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Supreme Court Rules Drugmakers Can Be Sued For Pay-To-Delay Deals

After years of anticipation and considerable debate, the US Supreme Court has ruled that drugmakers can face lawsuits over so-called pay-to-delay patent settlements, but that such deals should not necessarily be assumed to be illegal.

In these deals, a brand-name drugmaker pays a settlement to a generic rival in exchange for ending patent litigation and launching a copycat medicine at a future date. Also known as reverse settlements, these emerged as an unintended consequence of the Hatch-Waxman Act that was passed nearly 30 years ago to accelerate access to lower-cost generics.

“This court declines to hold that reverse payment settlement agreements are presumptively unlawful. Courts reviewing such agreements should proceed by applying the ‘rule of reason,’ rather than under a ‘quick look’ approach,” Justice Stephen Breyer wrote in a 5-to-3 decision. “…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” (here is the ruling).

The decision somewhat vindicates the position taken by the US Federal Trade Commission, which has maintained the deals are anti-competitive because generic drugmakers are given incentive to file lawsuits against brand-name rivals and then settle for a quick profit, rather than challenge a patent in court. The FTC argues consumers are prevented from obtaining lower-cost drugs sooner than they would otherwise and, consequently, this practice costs Americans about $3.5 billion annually.

The pharmaceutical industry, however, argues these settlements actually speed lower-cost generics to pharmacy shelves and medicine cabinets, and has warned that outlawing the deals could drastically alter the strategic decisions behind the introduction of many generic drugs. This, in turn, would raise costs to consumers. The issue, though, has divided lower courts for the past few years.

The court reviewed a case dating back to February 2009, when the FTC filed a complaint challenging agreements in which Solvay Pharmaceuticals, which is part of AbbVie and sells AndroGel, paid three generic drugmakers - including Actavis - to delay launching copycat versions. In 2007, AndroGel generated more than $400 million, according to documents filed by the FTC.

As a result of the ruling, which essentially looked to decide the balance between intellectual property rights and anti-trust behavior, generic drugmakers may become more aggressive about proceeding with their copycat versions, which suggests consumers may see lower prices on some medicines. At the same time, still more litigation is expected to ensue as retailers, wholesalers and insurers examine the deals.

“The Supreme Court’s decision is a significant victory for American consumers, American taxpayers and free markets,” says FTC chair Edith Ramirez in a statement. “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… We also are studying the court’s decision and assessing how best to protect consumer interests in other pay-for-delay cases.”

"No other decision this term will have as much impact on consumer's 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," says David Balto, a former FTC policy director. "At the same time, it permits the broad range of settlements that pose few competitive concerns. All pharmaceutical companies will have to carefully review how they settle patent litigation. Settlements are clearly not illegal; it’s the side arrangements that delay generic competition that have been struck down by the court."

Going forward, there will likely be fewer such settlements between brand-name and generic drugmakers, although there is likely to be more litigation about the settlements that already have taken place, according to Scott Hemphill, a professor at Columbia Law School who specializes in anti-trust issues and intellectual property.

“I think it’s a major move by the Supreme Court,” he tells us. “I think we should expect to see an end to these kinds of settlements, but there will be litigation over past deals… We’re likely now to see fights about what the payments were for. In the case the court looked at, the payment was not for delay, but for marketing services. We’ll now have ‘in the weeds’ fights.”

“But most patent litigation is settled without pay-for-delays, so the number this potentially affects is relatively small. They tend to be cases in which the brand patent is weak and most drugs that get pay-to-delay settlements are secondary patents; it’s not a patent on the active ingredient. Although brand-name drugmakers win most of the active ingredient patent suits, they lose most of the secondary patent suits. So we’re seeing payments in cases where the brand-name drugmaker would probably lose” (read more about this here).

In a statement, Actavis ceo expressed mixed feelings. On one hand, generci drugmakers are "pleased" the court signaled that the deals are considered illegal, but also acknowledged dismay about the hurdles going forward. "We believe this decision continues to provide for a lawful and legitimate pathway for resolving patent challenge litigation in a manner that is pro-competitive and beneficial to American consumers,"he says. "The court’s ruling however, does place an additional and unnecessary administrative burden on our industry”

Posted: June 2013