In a landmark decision for the pharmaceutical industry, the U.S. Supreme Court ruled that the Federal Trade Commission can sue drug makers over potential anticompetitive effects of "pay for delay" patent settlements.

Supreme Court, pay for delay, pay-for-delay deals, generic drug, Federal Trade Commission, FTC, reverse payment settlement, Solvay, Actavis, Watson Pharmaceuticals, Paddock Laboratories, Par Pharmaceutical, AndroGel, generic version, Justice Stephen Breyer, Chief Justice John Roberts, patent law, antitrust law, pharmaceutical market, drug makers, David Balto, Ralph Neas, Generic Pharmaceutical Association, GPhA, Pharmaceutical Research and Manufacturers of America, PhRMA, Mit Spears

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Supreme Court OKs pay-for-delay deal challenges

June 17th, 2013

WASHINGTON – In a landmark decision for the pharmaceutical industry, the U.S. Supreme Court ruled that the Federal Trade Commission can sue drug makers over potential anticompetitive effects of "pay for delay" patent settlements.

The 5-3 vote on Monday, with Justice Samuel Alito recused, enables the FTC to challenge deals in which branded drug manufacturers pay would-be generic competitors millions of dollars to keep their products off the market for a specified time period.

These payments settle disputes over the validity or infringement of the branded drug maker's patent. And because the patent holder is making the payment, rather than the alleged infringer, such agreements are also known as "reverse payment" settlements.

Critics of such deals claim they dilute competition in the pharmaceutical market and cost consumers and other drug purchasers billions of dollars by delaying the introduction of lower-cost generic drugs into the market. Supporters of these agreements say they are legitimate settlements and enable parties to avoid time-consuming, complex and costly patent litigation.

"No other decision this term will have as much impact on consumers' pocketbooks. It clearly maps out how the FTC can use the law to stop these anticompetitive schemes and make sure consumers receive the full benefits of a competitive marketplace," antitrust attorney David Balto, former policy director for the FTC, said in a statement.

"All pharmaceutical companies will have to carefully review how they settle patent litigation," Balto stated. "Settlements are clearly not illegal; it's the side arrangements that delay generic competition that have been struck down by the court."

The case, FTC v. Actavis Inc. et al, spotlighted discrepancies between patent law and antitrust law. In the decision, the Supreme Court negated an Eleventh Circuit Court of Appeals ruling that dismissed an FTC complaint against pay-for-delay deals over generic versions of the drug AndroGel, a treatment for low testosterone. Branded drug maker Solvay Pharmaceuticals (now part of AbbVie) had entered agreements with Watson Pharmaceuticals (now part of Actavis), Paddock Laboratories and Par Pharmaceutical to not bring AndroGel generics to market for a certain time span.

Writing for the majority opinion, Justice Stephen Breyer stated, "In this case, the Eleventh Circuit dismissed a Federal Trade Commission complaint claiming that a particular reverse payment settlement agreement violated the antitrust laws. In doing so, the Circuit stated that a reverse payment settlement agreement generally is 'immune from antitrust attack so long as its anticompetitive effects fall within the scope of the exclusionary potential of the patent.' And since the alleged infringer's promise not to enter the patentee's market expired before the patent's term ended, the Circuit found the agreement legal and dismissed the FTC complaint.

"In our view, however, reverse payment settlements such as the agreement alleged in the complaint before us can sometimes violate the antitrust laws," Breyer said. "We consequently hold that the Eleventh Circuit should have allowed the FTC's lawsuit to proceed."

With the ruling, the case was remanded to the lower court. The Supreme Court, though, didn't rule on the legality of pay-for-delay settlements, leaving that to lower courts to decide on a case-by-case basis.

"The FTC urges us to hold that reverse payment settlement agreements are presumptively unlawful... We decline to do so," Breyer wrote.

"That is because the likelihood of a reverse payment bringing about anticompetitive effects depends upon its size, its scale in relation to the payor's anticipated future litigation costs, its independence from other services for which it might represent payment, and the lack of any other convincing justification. The existence and degree of any anticompetitive consequence may also vary among industries," he explained.

Chief Justice John Roberts, writing the dissenting opinion, said that with the decision, "the Court announces a new rule" with regard to patent litigation.

"The majority today departs from the settled approach separating patent and antitrust law, weakens the protections afforded to innovators by patents, frustrates the public policy in favor of settling, and likely undermines the very policy it seeks to promote by forcing generics who step into the litigation ring to do so without the prospect of cash settlements," Roberts wrote. "I would keep things as they were and not subject basic questions of patent law to an unbounded inquiry under antitrust law, with its treble damages and famously burdensome discovery."

Pharmaceutical industry trade groups had a mixed response to the Supreme Court's decision, in particular pointing to a lack of clarity regarding future patent challenges and settlements.

"We are pleased that the court clearly recognized that settlements require a case-by-case assessment. In establishing the 'rule of reason,' and leaving the decision to lower courts, the ruling continues to provide a lawful pathway for companies to resolve disputes through settlements," Ralph Neas, president and chief executive officer of the Generic Pharmaceutical Association (GPhA), said in a statement. "This preserves all options for generic manufacturers to bring lower-cost generic medicines to patients as soon as possible."

Still, GPhA noted that the ruling will require generic drug makers to assume a greater administrative burden to pursue a patent challenge.

The Pharmaceutical Research and Manufacturers of America (PhRMA), which represents branded drug manufacturers, also stressed that the Supreme Court's ruling leaves a degree of ambiguity.

"We are pleased that the court unanimously rejected the FTC's position that patent settlement agreements between innovator and generic pharmaceutical companies should be viewed as presumptively unlawful under the antitrust laws. In that respect, the court recognized that patent settlements are a vital aspect of a patent owner's ability to protect intellectual property and are common in numerous industries," PhRMA executive vice president and general counsel Mit Spears said in a statement.

"At the same time, we are disappointed that the majority failed to provide clear and unambiguous guidance as to how patent settlements could be structured to avoid antitrust exposure short of litigating a patent dispute to the end," he explained. "Fully litigating patent disputes can result in substantial costs for both innovator and generic companies, create business uncertainty and can result in delayed availability of generic drugs."

Patent settlements increase patient access to lower-priced generics by enabling these medications to hit the market before innovator pharmaceutical company patents expire, according to Spears.

"Unfortunately, the court's decision creates a degree of uncertainty that will make it less likely that innovator pharmaceutical and generic companies will be able to settle these disputes in the future," he stated. "This will negatively affect patients and discourage investment in future biomedical research."

*Editor's Note: Article updated with pharmaceutical industry comment.