Pay-for-Delay Circuit Split Continues; 31 States File Amicus Brief Arguing Pay-For-Delay is Presumptively Unlawful

Earlier this year, in the case In re K-Dur, the Court of Appeals for the Third Circuit found that reverse settlement agreements, also known as “pay-for delay” arrangements, were prima facie evidence of anticompetitive behavior. The court noted that the presumption that such payments are unreasonable restraints of trade can be rebutted by a showing that the payment either offered a pro-competitive benefit or that the payment was for a purpose other than delayed entry into the market of generics. In re K-Dur was seen as a significant victory for the Federal Trade Commission (FTC) and created a circuit split that continues to widen. Additional information about the case can be found here.

Last week, in the case FTC v. Watson pharmaceuticals Inc. (AndroGel), 31 states filed an amicus brief in another pay-for-delay case, supporting a petition for writ of certiorari of the FTC asking the Supreme Court of the United States to hear the case. As noted by the Third Circuit, the Supreme Court has never determined the legality of reverse settlement payments. The states filing the brief, led by the Attorney General of New York, include: Arizona, Arkansas, California, Colorado, Connecticut, Delaware, Hawaii, Idaho, Illinois, Iowa, Kentucky, Louisiana, Maine, Maryland, Massachusetts, Minnesota, Mississippi, Nevada, New Hampshire, New Mexico, Ohio, Oregon, Pennsylvania, Rhode Island, Tennessee, Utah, Vermont, Washington, West Virginia and Wyoming. In the AndroGel case, the Eleventh Circuit, contrary to the Third Circuit’s opinion, found that pay-for-delay arrangements are lawful unless there is evidence of fraud or sham. The amicus brief of these 31 states argue that pay-for-delay settlements are presumptively unlawful and can “cause real and substantial harm to the States and the public.” The brief’s arguments regarding harm to the States and the public focuses on the high costs of branded pharmaceutical medicines in comparison to generic drugs:

The question presented by this case has enormous practical significance for consumers of pharmaceutical products, for the national economy, and for the States. Total expenditures on prescription drugs in the United States in 2010 were about $259 billion. In New York alone, about $19 billion was spent on prescription drugs in 2011. The States are major participants in the pharmaceutical market, because they expend funds for prescription drugs through Medicaid and other public health programs. Altogether, state Medicaid programs and local health programs across the country spent $6.5 billion for prescription drugs in 2010.

Pay-for-delay settlements harm drug purchasers, both government health-care programs and consumers alike: such settlements delay the availability of generic drugs and keep drug prices artificially high. A 2010 analysis by the FTC found that pay-for-delay settlements cost drug purchasers $3.5 billion annually. FTC, Pay-for-Delay: How Drug Company Pay-Offs Cost Consumers Billions 2 (2010). Another empirical study conducted in 2009 estimated that pay-for-delay settlements had cost consumers at least $16 billion since 1993. C. Scott Hemphill, An Aggregate Approach to Antitrust: Using New Data and Rulemaking to Preserve Competition, 109 Colum. L. Rev. 629, 645, 661 & n.130 (2009). And decisions by the courts of appeals that immunize pay-for-delay settlements from antitrust scrutiny have made pay-for-delay settlements more popular, as the Second Circuit has noted. Arkansas Carpenters, 604 F.3d at 109 (noting that pay-for-delay settlements appeared to have become more common after the Tamoxifen decision). Thus, judicial protection of pay-for-delay settlements has caused significant and direct harms to consumers, and these harms will continue until meaningful antitrust scrutiny of these agreements is restored on a nationwide basis.

When generic competitors successfully challenge a brand-name patent, the benefits for consumers and governments that participate in the health-care market are substantial. In general, the availability of a generic substitute for a popular drug has immediate and significant consequences for drug consumers; the average retail price for a brand-name drug in 2007 was $119, while the average price for a generic was about $34, just over one-fourth of the average brand-name price. (2d Am. Compl. ¶ 28.) A successful challenge to the patent for Prozac, for example, resulted in entry of a generic two and a half years before the patent would have expired, saving consumers about $2.5 billion. (Id. ¶ 30.)

Litigation that challenges patents is an important check on aggressive patent practices, and patent practices are growing only more aggressive. See Hemphill and Sampat, supra, at 640-643 (discussing empirical evidence of a rise in weaker patents). Immunizing pay-for-delay settlements will result in the use of patents to maintain improper monopolies at serious cost to consumers, even when those patents are invalid or not infringed by the generic product that the settlement keeps off the market. As noted above, a significant majority of challenges to drug patents that are litigated to conclusion—about seventy-three percent—result in a victory by the generic. See FTC, Generic Drug Entry Prior to Patent Expiration 16 (2002). (footnotes omitted)

There is a chance that the K-Dur and AndroGel cases could be combined should the Supreme Court grant certiorari. In fact, a number of retail pharmacies have asked the Supreme Court to do so.

There is certainly a clear circuit split regarding the presumptive validity of pay-for-delay agreements. The Third Circuit, Sixth Circuit and DC Circuit have suggested that strict antitrust scrutiny should apply to such settlements, making it more difficult for pay-for-delay arrangements to be upheld. By contrast, the Second Circuit, Eleventh Circuit and Federal Circuit have all applied a “scope of the patent” test which increases the likelihood that pay-for-delay will be upheld. The Supreme Court has yet to weigh in and, given the continued splits (most notably the July decision by the Third Circuit), the Court could find that now is an appropriate time to hear such a case.