Supreme Court to Decide "Pay for Delay" Antitrust Case Involving Generic Drugs

What is the connection between a turducken and generic prescription testosterone replacement drugs?  Antitrust law, of course!  At least according to Judge Carnes' opinion in  FTC v. Watson Pharmaceuticals, 677 F.3d 1298 (11th Cir. 2012), an Eleventh Circuit case affirming the dismissal of the FTC's challenge to a "reverse payment" patent settlement agreement.

On December 7, 2012, the Supreme Court granted certiorari in Watson, making it the first "pay for delay" or "reverse payment" settlement case that the Supreme Court has agreed to hear.  The Courts of Appeal are currently divided on the issue.  The Third Circuit has accepted the FTC's argument that "pay for delay" patent settlement agreements are presumptively anticompetive.  See In re K-Dur Antitrust Litigation, 686 F.3d 197 (3d Cir. 2012).  The Eleventh, Second and Federal Circuits, however, have held that such agreements are lawful so long as the exclusion in the settlement agreement is not beyond the potential "scope of the patent."  See Watson, supra; In re Tamoxifen Citrate Antitrust Litigation, 466 F.3d 187 (2d Cir. 2006); In re Ciprofloxacin Hydrochloride Antitrust Litigation, 544 F.3d 1323 (Fed. Cir. 2008).

These cases arise when a pharmaceutical patent holder sues a generic manufacturer, who is about to enter the market, for patent infringement.  Instead of litigating the validity of the patent to conclusion, however, the parties enter into a settlement agreement in which the patent holder pays the generic manufacturer not to enter the market until sometime shortly before the expiration of the patent.  The FTC estimates that reverse payment settlements cost consumers $3.5 billion per year in the form of higher drug prices.  The FTC claims that such "reverse payments" or "pay for delay" settlement agreements are presumptively anticompetitive, especially when, as alleged in Watson, the patent holder was "unlikely to prevail" in the patent litigation.  Absent the protection of the patent, the "pay for delay" settlement agreement would be a naked restraint on trade.  Thus, the FTC has urged courts to look into the merits of the underlying patent litigation to determine how likely it was that the patent would have been upheld.

In Watson, the Eleventh Circuit rejected the FTC's argument, characterizing it as the "predict-the-likely-outcome-that-never-came approach."  Instead, the Eleventh Circuit reaffirmed its prior holding "that, absent sham litigation or fraud in obtaining the patent, a reverse payment settlement is immune from antitrust attack so long as its anticompetitive effects fall within the scope of the exclusionary potential of the patent."  In other words, the Court would not conduct an after-the-fact examination of the likely success of the underlying patent litigation so long as the litigation was not objectively unreasonable (i.e. a sham).

In rejecting the FTC's argument, Judge Carnes coined a delicious new phrase:

... it is worth emphasizing that what the FTC proposes is that we attempt to decide how some other court in some other case at some other time was likely to have resolved some other claim if it had been pursued to judgment. If we did that we would be deciding a patent case within an antitrust case about the settlement of the patent case, a turducken task.

(What are the chances that Justice Scalia will come up with another roasted meat metaphor in the Supreme Court's decision?)

Judge Carnes' opinion contains a very good summary and description of the incentives at issue in these "pay for delay" settlements, and I highly recommend it to anyone interested in this issue. 

The Supreme Court's decision will have a huge impact on the pharmaceutical industry, as noted in this Bloomberg article.  More than 100 reverse payment settlement agreements have been reached since 2005, involving some of the most popular (and profitable) blockbuster drugs.  As noted by the President of the Generic Pharmaceutical Association: "This case could determine how an entire industry does business because it would dramatically affect the economics of each decision to introduce a generic drug." 

We will be following the developments in this case and will be posting more information about this issue in the near future.