-for-delay agreement.
    The report found that the retail price of Lipitor increased 
by 17.5 percent in 2011. Lipitor is raising its price while the 
alleged pay-for-delay was in place. The average annual retail 
price of Lipitor increased by roughly $300 between 2010 and 
2011. I hear from our members just how punishing brand-name 
drugs' prices can be. John Charles from Greenwood, Indiana, is 
one example. A long-time Lipitor user, he was paying $70 out of 
pocket for a three-month supply. Now, with the generic, he only 
pays $15 for that same three months' supply. This may not sound 
like much, but to John and for millions of older Americans, 
particularly those on fixed incomes, this reduction made, in 
his words, ``a dramatic difference.''
    AARP has filed a Friend of the Court brief in the recent 
Supreme Court challenge on pay-for-delay. We supported the 
FTC's argument that pay-for-delay agreements are anti-
competitive. The Supreme Court decision represents a major step 
forward with more antitrust claims against pay-for-delay likely 
to go to court and receive the scrutiny they deserve.
    However, experts generally agree that pay-for-delay 
agreements, while now more legally risky, will continue unless 
Congress intervenes. We believe legislative solution is needed 
to eliminate these agreements and save money for consumers, 
businesses, and taxpayers.
    We urge Congress to take action on Senate bill 214, the 
Preserve Access to Affordable Generics Act, a bipartisan bill 
sponsored by Senator Klobuchar and Grassley. The CBO, as we 
know, expects this legislation would accelerate the 
availability of generic drugs and save $4.7 billion over 10 
years.
    We are also a strong supporter of another bipartisan bill, 
Senate bill 504, the Fair and Immediate Release of Generics 
Act, sponsored by Senators Franken and Vitter. The CBO estimate 
of savings for that is $3.8 billion over 10 years.
    We are committed to working to further lower the cost of 
prescription drugs through the enactment of responsible changes 
that improve access and reduce costs for consumers, businesses, 
and Medicare and Medicaid.
    We look forward to working with Members of Congress from 
both sides of the aisle to address pay-for-delay agreements. We 
seek to ensure that each and every American has access to 
affordable prescription drugs. Thank you very much.
    Senator Klobuchar. Very good. Thank you very much.
    [The prepared statement of Robert G. Romasco appears as a 
submission for the record.]
    Ms. Bieri.

  STATEMENT OF DIANE E. BIERI, PARTNER, ARNOLD & PORTER LLP, 
                         WASHINGTON, DC

    Ms. Bieri. Senator Klobuchar, Ranking Member Lee, Members 
of the Subcommittee, good morning. My name is Diane Bieri and 
I'm a partner in the law firm of Arnold & Porter. I'm appearing 
today on behalf of the Pharmaceutical Research and 
Manufacturers of America. PhRMA members are leading research-
based pharmaceutical and biotech companies working to develop 
new life-saving and life-enhancing treatments.
    PhRMA and I appreciate the invitation to participate in 
today's hearing on important issues concerning pharmaceutical 
patent settlements. During my own more than 10 years in private 
practice, I have counseled pharmaceutical companies on the 
antitrust implications of Hatch-Waxman settlements and 
represented these companies in antitrust proceedings before the 
FTC and in various courts.
    And, of course, while I was general counsel at PhRMA, I 
worked on these issues intensively and helped shape PhRMA's 
advocacy positions on this important topic. I'd like to begin 
by briefly putting the patent settlements we're discussing 
today in context.
    As Ranking Member Lee noted, it takes, on average, more 
than $1 billion and 10 to 15 years to bring an innovative 
medicine to market, and the majority of drug candidates fail 
during the development process. Innovators need strong patent 
protections simply to justify making the huge and very risky 
investments required for drug development.
    In contrast, the Hatch-Waxman Act allows generic drug 
companies to use a far less expensive and faster pathway to FDA 
approval. One expert has pegged the cost of preparing and 
filing an abbreviated new drug application for a generic at 
about $1 million.
    Based on this and other factors, the Hatch-Waxman Act 
creates significant incentives for drug companies, generic drug 
companies--to challenge patents, even where the innovator is 
highly likely to prevail in litigation. According to a recent 
analysis based on the FTC's own data, a first filing generic 
challenger often can justify challenging an innovator's patent 
if it believes it has only a 1.3 percent chance of success of 
winning that patent challenge in court.
    Against this backdrop, it's not surprising that we have 
seen a proliferation of Hatch-Waxman Act's challenges. it also 
should not come as a surprise that parties often prefer to 
minimize costs, minimize litigation risks, and deal with 
business uncertainty by settling Hatch-Waxman Act cases rather 
than litigating them to final judgment.
    In spite of these dynamics, the FTC and others have 
criticized certain types of patent settlements as pay for 
delay, but respectfully the very term ``pay for delay'' is a 
misnomer in at least two significant respects. First, we can't 
lose sight of the fact that these settlements, where the 
innovator gives something of value to the generic, brought 
generic drugs to market months or years before the patent 
expiration, before the expiration of presumptively valid 
patents.
    What's more, consideration flowing from the innovator to 
the alleged infringer is a typical dynamic in settlements. In 
traditional patent litigation, an alleged infringer brings its 
product to market, the patent holder files suit, and a 
settlement often takes the form of a patent holder declining to 
collect a portion of its damages from the infringer.
    Under the Hatch-Waxman Act, a generic company can trigger 
patent litigation without marketing its product so there won't 
be any damages for the innovator to forgive. In such cases, a 
separate, pro-competitive transfer of value from the innovator 
to the generic company can bridge the gap and allow parties to 
reach a settlement where they could not do so based solely on a 
generic entry date.
    Critics of these types of settlements seem to believe that 
innovators are willing to settle primarily because the patents 
in question are weak. But frankly, the data from multiple 
sources show that innovator companies have prevailed in 50 
percent or more of Hatch-Waxman cases litigated to court 
decisions between 2000 and 2012.
    The fact is, we can't simply assume that the innovator's 
payment or other transfer of value to the generic results in 
delayed generic entry. Instead, as the Supreme Court told us in 
the Actavis case, we need to look at each settlement on a case-
by-case basis in order to determine its net effect on 
competition.
    The Court also explicitly said that these complex 
settlements should not be subjected to a short-cut presumption 
of illegality. That is typically reserved for only the most 
obviously anti-competitive conduct. Applying such a presumption 
here would be a significant departure from antitrust and patent 
law principles, it would not necessarily add clarity, and it 
would significantly undermine the value of patents that are the 
cornerstone of pharmaceutical innovation.
    Thank you again for the chance to speak with you today, and 
PhRMA looks forward to working with you and all the Members of 
the Subcommittee and others in Congress on these, and other 
important issues relating to access to medicines.
    [The prepared statement of Diane E. Bieri appears as a 
submission for the record.]
    Senator Klobuchar. Thank you.
    Professor Carrier.

   STATEMENT OF MICHAEL A. CARRIER, DISTINGUISHED PROFESSOR, 
          RUTGERS UNIVERSITY SCHOOL OF LAW, CAMDEN, NJ

    Professor Carrier. Chairman Klobuchar, Ranking Member Lee, 
Members of the Subcommittee, thank you for holding this 
hearing. Reverse payment settlements are one of the most 
important antitrust issues that we face today. They have a 
direct effect on the health of millions of Americans and there 
still is a role for Congress to play even after the Actavis 
decision.
    My name is Michael Carrier. I'm a distinguished professor 
at Rutgers Law School in New Jersey and I have spent my career 
focused on the intersection of the antitrust and the 
intellectual property laws. I began at Covington & Burling here 
in town, focused on these issues, and in my time in academia, I 
wrote a 400-page book with Oxford press on antitrust and IP and 
more than 50 articles on antitrust and IP, including a bunch on 
reverse payment settlements, as well as briefs in appellate 
courts and one in the Supreme Court on behalf of 118 professors 
and the American Antitrust Institute that Justice Breyer cited 
in the Actavis decision.
    In a nutshell, antitrust alarm bells should be going off 
when you hear that one company is paying a second company not 
to enter the market. Market division is per se illegal, and the 
reason is that there's no competition whatsoever, even worse 
than price fixing, because the parties do not compete.
    Now, here there's a patent, but keep in mind the big 
picture. The big picture here is that exclusion is not coming 
from the patent, but it's coming from the payment. So the first 
problem we have here is that we have significant concerns of 
market division.
    The second problem is that we have the Hatch-Waxman Act 
that has been twisted beyond recognition. Initially there was a 
180-day period of exclusivity that was designed to encourage 
generic entry into the market. The problem is that that period 
has been twisted so that other generics are not able to enter 
the market.
    The brand company buys off the first generic, and no other 
generics can enter. So when the first generic says I'm going to 
enter in 10 years, there's no competition for that period of 
time. You put together market division, a perversion of the 
180-day period, and the fact that this has real consequences 
for Americans that are not able to take their medications, as 
we've heard this morning, and we see that there is a real 
problem.
    In the Actavis decision, the Supreme Court recognized that 
reverse payment settlements can be severely anti-competitive, 
it said that these payments can be unjustified, it said that 
there could be market power when you see a large payment, and 
it said that there are ways of settling cases other than with 
reverse payments.
    At the end of the day and despite all that, however, it 
only applied the Rule of Reason. Under the Rule of Reason, the 
court said we need to look at various factors, like the size of 
the payment, the scale in relation to future litigation costs, 
and independence from other services.
    After the decision, the drug companies were not very happy, 
so PhRMA and the generics association and generic firms like 
Actavis said this is an uncertain decision, we don't know how 
to settle these cases and so we need more clarity, there's 
something wrong with the decision.
    You look at Chief Justice Roberts in dissent in Actavis and 
he said, look, Congress has not acted. There have been 11 times 
that Congress has considered legislation since 2006, and 
Congress still has not acted.
    S. 214 would be beneficial. The findings section of S. 214 
would make clear that the intent of Hatch-Waxman has been 
subverted. The purposes section of S. 214 would make clear that 
stopping these anti-competitive agreements is a good thing that 
would help competition. And this would help future courts in 
trying to figure out how to deal with these complicated 
agreements.
    Most important, as we've heard this morning, S. 214 creates 
presumptive illegality. We heard from the Chairwoman of the FTC 
how presumptive illegality will help the FTC in going to court 
and making clear to courts that this is behavior that generally 
is illegal, and sure, if you want to come back and show how in 
a particular case it's not illegal, that's fine, but the 
default presumption is that this is illegal. S. 214 is also 
helpful in making clear that just because you have entry before 
the end of the patent term, that doesn't necessarily mean that 
it is pro-competitive.
    In short, I would say that S. 214 is something that the 
Subcommittee should look very favorably at: S. 214 would 
confirm the hazards of reverse payment settlements; S. 214 
would provide a framework that would allow the FTC to challenge 
these settlements in court; and S. 214 would help save 
consumers money and deal with a pressing problem of public 
health. Thank you.
    [The prepared statement of Michael A. Carrier appears as a 
submission for the record.]
    Senator Klobuchar. Thank you very much. Very good.
    Mr. Lee is going to--Senator Lee is going to go out and buy 
the 400-page book. That's what he was just talking about.
    Mr. Orszag.

  STATEMENT OF JONATHAN M. ORSZAG, SENIOR MANAGING DIRECTOR, 
           COMPASS LEXECON, LLC, WEST PALM BEACH, FL

    Mr. Orszag. Thank you, Madam Chair, Ranking Member Lee, 
Members of this Subcommittee. Good morning.
    I have conducted extensive economic research on the effect 
on consumers of reverse payment patent settlements. The 
research demonstrates that reverse payment settlements can be 
good for consumers under certain real-world situations.
    One key reason: In those situations, without a payment from 
the brand to the generic, the parties will be unable to reach 
an agreement on a settlement even if that settlement were good 
for consumers. Thus, attempts to ban patent settlements in 
which some form of consideration is provided to the generic 
would be misguided public policy because such a ban would make 
consumers worse off.
    One may ask, why would the branded company enter into a, 
what I'm going to call a pay-for-entry settlement, allowing 
earlier competition from lower-priced generics? The answer: 
litigation is expensive. It has a lot of uncertainty associated 
with it.
    If you're the CEO of a drug company, it may be better to 
have lower profits with certainty than an uncertain world where 
losing the litigation means financial harm. Our research shows 
other real-world situations in which a reverse payment 
facilitates a settlement that is in the best interests of 
consumers, that is, a settlement where consumers get lower-
priced generics earlier.
    The proper economic analysis must also include the 
important effect of settlements on long-term incentives of 
branded manufacturers to innovate and the incentives of generic 
ones to challenge branded patents. Unfortunately, there is very 
little empirical evidence on this topic. As a first step in 
filling this gap, we conducted a survey of generic 
manufacturers. The results of the survey are interesting, and 
they are included in my written statement.
    Now with regard to the Supreme Court decision, the good 
news is that it got the economics basically right with the Rule 
of Reason test. It is precisely the Rule of Reason test that 
sound economics would dictate. The bad news is that the Supreme 
Court did not delineate precise factors for judges to evaluate 
whether settlements are pro- or anti-competitive.
    Fortunately, economic theory shows circumstances where that 
is possible. First, is there easily obtained interpreted 
evidence that the patent is very strong? If the patent is very 
strong, then whatever the reason is for the settlement, it 
cannot likely reduce competition. Even the FTC acknowledged the 
absence of an anti-competitive problem where very strong 
patents are concerned, and we heard that this morning.
    Second, is the reverse payment consistent with the expected 
litigation costs of the branded manufacturer inclusive of its 
costs of bearing the litigation risk? The basis for some of the 
suspicion about the settlement also crumbles if the payment 
does not exceed the patent holders' expected litigation costs, 
plus the benefits of reduced uncertainty that the patent holder 
obtains from settling the litigation.
    The Justice Department has stated that a reverse payment is 
competitively benign when the payment is less than the patent 
holder's litigation costs. Of course, such safe harbors will 
not resolve every case. There will inevitably be those cases 
where the trial court will have to conduct a full-fledged 
analysis, a full-fledged Rule of Reason analysis.
    In such cases, everyone must remember a very basic 
question: anti-competitive in comparison to what? In other 
words, what is the alternative to the challenge settlement that 
the challenging party or parties believe would have been 
realized but for the settlement?
    One final point. The court suggested in its decision that 
one could examine the size of the reverse payment. However, on 
closer examination, this may prove less helpful than it seems. 
Economics shows that the size of the payment may prove to be an 
unreliably blunt instrument for assessing the competitive 
effects of settlements.
    In conclusion, the Rule of Reason test adopted by the court 
in Actavis is surely the best available posture for guarding 
the public interest in settlements of pharmaceutical patent 
disputes involving reverse payments. Finding methods for 
answering the relevant questions raised under the Rule of 
Reason test is critical and courts will be well advised to take 
a careful and rigorous approach, especially in early cases 
where the precedents are likely to be set.
    Congressional action at this point to upset the process 
would likely be counterproductive and possibly have very 
damaging unintended consequences for innovation and competition 
in the pharmaceutical sector. A ban on settlements would not 
likely generate the consumer savings that the FTC alleges. If 
the FTC does its job under the Rule of Reason test, anti-
consumer deals will be blocked in the courts and a ban would 
produce no incremental benefits for consumers.
    Thank you again for the opportunity to discuss this issue 
with the Committee, and I look forward to your questions.
    [The prepared statement of Jonathan M. Orszag appears as a 
submission for the record.]
    Senator Klobuchar. Thank you very much.
    Mr. Russo.

  STATEMENT OF MICHAEL RUSSO, FEDERAL PROGRAM DIRECTOR, U.S. 
                      PIRG, WASHINGTON, DC

    Mr. Russo. Chairman Klobuchar, Ranking Member Lee, thank 
you very much for this opportunity to testify. My name is Mike 
Russo, the federal program director with the U.S. Public 
Interest Research Group, or U.S. PIRG. I think this hearing 
today is very important to draw attention to this issue of how 
these deals hurt consumers by inflating drug prices and too 
often putting critically needed medication out of the hands of 
patients.
    As I mentioned, U.S. PIRG is the federation of State public 
interest research groups. We're a nonprofit, nonpartisan public 
interest organization that works to protect consumers, and one 
of our key concerns as a consumer issue is the high cost of 
health care because too often consumers and patients pay more 
than they should.
    The issue of pay-for-delay deals, therefore, is one we've 
paid very close attention to because they are an egregious 
example of how consumers too often bear much higher costs than 
they should. Putting an end to these deals would cut a lot of 
wasteful spending and improve the lives of millions of 
patients.
    Chairman Klobuchar, I appreciate that you mentioned in your 
opening remarks the story of Karen Winkler, who we've worked 
with through the course of our campaign, because I think the 
impact of these deals on everyday consumers is absolutely 
critical.
    We have heard a lot and we'll continue to discuss a lot the 
impacts of incentives, how court cases would proceed, the 
decision making of brand-name and generic drug manufacturers, 
but at the end of the day, the real place where this matters is 
in the living rooms of consumers across the country, as with 
Karen Winkler, who is paying hundreds of dollars per month for 
a medication she needed just to function, and then once the 
pay-for-delay deal ended was able to get that drug for $16 for 
a three-months' supply, an incredible difference that she says 
gave her her life back.
    Moving on to what the Supreme Court said in their recent 
case, it was certainly good news when they ruled that these 
deals may violate antitrust law and open the door to these 
kinds of challenges, and it does hold out the hope that 
antitrust litigation may lead to the overturning of some of 
these deals and some compensation for consumers who have 
suffered as a result of them.
    But we don't think it's appropriate to wait for years, if 
not a decade, for litigation to ultimately converge on a 
solution to the problem, because consumers need relief right 
now. We do think that congressional action is urgently needed, 
and we are happy to support S. 214 by yourself and Senator 
Grassley, as well as the Fair Generics Act by Senators Franken 
and Vitter.
    Also in the wake of the recent Supreme Court ruling, our 
staff worked together with our partners at Community Catalyst 
to pull together, again, a real-world example of how these 
deals are impacting consumers. So earlier this month we did 
release a report listing 20 drugs known to be impacted by these 
deals.
    We found that these reverse payment settlements have 
effective drugs used by patients with a wide range of serious 
and chronic conditions, ranging from cancer and heart disease 
to depression and bacterial infections. There are a few well-
known examples: Tamoxifen, which is used to treat hormone-
receptive breast cancer; Cipro, a very important antibiotic; 
and Profedil, which, as mentioned, helps MS patients and others 
with fatigue and sleep disorders.
    We found that those payoffs in these pay-for-delay deals 
delayed the entry of those 20 drugs for five years, on average, 
and the consequences of those delays on patients were 
significant. On average, the brand-name drug was about 10 times 
more costly than the eventual generic, in one case about 33 
times more costly, and we conservatively estimate that the 
total amount of sales made by the brand-name company over the 
course of those delays was $98 billion. Again, that was the 
total sales, not the net cost to consumers, but it still 
illustrates the scale of the problem and how much these deals 
are doing.
    Again, without reverse payments we would expect the generic 
version of these drugs to become available much sooner without 
the option of making a payment to the generic drug maker. There 
are several different alternatives, again, which we've heard 
discussed--other settlements, withdrawing the suit--pretty much 
all of which would lead to earlier generic entry.
    I also wanted to highlight that the Generic Pharmaceutical 
Association did take issue with our study and also put out 
their own study that found that there were billions and 
billions of dollars of savings to consumers as a result of 
these deals. I think there are a few weaknesses in that study 
that mean it's not painting an accurate picture of these pay-
for-delay settlements.
    First, it looked at all settlements, not simply those with 
consideration, and it also did not assume that a deal could 
even potentially lead to any cost to consumers even if it was 
having to do with a patent that would not have been upheld, so 
we don't think that analysis is the correct one to look at when 
assessing the cost of these deals to consumers.
    Finally, I wanted to thank you for holding this hearing and 
giving us the opportunity to share our views on this critical 
issue. Increased attention to the way these deals are impacting 
consumers comes at a critical time in the wake of the Supreme 
Court ruling, and while that ruling was a step in the right 
direction, it really is up to Congress to put an end to these 
deals once and for all. We urge all the Members of the 
Subcommittee, and the Congress at large, to take that action.
    Thank you.
    [The prepared statement of Michael Russo appears as a 
submission for the record.]
    Senator Klobuchar. Thank you very much, Mr. Russo.
    Dr. Addanki.

 STATEMENT OF DR. SUMANTH ADDANKI, SENIOR VICE PRESIDENT, NERA 
             ECONOMIC CONSULTING, WHITE PLAINS, NY

    Dr. Addanki. Chairman Klobuchar, Ranking Member Lee, thank 
you very much for inviting me here to testify on this important 
subject.
    I have been doing economic research on the pharmaceutical 
industry for over 30 years, and I've been thinking about these 
so-called pay-for-delay settlements for about 12 or 13 years. 
You heard about the Schering-Plough case from Chairwoman 
Ramirez. I actually served as a trial witness in that case and 
did a Rule of Reason analysis 12 years before the Actavis 
decision. What is perhaps often forgotten is that the trial 
judge in that case found that under the Rule of Reason there 
was no problem with the agreement under consideration.
    One of the advantages of going last is that a lot of the 
things that you were going to say have been said already, so I 
can make my remarks----
    Senator Klobuchar. Well, that never stops any of us from 
saying it again, so please go ahead.
    [Laughter.]
    Dr. Addanki. I'll make my remarks brief, therefore.
    It is, in fact, the case that economics tells us that 
agreements are not always in possible. A pure term split 
agreement is not always possible. What that means it that you 
cannot compare the agreement that you have before you, the 
settlement agreement you have before you, with some 
hypothetical settlement that you wish the parties had entered 
into. You can really only compare it to what would have 
happened had the parties not settled, which is, of course, 
litigation.
    What that means is that if you are to come to any 
reasonable conclusion about the actual competitive effect of a 
settlement you are going to have to think about the patent, the 
underlying patent. There's no way around it. I think every 
economist who has written a principal article on the subject 
has come up with exactly that same conclusion. There are strong 
patents and there are weak patents.
    An agreement involving a weak patent, which involves a 
payment, may indeed be anti-competitive. An agreement involving 
a strong patent probably won't be anti-competitive. So this may 
pose, at first sight, a problem, a conundrum: Why do we want to 
litigate a patent case that was just settled? And you know, the 
answer to that apparent conundrum is actually not that 
difficult.
    In almost all of these cases, if you have a settlement 
you've got a patent suit that's been going for a while, you've 
got a federal judge sitting there who has learned more than he 
or she ever wanted to know about this patent technology, was 
probably issued a Markmen ruling, and is certainly, I would 
think, pretty well qualified at least to make the threshold 
judgment as to whether this is a strong patent involved in the 
settlement or a weak patent involved in the settlement.
    The other thing that is frequently forgotten, the Rule of 
Reason, tells us with good reason that the very first step in 
any such analysis is to ask, is there monopoly power being 
sought, created, or protected by the agreement at issue? If 
there isn't, we go home. We don't do anything more. That's an 
important screen because these analyses, to be sure, are 
difficult. They're not easy, they're time consuming.
    But the question of does the patentee have monopoly power 
seems to have been completely forgotten in any discussion of 
these settlements and their analysis and, as we should all know 
by now, patents confer exclusivity, they don't necessarily 
confer monopoly power.
    So I would say that at least two points are missing from 
214 as it currently stands. One, is that you've got to consider 
the entire settlement in the context of the underlying patent 
suit, and if you ignore the patent suit you're never going to 
get to a right answer because you've ignored the most important 
underlying factor. Second, monopoly power as a screen is an 
important part of any Rule of Reason analysis and some mention, 
really, I think, should be of a monopoly power screen.
    Finally, presumptions. Presumptions have a way of morphing 
into per se rules. It would be an odd presumption here to say 
that an agreement that allows for entry before patent 
exploration is invalid and illegal and anti-competitive when 
you've got at the same time, as Senator Lee pointed out, a 
presumption that a patent is valid. I have certainly seen 
agreements that, when the FTC has the power to block them, were 
blocked by the FTC because they appeared to contain--payment 
terms.
    The parties went on to litigate, the patent was upheld, 
found to be valid and infringed, and the FTC's decision cost 
consumers three or four years of generic competition. So 
presumptions, I think, are tricky things. You've got a 
perfectly good Rule of Reason out there. It seems to me 
analysis under that Rule of Reason can do the job more than 
adequately.
    Thank you very much.
    [The prepared statement of Dr. Sumanth Addanki appears as a 
submission for the record.]
    Senator Klobuchar. Okay. Well, thank you to all our 
witnesses.
    I think I'll start with you, Mr. Romasco, because some of 
the witnesses, particularly Mr. Orszag, was talking about how, 
in fact, doing something about this in the Supreme Court's 
opening the gates, as well as the--most significantly our bill, 
would somehow be anti-consumer. I find this curious, given that 
you represent a whole lot of consumers, the seniors of America. 
And Mr. Russo is over here representing the consumers.
    We have AMA supporting this legislation, we have a number 
of companies that have contacted me, including Wal-Mart, that 
are looking out for their employees and the cost of health care 
and they support this legislation. I'm curious how all of these 
groups could have gotten this wrong. Could you explain why you 
think that this is in fact good for the consumer to have our 
legislation passed and at least have some kind of a presumption 
that would follow from the Supreme Court's opening the door?
    Mr. Romasco. Well, we agree with the--we don't think we--we 
and Wal-Mart and others got it wrong, obviously. The telling 
issue for us is when you look at patent settlements with and 
without these agreements, with these agreements, on average, it 
took 17 months longer to get into the marketplace. That's 17 
months where brand--these prices, the generics, weren't allowed 
to compete, the benefits were kept from consumers, and we had 
two impacts: Consumers pay more, businesses pay more, and 
taxpayers pay more.
    The other issue is the unintended consequence, or at least 
not the consequence that people don't talk about, is when 
people have these prescription drugs they modify their behavior 
in unhealthy ways. They skip, they don't fulfill, they cut 
their pills in half. We all bear the cost of poor adherence to 
prescription drug regimen. The estimate, as I said earlier, is 
$290 billion a year in incremental health care costs for urgent 
care inpatient services.
    So it's to our benefit to get these drugs as soon as 
possible at the generic level into the hands of people who can 
afford it, so that's kind of the model that we look at and the 
data that encouraged us to support this issue that says at 
least these agreements bear scrutiny and an intense standard 
for why they--why they should be allowed to stand. Again, the 
issue is, they don't all have to be that way, but at least 
there's a standard and a bright line, as Chairperson Ramirez 
said.
    Senator Klobuchar. Thank you very much.
    Professor Carrier, a number of people have talked about the 
effect of the Supreme Court hearing. I note Mr. Orszag noted 
that it was bad news that the court didn't delineate precise 
factors for District Courts to evaluate whether the settlement 
was competitive, pro-competitive or not.
    In fact, after the Supreme Court ruling, an industry 
analyst said in a CNBC interview that the court created a 
``holy mess out of this. If I were a patent attorney in the 
drug world, I would be opening a bottle of champagne right now. 
It's basically a full employment of patent attorney's 
decision.''
    This suggests concern that the decision creates an enormous 
amount of uncertainty and that it will take years of litigation 
to determine what Actavis means and what types of pay-for-delay 
deals are illegal. The Preserve Access to Affordable Generics 
Act, which has been referenced many times here today, was 
originally a per se ban on pay-for-delay settlements.
    As part of a compromise, the ban was removed, and it now 
has a rebuttable presumption of illegality. Would a per se ban 
be more clear and provide more certainty to the industry and 
save the inefficiencies associated with years of litigation? 
Short of a ban, would our bill with its presumption of 
illegality and delineated factors that a court should consider 
also help?
    Professor Carrier. A per se ban would be clearer and would 
leave the lawyers putting the cork back in their champagne 
because there wouldn't be as much room for negotiation over all 
of these terms. It's conceivable that if you squint the right 
way, as several folks on this panel have said, maybe, in 
theory, once in a blue moon we see a settlement that can only 
take place because of a reverse payment, and so if we really 
want to be as cautious as possible, we would say presumptive 
illegality is the right approach.
    I think as a practical matter that is just hypotheticals. I 
don't think it's really happened, and so I think per se 
probably would be fine. But if we really want to be cautious, I 
think presumptive illegality would be the approach where we see 
that these agreements are very concerning, they're a form of 
market division, and the exclusion comes from the payment 
rather than the patent, but if the settling parties in a 
particular case want to say our case really is different 
because there really is no delay in this case, then that can be 
introduced under presumptive illegality.
    Senator Klobuchar. Very good.
    According to the FTC, from 2000 to 2004--and most people 
assume that pay-for-delay agreements were illegal--this is 2000 
to 2004--cases settled and none of them involved pay-for-delay. 
What's different now? Could you answer that, Professor Carrier, 
and then we'll ask Ms. Bieri.
    Professor Carrier. So between 2000 and 2004, we have a 
great natural experiment. We always hear the argument that if 
you get rid of reverse payments then these cases are not going 
to settle and that has all sorts of bad consequences. But we 
saw in 2000 that the FTC announced that it was challenging 
these decisions.
    By 2004, the courts had not yet deferred completely to 
these agreements so we had a period of time in which the 
settling parties knew that they could settle cases, but it 
could violate the antitrust laws if they included a payment 
from the brand to the generic. They still settled cases. 
Settlements continued, it's just that they took other forms. 
Those forms are better because they don't involve payments for 
delayed entry in the market.
    When the brand pays the generic to stay off the market, you 
have no entry. In contrast, if you have a better settlement 
when the generic enters the market or you have a patent term 
split where there are 10 years left and the brand and the 
generic agree, hey, let's come in in the middle, that is better 
for competition. So what I think 2000 to 2004 shows is that 
settlement is completely possible without reverse payments, 
it's just that it takes forms that are better for competition.
    Senator Klobuchar. Uh-huh. And then it wouldn't cost the 
$4.7 billion per year that was estimated by the CBO, the 
nonpartisan CBO. Is that correct?'
    Professor Carrier. I think that there would be benefits of 
billions of dollars from outlawing these reverse payment 
settlements, and so I don't think we have to worry about there 
being no settlements whatsoever if S. 214 is enacted.
    Senator Klobuchar. Ms. Bieri, how do you respond to the 
2000 to 2004 time period, or Mr. Orszag, when they were 
presumed illegal and we didn't see these kinds of settlements 
that many of us feel, while settlements may be fine, that these 
particular type of settlements are delaying entry into the 
market and hurting consumers and the U.S. Government, which 
doesn't have a lot of money right now. Ms. Bieri.
    Ms. Bieri. Thank you. I think what we know about the time 
period in 2000 to 2004 is, as Mr.--Professor Carrier said, 
there was an indication that courts--that the FTC was going to 
be aggressive in enforcing against these types of settlements 
and that courts were not sure how to evaluate them, and I think 
what the lack of so-called reverse payment settlements in that 
period may show is that companies are very sensitive to 
enforcement and to uncertainty in the courts and they're trying 
to follow the rules as the courts and the agencies set them 
forth. What we don't know about the period from 2000 to 2004 is 
how many cases would have settled and brought generics onto the 
market sooner if they could have, in fact, done a pro-
competitive settlement with some type of value passing from the 
innovator to the generic.
    So there's an unknown about that period that I--that I 
think no one can--can speak to at this point. We're all 
assuming that because there were no reverse payment 
settlements, that that was a more pro-competitive outcome, and 
I think that's an assumption that really doesn't have a basis 
in fact, or at least that we can't prove looking forward.
    Senator Klobuchar. Mr. Orszag, did you want to add 
anything?
    Mr. Orszag. If I may respond to the 17-month argument, 
because this has been bantered about a number of times, that 
the FTC has found that the presence of reverse payment delays 
entry by a generic by 17 months, on average. There are a few 
points that are worth noting here.
    Number one, in that study the FTC does not control for any 
differences between patent settlements. They assume that 
they're all identical for all these different drugs. They don't 
control for the patent expiry date in any potential differences 
in the future. They actually assume, with no evidence 
whatsoever, that these cases could be settled in some other way 
without a settlement. That is the underlying assumption, is 
that the----
    Senator Klobuchar. I think they assume that because for a 
number of years they were settled without pay for delay.
    Mr. Orszag. But not necessarily the ones where there were 
reverse payments. We don't have access to that data to analyze 
because it is confidential to the FTC, so it's not been subject 
to peer review like some of the articles that have analyzed 
whether reverse payment settlements are pro- or anti-
competitive in the real-world situations where those may occur.
    So that's an important element to this that that very 17-
month assumption is key to the FTC study. It's also key to the 
CBO study, and CBO has not analyzed the budgetary savings in 
the presence of the Supreme Court decision where there's a Rule 
of Reason as the standard that would be used and under the Rule 
of Reason, presumably as I noted, anti-consumer deals would be 
blocked by the courts.
    Senator Klobuchar. So you disagree with the nonpartisan CBO 
analysis?
    Mr. Orszag. I disagree--I believe that a number of the key 
assumptions in the CBO analysis are misguided. I've written 
about how they're misguided and I've shared those with Director 
Elmendorf.
    Senator Klobuchar. Thank you.
    Senator Lee.
    Senator Lee. Thank you, Madam Chair.
    I want to start with Dr. Addanki. As you know, our 
antitrust laws are built upon statutes, statutes that state in 
pretty simple terms that we need to have pro-competitive 
policies in place that make sure we don't have a market that's 
too distorted. We don't want anti-competitive behavior in our 
marketplace. So the Supreme Court has over time filled in those 
gaps.
    The courts generally, capped by the Supreme Court--courts 
have had the occasion to consider various formulations, various 
tests and standards. One of the standards that they've had to 
consider is how to decide when, whether, to what extent to 
employ a presumption of illegality.
    What the Supreme Court has said in that regard is that a 
presumption of illegality is proper only when ``an observer 
with even a rudimentary understanding of economics could 
conclude that the arrangements in question would have an anti-
competitive effect on customers and markets'' and also added 
that it's not proper to have such a standard where the 
agreements ``might plausibly be thought to have a net pro-
competitive effect or possibly no effect at all on 
competition.'' That's from California Dental Association v. 
FTC.
    Now, you have more than a rudimentary understanding of 
economics, correct? It's my understanding you've got a Ph.D. in 
Economics from Harvard.
    Dr. Addanki. Yes, sir.
    Senator Lee. Would you conclude that patent settlements of 
the sort that we're discussing here, that is, patent 
settlements involving reverse settlement agreements among 
pharmaceutical manufacturers, might plausibly be pro-
competitive or might, in the words of the Supreme Court, 
possibly have no effect on competition?
    Dr. Addanki. Indeed that is the case, Senator. Agreements 
of this sort can be anti-competitive, can be pro-competitive, 
can be competitively neutral. It really depends on the facts, 
and that is why any kind of presumption is an unnecessary thing 
and one that will surely have unintended consequences, 
particularly when the Supreme Court has said we analyze these 
under the Rule of Reason.
    If I may just make one more comment on that. People have 
commented about the lack of guidance. Well, that's not unusual 
for the Supreme Court, right? When they say you're going to do 
this under the Rule of Reason, they leave it to the lower 
courts to develop the jurisprudence that is going to apply 
because these are all going to be fact-specific investigations, 
and that is by way of agreeing with Mr. Orszag.
    Any assumption that, but for the settlement you would have 
had this other settlement, that somehow you can characterize 
enough to say that it had been 15 months, 17 months, or 
whatever, it is based on all my work in this area, that's 
absurd. You can't do that because you--every settlement is 
idiosyncratic and so, but for the settlement what you would 
have had is really a question that you're going to have to look 
at on a fact-specific basis in the courts and develop that 
jurisprudence.
    Senator Lee. And it's for that very reason that the Supreme 
Court has tended, over the course of the last century, to lean 
more toward the Rule of Reason and away from per se rules of 
invalidity and also from presumptions of illegality.
    Dr. Addanki. Indeed. That is exactly right. For instance, 
even the long-held view that resale price maintenance was per 
se has been abandoned.
    Senator Lee. Dr. Michaels. Yes. Excellent point. Thank you.
    Mr. Orszag, so much of the discussion today, including some 
of your discussion with Senator Klobuchar, has focused on the 
potential harm to customers that consumers might incur from 
reverse settlements among pharmaceutical manufacturers in this 
type of context we've been discussing today.
    Several witnesses have added to this discussion by pointing 
out that they believe consumers need to be protected because 
they--from these kinds of settlements because they might cost 
consumers and taxpayers billions of dollars. But doesn't this 
overlook part of the equation? I mean, doesn't this overlook 
the fact that there is a reason why we have patent protection, 
and the reason why we have patent protection is to spur 
innovation?
    So, you know, we could, for example, save consumers and the 
government billions of dollars over the next few years, I 
suppose, if we took the existing patent life and we shortened 
it, I don't know, by 10 percent, 25 percent, 50 percent, 75 
percent, that would save consumers money in the short run, 
would it not? And if it would, what else would it do that might 
not be as pleasant?
    Mr. Orszag. Our patent system, the Hatch-Waxman Act, really 
strikes a balance between the interests in the incentives for 
manufacturers to innovate and the interests of consumers who 
benefit from those innovative drugs and benefit also from 
lower-priced generic alternatives. So there's a balancing act. 
It provides patent protection but it also facilitates entry by 
generics under an easier mechanism than the brands have to go 
through in terms of the testing of the drug, et cetera. So it 
reflects a balancing act.
    When you shift that balance in some ways, for example, 
taking away an avenue of settlement that may be important for 
litigation, as I noted, litigation is expensive and it involves 
a lot of uncertainty, and one avenue of settlement may only 
occur if you can have a payment of some consideration from the 
brand to the generic, you shift that balance in some way.
    Sitting here today, we don't have strong empirical evidence 
one way or the other how significant that would be. The survey 
that we conducted provides a piece of that and it suggests that 
settlement, the ability to settle, is a factor in generics' 
decisions to enter markets. That's one piece of empirical 
evidence that's now been added. I would hope that over time 
more empirical evidence could be added about this long-term 
incentive point, which is critically important in this industry 
and other industries.
    Senator Lee. But to the extent that the existence of the 
patent and the existence of the current patent term as we have 
it set up, facilitates innovation, leads to innovation. 
Innovation in this industry presumably extends, improves the 
quality of, and prolongs life. That, too, could also save money 
in the long run, could it not?
    Mr. Orszag. It saves money or improves the quality of 
people's lives. I think everybody would agree, or I'd be 
shocked if we didn't all agree, that having a sound patent 
system produces significant benefits to consumers because of 
the innovations that we all benefit, and the drug industry in 
particular, the types of drugs that are now available help save 
lives and help save lives in ways that I think many of us could 
never imagine 10, 20, 30, 40, 50 years ago. So it's because of 
that patent system that we have those innovations that benefit 
consumers.
    Senator Lee. Okay. Thank you.
    My time's expired. Thank you, Madam Chair.
    Senator Klobuchar. Thank you very much, Senator Lee.
    I understand we're going to have a vote at noon, so we're 
going to have Senator Franken, then Senator Blumenthal go. I 
think I will leave briefly and then come back after I've voted, 
so we may have to recess a little after Senator Blumenthal is 
done, but it will only be briefly.
    Senator Franken.
    Senator Franken. Thank you, Madam Chair.
    Mr. Romasco, I'd like to thank you and the AARP for its 
work in this area, and in particular for supporting both my 
bill and Senator Klobuchar's bill.
    I'd like to take a step back for a second and look at the 
big picture here, which is that pay-for-delay agreements can 
really hurt our Nation's seniors. I go back to Minnesota nearly 
every weekend, and I often visit senior centers and also go to 
nursing homes.
    One of the most common concerns I hear from seniors is that 
prescription drugs cost too much. Now, health reform is doing a 
lot to change that. Over the next few years, we will completely 
close the gap, the donut hole, and I think that's a big deal 
and a big contribution so some of the burden will go to 
Medicare.
    But there's another thing that's costing seniors a lot of 
money, and that's the lack of availability of generic drugs, 
and will be costing Medicare. And as we've already heard this 
morning, this is due, either largely or in some part, to pay-
for-delay settlements. Would you say that pay-for-delay 
settlements impact seniors more than any other group, and can 
you talk a bit about why AARP has made this issue one of its 
top priorities?
    Mr. Romasco. Thank you, Senator. Yes, we believe--first of 
all, prescription drugs, by definition, are used most heavily 
by the folks over 65. That's just a fact. As we age, and as the 
study--CDC study showed, two-thirds of people over 65 use at 
least three, 40 percent use five. Now, that translates into a 
nice percentage, but that means tens of millions of people use 
three or five of these drugs every month.
    If you just sort of think through, as John said from 
Indiana, the difference between $70 for a supply and $15 for a 
quarter supply, that adds up. If the generics are part of that 
five drugs, you can do the math and it starts to become 
hundreds of dollars. When your average Medicare recipient is 
$20,000 or less or your Social Security--one out of three 
Social Security recipients are living on $14,000--this is real 
money to real people.
    The other issue that we talked about earlier, and I can't 
emphasize this enough, the prescription drugs force behavior 
that says they skip it, they cut the pills in half, and while 
that saves them a few bucks, it exacerbates the health 
consequences, so when the--when the--when the lack of avoiding 
medications because they're too expensive, then it creates 
another cost when they go to the emergency room, when they need 
urgent care. Again, we've documented the fact that that could 
be as much as $290 billion a year.
    So at the kitchen table it's meaningful for millions of 
retired Americans, particularly those on fixed incomes, and for 
all of us. We all pay that, consumers, not just seniors, but 
everyone, and businesses, businesses and taxpayers. So this is 
a situation that affects everyone, seniors in particular, the 
people we represent.
    Senator Franken. When I was at the State fair in 2009 
during the heated debate about the ACA, a woman in her 60s came 
up to me and she said, at my age everything's pre-existing.
    [Laughter.]
    Senator Franken. So three to five doesn't surprise me at 
all, and more.
    Professor Carrier, my Fair Generics Act would make the 
exclusivity privilege available to subsequent filers if the 
first filer bargained the privilege away in a pay-for-delay 
settlement. Do you agree that this change to the law will 
reduce patent holders' incentive to enter into these agreements 
in the first place and would drive down the costs for seniors, 
and can you explain how this would work in the market?
    Professor Carrier. Yes, I agree that that would reduce the 
number of these very concerning settlements. The reason why 
gets to the heart of how the Hatch-Waxman Act has been 
perverted. Hatch-Waxman has been beneficial in certain ways. 
There are a lot more generics on the market today than there 
were in 1984, but one provision of Hatch-Waxman has been 
twisted beyond recognition.
    A 180-day period designed for the first generic to file a 
validity or infringement challenge against a patent is designed 
to get the generic onto the market quickly. That is what Hatch-
Waxman was about. Hey, generic, challenge this patent. We'll 
give you 180 days on the market to yourself. That 180 days is 
very powerful.
    The problem is that the brand company can now look at that 
one generic, or if there are a couple on the first day those 
couple, and say, let me give you money. If I give you money, I 
get to keep my monopoly, no one is going to challenge it. Those 
generics get more money, maybe more money than they would get 
from actually entering the market after winning a patent case, 
and nobody has an incentive to challenge like those subsequent 
filers that you're talking about.
    So the benefit of opening up that 180-day period is that it 
gives other generics, who aren't in cahoots with the brand 
firms, an incentive to actually go to court and win one of 
these cases knowing that they have a shot at that 180 as well. 
So I think that would be very helpful legislation.
    Senator Franken. It breaks the incentive and the issue of 
whether it's a weak or strong patent is not really any issue 
anymore.
    Professor Carrier. I think what it does is----
    Senator Franken. Or less an issue.
    Professor Carrier. That's right. It takes the brands and 
generics and stops them so much from being on the same side, 
where the brands and the generics benefit from these reverse 
payment settlements--the consumer, of course, is the one that's 
hurt--but by opening up the 180 you leave room for other 
generics to file challenges against validity, which is what 
Hatch-Waxman is supposed to be about.
    Senator Franken. Let's take Senator Lee's point in terms 
of--my understanding is that Senator Klobuchar's bill basically 
just changed the presumption. What is your experience? I 
noticed in your--not in your testimony, but in a brief that you 
filed or that you presented to the Supreme Court, that 
basically in pharmaceutical the generics prevailed in 73 
percent of the challenges. So the presumption--the facts of the 
matter are, if you reverse the presumption that Senator 
Klobuchar is talking about, as the Chairwoman is talking about, 
you're really more reflective of reality. Let me ask you that.
    Professor Carrier. Sure. So in the study that I cited, the 
FTC found that from 1992 to 2000, generics won 73 percent of 
these cases against brand firms' patents. And even if you don't 
take that figure, every study that I've looked at shows that at 
least 40 percent, and oftentimes more, of patents are invalid 
or not infringed.
    Another point on this presumption is that a procedural 
presumption is just that. You go into court, one side has to 
have the initial presumption and their presumption is, Okay, 
we'll presume the patent is valid. That's the starting point, 
but that's not the ending point. As a patentee, you have to 
prove that your patent really is valid and infringed.
    One final point on this is that even though there's a 
procedural presumption of validity, the presumption in terms of 
infringement is just the opposite. So it is the alleged 
infringer that has the presumption here. It's the patentee that 
has to prove to the court that this product really is 
infringing. So if you're going to make a big deal about this 
procedural presumption of validity you have to do the same 
thing and say there's also this procedural presumption of non-
infringement.
    Senator Franken. Okay. Thank you.
    Senator Klobuchar. Thank you very much.
    Senator Blumenthal.
    Senator Blumenthal. Thank you, Madam Chairman. Thank you 
all for being here today.
    Let me sort of pick up on the point, and I think it's a 
very important one that Professor Carrier just made, because I 
think your point, Dr. Addanki, that presumptions morph into per 
se rules is not really the practical experience of a lot of 
litigating attorneys. There is a presumption on one side or 
another. There has to be a presumption because the burden of 
proof has to exist in any litigation on any question at any 
time before a case is either resolved or goes to verdict.
    So I wonder, Mr. Orszag, your testimony seems to assume 
that what's proposed here is a ban, and a lot of the testimony 
seems to assume that there will be in effect a ban on the 
reverse payments. If you assume that it's a presumption and if 
you were to tailor that presumption in a way that it could be 
rebutted by evidence about the benefits of the outcome, would 
your view be different?
    Mr. Orszag. My view on this issue is that one should come 
at this with neutral principles and that you can't, on its 
face, say whether these settlements are pro- or anti-
competitive with a presumption. It should come at it with a 
view that one has to look at the facts and circumstances of the 
individual case. It should be an individualized inquiry without 
prejudice because, as people have noted, there are some cases 
that are anti-competitive, there are some cases that are pro-
competitive.
    That's why I think the Supreme Court--and I noted got the 
economics basically right because the Rule of Reason test 
allows for the neutral principles, that you have to come in and 
you have to show whether the deal is pro-competitive or not or 
anti-competitive or not, and that's the right way to think 
about it.
    Now, one thing that I benefit from on this panel, is I'm 
not a lawyer and so presumptions are often more legal terms 
than they are economic terms. But from an economic perspective, 
I think the right approach to this is to come at this with 
neutral principles, the Rule of Reason test, and use the facts 
of the case to determine whether that individual settlement is 
pro- or anti-competitive.
    Senator Blumenthal. Well, the Rule of Reason case doesn't 
necessarily bar some presumptions on evidentiary issues, does 
it?
    Mr. Orszag. I think when we get into evidentiary issues I'm 
going to defer to the legal counsel on this issue. As a matter 
of economics, one should come at this with the view that you 
have to look at the individual case and while you can have safe 
harbors, and safe harbors are important, for example, if the 
clear evidence is that it's a weak patent, that would suggest 
that any potential--or very weak patent that any potential 
reverse payment is anti-competitive.
    Similarly, the mirror image of that is any very strong 
patent is likely to be pro-competitive. Those type of safe 
harbors are important to give businesses certainty, but once 
you get beyond those types of safe harbors I think one has to 
have neutral principles on the issue.
    Senator Blumenthal. Let me ask the same question of 
Professor Carrier. Isn't this--the criticism of the presumption 
at bottom really based on the idea that somehow the door is 
barred, that there's a per se rule, that the presumption is so 
strong that it can't be rebutted, whereas if the FTC enforces 
this law fairly it will look at all of these factors that are 
raised by Mr. Orszag's survey, by the views of the business 
community, by the costs in delay in litigation, and by the 
ultimate benefit to consumers, but just that there is a 
requirement that somebody come forward with evidence of its 
pro-consumer effect?
    Professor Carrier. Yes, that's exactly right. No one is 
saying here that these are per se illegal. So whatever 
framework we have, if it's Rule of Reason or presumptive 
illegality, there always will be a chance for the settling 
parties to say this settlement would not have happened absent 
the reverse payment and here's why it's good for consumers.
    Now, again, it's easy to come up with hypotheticals and 
have complex models on how this could happen once in a blue 
moon, when you squint in a certain direction you might actually 
see it over there, but let's keep common sense in mind here. 
The reason why presumptive illegality is better than Rule of 
Reason is because this is not your garden-variety business 
arrangement.
    The Rule of Reason applies when there are anti-competitive 
effects and pro-competitive effects and having looked at the 
thousands of Rule of Reason cases and seeing that in nearly all 
the cases the defendants win, this is the case where generally 
we're not concerned because there are a lot of good reasons for 
licensing agreements when the alleged infringer enters the 
market.
    The reason why presumptive illegality is better here is 
because this stuff doesn't even pass the smell test. Again, you 
can come up with these complicated formulas, but let's just 
take a step back. What's going on here is one company is paying 
another not to enter the market. That is anti-competitive.
    And when that payment comes and that payment is leading to 
the exclusion rather than the patent, that's a real problem.
    Again, just to be clear, the FTC has said for a decade that 
if the two parties can agree on a patent term settlement, so 
let's say the brand has 10 years left in the patent term and 
the brand and the generic say it's 50 percent likely, fine, 
enter in five years, they don't have a problem with that. It's 
that extra payment. Hey, generic, here is $100 million. Let's 
forget about year five, why don't you enter in year eight? 
During those three years, the exclusion comes from the payment 
and not the patent. That's why presumptive illegality is better 
than Rule of Reason.
    Senator Blumenthal. And to put it in terms that consumers 
can understand, the payment, in addition to the settlement on 
time period, probably means that entry is delayed as a 
consequence of that payment.
    Professor Carrier. That's right. With the payment, the 
brand firm is getting more delay than it could otherwise get. 
So let's say it has a weak patent and the generic wants to 
enter quickly. All of a sudden, the brand says, here's a lot of 
money, more money than you ever would have gotten from actually 
winning your patent case and entering the market. We know that 
there's delay.
    Senator Blumenthal. And Mr. Orszag is shaking his head, so 
I'm going to give him the opportunity in the few moments I have 
left to offer the other side.
    Mr. Orszag. Thank you, Senator. The economic models where 
it results in a payment for entry, that is, the generic enters 
earlier than expected, are very simple. It's not these--you 
don't have to twist yourself into a pretzel to do it. You can 
have a simple situation like this. The brand believes it's 
going to win with a, say, 80 percent probability. He actually 
believes it has a strong patent.
    If the generic believes that it has a 50 percent chance of 
winning, so they obviously both can't be right because it 
should add up to 100 percent, that situation alone can result 
in a pro-competitive reverse payment settlement. That's all you 
need. All you need is risk aversion and things like that just--
--
    Senator Blumenthal. Yes. But an equally likely result would 
be a splitting of the difference in terms of the time of entry 
if that is the coin of the realm, if that's the currency. If 
time is the only means of settlement then presumably they would 
agree in those terms.
    Mr. Orszag. But in many of these situations when you have, 
say, the example I just gave, you can actually not reach a 
cash--a settlement without payment from the brand----
    Senator Blumenthal. Why is that?
    Mr. Orszag. How long do we have?
    Senator Blumenthal. Well, let me put it a different way. 
Why isn't that kind of settlement justifiable in the terms that 
Chairwoman Ramirez said, the cost of litigation can be 
considered if a settlement is proposed to the FTC even under 
this act, this proposed act?
    Mr. Orszag. So the simplest way to think about this, and 
it's detailed in relatively simple models with nice pictures in 
a paper that I have with my former boss, Laurie Tyson, and a 
colleague of mine. The simplest way to think about this is if 
the generic believes it has a high probability of winning it 
doesn't want to settle because it thinks it's going to actually 
win and get entry sooner.
    If the brand thinks it's going to win, it's going to not 
settle for anything. When you just have the date of entry as 
the only settlement point, only one avenue of negotiation, 
we'll believe that the entry date should be much later. They 
can't come to an agreement on the entry date that is pro-
consumer, so you need that payment. It's the only way you can 
actually get that way.
    Senator Blumenthal. You've just described a circumstance 
where payments are possible----
    Mr. Orszag. Right.
    Senator Blumenthal [continuing]. To delay entry.
    Mr. Orszag. No. Actually, the payment results in earlier 
entry than would otherwise occur, because in the real-world 
situation the brand actually has--understands its probability 
of winning better than the generic, and so the entry that would 
occur on an expected value basis in the litigation would be 
later than the entry date in this when there's a payment.
    It's that result where you can't get a settlement otherwise 
without some form of consideration going from the brand to the 
generic, which happens all the time. There's a good example 
here, the example of Plavix.
    Senator Blumenthal. Yes. Well, you mention that in your 
testimony.
    Mr. Orszag. Yes.
    Senator Blumenthal. My time has expired. I am going to turn 
over to Senator Lee. This is a very interesting and important 
area. All of these witnesses are experts. I'm going to be 
reading that paper. Given that I'm a lawyer, not an economist, 
I'm going to be looking at the pictures as much as the print.
    Mr. Orszag. It's in a law journal, so that will actually 
hopefully be helpful.
    Senator Blumenthal. Well, then I may be able to understand 
it. But thank you, each of you, for your expertise and your 
contribution today. Thank you very much.
    Senator Lee. Okay. Running against the shot clock here--
it's something we deal with a lot in the Senate--I want to ask 
a few more questions and then we're going to have to recess 
briefly before coming back after the vote.
    Ms. Bieri, I'd like to ask you a couple of questions. 
First, could you respond to the point made by Professor Carrier 
a minute ago about the 73 percent of patents in this area 
ultimately being found invalid? Do you agree with that 
statistic?
    Ms. Bieri. I think that statistic does come from the FTC 
study which looked at data from, I believe it was 1993 through 
2000. Since then, several other studies have been done that 
look at more recent data, particularly from the period of 2000. 
I think one goes 2000 to 2009, another goes 2009 to 2012. So 
they cover, among two or three different studies, about a 12-
year period from 2000 forward.
    In those studies, they all trend the same direction, which 
is that the brand has won in 50 percent or more of the cases 
that were litigated to final court decision. So I think the FTC 
study, while it could have represented the data correctly from 
that time period, I think it's not consistent with what we've 
seen in later studies that look at litigated cases in later 
years.
    Senator Lee. Okay. In your testimony you note that we have 
a statutory directive that exists under current law that all 
patents are to be presumed valid. It would seem that that 
statutory directive is quite fundamentally at odds with an 
approach that would place a burden on the patent holder to 
demonstrate, by clear and convincing evidence no less, that 
agreements within the scope of their patent are pro-
competitive--not just neutral, but pro-competitive.
    Do you agree that the presumption of illegality for patent 
settlements in this context would effectively result in 
something approaching either a per se rule of illegality or 
alternatively a presumption of patent invalidity?
    Ms. Bieri. Well, I think it certainly would undermine the 
presumption of validity that we now enjoy with patents. I think 
from an antitrust perspective you only employ a presumption of 
illegality where the consequences of the conduct are so 
obviously anti-competitive that you basically have to abandon 
the traditional Rule of Reason analysis and say that for the 
most part these are going to be presumed unlawful, and you're 
going to put the burden on the parties who engaged in that 
conduct to prove otherwise.
    In these scenarios, first of all, the Supreme Court has 
recently said that that's not the case here, that here we have 
conduct that sometimes could be pro-competitive, sometimes 
could be anti-competitive, and that should be judged under the 
traditional Rule of Reason.
    I think when you layer on top of that the presumption that 
patents--the presumption of validity for patents, that's just 
another reason why one should be very cautious before imposing 
a presumption of illegality on settlements that I think 
economists, courts, and agencies throughout the years have 
noted could be pro-competitive in certain circumstances.
    Senator Lee. Right. Right. Whereas, with Rule of Reason 
analysis they could continue to take into account the 
presumption of patent validity and that would operate 
unhindered in that context.
    Ms. Bieri. Absolutely. And I think the burden of proof 
would--you know, to prove a prima facie case at least would be 
on the government or the private parties challenging these 
settlements to state their case.
    Senator Lee. Okay. By the way, when we're in the context of 
a patent, isn't there something sort of internally inconsistent 
or contradictory about a standard that would require the patent 
holder in this context to produce clear and convincing evidence 
to show that the agreement at issue was pro-competitive?
    I mean, if the purpose of the agreement is to bolster, 
shore up, make more certain the interests of the patent holder, 
and if the whole purpose of our patent law is to limit 
competition within the scope of the patent life and within the 
scope of the terms of the patent, don't these two things 
conflict irreconcilably, almost?
    Ms. Bieri. I think potentially there is a tension at least, 
if not an irreconcilable conflict. I think the other thing that 
I would note is when you're in a world where these are presumed 
to be unlawful, these types of settlements, you're really going 
to have to, as I think Dr. Addanki noted, look at the 
underlying patent in order to rebut that presumption.
    So you are in a position now where the parties to these 
settlements are going to be, and particularly the innovator 
obviously, is going to be put in the position where it's going 
to have to defend its underlying patent. And as you say, that 
is not necessarily consistent with, or at least intentioned 
with, the presumption that that patent is valid.
    Senator Lee. Okay. Thank you very much. I'm going to have 
to run to go vote. I'm going to turn into a pumpkin in a few 
minutes.
    Senator Klobuchar will come back in just a few minutes 
because she's probably voted by now, so depending on the timing 
of my vote and her return, we will stand in recess for probably 
just a few minutes. Thank you very much.
    [Whereupon, at 12:16 p.m. the hearing was recessed and 
resumed back on the record at 12:22 p.m.]
    Senator Klobuchar. Okay. We're back. The hearing comes to 
order again. We will have just a few more questions here and 
then we can conclude. I want to thank you all for staying. It 
has been a long morning.
    I first wanted to talk, I had not asked any questions of 
you, Mr. Russo. Pay-for-delay settlements are the most 
egregious form of antitrust violation in my mind and think they 
have been this kind of agreement between competitors not to 
compete, to me, is the essence of what we don't want to be 
doing in a competitive market place.
    What is your view of the Supreme Court's decision in 
Actavis? Is it sufficient to protect consumers from harmful 
play-for-delay deals that limit generic drug competitions?
    Mr. Russo. I think it is a step in the right direction, as 
I believe I said in my testimony, but not sufficient, no. And I 
would certainly agree that this is an egregious example of a 
violation of what you would think would be common sense 
antitrust principles.
    We are actually doing citizen outreach around this 
campaign, so we are talking to tens of thousands of Americans 
to educate them about the problem and get them involved in the 
campaign. And I think by far the number one response that we 
get is disbelief, people who just don't think that this could 
possibly be legal and it could possibly be okay to do this sort 
of thing. You know, before they know any of the details of the 
Hatch-Waxman Act and exclusivity periods and burdens of proof 
and presumptions and so on, at just that gut level they think, 
wait a minute. There has got to be something wrong here.
    I think that the Supreme Court case recognized that but was 
wary of taking the further step which we joined the AARP amicus 
brief as well, urging them to adopt the presumption. I think 
there were good reasons, perhaps, why they were hesitant. The 
institutional competency of the court is not the same as the 
Congress. So I think what they did was to open a door to allow 
these arguments to be made to show the potentially anti-
competitive impact of some of these deals.
    But I think just given the scale of what these deals have 
potential to do to consumers who rely on this life-setting 
medications, it is entirely proper to put the burden on the 
drug companies to demonstrate that actually these have a pro-
competitive, not anti-competitive impact. Otherwise, you are 
just putting too much risk on consumers and potentially forcing 
them to pay high rates for drugs that they need. And it will 
take a Congressional action to fix that.
    Senator Klobuchar. Thank you. Professor Carrier, Dr. 
Addanki in his testimony, in discussions with Senator Lee 
talked about the Rule of Reason analysis and that being 
sufficient. Could you talk about some of the proof problems in 
bringing an antitrust cast under Rule of Reason analysis?
    Professor Carrier. The difficulty with the Rule of Reason 
is that the general presumption is that these agreements are 
pro-competitive. And so if we don't adopt the two poles of per 
se legality and per se illegality, the question is what does 
Rule of Reason do that presumptive illegality does not?
    And my sense is that Rule of Reason is completely 
appropriate for the vast majority of agreements like licensing 
agreements in which there is market entry and the agreements 
are pro-competitive. The difficulty here is that you have a 
payment not to enter the market. That payment is what is 
driving this exclusion, rather than the patent.
    So the problem with the Rule of Reason is there is the 
potential to throw everything up in the air and say it is the 
kitchen sink Rule of Reason approach and that puts a lot of 
thumb on the scale in terms of saying that these agreements are 
all lawful, when in reality they are payments to delay entry 
into the market.
    Senator Klobuchar. Do you have any comments about also the 
points Dr. Addanki was making on the patent strength argument?
    Professor Carrier. Sure. So one argument that we have heard 
this morning and one argument that the pharmaceutical industry 
always talks about is innovation. Innovation is crucial. The 
pharmaceutical industry has done a lot for innovation through 
the years.
    But you can't do anything you want and say that will 
increase your profits and you will plow that back into 
innovation. If you violate the antitrust laws and take that 
money and put that in innovation, that is not allowed. The 
Hatch-Waxman Act was a very complicated calibration of how 
antitrust and patent law should be balanced in the 
pharmaceutical industry.
    And the brand-name drug companies got a lot in Hatch-Waxman 
like patent term extension, non-patent market exclusivity, and 
a 30-month stay, all very powerful tools. One of the things 
that generics got was 180 days of exclusivity that was designed 
to encourage market entry, and so that is what we are talking 
about here in the context of encouraging entry.
    My final point on this is that we have heard a lot about 
weak patents and strong patents. Empirical research has shown 
that 89 percent of these settlements take place where the 
patent involved is not on the active ingredient of the drug, 
but rather on something that is more minor like the formulation 
or the particle size or the number of times a day you take it. 
And so when you have so many of these settlements for which the 
brand company only wins 32 percent that are not on the active 
ingredient itself, but rather on something that is a lot more 
minor in nature, that shows additional reason for concern with 
these settlements.
    Senator Klobuchar. Very good. Thank you. Ms. Bieri, I am 
just trying to figure out if a brand company has the 
opportunity to stall the entry of a competitor coming into the 
market and by paying a generic a fraction of the profits, why 
wouldn't the brand company do it? What incentive do they have 
not to do it?
    Ms. Bieri. Well, I think if you put it starkly in those 
terms, then the incentive is that it might violate the 
antitrust laws. I think in these kinds of situations, the 
companies are trying to resolve a patent dispute. That is kind 
of first and foremost what they are trying to do.
    And in a scenario as Mr. Orszag described where the brand 
feels that its patent is very strong, they think they have a 
great chance of winning in patent litigation, but for various 
reasons, business reasons, risk management reasons and so 
forth, they would prefer to settle. They are looking to reach 
an agreement with a generic.
    And in situations where the generic is equally certain that 
it has a strong case and that it would prevail under 
litigation, the two parties just are not likely to be able to 
come to an agreement if all they are negotiating about is the 
split of when the patent would come onto market. So it is in 
those circumstances where the companies look to do some other 
type of transaction that will bridge the gap. And if that 
transaction is lawful, if it is pro-competitive and on its face 
for fair market value or within the scope of the patent 
exclusivity that the brand company possesses, then I think they 
should be looking at those settlements in order to enforce 
their patents.
    Senator Klobuchar. Mr. Orszag, I guess same question, is 
the same true for a generic company? If a generic company is 
presented with a settlement agreement where a brand name 
company would pay it more money to delay entry into the market 
than it would have been paid if it entered, how could the 
generic company turn that down?
    Mr. Orszag. In such circumstance, it would not. I think the 
simplest way to characterize all of this is--in my 
perspective--if the deal is truly a pay-for-delay deal, a pay-
for-delay relative to what would have occurred otherwise, it is 
likely to be anti-competitive. But not all reverse payment 
deals, not all deals involving payments of consideration from 
the brand to the generic involve a pay-for-delay. Many of them 
are payments for entry because of the factors that I have 
discussed, litigation is expensive, the uncertainty involving 
litigation and the desire of a business to have certainty 
instead of uncertainty.
    And so those are pay-for-entry. So to presume just because 
there is some consideration paid that it is either a payment-
for-delay or payment-for-entry is taking sides in many 
respects. I think the right way to think about this is come at 
it with neutral principles, look at each case on their own and 
determine based on the facts and circumstances of that 
settlement, because each settlement is different, involving 
different drugs, different companies, different expectations, 
whether that settlement relative to what would have occurred 
otherwise is pro-competitive or not.
    Senator Klobuchar. Yes. I just am looking at reality here. 
You have an FTC which probably does not have the resources to 
match yours and the pharmaceutical industry, to go up on these 
cases with Mr. Russo at their side. You have a situation where 
five Supreme Court justices have said that strong evidence that 
the patentee seeks to induce the generic challenger to abandon 
its claim with a share of its monopoly profits that would 
otherwise be lost in the competitive market is happening.
    You have got the CBO analyses, which I believe. You have 
got a number of people that are hurt by this that are--I am 
remembering my college political science class--that are very 
diffuse, they don't really have the ability to all come 
together and fight this where the benefits are very focused.
    So that is why we were coming up, Senator Grassley and I, 
with a way to sort of even the playing field in terms of making 
this simply presumptively illegal, allowing you to still 
litigate on the margins here when there are exceptions and 
things where you find that you can show that the benefits 
outweigh the costs. So that is where we came down in terms of 
why we did this.
    I don't know if you want to comment, Professor Carrier, 
about those incentives or questions I just asked Ms. Bieri and 
Mr. Orszag.
    Professor Carrier. Basically, when the cat is away, the 
mice will play. There is no reason why a brand company or the 
first filing generic will not enter into those agreements. And 
so your question was, why would the brand company not do this? 
And the answer is, there is no reason, absent antitrust law, 
that the brand would not do this.
    The brand often is not sure that the patent is valid. When 
it is not on the active ingredient, there is a significant 
likelihood that it is invalid. Rather than taking that chance 
of having this stream of profits cut off immediately overnight, 
it pays money to make sure that that never happens.
    And we hear a lot about risk uncertainty, risk aversion and 
all of that. In many cases, that just means that competition is 
being blocked because they have the certainty of preventing 
patent challenges. Again, if you are a shareholder in a 
pharmaceutical company, that is good. If you are a CEO of a 
pharmaceutical company, that is good. If you are the American 
consumer, that is bad.
    The same goes for the generic firm. If the generic firm 
makes more money by receiving payment to sit on its hands and 
not enter the market than it does even if it were to win the 
patent litigation and enter the market, that tells you that 
something is wrong.
    And one final point is that we hear sometimes that this is 
entry before the end of the patent term, so therefore, it is 
good. Something to keep in mind here is that it is not like 
just one patent covers every one of these drugs. There are 
multiple patents covering drugs. It is possible to switch the 
number of patents to say, OK, we are entering before the last 
patent, but all of the active ingredient patents have already 
expired.
    There is also--as my final point--the interplay between the 
settlement by which the brand firm knows that no one is going 
to challenge and the pharmaceutical industry and product 
hopping, switching the market to the next product.
    So for example, in Provigil, that happened, switching to 
the new product knowing with the certainty of settlement that 
it will never be challenged. So in short, there is no reason 
for a brand company or the first filing generic not to enter 
into these agreements. That is why antitrust has a crucial role 
to play here.
    Senator Klobuchar. Okay. Mr. Russo, and then I can see you 
want to say something, Dr. Addanki, and we will get to you in a 
minute.
    Generic and brand name, our witnesses here argue that pay-
for-delay deals can be pro-competitive because the settlement 
may allow for entry for one to two years before the patent 
expires, and if the case was litigated to completion and the 
generic company lost, it would be five to 10 years until the 
patent expires. What is your response to this criticism?
    Mr. Russo. I think that if that is the case, what is the 
problem with proving it? I mean, obviously there is process 
cost, there is litigation cost and so on, but if there are 
cases where it is clear that it is pro-competitive, we will get 
a generic on the market sooner as a result of one of these 
deals, then that would rebut the presumption.
    However, there do seem to be very strong indications that 
that is not the ordinary course of business when you look at 
these settlements. You know there is the fact that there is the 
73 percent rate that was found in 1992 to 2000 before there was 
this huge increase in the rate of these settlements, the fact 
that it then goes down to about 50 percent once you start 
looking in the period where there were many more of these pay-
for-delay settlements suggests that there may be displacing 
cases where the patent was weak and it would have been 
overturned if it went to trial.
    And similarly, the impact on consumers, the bigger the 
impact on consumers, the bigger potential profits and 
therefore, the bigger carrot that can be dangled in front of 
the generic drug maker in order to make a deal happen. When you 
add that all up, it makes you think that this is dividing the 
market, that it is about giving up monopolistic profits, and 
that consumers are the ones who are losing out.
    If in a particular case there are enough facts and 
circumstances to rebut that and say, no, actually there is 
legitimate uncertainty and we are going to be able to get a 
generic to market sooner than otherwise, I mean, fine. That is 
what the bill allows the company to do and they should be 
allowed to do that. But again, it doesn't seem like that is the 
ordinary course of business here, and that is why the 
presumption is so important to establish.
    Senator Klobuchar. Thank you. Dr. Addanki, do you want to 
respond?
    Dr. Addanki. Thank you. I would like to be very clear that 
it certainly has never been my position that agreements are 
presumptively legal. I am certainly not taking the position and 
I have never taken the position that the Eleventh Circuit got 
it right. Patents are, indeed, probabilistic rights and when 
the validity and infringement of potential--the exclusionary 
part of a patent is being litigated, then it is right to treat 
it as a probabilistic right.
    What I am a little bemused by, I think is the right word, 
is that the same evidence is being interpreted in any number of 
different ways by the same people. The reason I said that a 
presumption will probably operate more like a per se rule, is 
just looking at the evidence that was adduced earlier today 
that in the period where this--before the Eleventh Circuit set 
out its scope of the patent standard, I think we heard from the 
FTC and from Professor Carrier and a bunch of other people that 
there were no agreements with a pay-for-delay provision.
    Now that the Supreme Court has said it is a Rule of Reason 
analysis, essentially undoing the Eleventh Circuit's scope of 
the patent test, why would the very same data not tell us that 
the incidence of pay-for-delay deals would drop sharply. Now if 
you go beyond that and say, I am going to move it away from 
where presumably it was before 2000, 2004 and say, I am going 
to create a presumption, it seems to me it is going to have--it 
is going to overreach in the other direction and have the 
effect of saying don't ever do these.
    That was my point. It seems to me the evidence suggests 
that just putting it back to rule of reason should have--should 
do the trick based on the evidence that is being adduced by my 
colleagues on the panel.
    Senator Klobuchar. What do you think of that, Professor 
Carrier?
    Professor Carrier. So we have to keep in mind that in that 
initial period for part of it it was per se illegal, at least 
under the Cardizem case in the Sixth Circuit, for a brand to 
pay the generic to stay out of the market. And so----
    Senator Klobuchar Than what we have now, after the Supreme 
Court decision.
    Professor Carrier. [continuing]. So right now we have Rule 
of Reason, which is tons better than the scope of the patent 
test, which is basically pure deference and every agreement in 
the world is fine, basically. When we go to Rule of Reason, 
that is a lot better than the scope of the patent test, but 
presumptive illegality maybe gets us a little closer to the 
Cardizem, per se, approach.
    And if for practical reasons we are not willing to go that 
far, at least presumptive illegality pushes us in that 
direction where we will see other types of settlements that are 
good for consumers, rather than brands paying generics to delay 
entering the market.
    Senator Klobuchar. Okay. I know, Mr. Orszag, you question 
the CBO numbers, and I just wanted to ask you about your study, 
the Generic Pharmaceuticals Association study which claimed 
that drug settlements have saved consumers $25.5 billion. Is it 
true that this number doesn't say how many of the settlements 
involved pay-for-delay? I point this out because I don't think 
anyone here would say that settlements of drug patent 
litigation are necessarily bad. It is the pay-for-delay 
settlement that we have concerns about, Senator Grassley and I, 
Senator Vitter and Senator Franken and many of the Senators on 
this Committee, as well as many out there that have been 
mentioned today, the AMA, WalMart, a number of other companies, 
the AARP, the consumer groups.
    And in fact, many more cases settle without pay-for-delay 
than with pay-for-delay. In FY 2012 the FTC found, as we have 
all noted, that 40 pay-for-delay settlements--and 100 of the 
drug settlements did not involve pay-for-delay, while 40 did. 
Can the report accurately be used to defend pay-for-delay 
settlements as saving consumers 25 billion when, in fact, most 
of them appear not to be pay-for-delay settlements?
    Mr. Orszag. I can make this very easy. I had no involvement 
in the study.
    (Laughter.)
    Mr. Orszag. It was, I believe, done by IMS, which is a 
health care consulting firm. So I have no view on it because I 
was not involved in it.
    If I may have one second? There was a comment made earlier 
that there has been an increase in the number of cases at the 
same time that there has been a decrease in the generics 
winning percentage in many respects. We know that the early 
evidence from the FTC suggests, I think it was 73 percent of 
generics won, when they went to the full litigation, to 
judgment between 1992 and 2000. More recently that number is 
much lower.
    I don't think one can take those pieces of evidence, put 
them together, and say that somehow it is telling us something 
about the strength of the patent because of the differences in 
the cases, but if anything it would suggest because the generic 
win rate is much lower now, that the cases that go to 
litigation or the cases that are brought tend to be situations 
where the brand has a stronger patent. But I wouldn't go to the 
step of making that full inference given that there are 
differences in the types of settlements that are out there and 
types of cases that have been brought. And so I worry about 
inferring too much from that piece of empirical evidence.
    Senator Klobuchar. Okay. All right. You want to respond, 
Professor Carrier?
    Professor Carrier. For the IMS study, I completely agree. 
When you take off the table all of the generics that have not 
entered the market because of delayed entry, that is not an 
accurate report. And then finally, we will never agree on a 
single figure for the percentage of patents that are invalid or 
the number of times the generics are successful challenging 
patents.
    But what is clear is that that number is non-trivial, and 
addressing that is what Hatch-Waxman is supposed to be about. 
Hatch-Waxman is supposed to be about--at least paragraph 4 
certifications--challenging invalid or not infringed patents. 
So even if the number is not 73 percent, let's say it is only 
40 percent or 50 percent, those are 40 or 50 percent of the 
cases in which consumers are paying more money and splitting 
pills more than they have to because of an invalid or not 
infringed patent. So even if that number is less than 73 
percent, the point of Hatch-Waxman and what Congress can do is 
to make clear that that sort of delayed entry is not allowed.
    Senator Klobuchar. Okay. Very good. Well, I wanted to thank 
all of you for coming. I also wanted to thank Caroline Holland, 
my Staff Director here, for the Antitrust Subcommittee, who has 
done a great job getting ready for this. She also worked on 
this issue, as you all know, for Senator Kohl, who is now 
happily retired and engaged in his own competitive endeavor 
with the Milwaukee Bucks. We prefer the Timberwolves.
    I want to thank her as well as Craig Colcutt, my counsel, 
and Maria Lavidering, everyone who worked on this. I want to 
also thank Senator Lee's staff, who are also very pleasant to 
work with.
    We have done a number of hearings with, again, I mentioned 
one on patent issue coming up next week--and also Senator 
Grassley's staff for their long-term leadership on this issue 
and work on this issue.
    We will leave the record open for two weeks. I want to 
thank all of you for coming and your well-thought-out 
testimony. I am hopeful we are going to be able to get this 
done. I think the door was opened, and we have come up with 
what I consider a reasonable compromise in this bill, and we 
hope to move forward with this legislation.
    Thank you very much. The hearing is adjourned.
    [Whereupon, at 12:44 p.m., the Subcommittee was adjourned.]



                            A P P E N D I X

              Additional Material Submitted for the Record

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           Prepared Statement of Subcommittee Ranking Member

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                Prepared Statement of Hon. Edith Ramirez


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                Prepared Statement of Robert G. Romasco

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                  Prepared Statement of Diane E. Bieri

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                Prepared Statement of Michael A. Carrier

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                Prepared Statement of Jonathan M. Orszag

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                  Prepared Statement of Michael Russo

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               Prepared Statement of Dr. Sumanth Addanki

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                Miscellaneous Submissions for the Record

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