Supreme Court: 'Pay-for-delay' deals between drug companies can sometimes be illegal

WASHINGTON — Deals between pharmaceutical corporations and their generic drug competitors, which government officials say keep cheaper forms of medicine off the market, can sometimes be illegal and therefore can be challenged in court, the Supreme Court said Monday.

The justices voted 5-3 to allow the government to inspect and challenge what it calls "pay-for-delay" deals or "reverse payment settlements."

Drug companies wanted the court to immunize their agreements from possible antitrust attack in court. But "this court's precedents make clear that patent-related settlement agreements can sometimes violate antitrust law," said Justice Stephen Breyer, who wrote the court's opinion.

Reverse payment settlements arise when generic companies file a challenge at the Food and Drug Administration to the patents that give brand-name drugs a 20-year monopoly. The generic drugmakers aim to prove the patent is flawed or otherwise invalid, so they can launch a generic version well before the patent ends.

Brand-name drugmakers then usually sue the generic companies, which sets up what could be years of expensive litigation. When the two sides aren't certain who will win, they often reach a compromise deal that allows the generic company to sell its cheaper copycat drug in a few years — but years before the drug's patent would expire. Often, that settlement comes with a sizable payment from the brand-name company to the generic drugmaker.

Drugmakers say the settlements protect their interests but also benefit consumers by bringing inexpensive copycat medicines to market years earlier than they would arrive in any case generic drugmakers took to trial and lost. But federal officials counter that such deals add billions to the drug bills of American patients and taxpayers, compared with what would happen if the generic companies won the lawsuits and could begin marketing right away.

"This decision makes clear that drug companies can be sued to stop anticompetitive pay-for-delay agreements,' said New York Attorney General Eric T. Schneiderman. " It will be an important weapon in the fight for affordable drug prices and quality healthcare for every citizen."

"The upshot of the decision is that, with the exception of settlements limited to compromises on the patent term itself — with modest payments to avoid the cost of litigation — there will be increased uncertainty about whether particular settlements will pass antitrust scrutiny," Reed said. "This may have a chilling effect on parties' willingness to settle, and thus forego guaranteed early entry by generics."

Generic drugs account for about 80 percent of all American prescriptions for medicines and vaccines, but a far smaller percentage of the $325 billion spent by U.S. consumers on drugs each year. Generics saved American patients, taxpayers and the healthcare system an estimated $193 billion in 2011 alone, according to health data firm IMS Health.

But government officials believe the number of potentially anticompetitive patent settlements is increasing. Pay-for-delay deals increased from 28 to 40 in just the last two fiscal years and the deals in fiscal 2012 covered 31 brand-name pharmaceuticals, Federal Trade Commission officials said. Those had combined annual U.S. sales of more than $8.3 billion.

Chief Justice John Roberts, who wrote the dissent that also included Justices Antonin Scalia and Clarence Thomas, said ordinarily the high court would say that any deal that would end costly and time-consuming litigation would be thought of as a good thing.

"The majority's rule will discourage settlement of patent litigation," Roberts said. "Simply put, there would be no incentive to settle if, immediately after settling, the parties would have to litigate the same issue — the question of patent validity — as part of a defense against an antitrust suit."

The government said Solvay agreed to pay Watson, now called Actavis Inc., an estimated $19 million-$30 million annually. Actavis said the deal, in addition to providing a licensing agreement over Solvay's Androgel patents, compensated Actavis for using its sales force to promote AndroGel to doctors.

The FTC called the deal anticompetitive and sued Actavis. The 11th U.S. Circuit Court of Appeals in Atlanta rejected the government's objections, and the FTC appealed to the Supreme Court.

The Justice Department asked the court to rule that all reverse payment settlements were illegal, but Breyer said that was going too far. The deals' "complexities lead us to conclude that the FTC must prove its case," he said.

Paul Bisaro, president and CEO of Actavis, said he was glad the court did not rule "settlement agreements are presumptively unlawful."

"Rather, the court has established that the 'rule of reason' be applied, and left it to the lower courts to determine if the benefits of the settlement outweigh harm to consumers," Bisaro said. "We believe this decision continues to provide for a lawful and legitimate pathway for resolving patent challenge litigation in a manner that is pro-competitive and beneficial to American consumers."