REMS-Restricted Drug Distribution Programs and the Antitrust Economics of Refusals to Deal with Potential General Competitors

The Food and Drug Administration Amendments Act of 2007 (FDAAA) grants the Food and Drug Administration (FDA) authority to require a Risk Evaluation and Mitigation Strategy (REMS) from drug manufacturers to ensure that a certain drug’s benefits outweigh its risks. Through REMS, the FDA restricts the distribution of drugs with dangerous characteristics, such as high toxicities and severe side effects, to qualified medical professionals. Such restrictions limit the ability of generic drug manufacturers to obtain samples of the REMS-restricted drugs for bioequivalence testing for an Abbreviated New Drug Application (ANDA).Without the ability to demonstrate bioequivalence in the ANDAs, potential generic entrants are unable to obtain FDA approval of drugs that would eventually compete with the REMS drugs. Recently, potential generic entrants have attempted to use the antitrust laws to force manufacturers of REMS-restricted drugs to provide them with samples.The Federal Trade Commission (FTC) has weighed in on behalf of generic entry. The FTC’s recent actions are consistent with its long-standing policy concern regarding restrictions that limit generic drug competition. The FTC’s actions demonstrate its belief that generic entry in the pharmaceutical market will create positive consumer welfare effects. The consumer welfare effects of such generic competition, however, are more complex than merely lowered prices. Indeed, the FTC has downplayed evidence that generic entry restricts drug utilization, chills industry investment, and may have unintended health and safety consequences. Yet, the FTC has continued unabatedly down the path to generic drug nirvana, asserting that new entry by generics produces unambiguously positive effects for consumers. The FTC’s recent intervention on behalf of generic manufacturers that attempt to use federal antitrust laws to gain access to REMSrestricted drugs overlaps with the FDA’s direct oversight of REMSrestricted drugs. So long as original-brand manufacturing companies (brand manufacturers) have unanswered questions related to their liability for the actions of generic companies, they are unwilling to provide potential competitors with product samples, as there is no valid business justification to give up those samples. Rather, REMSrestricted drug makers have many valid business justifications for their refusal to deal with a potential generic manufacturer. This ongoing dispute has spurred private litigation and an FTC investigation. In two private litigation cases, the FTC filed amicus briefs claiming that the antitrust claims under section 2 of the Sherman Act are cognizable and that the court should determine the merits of the claim. To date, no court has addressed the merits of these antitrust claims and details of the FTC’s investigation are unclear. This Article provides an antitrust and economic analysis of a refusal-to-deal claim in the REMS context. The analysis suggests that the antitrust claims involved do not provide a proper justification for a new exception to a competitor’s right to refuse to deal. The FDA and Congress play important roles in the complex regulatory scheme of the U.S. pharmaceutical industry. With so much regulation and oversight, antitrust has little place in ensuring an efficiently functioning market for REMS-restricted pharmaceuticals

REMS-Restricted Drug Distribution Programs and the Antitrust Economics of Refusals to Deal with Potential General Competitors

The Food and Drug Administration Amendments Act of 2007 (FDAAA) grants the Food and Drug Administration (FDA) authority to require a Risk Evaluation and Mitigation Strategy (REMS) from drug manufacturers to ensure that a certain drug’s benefits outweigh its risks. Through REMS, the FDA restricts the distribution of drugs with dangerous characteristics, such as high toxicities and severe side effects, to qualified medical professionals. Such restrictions limit the ability of generic drug manufacturers to obtain samples of the REMS-restricted drugs for bioequivalence testing for an Abbreviated New Drug Application (ANDA).Without the ability to demonstrate bioequivalence in the ANDAs, potential generic entrants are unable to obtain FDA approval of drugs that would eventually compete with the REMS drugs. Recently, potential generic entrants have attempted to use the antitrust laws to force manufacturers of REMS-restricted drugs to provide them with samples.The Federal Trade Commission (FTC) has weighed in on behalf of generic entry. The FTC’s recent actions are consistent with its long-standing policy concern regarding restrictions that limit generic drug competition. The FTC’s actions demonstrate its belief that generic entry in the pharmaceutical market will create positive consumer welfare effects. The consumer welfare effects of such generic competition, however, are more complex than merely lowered prices. Indeed, the FTC has downplayed evidence that generic entry restricts drug utilization, chills industry investment, and may have unintended health and safety consequences. Yet, the FTC has continued unabatedly down the path to generic drug nirvana, asserting that new entry by generics produces unambiguously positive effects for consumers. The FTC’s recent intervention on behalf of generic manufacturers that attempt to use federal antitrust laws to gain access to REMSrestricted drugs overlaps with the FDA’s direct oversight of REMSrestricted drugs. So long as original-brand manufacturing companies (brand manufacturers) have unanswered questions related to their liability for the actions of generic companies, they are unwilling to provide potential competitors with product samples, as there is no valid business justification to give up those samples. Rather, REMSrestricted drug makers have many valid business justifications for their refusal to deal with a potential generic manufacturer. This ongoing dispute has spurred private litigation and an FTC investigation. In two private litigation cases, the FTC filed amicus briefs claiming that the antitrust claims under section 2 of the Sherman Act are cognizable and that the court should determine the merits of the claim. To date, no court has addressed the merits of these antitrust claims and details of the FTC’s investigation are unclear. This Article provides an antitrust and economic analysis of a refusal-to-deal claim in the REMS context. The analysis suggests that the antitrust claims involved do not provide a proper justification for a new exception to a competitor’s right to refuse to deal. The FDA and Congress play important roles in the complex regulatory scheme of the U.S. pharmaceutical industry. With so much regulation and oversight, antitrust has little place in ensuring an efficiently functioning market for REMS-restricted pharmaceuticals

REMS-Restricted Drug Distribution Programs and the Antitrust Economics of Refusals to Deal with Potential General Competitors

The Food and Drug Administration Amendments Act of 2007 (FDAAA) grants the Food and Drug Administration (FDA) authority to require a Risk Evaluation and Mitigation Strategy (REMS) from drug manufacturers to ensure that a certain drug’s benefits outweigh its risks. Through REMS, the FDA restricts the distribution of drugs with dangerous characteristics, such as high toxicities and severe side effects, to qualified medical professionals. Such restrictions limit the ability of generic drug manufacturers to obtain samples of the REMS-restricted drugs for bioequivalence testing for an Abbreviated New Drug Application (ANDA).Without the ability to demonstrate bioequivalence in the ANDAs, potential generic entrants are unable to obtain FDA approval of drugs that would eventually compete with the REMS drugs. Recently, potential generic entrants have attempted to use the antitrust laws to force manufacturers of REMS-restricted drugs to provide them with samples.The Federal Trade Commission (FTC) has weighed in on behalf of generic entry. The FTC’s recent actions are consistent with its long-standing policy concern regarding restrictions that limit generic drug competition. The FTC’s actions demonstrate its belief that generic entry in the pharmaceutical market will create positive consumer welfare effects. The consumer welfare effects of such generic competition, however, are more complex than merely lowered prices. Indeed, the FTC has downplayed evidence that generic entry restricts drug utilization, chills industry investment, and may have unintended health and safety consequences. Yet, the FTC has continued unabatedly down the path to generic drug nirvana, asserting that new entry by generics produces unambiguously positive effects for consumers. The FTC’s recent intervention on behalf of generic manufacturers that attempt to use federal antitrust laws to gain access to REMSrestricted drugs overlaps with the FDA’s direct oversight of REMSrestricted drugs. So long as original-brand manufacturing companies (brand manufacturers) have unanswered questions related to their liability for the actions of generic companies, they are unwilling to provide potential competitors with product samples, as there is no valid business justification to give up those samples. Rather, REMSrestricted drug makers have many valid business justifications for their refusal to deal with a potential generic manufacturer. This ongoing dispute has spurred private litigation and an FTC investigation. In two private litigation cases, the FTC filed amicus briefs claiming that the antitrust claims under section 2 of the Sherman Act are cognizable and that the court should determine the merits of the claim. To date, no court has addressed the merits of these antitrust claims and details of the FTC’s investigation are unclear. This Article provides an antitrust and economic analysis of a refusal-to-deal claim in the REMS context. The analysis suggests that the antitrust claims involved do not provide a proper justification for a new exception to a competitor’s right to refuse to deal. The FDA and Congress play important roles in the complex regulatory scheme of the U.S. pharmaceutical industry. With so much regulation and oversight, antitrust has little place in ensuring an efficiently functioning market for REMS-restricted pharmaceuticals

REMS-Restricted Drug Distribution Programs and the Antitrust Economics of Refusals to Deal with Potential General Competitors

The Food and Drug Administration Amendments Act of 2007 (FDAAA) grants the Food and Drug Administration (FDA) authority to require a Risk Evaluation and Mitigation Strategy (REMS) from drug manufacturers to ensure that a certain drug’s benefits outweigh its risks. Through REMS, the FDA restricts the distribution of drugs with dangerous characteristics, such as high toxicities and severe side effects, to qualified medical professionals. Such restrictions limit the ability of generic drug manufacturers to obtain samples of the REMS-restricted drugs for bioequivalence testing for an Abbreviated New Drug Application (ANDA).Without the ability to demonstrate bioequivalence in the ANDAs, potential generic entrants are unable to obtain FDA approval of drugs that would eventually compete with the REMS drugs. Recently, potential generic entrants have attempted to use the antitrust laws to force manufacturers of REMS-restricted drugs to provide them with samples.The Federal Trade Commission (FTC) has weighed in on behalf of generic entry. The FTC’s recent actions are consistent with its long-standing policy concern regarding restrictions that limit generic drug competition. The FTC’s actions demonstrate its belief that generic entry in the pharmaceutical market will create positive consumer welfare effects. The consumer welfare effects of such generic competition, however, are more complex than merely lowered prices. Indeed, the FTC has downplayed evidence that generic entry restricts drug utilization, chills industry investment, and may have unintended health and safety consequences. Yet, the FTC has continued unabatedly down the path to generic drug nirvana, asserting that new entry by generics produces unambiguously positive effects for consumers. The FTC’s recent intervention on behalf of generic manufacturers that attempt to use federal antitrust laws to gain access to REMSrestricted drugs overlaps with the FDA’s direct oversight of REMSrestricted drugs. So long as original-brand manufacturing companies (brand manufacturers) have unanswered questions related to their liability for the actions of generic companies, they are unwilling to provide potential competitors with product samples, as there is no valid business justification to give up those samples. Rather, REMSrestricted drug makers have many valid business justifications for their refusal to deal with a potential generic manufacturer. This ongoing dispute has spurred private litigation and an FTC investigation. In two private litigation cases, the FTC filed amicus briefs claiming that the antitrust claims under section 2 of the Sherman Act are cognizable and that the court should determine the merits of the claim. To date, no court has addressed the merits of these antitrust claims and details of the FTC’s investigation are unclear. This Article provides an antitrust and economic analysis of a refusal-to-deal claim in the REMS context. The analysis suggests that the antitrust claims involved do not provide a proper justification for a new exception to a competitor’s right to refuse to deal. The FDA and Congress play important roles in the complex regulatory scheme of the U.S. pharmaceutical industry. With so much regulation and oversight, antitrust has little place in ensuring an efficiently functioning market for REMS-restricted pharmaceuticals

Restricted Distribution Contracts and the Opportunistic Pursuit of Treble Damages

The analysis presented in this article addresses the narrow issue of the effects of potential treble damage actions on the behavior of contractually-related manufacturers and distributors. Part II of this article presents the notion of opportunistic behavior, which has influenced much of the economic analysis and the Supreme Court\u27s recent treatment of vertical nonprice restraints. The transformation of the threat of opportunism into socially-wasteful expenditures of resources is also discussed. Part III examines the problematic role of opportunism in the distribution of goods, restricted distribution practices that aim to solve the problem, and the antitrust treatment of such restricted distribution practices. This part argues that, in terms of controlling opportunism, which is the substantive purpose of the practice, the Supreme Court\u27s formalistic distinction between price and nonprice restraints is not useful. Part IV examines the perverse incentives created by the current antitrust treatment of restricted distribution practices. Part IV begins with an analysis of contract law damages and the incentives to engage in opportunistic behavior through inducing breach and collecting damages when stipulated damage clauses provide for damages greater than actual damages. The analysis is then extended to the antitrust treatment of restricted distribution contracts where the threat of a treble damage action is viewed as an implicit government-mandated clause stipulating damages greater than actual damages. Thus, the incentives to engage in opportunistic behavior through the manipulation of restricted distribution contract terms are the same as under other contracts when stipulated damages are greater than actual damages. This part argues that the pursuit of treble damages in restricted distribution cases is another form of opportunistic behavior, and that the threat of such opportunistic behavior increases the costs of procompetitive distribution practices and thus decreases consumer welfare. The opportunistic pursuit of treble damages also explains why distributor and franchisee terminations are among the most actively litigated categories of antitrust actions. Part V discusses the policy implications of the analysis. Although it is clear that the perverse incentives created by the current state of the antitrust law of restricted distribution practices could be eliminated by declaring all such practices to be per se legal, the narrow scope of the analysis does not support such a sweeping recommendation. Instead, Part V recommends that when the true basis of an action is a dispute concerning a voluntary contract between vertically-related parties, the problem of the opportunistic pursuit of treble damages should be minimized by adopting a uniform rule of reason for all restricted distribution practices and by revitalizing the in pari delicto defense to antitrust actions