On December 7, 2012, the Supreme Court of the United States
granted the U.S. government's petition for a writ of certiorari
and agreed to hear a case involving the contentious
"pay-for-delay" antitrust theory applied to certain
patent settlement agreements between branded pharmaceutical
companies and generic drug applicants. Federal Trade
Commission v. Watson Pharmaceuticals Inc., Case No. 12-416
(Dec. 7, 2012).
The Federal Trade Commission (FTC) has opposed pay-for-delay
agreements, also called "reverse payment" settlements, on
antitrust grounds since at least 2001. Until earlier this
year, however, U.S. courts of appeals have repeatedly rejected the
FTC's theory of consumer harm and ruled for defendants in
upholding the agreements. That trend changed in July 2012
when, in a private antitrust challenge to a patent settlement, the
U.S. Court of Appeals for the Third Circuit in In re
K-Dur Antitrust Litigation, adopted the FTC's analysis and
ruled against the defendants. K-Dur reflects a
"split" on the issue between the U.S. Court of Appeals
for the Third and Eleventh Circuits. Two other U.S. Courts of
Appeals—the Second Circuit (in In re Tamoxifen Citrate
Antitrust Litigation) and Federal Circuit (in In re
Ciprofloxacin Hydrochloride Antitrust Litigation)—are
aligned with the 11th Circuit on this issue.
Pay-for-delay cases arise in settlements of patent infringement
suits by branded drug patent-holders against generic drug
applicants that defend on grounds of non-infringement or patent
invalidity. The antitrust claim stems from two provisions
(both necessary to trigger the claim): a restriction on generic
entry until a future date and the brand's payment of money or
other value to the generic, often in the form of an ancillary
agreement such as a supply arrangement or patent license (coined a
"reverse" payment because the plaintiff pays the
defendant). The FTC argues that this paradigm delays
competition because it induces the generic to accept later entry
than it would demand in settlement negotiations absent the payment
or that it would obtain under exclusivity provisions if it
prevailed in the lawsuit. Defendants counter that the
settlements accelerate competition because they enable generic
entry prior to patent expiration.
Faced with these arguments, the 11th, 2d and Federal Circuits
have applied a "scope of the patent" test to resolve
them. Under this test, so long as the underlying infringement
suit is not a sham, an agreement authorizing generic entry prior to
patent expiration—even with a "reverse
payment"—is lawfully within the brand's patent law
right to exclude. The 3d Circuit rejected that test, holding
that it "[e]ntitles the patent-holder to pay its potential
generic competitors not to compete" and instead applied a
rebuttable presumption that the payment is an anticompetitive
quid pro quo for delayed generic entry. It is into
this state of judicial uncertainty that the Supreme Court now
Practice Note: The
"pay-for-delay" controversy is not limited to the United
States. The European Commission (EC) has recently issued
Statements of Objections in its first two investigations into
alleged delayed generic-entry arrangements:
Citalopram (July 25, 2012) and Perindopril (July
30, 2012). The EC's analytical approach to the
competition issues follows that of the FTC. Whether and to
what extent the EC adopts the legal reasoning of the Supreme
Court—no matter which way it resolves the split within U.S.
courts—will be an important development for the
pharmaceutical industry. The extent to which the U.S. and EU
approaches to patent settlements are harmonized will be a
significant factor in how much legal uncertainty pharmaceutical
companies will face when trying to settle cases.
The defendants in K-Dur also sought Supreme Court
review, but the Court is holding that petition pending its ruling
in FTC v. Watson Pharmaceuticals. The Court is
likely to hear oral argument in Watson Pharmaceuticals
during the last two weeks of March 2013.
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On May 5, 2016, the White House issued a report largely piggybacking on a recent U.S. Treasury Department study, on which we previously posted, with a primary focus on the purported misuse and negative impacts of non-compete agreements.
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