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FTC vows to challenge pay-for-delay court settlements
September 2013
by Lori Lesko  |  Email the author


WASHINGTON, D.C.—One week after the U.S. Supreme Court decision in FTC v. Actavis Inc., which held that "pay-for-delay" settlements between brand and generic drug manufacturers may violate antitrust laws, the Federal Trade Commission (FTC) vowed in subcommittee to continue challenging these high court decisions that some say border on the illegal.
In the wake of the July 17 controversial court decision, the Senate Judiciary Committee's Subcommittee on Antitrust, Competition Policy and Consumer Rights held a hearing to take comments on whether the Senate should go beyond the Supreme Court's Actavis ruling and consider legislation creating a presumption that all these settlements are invalid and should be banned outright.
The Supreme Court ruled that under the "scope-of-the-patent" test, "absent sham (patent) litigation or fraud in obtaining the patent, a reverse [pay-for-delay] payment settlement is immune from antitrust attack so long as its anticompetitive effects fall within the scope of the exclusionary potential of the patent." The court further ruled that pay-for-delay agreements are appropriately subject to "rule-of-reason" scrutiny, the standard applied to most antitrust actions, under which the court considers evidence that the agreement harms consumers.  
Under the Hatch-Waxman Act, a generic drug manufacturer must file an abbreviated new drug application (ANDA) with the U.S. Food and Drug Administration (FDA) in order to introduce a generic version of a branded drug. The act then allows the brand drug manufacturer, when it is protected by a patent, to file a patent infringement suit against the generic manufacturer who filed the ANDA.  
The problem with these pay-for-delay settlements is that the brand manufacturer pays its potential generic competitor to abandon a patent challenge and delay entering the market with a lower-cost generic product. The "relevant competitive harm," according to the Supreme Court in Actavis, is that these agreements will allow the brand manufacturer to "prevent the risk of competition" by splitting monopoly profits with the generic applicant.
Edith Ramirez, chairwoman of the FTC, testified that the court's decision confirms that these settlements harm competition and consumers, promising that the FTC will continue to aggressively prosecute these anticompetitive agreements. She stated her belief that passage of Senate Bill 214 would help the FTC by allowing it to begin its prosecution with a presumption of invalidity, which would reduce FTC time and effort by putting the burden on the brand and generic drug manufacturers to rebut the presumption.  
However, Diane E. Bieri, partner at Arnold & Porter LLP, appearing before the subcommittee on behalf of the Pharmaceutical Research and Manufacturers of America (PhRMA), testified that S. 214's presumption of invalidity is unnecessary and inconsistent with long-standing principles of antitrust and patent law. The concept of a presumption of illegality for certain types of patent settlements ignores the statutory directive that all patents "shall be presumed valid," Bieri testified.  
"An issued patent is presumed valid until it is adjudicated otherwise," she added. "As the Supreme Court recently recognized, in the face of similar arguments in a different context, neither allegations of 'bad' or 'weak' patents, nor purported flaws in the patent system, justify adoption of a legal standard that ignores the Congressional intent of the presumption of patent validity. Quite simply, the Hatch-Waxman Act was intended to give generic drug companies the incentive to challenge patents, which it clearly does. The Supreme Court's decision in Actavis permits an antitrust review of each and every settlement using the traditional antitrust analysis of the rule of reason announced almost a century ago in Chicago Board of Trade. There is no need to replace this approach with an industry-specific presumption of illegality that would further undermine the value of patents."
Committee Chairman Sen. Amy Klobuchar, D- Minn., seemed interested in gaining support for an outright ban of these pay-for-delay agreements, rather than the mere presumption of invalidity contained in S. 214. The commission also pledged to pursue pay-for-delay matters currently in litigation, monitor private lawsuits regarding any such deals, investigate pending pay-for-delay accords, examine new settlements and investigate those that raise anti-competitive concerns.
However, the sheer numbers of pay-for-delay deals are on the rise as the stakes get higher. The FTC had argued before the court that Solvay's pharmaceutical unit, which was acquired by AbbVie in 2010, agreed to pay as much as $30 million annually to Actavis' Watson Pharmaceuticals unit, Paddock Laboratories and Par Pharmaceuticals to delay generic competition for the testosterone replacement therapy AndroGel until 2015. While the decision permitted lawsuits against companies involved in pay-for-delay deals, the Supreme Court declined the FTC's request to declare them illegal.  
A second case, in which the FTC alleged Teva's Cephalon unit paid four drugmakers to postpone the introduction of generic versions of the insomnia drug Provigil (modafinil), was put on hold until the Supreme Court rendered its decision.  
In 2012, the number of potentially anticompetitive patent dispute settlements between branded and generic drug companies increased significantly compared with those in 2011, jumping from 28 to 40, according to a new FTC staff report. The study also found that in nearly half of these settlements, branded firms may have used the promise that they would not develop or market an authorized generic (AG) as a payment to stall generic drug firms from marketing a competing product.
The FTC staff report found that drug companies made 40 potential pay-for-delay deals in 2012. The figure is significantly higher than last year's total of 28 deals, and is the highest of any year since the FTC began collecting data in 2003. Overall, the agreements reached in the latest fiscal year involved 31 different brand-name pharmaceutical products with combined annual U.S. sales of more than $8.3 billion, the FTC reports.
Of the 40 final settlements that potentially involve pay-for-delay, FTC staff found that 19 involved agreements by the branded firm not to market an AG product that would compete with the generic company's product. Such "no-AG " promises are valuable to generic firms, as they significantly reduce the level of competition the new generic entrant will face, allowing the generic firm to secure greater market share and extract higher prices from consumers.
"Sadly, this year's report makes it clear that the problem of pay-for-delay is getting worse, not better," said FTC Chairman Jon Leibowitz. "More and more brand and generic drug companies are engaging in these sweetheart deals, and consumers continue to pay the price. Until this issue is resolved, we will all suffer the consequences of delayed generic entry—higher prices for consumers, businesses and the U.S. taxpayer."
Generic drugs are the key to making medicines affordable for millions of American consumers, and help hold down costs for taxpayer-funded health programs such as Medicare and Medicaid, the FTC reports. Prices for generic drugs are typically 85 percent less than brand-name drugs.
In recent years, certain brand-name companies have paid generic firms to settle their patent challenges and, in turn, delay the introduction of lower-cost medicines. The FTC staff study has found that patent settlements that include a payment delay generic entry by 17 months longer, on average, than those that do not include some form of payment. By delaying the entry of cheaper generics, pay-for-delay deals cost Americans $3.5 billion annually, the FTC reports.
Code: E091325



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