The drug companies insist they’re doing nothing wrong. They’re merely settling some patent infringement suits.

Many others assert, however, that there’s something fishy about these settlements between the brand name companies that own patents on blockbuster drugs and the generic drug makers that allegedly infringed those patents. Instead of the alleged wrongdoers paying hefty sums to settle the allegations against them (as is typical in any settlement), the money goes the other way. The defendants receive hundreds of millions of dollars from the patentees.

And the defendants agree to postpone making and selling generic versions of the patented drugs.

The patent-owning drug companies are using these settlements to buy off potential competitors and keep them out of the marketplace, according to many academics, consumer advocates and the FTC–among others. And the critics assert this clearly violates federal antitrust law.

The 2nd, 11th and Federal Circuit Courts of Appeal disagree. These courts have held that so-called “reverse payment” (or “pay-for-delay”) settlements are almost completely immune from antitrust scrutiny because they are within the exclusionary zone of the patents involved.

But that may soon change. In one closely watched case, Arkansas Carpenters Health and Welfare Fund v. Bayer AG, a 2nd Circuit panel is re-examining the legality of the reverse payments. The court asked the Justice Department to file an amicus brief on this issue, and the DOJ responded in June with a brief strongly disputing current 2nd Circuit law. “[W]hile not going so far as to advocate a per se unlawful approach, the DOJ went almost that far,” Sean Gates, an antitrust litigator with Morrison & Foerster, wrote in an article the firm released.

This case, at the intersection of patent and antitrust law, could have a major effect on both areas of law, on the pharmaceutical industry and on consumers. “This is the most important antitrust issue in the country today,” says David Balto, antitrust expert and senior fellow at the think tank Center for American Progress.

Ideal Deal

The money at stake is huge. Consider just the Bayer case. In 1997, Bayer AG held a patent on the active ingredient in Ciprofloxacin, the blockbuster antibiotic popularly known as Cipro. The company was earning close to $1 billion per year from the product. But Bayer’s profits were threatened by four companies that wanted to make generic versions of the drug. Bayer had sued the generic manufacturers for patent infringement, and in January 1997, on the eve of trial, the parties settled. Bayer paid the alleged infringers a total of $398 million, and these defendants agreed not to make or sell any generic version of Cipro for six years–until Bayer’s patent expired at the end of 2003.

Such reverse payments are a good deal for the parties involved. The patentee keeps its monopoly on the drug and continues to sell it at far higher price than if there were competition from generics. The alleged infringers receive far more money than they could have earned by selling low-priced generics. Everyone thus earns a great deal more than if there were generic competition. Each day a generic drug is kept off the market can mean millions of dollars in extra profits.

These extra profits, however, come out of the pockets of those who purchase the drugs. Consumers, health insurers, businesses that provide employees with drug coverage and the government are all forced to keep paying monopoly prices for drugs. The FTC has recently estimated that if reverse payments are allowed to continue, these deals will cost consumers and other drug purchasers at least $3.5 billion per year.

Differing Opinions

Initially, courts took a dim view of reverse payments. The 6th Circuit held in a 2003 decision, In re Cardizem CD Antitrust Litigation, that these settlements were per se violations of antitrust law.

More recent appellate decisions, however, have rejected the 6th Circuit’s approach. The 2nd, 11th and Federal circuits have upheld reverse payments, finding that these settlements were within the scope of the legal monopoly given to patent owners.

These later rulings indicate that reverse payments do not violate antitrust law unless the underlying infringement litigation is a sham or the patent at issue was procured by fraud on the patent office. “That’s a very, very high threshold,” says Carole Handler, a patent litigator at Wildman, Harrold, Allen & Dixon.

The later decisions have come under heavy fire from academia. “There has been a steady drumbeat of criticism by antitrust scholars who argue that when you pay off a rival, you’re doing something that clearly violates antitrust law,” says C. Scott Hemphill, who teaches intellectual property and antitrust law at Columbia Law School.

The Federal Trade Commission (FTC), too, takes issue with the recent court rulings. The agency staunchly maintains its position that reverse payments violate antitrust law.

The Justice Department (DOJ) recently entered the fray against reverse payments. Under the Bush administration, the DOJ indicated that these settlements raised serious antitrust concerns, but it rejected the idea that reverse payments were presumptively unlawful. The department has reversed course under President Obama, telling the 2nd Circuit in the Bayer case that reverse payments are resumptively unlawful under Section 1 of the Sherman Antitrust Act. And, according to the DOJ, refuting this presumption is tough whenever a reverse payment is far larger than the patentee’s avoided litigation costs.

About Face

Because of the DOJ’s change of heart, the executive branch has adopted a unified stance against reverse payments. And that, according to some observers, should make drug companies nervous.

“In the past, drug companies took a lot of comfort from the fact that the federal agencies [FTC and DOJ] differed on this,” Hemphill says. “They should be worried, because the ground has shifted.”

And even though the drug companies have three appellate court rulings on their side, the outcome in the Bayer case is far from certain, according to observers.

“The 2nd Circuit’s prior opinion on this issue [In re Tamoxifen (2005), which upheld reverse payments] was well reasoned against the background of other decisions by other courts,” says Martha Gifford, a solo practitioner who specializes in antitrust law. “Whether the 2nd Circuit will now take a quite different view is up in the air.”

No matter how the 2nd Circuit panel rules on the case, an appeal seems likely. The case could even find its way to the Supreme Court–particularly if the 2nd Circuit rejects the current Tamoxifen standard, thus widening the circuit split over reverse payments. “That might be sufficient for the Supreme Court to finally take one of these [reverse payment] cases,” Gifford says.