Court: ‘Pay to Delay’ Generic Drugs Can Be Illegal

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

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

“This court’s precedents make clear that patent-related settlement agreements can sometimes violate anti-trust law,” said Justice Stephen Breyer, who wrote the court’s opinion.

Reverse 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.

Chief Justice John Roberts, who wrote the dissent for himself and 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 setting, the parties would have to litigate the same issue – the question of patent validity – as part of a defense against an antitrust suit.”

The Justice Department asked the court to rule that all reverse 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.”

Justice Samuel Alito did not take part in the case.

The case is Federal Trade Commission vs. Actavis, Inc., 12-416.