Use Patents, Carve-Outs, and Incentives -- A New Battle in the Drug-Patent Wars

Abstract

The Hatch-Waxman Act of 1984 aims to strike a balance between the innovation incentives provided by patents and the greater consumer access provided by low-cost generic drugs. The legislation, which relies in part on an explicit link between the FDA drug approval process and the U.S. patent system, has been controversial, particularly because of the ways in which firms producing brand-name drugs have exploited that link to delay market entry of generics as long as possible. Voluminous scholarship has focused on so-called "pay-for-delay" settlements of patent litigation between brand name and generic firms.

In contrast, this Perspective uses the lens of a recently decided Supreme Court case, Caraco Pharmaceutical Laboratories v. Novo Nordisk, to examine conflicts between incentives and access in an important new arena -- "carve out" efforts by generic firms to avoid use patents held by brand-name firms. With the number of approvals for drugs that are new chemical compounds dropping significantly in recent years, new uses for existing compounds, and the scope of patent protection for such uses, are increasingly contested territory.

Caraco holds, quite correctly, that Congress intended generics to be able to challenge overly broad claims regarding use patents that brand name firms make to the FDA. However, the litigation-based approach for challenge that Congress has provided is highly inefficient. An administrative approach, in which the FDA might consult with the Patent and Trademark Office, would clearly be more efficient.

Lurking behind these administrative policy issues is an issue of substantive innovation policy. The decision in Caraco, although doctrinally correct, arguably reduces patent-related incentives to test potential new uses rigorously. However, patents are not the only possible incentives. Public funding can play, and indeed already has played, a significant role in rigorous testing of new uses. Going forward, brand-name firms could view Caraco's partial restriction on their proprietary claims as a spur to leverage public-sector investment.

Keywords: Hatch-Waxman, use patents, carve-outs, incentives

JEL Classification: K23, L51, L63, O31, O32, O34, 038