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“Pay-for-Delay” Patent Settlements Coming Under Increased Antitrust Scrutiny

April 1, 2013

On January 17, 2013, the Federal Trade Commission (FTC) issued a report revealing an increase in “pay-for-delay” or “reverse-payment” patent settlements between brand-name pharmaceutical companies and their generic counterparts

These controversial settlements typically involve a brand-name drug manufacturer who is granted a drug patent which gives the company the exclusive right to sell the drug for up to 20 years, depending on the type of drug. The patent is then challenged by a generic rival.  Rather than risk losing their patent monopoly on account of a judgment holding that the patent is invalid or would not be infringed by the generic competitor, the brand-name competitor settles with the generic rival by promising them a percentage of their (often massive) profits in exchange for the generic’s agreement to drop the challenge.  Typically, the generic rival agrees not market an authorized generic drug within the brand-name competitor’s exclusivity period.

The FTC considers such arrangements inherently anticompetitive.  In the eyes of the FTC, reverse payment agreements create a cartel in which potential competitors share the benefit of a monopolistic patent rather than compete with each other on the open market.  According to the FTC, these agreements contribute to the artificial inflation of health costs which delay the entry of generic drugs onto the market by an average of 17 months, costing American consumers $3.5 billion each year.Proponents of the agreements argue that these settlements enhance innovation and encourage competition because brand-name companies often spend billions of dollars to produce a new drug.  As such, the settlements provide a degree of predictability for return on investment rather than embroil the company in lengthy litigation at the expense of future drug development.Three U.S. Courts of Appeals — those for the Second Circuit, Eleventh Circuit, and Federal Circuit — have found these arrangements lawful provided that such agreements stay within the scope of the brand-name drug manufacturer’s exclusivity period.

The Third Circuit, on the other hand, found such arrangements to be presumptively anti-competitive under the “quick look” rule of reason analysis because they closely resemble horizontal agreements to suppress competition that have previously been condemned under antitrust laws.

In December of 2012, the Supreme Court granted certiorari to resolve the circuit split in the case FTC v. Watson Pharmaceuticals.  The issue taken up by the Court is “whether reverse-payment agreements are per se lawful unless the underlying patent litigation was a sham or the patent was obtained by fraud (as the court below held), or instead are presumptively anticompetitive and unlawful (as the Third Circuit has held).”

The American Medical Association (AMA) submitted an amicus brief urging the Supreme Court to overturn the U.S. Courts of Appeals upholding such agreements.  In a released statement, AMA President Jeremy A. Lazarus, M.D. stated that “The AMA believes that pay-for-delay agreements undermine the balance between spurring innovation through the patent system and fostering competition through the development of generic drugs, pay-for-delay must stop to ensure the most cost-effective treatment options are available to patients.”

Also siding with the FTC and AMA is the new chair of the Senate’s antitrust subcommittee Senator Amy Klobuchar (D-Minn.), who reintroduced a bill to eliminate pay-for-delay agreements which keep more affordable generic pharmaceuticals equivalents off the market.

Senator Klobuchar and co-sponsor Senator Chuck Grassley (R-Iowa) introduced similar legislation in 2010 that failed in part because of strong opposition from the drug industry, both branded and generic. The new bill cites the recent FTC report showing that the number of potential pay-for-delay agreements increased more than 40 percent in 2012.

Despite the introduction of this legislation, it is far more likely that the Supreme Court will have the ultimate say about the viability of “pay-for-delay” and “reverse-payment” patent settlements going forward.  Oral argument in FTC v. Watson Pharmaceuticals took place on March 25, 2013.