Pay to Delay? Supreme Court Authorizes Distinct Antitrust Scutiny of Reverse Payments in Pharmaceutical Patent Litigation
The Supreme Court has issued its decision in Federal Trade Commission (FTC) v. Actavis, a case that presents the issue of pay for delay settlements between brand name and generic drug companies - a legal dispute at the intersection of patent, antitrust and food and drug law. Essentially, this case scrutinized a particular form of settlement practice in a patent infringement suit between a brand name drug patent holder and a generic competitor – facilitated by the intricate mechanics of the 1984 Hatch-Waxman Act, which rewired the drug approval process for generic drugs and accelerated the entry of generic drugs into the marketplace. When a generic company prepares for market entry, it may undertake actions which trigger an infringement lawsuit (most commonly in the statute's Paragraph IV certification in which the generic asserts that the brand name patent is either not infringed or is invalid) from the brand name company. In these suits, although a brand name company sues a generic competitor for patent infringement, the litigation flips and the plaintiff (brand name) might decide to pay the defendant (generic) to drop the suit and delay its entry into the market – hence, the "pay for delay" or “reverse payment” settlement. As a result, generic entry is delayed by the deal made with the brand name; in addition, potentially invalid patents are not challenged or litigated for validity. As Justice Breyer explained:
The payment in effect amounts to a purchase by the patentee of the exclusive right to sell its product, a right it already claims but would lose if the patent litigation were to continue and the patent were held invalid or not infringed by the generic product.
These reverse payment settlements have been controversial – so much so that the FTC tracks these settlements, under Congressional mandate (40 reported in 2012). Are these settlements anticompetitive, potentially violating the antitrust laws? The FTC thought so and challenged one of these in FTC v. Actavis (as violating Section 5a of the Federal Trade Commission Act), which made its way to the 11th Circuit – there, the appellate court said that the FTC could not challenge the settlement on antitrust grounds, because the patent holder was not exceeding the effective rights granted by the patent – that is, to exclude competitors. This standard was known as the “scope of the patent” analytic framework – and it’s clearly deferential to reverse payments. Other courts disagreed, notably the 3rd Circuit in the In Re: K-Dur Antitrust Litigation in 2012, which characterized these settlements as presumptively illegal ("prima facie evidence of an unreasonable restraint of trade"). A classic Circuit split developed over the the antitrust analysis applicable to these settlements. The question presented:
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 FTC urged the Court to adopt a presumptive illegality standard (relying on Section 1 of the Sherman Act) – but the Court has now rejected that in favor of the “rule of reason” analysis under antitrust law – essentially, a contextual inquiry that will study the market, product, parties, etc., to analyze the anticompetitive effects of a particular settlement. This is more of a victory than a loss for the FTC and consumers – because the Court has said that reverse payment settlements are not immune to antitrust scrutiny and any distinct allegations of anticompetitive effect must be considered – albeit against the background of a patent-generated dispute. The FTC reacted accordingly:
The Supreme Court’s decision is a significant victory for American consumers, American taxpayers, and free markets. The Court has made it clear that pay-for-delay agreements between brand and generic drug companies are subject to antitrust scrutiny, and it has rejected the attempt by branded and generic companies to effectively immunize these agreements from the antitrust laws. With this finding, the Court has taken a big step toward addressing a problem that has cost Americans $3.5 billion a year in higher drug prices.
The lower courts will have to sort out how to assess an antitrust claim apart from a fully litigated patent infringement suit – and Justice Breyer did not provide much of roadmap to do so (now an antitrust analysis must be performed that need not be dependent on litigating the merits of the underlying patent lawsuit, which may be difficult):
We therefore leave to the lower courts the structuring of the present rule-of-reason antitrust litigation.
Because reverse payment deals delay the entry of generics, it’s been argued that they contravene the spirit of Hatch-Waxman – and now, the Court has authorized the validity of an antitrust inquiry into these settlements. More litigation will follow, and it’s likely that some of these deals will be deemed anticompetitive – and illegal. The result will likely be that brand names will lose a handy mechanism to buy off generic competition. Because generic competition lower drugs prices significantly, consumers are likely to encounter more competitive drug pricing. The Court’s decision may also mean that the appetite for these deals is decreased, as brand name companies consider whether to risk an antitrust challenge to any of these settlements. Alternatively, the deals offered to the generics may not be as lucrative, to avoid triggering the antitrust scrutiny that the Court will now allow.
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