Pay-for-Delay Tactics of Drug Manufacturers Considered by Supreme Court
The debate over “reverse payment” patent litigation settlements continues following the Supreme Court’s decision in FTC v. Actavis that such agreements should be individually evaluated to determine whether they violate the anti-trust laws.
Reverse payment settlements (aptly referred to as pay-for-delay settlements) arise when a brand drug manufacturer sues a generic drug maker for patent infringement and settles the litigation by paying the generic drug manufacture not to bring the lower-cost generic drug to market for a specified period of time, rather than continue to litigate the matter (a costly undertaking in its own right).
The economic impact of pay-for-delay settlements is a matter of great concern, with opponents (as well as the Federal Trade Commission) arguing that these agreements cost consumers billions of dollars by delaying entry of generic drugs to market. Proponents, however, argue that the arrangements benefit consumers by allowing generic drugs to enter the market prior to the expiration of the brand’s patent. The debate has even prompted calls for new legislation – the Preserve Access to Affordable Generics Act (S. 214) – to establish a presumption that reverse payment settlements are anti-competitive. While the Supreme Court, in its 5 to 3 decision in Actavis, indicated that reverse payment settlements may violate antitrust laws in some cases, the Court declined to find them presumptively unlawful. Instead, the Court held that the “rule of reason” should be applied to determine whether a particular pay-for-delay deal is so “large and unjustified” that it is anti-competitive.
Given the great divide on the issue, Matrix Global Advisors, LLC, a Washington, DC-based economic policy consulting firm, analyzed the economic research provided by both sides of the issue and agreed with the Supreme Court’s “rule of reason” decision – to judge each reverse payment settlement on its own terms – as the most appropriate way to foster competitiveness in the pharmaceutical industry. In the report, Comparing the Economic Impact of “Reverse Payment” Settlements (February 20, 2014), Matrix Global Advisors found that each settlement must be analyzed individually in light of when the generic manufacturer would be likely to enter the market but for the reverse settlement agreement. Proponents and opponents had based their research on an arbitrary generic entry date for all cases, which inherently skews the actual economic impact analysis and any resulting conclusion as to whether it is anti-competitive.
The Supreme Court recognized that not all reverse payments are necessarily improper. For instance, a company with a solid patent may be willing to make a modest payment to a challenger rather than engage in costly patent litigation. On the other hand, companies with questionable patents that pay large settlement sums to keep generics off the market in order to years of reap monopoly profits. With a “rule of reason” test, reverse settlement deals will face increased scrutiny in the courts and, ultimately, may lead to the enactment of new legislation.
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