Supreme Courts Hears Oral Arguments on “Pay for Delay” Agreements Between Brand and Generic Drug Manufacturers

On March 25, 2013, the U.S. Supreme Court heard oral arguments on “pay for delay” agreements between brand and generic drug manufacturers, which the FTC has asserted costs consumers $3.5 billion each year. The justices hearing the arguments in Federal Trade Commission v Actavis, No. 12-416, will soon resolve a circuit split and decide whether such agreements are presumptively unlawful.

“Pay for Delay” Agreements

Under “pay for delay” agreements,” branded drug manufacturers pay patent settlements to generic companies in exchange for an agreement not to bring lower-cost alternatives to market, according to the FTC.

Watson

In 2009, the FTC filed a complaint alleging that Solvay Pharmaceuticals, Inc. paid generic drug manufacturers to delay generic competition to Solvay’s AndroGel, a prescription testosterone replacement with annual sales of more than $400 million. The FTC argued that the companies violated antitrust laws when Solvay paid the generic companies millions of dollars annually in exchange for an agreement to abandon their patent challenges and to delay marketing a generic version of the drug until 2015.

The Eleventh Circuit found no antitrust violations in Federal Trade Commission v Watson Pharmaceuticals, holding that, absent sham litigation or fraud in obtaining the patent, a reverse patent settlement is immune from antitrust liability as long as its anticompetitive effects fall within the scope of the exclusionary potential of the patent.

Circuit split. The Supreme Court granted certiorari after a split developed in the circuits over this issue. The Second, Eleventh, and Federal Circuits permit the agreements unless the underlying patent litigation was a sham or the patent was obtained by fraud. The Third Circuit treats reverse-payment agreements as presumptively anticompetitive and unlawful.

FTC’s Oral Argument

Malcolm Stewart from the Office of Solicitor General urged the Supreme Court to reject the “scope of the patent” approach adopted by the Eleventh Circuit in favor of a rule that such agreements are presumptively unlawful. Justice Kennedy expressed concern that the FTC’s test would be the same for a weak or strong patent, which “doesn’t make a lot of sense.” Similarly, Justice Breyer was cynical about per se burden of proof rules “that I have never seen in other antitrust cases,” and Sotomayor stated that it is “rare” for the Court to find a per se antitrust violation, noting that it usually follows the rule of reason. Breyer also noted the “true nightmare” inherent in deciding what payments were for when multiple drugs distribution systems are involved.

Hatch-Waxman Act

Justice Scalia suggested that the problem is with the Hatch-Waxman Act, which, in certain circumstances, protects an applicant whose abbreviated new drug application (ANDA) includes a “paragraph IV” certification challenging patents that may be invalid from competition against subsequent versions of the same drug product for 180 days. According to Scalia, Congress “made a mistake” by not foreseeing that the Hatch-Waxman Act could produce this type of agreement, which, according to the FTC, gives the generic drug manufacturer an incentive to accept something other than competition as a way of earning money. Scalia asserted that, in response to that issue, the FTC has proposed a new interpretation of antitrust law that did not exist before.

Pharmaceutical Companies’ Oral Argument

Jeffrey Weinberger represented the pharmaceutical companies. He argued that if settlement between brand-name and generic drug companies were made more difficult, fewer generics would challenge patents, which would be contrary to the purpose of Hatch-Waxman. He also rejected the suggestion that there was little incentive for a generic manufacturer to challenge a patent after the 180-day exclusivity period created by Hatch-Waxman.

Justices Kennedy and Ginsburg also expressed concern that generic companies earn more by settling the suit than by selling their generic in competition with the brand.