"Pay-for-Delay" Settlements: Antitrust Violation or Proper Exercise of Pharmaceutical Patent Rights?

01/27/2011

How the judiciary and Congress are dealing with the increased use of reverse payment settlements in the pharmaceutical industry.

In recent years, there has been a surge of agreements between pharmaceutical patent holders and generic drug manufacturers in which the market entry of competing generic drugs is delayed by agreement, effectively extending the patent holder's market exclusivity and profit. Known as "reverse payment settlements" or "pay-for-delay" settlements, these arrangements are characterized by payments from pharmaceutical patent holders to generic manufacturers in return for settling challenges to the patent's validity, and for delaying the introduction of generics into the market. As these settlements have become increasingly popular among pharmaceutical companies, they have also become increasingly controversial. The issue is whether reverse payment settlements are illegal restraints of trade under the Sherman Antitrust Act.

The Federal Trade Commission (FTC) has taken a strong stance in both courts and in Congress that reverse payment settlements are per se illegal. As FTC Chairman Jon Leibowitz has written, "One of the Commission's top competition priorities is stopping 'pay-for-delay' agreements between brand-name pharmaceutical companies and generic competitors that delay the entry of lower priced generic drugs into the market." Because of what the FTC calls "the inherently anticompetitive nature of these deals and the enormous consumer harm caused by pay-for-delay," the FTC continues to challenge these arrangements in court and by initiating investigations.

The FTC's opposition to reverse payment settlements has had limited success in the courts. The Circuit Courts of Appeals have split over the antitrust implications of reverse payment settlements. Most courts that have ruled on the issue have held that these settlements are a valid by-product of a patent holder's exclusionary rights, while only the Sixth Circuit has adopted the FTC's per se argument. Ultimately, however, the issue may be resolved not in the courts, but by Congress, which is currently considering legislation that would end the practice of reverse payment settlements.

The resolution of this question involves billions of dollars, and will have far-reaching consequences for drug manufacturers and the public. According to the FTC, "[d]elays in generic competition harm all those who pay for prescription drugs: individual consumers, the federal government (which purchases roughly one-third of all prescriptions), state governments struggling with the cost of providing access to health care, and American businesses striving to compete in a global economy." Reverse payment settlements currently protect at least $20 billion in sales of branded drugs from generic competition, and the FTC estimates that reverse payment settlement cost consumers $3.5 billion a year--or $35 billion over the next 10 years.

This article examines how reverse payment settlements were born out of the Hatch-Waxman framework, and explores how the judiciary and Congress are dealing with the increased use of reverse payment settlements in the pharmaceutical industry.

Excerpted from Business Law Today, ABA Business Law Section, January 27, 2011 © American Bar Association, February 7, 2010. To read the full article, click here.

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