Pay for Delay Update: Supreme Court Enters the Fray

The day of reckoning, or perhaps vindication, could be approaching for those pharmaceutical companies daring enough to enter into reverse payments agreements to settle their patent litigation with generic challengers. On December 5, 2012, the Supreme Court announced that it had granted certiorari in a case brought by the Federal Trade Commission (“FTC”), and that it would decide what level of antitrust scrutiny should be applied by the courts when reviewing these types of agreements.

Background

When a generic drug company challenges the patents of an innovator pharmaceutical company, there are basically only three possible outcomes: (i) the patents are upheld, and the generic challenger is kept off the market until the patents expire, (ii) the patents are overcome, and the generic challenger is allowed to enter the market immediately following Food and Drug Administration approval of the marketing application for the generic drug, or (iii) the companies settle the dispute.

The focal point of any settlement agreement is the date that the generic challenger should be allowed to enter the market. The parties will typically reach an agreement that gives some deference to the patents, and keeps the generic challenger off the market for a limited time period but not the full term of the patents. This aspect of the settlement is called a “patent split,” and the FTC has not challenged the legitimacy of this aspect of any patent settlements.

The FTC becomes concerned when there is some other form of consideration that changes hands in the settlement that arguably sweetens the deal for the generic company, and influences it to stay off the market longer than it would have if a pure patent split was agreed upon by the parties. The FTC has assigned various terms to these deals over the years, including “reverse payment” and “pay-for-delay,” but seems to be using the more neutral terminology “side deal” of late.

The first agreement of this type that the FTC challenged involved a straight payment of cash from the branded drug company to the generic challenger.

The FTC won hands down, with the Sixth Circuit Court of Appeals declaring that it would automatically deem this type of agreement invalid under the antitrust laws without any further analysis of the competitive landscape. The Sixth Circuit declared this type of agreement to be a “per se” violation of the antitrust laws.

Subsequent settlement agreements have been more difficult for the courts to evaluate, involving cooperative relationships between the two companies such as agreements for the generic challenger to manufacture product for the branded drug company, cross-licensing arrangements, and co-promotion agreements. The FTC argues that anything of value that changes hands in a patent settlement other than a pure patent split is per se anticompetitive and should be automatically deemed to violate the antitrust laws, but no court has so far adopted its stringent position.

In fact, courts have mostly been going in a direction opposite from the FTC, with three Circuit Courts of Appeal ruling these agreements are legal, and holding that courts need not consider any competitive harms as long as the parties did not exceed the “scope of the patent.” 3 In practical terms, this has meant that the settlement survives antitrust scrutiny as long as the generic challenger is allowed to enter the market at some point before the patents expire.

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