Argument preview: Is “pay for delay” of drugs illegal?

At 11 a.m. Monday, the Supreme Court will hold one hour of oral argument on the legality, under antitrust laws, of payments by the maker of a brand-name drug to the maker of a generic substitute to keep the generic off the market temporarily.  In the case of Federal Trade Commission v. Actavis, Inc. (docket 12-416), the FTC will be represented by Deputy Solicitor General Malcolm L. Stewart.  On the drug industry side will be Jeffrey L. Weinberger of the Los Angeles law firm of Munger, Tolles & Olson LLP.   The case will be heard by an eight-member Court: Justice Samuel A. Alito, Jr., is not taking part.  (Before a merger, the case was titled FTC v. Watson Pharmaceuticals, Inc.)

Background

Not many cases that go before the Supreme Court have a more immediate impact on consumers than the drug industry dispute that the Court will review next week: it will affect everyone who gets sick and needs prescription medicine.  But the case also involves one of the most complex federal laws on the books, governing when the maker of a generic drug that is a cheaper substitute for a brand-name drug can be put on the market and prescribed by doctors.

Actually, the dispute has been developing for at least a decade, and a half-dozen attempts were made earlier to get a decision from the Supreme Court, but each time — until now — that effort failed.  The Court stepped in only after one federal appeals court broke ranks with a string of decisions by others.   The Justices, however, chose not to review that particular decision, but instead opted to take on an appeal in a separate case by the federal government — specifically, the Federal Trade Commission.   In that case, the federal appeals court followed the pattern that had previously favored the drug companies, against the FTC’s position.

The basic issue before the Court, for all of the complexity of the laws, can be stated simply: does a brand-name manufacturer, faced with a potential generic competitor, act illegally if it pays money — sometimes a quite sizable sum — to the generic in a deal that postpones for a period of years the substitute version’s marketing.  Popularly, this practice is known as “pay for delay.”  It also has been called a “reverse payment agreement.”   The FTC has been opposed to such deals for years under antitrust law, but until the Obama administration, the Justice Department did not share its opposition; it now does.

One analyst has suggested that the legality of such deals is “the most important unresolved problem in antitrust policy today.”

Whatever the label given to such a payment, the idea behind the practice is to give the owner of the patent on the brand-name version a longer period of time to maintain its sole right to market any version of the particular drug in dispute.   In this case, the drug is marketed under the brand-name AndroGel, developed by a foreign company now headquartered in Bangkok, Thailand, as a treatment for low testosterone in men.  Low testosterone is a condition that can result from advancing age, some types of cancer, diabetes, or AIDS.   There is, apparently, a huge market for such a treatment; seven years after it won Federal Food and Drug Administration approval, the drug’s sales topped $400 million.  AndroGel ads are now seen often on television networks.

The developer of the drug, Besins Healthcare, S.A., gave an exclusive license to market AndroGel in the U.S. to Solvay Pharmaceuticals, Inc.   The basic patents on AndroGel have expired, but Solvay got a patent on formulations of the drug in 2003.  Shortly afterward, two makers of generic drugs — Watson Pharmaceuticals, Inc., and Paddock Laboratories, Inc. — asked the FDA to approve generic versions of the drug.

A generic drug is designed to have the same scientific qualities (and thus the same treatment results) as the brand-name version, but it routinely sells, once on the market, for a significantly lower price.  The brand-name company paid all the costs of developing the drug, so the generic maker does not have to duplicate that expensive undertaking.

When Congress in 1984 made a major change in federal drug law in order to encourage the earlier marketing of generic substitutes, it did so mainly to give consumers the benefit of lower prices for generics.  The experience under that law is that, when a generic hits the market, it rapidly gains favor with consumers and with pharmacies.

Congress’s complex revision in the law basically allows a generic company to prepare its drug for market without any proof that its product will be safe and effective (which a brand-name drug producer must show), but needs to show only that the substitute has the same active ingredients and will be “bioequivalent” — that is, have the same effect on the human body.

Because marketing a substitute for a patented drug might infringe on the patent, the generic maker is obliged to make a claim that its version either won’t infringe on the patent, or that the patent is invalid and cannot be enforced.  In response to that kind of claim, which patent law defines as an act of infringement, the brand-name company then can sue for infringement of its patent rights.   That dispute must be resolved in the courts before the FDA can clear the generic substitute for marketing.

But the legal dispute confronts the brand-name company with a risk — sometimes, a significant one — that its patent may be nullified.  According to the FTC’s prosecution theory, that risk is what leads the brand-name maker to pay the generic competitor in order to persuade it not to enter the market when it might otherwise have done so with FDA’s approval.

In the AndroGel case, the drug’s distributor in the U.S., Solvay, concluded that, if the Watson or Paddock versions went to market, their versions might quickly absorb ninety percent of the sales, putting a huge dent in Solvay’s profits.   The generics were being targeted for the market no later than 2007.   But Solvay, with plans to put a new version on the market by 2015 (without a generic competitor), wanted the generics to stay on the sidelines until 2015.

The FTC would later claim that Solvay got the delay that it wanted by paying Watson somewhere between $19 million and $30 million each year, by paying $2 million a year to Paddock, and another $10 million a year to a third company, Par Pharmaceutical Companies, Inc., which had agreed to be a partner with Paddock in the court case and in later marketing.   The FTC challenged Solvay and the three generics.

This deal, the Commission argued, violated federal antitrust law because it was an agreement not to compete in exchange for money, even though the companies involved contended that it was no more than a fairly standard way of settling a pending court case.    That deal, according to the FTC, would give Solvay a lengthening of its patent monopoly, not because of its patents but because it had paid for the chance.   It sought a court order to block the payments.

The FTC’s case failed, on the same theory that other challenges to “reverse payment agreements” had failed: the theory that such a deal did no more than reduce competition in the same way that patent monopoly rights do.   In fact, the district court ruled in dismissing the FTC challenge, Solvay’s patent was not due to expire until 2020, five years beyond the deal’s entry point for generic substitutes.   If the patent lawsuit was not a sham, then a settlement deal that involved a payment of money was not an antitrust violation, the district court ruled.  The Eleventh Circuit Court, which had ruled the same way in prior cases, upheld that result.

So long as the anti-competitive effects of a settlement deal like this one came within the period that would normally be covered by the patent itself, and so long as the deal was not “a sham” or the result of fraud, it was valid, the Circuit Court concluded.   The FTC asked the Circuit Court to reconsider before an en banc court, and to treat such payment arrangements as illegal under the antitrust laws, unless the companies involved could prove that they were not illegal (an approach of “presumptive illegality”).   The Circuit Court denied further review.

Petition for certiorari

By the time the FTC filed a petition for review by the Supreme Court in October of last year, the Third Circuit Court had ruled — in what is generally known as the “K-Dur Antitrust Litigation” — in favor of the FTC position that “pay-for-delay” arrangements in the drug industry were illegal unless proven otherwise.  And two petitions already had been filed challenging that ruling — one by a brand-name company, Merck & Co., Inc. (docket 12-245), and one by a generic firm, Upshur-Smith Laboratories, Inc. (docket 12-265).

K-Dur is the brand-name for a supplement that is used for treating side effects from the use of high blood pressure medications.  Schering-Plough Corporation (now owned by Merck) won a patent on that drug in 1989.   The Third Circuit ruling in that case, too, was the result of an FTC challenge to a reverse payment agreement.

The FTC, in its petition, argued that the K-Dur case had some “significant defects” in comparison with the Commission’s own appeal as a vehicle for the Court’s review of the antitrust issue.  It thus urged the Court to accept the FTC petition, or, if the Court wished, to consolidate all three for review.

The Court on December 7 took the FTC’s advice, granted that petition, and noted that Justice Alito would not be taking part.  (It gave no reason for Alito’s recusal.)  The other two pay-for-delay cases apparently are being held until the FTC case is resolved, which will probably be before the Court recesses for the summer.

Not surprisingly, the FTC told the Court that the case presented “a recurring question of great economic importance,” noting that the U.S. market for drugs now runs at about $250 billion a year, and that pay-for-delay payments are “becoming increasingly common” among drug companies and have the tendency “to support monopoly pricing” of drugs.

When generics go to market, the petition said, they do so on average at about fifteen percent of the price charged for the brand-name version, and rapidly takes up to ninety percent of the market for that medicine.    Thus, individual consumers pay less, but so do health insurance companies, employers, and taxpayers (in financing the Medicare and Medicaid programs), the FTC said.

It argued that, while the patent law does protect the brand-name company’s patented product (at least until a generic maker can show that the patent is not being infringed, or is invalid), the generic maker of a substitute often can design its product to satisfy the FDA but also in a way that does not infringe.   Generic makers also have a fair chance of defeating a patent, the FTC said, citing data that close to half of all challenged patents are found to be invalid, and data showing that generics prove invalidity of challenged patents seventy-five percent of the time.

If pay-for-delay payments generally are permitted under antitrust law, such agreements will be embraced readily by both brand-name companies and by generic makers, the petition argued.   Everyone involved will make more money by delaying the market entry of generics, the FTC said, but that will be at the expense of consumers and others involved in delivery of medicines to the public.

The Commission also dwelled at length on the split that had lately developed among the Circuit Courts.  It noted that the venue where antitrust lawsuits may be filed is flexible, so that those who want to get pay-for-delay arrangements upheld will pursue their cases in a circuit that is favorable to those payments.  Giving drug companies that opportunity, it argued, “has effectively disabled the FTC from proceeding administratively” against the practice.    Procedural tactics should not determine what is legal about these payments, it asserted.

Each of those sued by the FTC for the AndroGel settlement filed a brief in reaction to the FTC.

Solvay Pharmaceuticals (which is now known as AbbVie Products, a subsidiary of Abbott Laboratories), the U.S. licensee for the brand-name version, agreed that there was “a clear circuit split” and urged the Court to grant review of the FTC petition. The company characterized the dispute over reserve payment agreements as a test of “whether holders of some types of pharmaceutical patents have fewer rights to enforce their patents than do other patentees,” just because they are selling drugs.

The controversy between it and the generics, Solvay said, was a “bona fide dispute” that was settled by agreement “after [three] years of hard-fought litigation,” by allowing the generics to go on the market five years earlier than the patent would have allowed, while the generics would be respecting the patent rights of Solvay until then.   That, it suggested, was essentially an agreement to split the remaining lifespan of the patent.

Just as the FTC had argued that defenders of pay-for-delay agreements could choose to go to a favorable court, Solvay said the FTC now could do the same, at the Third Circuit.   That Circuit’s ruling, it argued, “threatens to slow the development of both innovative products and low-cost generics.”  Moreover, it said, the decision “creates the potential for massive and punitive liability based upon conduct that, when taken, had been sanctioned by the federal courts.”

Watson Pharmaceuticals (now known as Actavis, Inc.) joined in urging the Court to grant the FTC petition, arguing that those involved in “expensive and lengthy patent litigation” need to know on what terms they can settle their dispute and thus avoid the prospect of tripled antitrust damages that could later befall them.   It also contended that the Third Circuit’s approach to the pay-for-delay issue was “ambiguous, incorrect, and burdensome.”

Paddock and Par filed a joint brief in opposition, urging the Court not to grant review of the case.   They made two arguments for that position: the government had switched position from the Justice Department’s former refusal to back up the FTC’s opposition to pay-for-delay payments, and Congress had made several changes in the drug marketing law in 2003 that had, in fact, resulted in a significant reduction in the number of such payment agreements.

There is an “old world” in this field, and a new one, that brief said, and “this case falls on the wrong side of that line….That this case arises under pre-amendment law is reason alone to deny the petition.”   Moreover, that filing contended, the FTC should not be heard to complain about a Circuit Court split, since it “sought to create” that very division.   The Eleventh Circuit decision in this case should be left standing, it said.   This brief, though, said that the Court should take on the Third Circuit ruling, in one of the other pending petitions in the K-Dur litigation.

A group of thirty-one states urged the Court to grant review of the FTC petition.  Trade groups for the brand-name industry and the generic makers, along with the Bayer aspirin company, intellectual property lawyers, and the Washington Legal Foundation, urged the Court to accept the K-Dur case for review.

Briefs on the merits

Having gained review of its petition, the FTC’s brief on the merits moved to a fuller argument of its claim that pay-for-delay agreements should be outlawed, as a presumption, but with those involved allowed to try to make a case for upholding a particular agreement.

The brief stressed that the government was not opposing settlement of patent litigation as a general matter, or even of drug patent lawsuits, but argued that resolving a case with a payment to ensure non-competitive agreement ordinarily would push it beyond the legal line.  A brand-name drug company and a generic maker could legally agree to settle with simply an agreement to let the generic product enter the market sooner than it otherwise might have, and that would be to consumers’ benefit, the brief suggested.

But, it added, when a payment is the means of settlement, that gives the generic a share of the monopoly profits that would co-opt it out of competing, with the result that the patent monopoly is “artificially prolonged.”   Such a payment, according to the FTC, gives the generic company the chance for more money than it could obtain from the brand-name firm even if the generic won their patent dispute.

Nothing in patent law, or in the 1984 law to encourage early entry of generics into the market, validates a system in which brand-name companies could buy off their would-be competitors, the FTC argued.

The brief suggested a mode of review for courts to apply if a “pay for delay” is made and then challenged, and the drug companies involved seek to rebut the claim of illegality.   In antitrust parlance, the FTC said that courts should use a “rule-of-reason analysis,” and give the agreement a “quick look.”   That approach puts the burden on the drug companies to show that the payment was actually made, not to suppress competition, but for some specific property or services unrelated to competition.   The brand-name company might also be able to justify it, the brief suggested, by showing that the payment approximated the litigation costs that the brand-name company could have faced without a settlement.

It argued that the approach taken by Circuit Courts that upheld “pay for delay” on “scope-of-the-patent” analysis does not give sufficient attention to the anti-competitive effect of a pay-for-delay settlement.

In an attempt to counter the argument that the FTC was singling out the holders of drug patents for less favorable treatment than other patent owners, the Commission brief said that the concept of reverse payments appears to be “essentially unknown” outside of the drug industry.

The bottom line of the Commission’s brief is that this particular deal, the AndroGel pay-for-delay agreement, would not satisfy a “quick look” approach, because that was simply a pact to keep the generic manufacturers out of the market “for the next nine years.”  The FTC, it asserted, has successfully made its case against this settlement.

The three briefs on the merits — by Solvay, Actavis and the Paddock/Par combine — have several common themes, but the most aggressive of those is an assertion that the FTC is simply overlooking the fact that there is a patent at issue, and patents by their very nature allow for exclusion of would-be competitors.  “Critical to this inquiry,” as Actavis’ brief put it, “is the presence of the patent, which is presumed to be valid and grants its holder the lawful right to exclude competition within its scope.”

The FTC is accused in these filings of treating a patent as if it were of questionable validity — “probabilistic,” as one of these briefs phrased it — and seeking to put on patent owners the legal duty of justifying their patent’s legal soundness in virtually any case where litigation, though legitimate, was settled with a payment of any kind.

The three briefs also mounted a sharp assault on the FTC’s suggestion of a “quick look” approach, arguing that it is simply unworkable, and that the Supreme Court has seldom allowed that approach to be used to actually nullify an entire category of commercial arrangements, using it instead only on a restraint-by-restraint basis.  In addition, the briefs said that the use of “quick look” in the generic drug context would necessarily draw courts into having to judge the validity of the underlying patent, since a patent settlement would never be anti-competitive if the patent were deemed valid.

The briefs also suggested that the Court has allowed the use of the “quick look” mode of analysis only in situations where extended court experience shows that a particular commercial arrangement would almost always be anti-competitive in its effect.  The government has not remotely met its burden of showing such an experience with drug patent settlements, the industry briefs asserted.

The Paddock/Par merits brief contended that the FTC was trying to pull the Court away from the traditional antitrust approach, which focuses on whether a particular restraint is illegal.  What the FTC proposes instead, that document said, was a novel focus on what “consideration” led the parties to their settlement.  “In 120 years,” that brief said, “no antitrust rule has turned on appraising parties’ consideration.”  Putting the focus on that, it added, may have the effect of nullifying settlements depending upon whether the amount of money that changes hands was “minimal or substantial.”

All of those briefs vigorously defend the scope-of-the-patent approach to drug patent settlements.  Actavis’s brief contended that “this approach is mandated by antitrust law, patent law, and the law of settlement.”

A drug patent settlement, the industry briefs said, can be subjected to antitrust scrutiny, but only where the underlying patent lawsuit was merely a sham, or whether the brand-name company had obtained the patent by fraud.

The FTC is backed in the case by a group of states, their number now swelled to thirty-six, plus Washington, D.C., and Puerto Rico; by Congressman Henry A. Waxman, California Democrat, one of the chief authors of the 1984 generic drug law; a group of chain store drug retailers and their trade association; professors of law, economics, and business along with the American Antitrust Institute; health insurers; patients’ and doctors’ advocacy groups, and the Public Patent Foundation.

Numerically, the list of amici on the side of the drug industry is longer.  Besides the trade groups, intellectual property lawyers, conservative advocacy groups, and the Bayer aspirin company, all of whom supported the companies at the petition stage, they have picked up the support of the firms involved in the K-Dur case, small and medium-sized pharmaceutical companies, several coalitions of professors, and a group of antitrust economists.

Analysis

By now, the Supreme Court almost certainly has a full appreciation of what is at stake in this controversy, having been offered a chance to rule on it multiple times before.   That is not to say, of course, that it has already begun to make up its mind: this is the first time it has taken a close look to sort out the mix of antitrust, patent and generic drug law that the pay-for-delay concept has created.  But this is not a strange field for most of the Justices; they probably have given it considerable thought already.

It does appear that, if the Court is not inclined to make a fresh start on antitrust principles, the FTC’s appeal may be in some trouble.  While the Commission has attempted to fit into argument into accepted modes of antitrust analysis, the drug companies’ lawyers have done a creditable job of portraying the agency as pressing the Court to embrace novelty in order to put reverse payment settlements in deep legal doubt.  They also have made strong points about the FTC’s supposed attempt to belittle the rights that go with a valid patent, and about the FTC’s supposed discrediting of the virtue of settling lawsuits.

At the same time, the FTC has laid out, in legal principle and economic pragmatism, a strong case for treating drug patent settlements as a stand-alone phenomenon that may well deserve its own antitrust approach.   It is the FTC’s primary task to foster competition, and it has the 1984 law’s push for competition by makers of low-cost medicines as a compelling argument on its side.

The Commission, though, may well face rigorous questioning about whether it has met the test for applying the “quick look” approach in this special context, and about how it would work in that context.   The briefs of the industry have taken the FTC seriously to task on the workability of using that mode of analysis.

For their part, the brand-name and generic companies may face tough questioning, at least from the more liberal Justices, about the impact on consumers of delaying their access to low-cost drugs — something to which Congress thought, as long as twenty-nine years ago, they were entitled.  There is no doubt that Congress did want to speed affordable medicines to market, and the pay-for-delay mechanism does not seem geared to that.

If there is a notable weakness in the industry’s side of this case, it is that this Court does have its doubts about the soundness of a patent system that may, perhaps too often, grant monopolies.   The briefs of the brand-name company and its settlement partners among the generic makers depend very heavily upon the Justices having a keen desire to protect exclusionary efforts by patent holders, and that simply may not exist.

The case, as indicated earlier, will be heard by an eight-member Court, without Justuce Alito.  That raises the possibility, though not predictable, that the other Justices will split four-four.  If that happens, the Third Circuit ruling accepting the FTC’s view will be upheld without an opinion by the Justices, and thus will govern that case only.  It will not set a precedent binding on any other federal court or any other case outside of the Third Circuit. The Court, however, would have the option then of taking up one of the K-Dur cases, provided that Justice Alito would not again have to recuse.

(Disclosure: Some attorneys who are participating in this case have various roles with this blog.  The author of this post, however, operates independently of those attorneys’ professional practice.)