Drugmakers may face ‘pay for delay’ suits, high court rules

Drugmakers can be sued for paying rivals to delay low-cost versions of popular medicines, the U.S. Supreme Court said in a decision that rewrites the rules governing the release of generic drugs.

The 5-3 ruling is largely a victory for the Federal Trade Commission and the Obama administration, reversing a lower-court decision that had effectively insulated pharmaceutical companies from liability. The FTC says those “pay for delay” accords cost drug purchasers as much as $3.5 billion a year. The industry says the deals are legitimate patent settlements.

The ruling may lead to lawsuits by wholesalers, retailers, insurers and antitrust enforcers. Bayer AG, Merck & Co. and Bristol-Myers Squibb Co. units already have faced claims. The FTC says 40 pay-for-delay agreements, also known as reverse payments, were reached in fiscal 2012 alone.

“A reverse payment, where large and unjustified, can bring with it the risk of significant anticompetitive effects,” Justice Stephen Breyer said in the court’s majority opinion.

Breyer stopped short of adopting the FTC’s proposal that such agreements should be presumed anticompetitive. He said the accords should be evaluated under a longstanding antitrust test known as the “rule of reason.”

Pay-for-delay deals 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 before the patent ends.

Brand-name drugmakers then usually sue the generic companies, settings up what can be years of expensive litigation. Indianapolis-based Eli Lilly and Co., for example, waged an expensive legal battle against generic firms to hold on to the rights to cancer drug Gemzar but eventually lost patent protection in 2010, years earlier than it expected.

A federal appeals court had said pharmaceutical companies can’t be sued unless the patent litigation is a sham or a generic-drug maker agrees to delay introduction even after the patent has expired.

“The Supreme Court’s decision is a significant victory for American consumers, American taxpayers, and free markets,” FTC Chairman Edith Ramirez said in a written statement. “The court has made it clear that pay-for-delay agreements between brand and generic drug companies are subject to antitrust scrutiny.”

The brand-name drug industry’s trade group, the Pharmaceutical Research and Manufacturers of America, said the ruling will discourage companies from reaching settlements.

“This will negatively affect patients and discourage investment in future biomedical research,” the Washington, D.C.-based trade association said in a statement.

Generic Pharmaceutical Association CEO Ralph Neas said the ruling “continues to provide a lawful pathway for companies to resolve disputes through settlements.”

The case divided the court along ideological lines, with Justices Anthony Kennedy, Ruth Bader Ginsburg, Sonia Sotomayor and Elena Kagan joining Breyer in the majority.

Chief Justice John Roberts and Justices Antonin Scalia and Clarence Thomas dissented. Roberts said the ruling will discourage settlements.

The ruling “weakens the protections afforded to innovators by patents, frustrates the public policy in favor of settling and likely undermines the very policy it seeks to promote,” Roberts wrote for the group.

Justice Samuel Alito didn’t take part in the case. As is the court’s custom, Alito didn’t give any reasons.

The disputed settlements stem from the economics of the pharmaceutical industry, where companies can reap billions of dollars from blockbuster drugs and then have sales plummet the moment a generic alternative appears.

The FTC says generic drugs sell for an average of 15 percent of the original price, with the brand-name company losing 90 percent of its market share by unit sales. Generics have saved purchasers $1.1 trillion in the last decade, the industry says.

Pharmaceutical patent settlements typically arise just as a generic-drug maker is securing Food and Drug Administration approval to introduce its version of a drug. At that stage, only the brand-name company’s patents stand in the way of competition.

The FTC and its allies say they don’t object to settlements that merely set the date for a generic drug’s entry to the market. They say a payment to the generic-drug maker changes the equation, suggesting the companies are agreeing to delay the generic drug, keep prices high and split what economists call “monopoly profits.”

A 2010 FTC study found that the accords cost purchasers $3.5 billion a year, a figure the drug industry contests.

The high court case centered on Androgel, a treatment for low testosterone in men that is made by Solvay Pharmaceuticals Inc. The FTC sued Solvay and three generic-drug companies, including Actavis Inc.

The FTC says the price for Androgel was poised to fall at least 75 percent in 2007 after the FDA cleared the way for competition. Faced with the prospect of losing $125 million in annual profits, Solvay instead paid the generic-drug makers as much as $42 million a year to delay their competing versions until 2015, the FTC says. At the time, Actavis was known as Watson Pharmaceuticals.

The companies said Solvay, which is now part of AbbVie Inc., had a patent that, if backed by the courts, would have protected the drug an additional five years, until 2020.

The 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,” Actavis CEO Paul Bisaro said in a statement. “The court’s ruling, however, does place an additional and unnecessary administrative burden on our industry.”

AbbVie said in a statement that the company is “confident that the plaintiffs’ claims will again be unsuccessful.”

The companies said the payments were compensation for services to be provided by the generic-drug makers, including Watson’s marketing of Androgel to urologists.

Breyer said that lower courts assessing agreements should consider the size of the payment. He said companies may be able to show that a payment covered only the litigation expenses saved through settlement or was compensation for services performed by the generic-drug company.

“The FTC didn’t get all that it asked for—specifically a holding that a reverse payment to delay generic entry is presumptively illegal,” said Jonathan Jacobson, an antitrust lawyer with Wilson Sonsini Goodrich & Rosati in New York. “But the Supreme Court gave the FTC a lesser, and still significant, win by holding that this type of legal theory is valid.”

The ruling “will lead to a lot more litigation to flesh out the rule-of-reason standard,” said Steve Reed, a partner at Morgan Lewis & Bockius LLP in Philadelphia and former deputy general counsel for the drugmaker Cephalon Inc. He said the decision “will have a chilling effect on patent settlements except those that only involve changes in the time frame of the patent or minor payments to avoid litigation.”

The FTC currently has a patent settlement case against Cephalon, which was put on hold during the Supreme Court fight.

Seth Bloom, the former general counsel for the Senate Antitrust Subcommittee, said drug companies may be able to find ways to work around the decision once the lower courts spell out how it will work in practice.

Rule-of-reason cases are “generally pretty difficult to win,” said Bloom, who is in private practice at Bloom Strategic Counsel in Washington. “In the short run, it may deter some pay-for-delay deals, but in the longer term, I wouldn’t be surprised if the drug companies adjust.”