Supreme Court: 'Pay-for-Delay' Agreements May be Anticompetitive, But Aren't Presumed to be
| Posted: 17 June 2013
By Alexander Gaffney, RF News Editor
In the second potentially landmark decision in as many weeks, the US Supreme Court has ruled that patent use settlements – more commonly referred to as "pay-for-delay" deals or reverse settlement agreements – may be anti-competitive under the law, though they are not presumed to be by default.
The case, known as Federal Trade Commission (FTC) vs. Actavis Pharmaceuticals, concerned the so-called pay-for-delay agreements under which generic and branded companies settle ongoing patent litigation in return for a settlement (generic companies typically get cash payments and a date by which they can enter the market, while branded companies get more time to market a product without competition), which have been under fire by federal regulators for years.
Agencies, and in particular the FTC, call the deals anti-competitive and allege they harm consumers by keeping the prices of existing medications higher than they would be with competition. Companies, and in particular the generic pharmaceutical industry, argue that the agreements generally settle difficult patent issues quickly and cost-effectively, and in many cases allow consumers to access drugs even more quickly than they would otherwise.
2012 saw a flurry of legal activity regarding the settlements, which a recent FTC report notes have been on the rise in the last decade. FTC's report found 140 patent settlements, of which 81 restricted market entry, 19 involved compensation and 40 included both compensation and delayed market entry.
But while FTC managed to claw out some legal victories over the course of the year, they were hardly unanimous or unequivocal, leaving both FTC and industry to look to the Supreme Court for the final word on the subject.
Case: Lead-up Arguments
In the lead-up to the case, both FTC and the generic pharmaceutical industry weighed in on its merits.
In its petition to the court, FTC argued that "Such agreements most closely resemble agreements through which an incumbent firm pays a potential competitor to stay out of the market—a practice ordinarily condemned as a per se violation of Section 1 of the Sherman Act."
"Such agreements between rivals are generally anticompetitive because they directly restrict output and raise price." FTC was seen by many as seeking a paradigm under which it could presumptively find such agreements to be anticompetitive, putting the burden on companies to prove that an agreement would not be in violation of federal competition law.
The Generic Pharmaceutical Association (GPhA), meanwhile, argued in an amicus curiae brief that this presumptive standard advocated for by FTC was "fundamentally flawed" – a "staggering oversimplification" in their words – because it neglected to take into account the possibility that the settlements could actually bring a drug to market sooner than it would reach it otherwise, and that the "win" rate for patent litigation was only around 50%.
"Given the complexities involved, it is hard to imagine a situation less suited to presumptive condemnation under the 'quick look' doctrine," GPhA noted. As Regulatory Focus explained at the time, GPhA appeared to put considerable energies in its amicus petition into attacking the presumptive standard – a decision that seems to have paid off.
The Supreme Court ruled that a lower court had "erred" when it threw out FTC's case, noting that no pay-for-delay case could be immunized from "antitrust attack."
"There is reason for concern that such settlements tend to have significant adverse effects on competition," the court wrote. "It would be incongruous to determine antitrust legality by measuring the settlement’s anticompetitive effects solely against patent law policy, and not against procompetitive antitrust policies as well. Both are relevant in determining the scope of monopoly and antitrust immunity conferred by a patent."
In other words, while there are potential benefits to the settlements, the Court held that there instances in which the agreements would be de facto anticompetitive, and therefore open to antitrust scrutiny under the law. The Supreme Court's decision goes on to note six potential harms raised by settlements that would meet the standards of anticompetitive:
- The absence of competition allows prices to be set by the patentee
- Removal of the first-to-file generic competitor removes an incentive to bring a generic drug to market by eliminating the 180-day exclusivity provision under the Hatch-Waxman Act
- "These anticompetitive consequences will at least sometimes prove unjustified."
- The size of the payments to generic pharmaceutical companies is a "strong indicator" of the market power of competition and the absence thereof.
- An antitrust action is feasible as a "large, unexplained reverse payment can provide a workable surrogate for a patent's weakness."
- Such settlements may still be done without the exchange of money.
A Subtle Victory for the Pharmaceutical Industry?
The pharmaceutical industry may see this nuance as a potential victory in part, as it validates two elements of their arguments as made in their amicus briefs to the court: The agreements can have potential benefits to consumers, and should not be considered to be presumptively anticompetitive.
Thus, it now appears that judges will have to determine each settlement case brought before them based on their respective merits. If, as the pharmaceutical industry has maintained, reverse payment settlements are done in good faith and bring products to market more quickly than they would be otherwise, pharmaceutical manufacturers can expect to find victories through the court system, albeit at the cost of litigation against the FTC.
The Supreme Court's Decision may be found here.