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Justices Free FTC to Fight Pay-for-Delay
The National Law Journal
The U.S. Supreme Court last week breathed new life into a long-running Federal Trade Commission campaign against "pay for delay" agreements between competing brand-name and generic drug manufacturers that put off the production of generics in return for cash.
But in the aftermath of the June 17 ruling in FTC v. Actavis, it is uncertain whether the agency can resume the litigation program at full strength, and also whether drug makers will scuttle the deals or gussy them up to make them more acceptable to lower courts.
"These agreements have been a major priority for the commission for more than a decade," said Jeffrey Brennan, a McDermott Will & Emery partner who worked on the issue as an FTC lawyer starting in 2001. "But until recently, they couldn't get past motions to dismiss. Now they won't get kicked out of court. But they don't have the resources to pursue every one of these agreements. And companies are making risk assessments starting now."
The commission did not get everything it wanted from the high court in the 5-3 ruling in Actavis; the justices did not find that the deals are presumptively illegal under antitrust laws. But the court said the government should be able to make a case that individual settlements are anti-competitive, under a "rule of reason" standard. Justice Samuel Alito Jr. recused in the case for reasons he has not explained.
Justice Stephen Breyer, probably the court's prime antitrust expert, wrote for the majority that the "risk of significant anticompetitive effects" flowing from reverse payments outweigh the desirability of the settlements between drug makers.
That was cause for celebration at the FTC. "The Supreme Court's decision is a significant victory for American consumers, American taxpayers, and free markets," said commission chairwoman Edith Ramirez. "The Court has made it clear that pay-for-delay agreements between brand and generic drug companies are subject to antitrust scrutiny, and it has rejected the attempt by branded and generic companies to effectively immunize these agreements from the antitrust laws."
In a dissent, Chief Justice John Roberts Jr., joined by Justices Antonin Scalia and Clarence Thomas, said the majority's approach will "discourage the settlement of patent litigation" and is not supported by any statute.
As significant a victory as it was for the FTC, the court's compromise gave drug companies — and their lawyers — something to work with if they want to continue making and defending pay-to-delay arrangements, which they insist do not harm consumers. In the opinion, Breyer suggested elements of future deals that might be acceptable, and others that would set off antitrust alarms.
"It clearly maps out how the FTC can use the law to stop these anticompetitive schemes and make sure consumers receive the full benefits of a competitive marketplace," said David Balto, an antitrust practitioner and former FTC official. "At the same time, it permits the broad range of settlements that pose few competitive concerns. All pharmaceutical companies will have to carefully review how they settle patent litigation."
DLA Piper litigation partner Lesli Esposito, also a former FTC lawyer, said, "In practical terms, I think the middle ground struck by the Supreme Court will result in continued litigation on the subject and continued attacks by the FTC. After being handed losses by many of the courts, I think the decision gives the FTC the encouragement they needed to continue to challenge pay-for-delay settlements."
The Supreme Court ruling came at the intersection of patent and antitrust law, made contentious by the inherent conflict between the monopoly that is granted by patents but frowned on by antitrust laws.
In the case before the court, the U.S. Court of Appeals for the Eleventh Circuit upheld a deal between Solvay Pharmaceuticals, maker of AndroGel, a low-testosterone treatment, and generics manufacturers including Actavis Inc.
The generic companies claimed Solvay's patent was invalid and wanted to get generic versions on the market. Under the settlement in 2006, the generics would not go on the market until 2015, more than five years before the patent expired, in return for payments to the generics exceeding $100 million. The FTC challenged the agreement, alleging that the generics abandoned their suits against Solvay's patent in return for a share of Solvay's monopoly profits.
The appeals court ruled against the FTC, finding that any anti-competitive effects of the deal were no greater than those resulting from the exclusive control over the drug conveyed by Solvay's original patent on the drug. In other words, the scope of the patent itself gave the company the same exclusivity over sales of AndroGel that the pay-for-delay deal would, making the deal permissible.
That "scope of the patent" safe haven was the main obstacle thwarting the FTC's efforts to rein in the pay-to-delay agreements. Critics of "scope of the patent" rulings said they effectively immunized the deals from antitrust scrutiny, even when the agreements have all the markings of seriously anti-competitive activity. The Supreme Court agreed with those critics. Breyer said it would be "incongruous" to measure an agreement's legal status under antitrust laws by invoking patent policy but not antitrust law.
"The court pressed the reset button and explained that antitrust laws pertain to these agreements just like everything else," said Columbia Law School professor C. Scott Hemphill, who has written extensively on the subject. "Having a patent is not a get-out-of-jail-free card."
Hemphill said several challenges to pay-for-delay have been in "suspended animation" awaiting the Actavis decision and could now move forward. One case pending in federal court in Philadelphia involves a deal between makers of Provigil, a sleep drug, and four generic makers who kept their products off the market in exchange for more than $200 million. Another suit before the California Supreme Court challenges a similar agreement with makers of the antibiotic Cipro.
Like other experts, Hemphill thinks the Supreme Court's examination of the agreements has already had an impact on the pay-to-delay issue. "A well-counseled drug maker might have seen the handwriting on the wall" based on oral arguments in March, he said. "These settlements may be drying up."
Dechert antitrust partner Steven Bradbury said other companies that still make the agreements have already begun to build in language that gives stronger justifications along the lines suggested by the Actavis decision. "Companies may still succeed," he said.
All of which means that "lawyers will do well" in the aftermath of the decision, said Rutgers School of Law – Camden professor Michael Carrier, an antitrust and patent expert. The ruling, Carrier said, is "a loss for the drug makers who were hoping the court would have slammed the door once and for all on these agreements. That didn't happen. So I think the FTC came out on top." Carrier predicted that "kitchen sink" litigation over pay-to-delay deals will continue.
Tony Mauro can be contacted at firstname.lastname@example.org.