“Pay for delay” or “reverse payment” agreements are a form of patent dispute settlement agreement in which a generic manufacturer acknowledges the patent of the originator pharmaceutical company and agrees to refrain from marketing its generic product for a specific period of time. In return, the generic companies agree to refrain from going to market until a certain date and receive a consideration in the form of a payment from the originator. The “Pay-for-delay” agreements are “win-win” for the companies that are brand-name pharmaceutical prices stay high, and the brand and generic share the benefits of the brand’s monopoly profits.

These settlements include payment or other consideration from the brand to the generic possibly including: cash; IP licenses; co-promotion, co-development, manufacturing, or API supply agreements.

Statutory framework leading to pay-for-delay settlements
The origins of the case date back to the Drug Price Competition and Patent Term Restoration Act of 1984, which permits a generic manufacturer to file an Abbreviated New Drug Application specifying that the generic product has the same “active ingredients” as the approved brand-name drug and is “biologically equivalent” to it.

To increase price competition and lower pharmaceutical costs to consumers, the Hatch-Waxman Act granted the first generic manufacturer that successfully challenges a patent (such as a patent that covers a particular formulation of a drug rather than the active ingredient itself) an exclusive right to sell the generic drug for 180 days, as well as the roughly 30-month period that subsequent manufacturers would be required to wait before receiving US Food and Drug Administration (FDA) approval for their own generic version of the drug.

The Act also requires the parties to a patent dispute to report settlement terms to the Federal Trade Commission (FTC). The act therefore seeks to facilitate the marketing of generic drugs, reducing health care costs.

Background
In 2002, the FTC issued a study showing that generics prevailed in 73 per cent of the patent litigation ultimately resolved by a court decision between 1992 and June 2002. The FTC’s 2002 study determined, however, that some brand-name and generic pharmaceutical companies had settled their patent litigation through agreements that compensated generics for substantial delays in generic entry.

After that the FTC recommended that Congress should pass legislation to require pharmaceutical companies to file certain agreements with the FTC.

Congress acted on the FTC’s recommendation and Under the Medicare Prescription Drug, Improvement, and Modernization Act of 2003 (the “MMA”), pharmaceutical companies must file certain agreements with the FTC and the Department of Justice within ten days of their execution.

Approach of courts for finding settlements legal:

• Must consider the “scope of the patent.”
• A violation can occur only if exclusionary effect of the agreement exceeds potential exclusionary scope of the patent.
• The exclusionary effect of the agreement exceeds the exclusionary scope of the patent:
• If the patent was obtained by fraud
• If the patent infringement litigation was a sham
• If the agreement covers unrelated or obviously non-infringing products

Developments to be watched
For over a decade, the Federal Trade Commission (FTC) has campaigned to limit these so called "pay for delay" settlements, which reverse the traditional flow of settlement funds from alleged infringer to patentee. The FTC argues that the economies favoring these "reverse payments" make them inherently anticompetitive.

Courts have long grappled with these conflicting policies, and recently, the Eleventh and Third circuits staked positions on opposite’s sides of the discussion.

K-Dur anti-trust litigation
The Third Circuit K-Dur opinion involved settlements between Schering, the NDA holder and patentee, and two potential generic manufacturers of Schering's K-Dur product, Upsher and ESI-Lederle (ESI).

Schering's agreement with Upsher included a non-royalty, non-exclusive license under its patent and an agreement to pay $60 million over three years. In return, Upsher agreed to delay market entry until four years later, albeit before the patent expired. (K-Dur, 686 F.3d at 205-206.)

Schering granted a similar license to ESI to market its generic version of the drug, beginning three years after Upsher's market entry, but also prior to the patent's expiration, in exchange for a total payment of $15 million. (Id. at 206.)

The FTC first opposed those agreements in 2001. But, after a two-month trial, an Administrative Law Judge (ALJ) dismissed the FTC's complaint in an initial decision comprising more than 100 pages and over 400 findings of fact.

In a subsequent hearing, the FTC rejected the ALJ's reasoning and unanimously ruled that the Schering settlements violated antitrust law without considering the inherent strength of the patent-in-suit.

Current decision: On appeal, to the Third Circuit, the FTC maintained that there is no need to consider the merits of the underlying patent. The Third Circuit holding that a reverse settlement arrangement was presumptively illegal under a modified ("quick look") Rule of Reason standard.

In the Third Circuit's analysis, economic realities of the reverse payment settlements make them presumptively anti-competitive and thus, such settlements are prima facie evidence of an unreasonable restraint of trade.

Such evidence, however, can be rebutted by showing that the payment was for a purpose other than delayed entry or offers some pro-competitive benefit.

The Third Circuit test will apply a stricter level of scrutiny to such settlements than the approach used by the Second, Eleventh and Federal Circuits, which have adopted a “scope-of-the-patent” test.  

Under the scope-of-the-patent test, reverse payment settlements do not violate the antitrust laws if:

• the exclusion does not exceed the patent’s scope,
• the patent holder’s claim of infringement was not objectively baseless, and
• the patent was not procured by fraud on the patent and trademark office.

Federal Trade Commission v. Actavis Inc
In FTC v Actavis, Solvay Pharmaceuticals (subsequently acquired by Abbott Laboratories) obtained a patent in 2000 for its brand-name drug AndroGel (a daily testosterone replacement therapy). The patent for the active ingredient, a synthetic testosterone, had already expired decades earlier; Solvay’s patent was for the particular gel formulation of the synthetic hormone. Actavis then filed an FDA application to market a generic form of AndroGel, certifying that its product did not infringe the patent. Although it received FDA approval, Actavis entered into an agreement with Solvay to not bring its generic product to market for a number of years in exchange for millions of dollars.

The FTC sued Solvay and the generics companies in 2009, claiming the settlements violated federal antitrust laws because they prevented the generics manufacturers from competing with Solvay and Actavis agreed to refrain from launching its low-cost generic and to share in Solvay’s large monopoly profits.

The FTC had alleged that because Solvay, according to the FTC, was “not likely to prevail” in the patent litigation, the settlements unlawfully restrained competition by extending a monopoly over AndroGel® that the patent laws did not authorize.

But earlier in 2012, The 11th Circuit dismissed the FTC’s case {FTC v. Watson Pharms. et al., 677 F.3d 1298 (11th Cir. 2012)} and upheld a patentee's payments to generic drug manufacturers in exchange for delayed market entry, applying the "scope of the patent" test.

The Eleventh Circuit's analysis was consistent with the Federal Circuit's 2008 Cipro decision and prior Eleventh and Second Circuit decisions.

• See In re Ciprofloxacin Hydrochloride Antitrust Litig., 544 F.3d 1323, 1336 (Fed. Cir. 2008);
• Andrx Pharms., Inc. v. Elan Corp., PLC, 421 F.3d 1227, 1235 (11th Cir. 2005);
• Schering-Plough Corp. v. FTC, 402 F.3d 1056, 1066 (11th Cir. 2005);
• Valley Drug Co. v. Geneva Pharms., Inc., 344 F.3d 1294, 1306 (11th Cir. 2003);
• In re Tamoxifen Citrate Antitrust Litig., 466 F.3d 187, 212-213 (2d Cir. 2006).

The Supreme Court of the United States has agreed for the first time to hear a case involving the contentious “pay-for-delay” antitrust theory. On Dec 7, 2012, the Supreme Court granted certiorari to review the Eleventh Circuit’s decision in FTC v. Watson Pharmaceuticals.

Supreme Court decision
Justice Stephen Breyer, writing for the 5-3 majority, reversed the appeals court decision. He said the FTC’s complaint should not have been thrown out because a “reverse payment, where large and unjustified, can bring with it the risk of significant anti-competitive effects.”

The FTC argued for a “quick look” approach to settlements. Under that approach, a pay-to-delay agreement is automatically considered anti-competitive, and the defendant must prove otherwise.

Defendant Actavis Inc., which Solvay paid to delay making a generic drug, argued that settlements should be immune from antitrust law scrutiny.

The Supreme Court disagreed with both parties, saying the “rule of reason” approach to antitrust law should be applied to reverse payment settlements. The “rule of reason” doctrine requires an analysis of the circumstances surrounding the activity to determine whether it is anti-competitive.

On June 17, 2013, the U.S. Supreme Court issued its Actavis decision which concluded that lower courts should not automatically dismiss the FTC’s complaints. Rejecting a general rule of legality based on the “scope of patent” test, the U.S. Supreme Court held that a “rule of reason” should apply to pay-for-delay deals.

Thus, the effects of those settlements must be assessed using “traditional antitrust factors” including “likely anti-competitive effects, redeeming virtues, market power, and potentially offsetting legal considerations present in the circumstances, such as those related to patents” (FTC v. Actavis, Inc. 133 S. Ct. 2223 (2013) at 2231).

Conclusion
The Supreme Court’s decision in Actavis was a victory for the FTC in its efforts to stop anticompetitive pay-for-delay deals because it overturned the so-called “scope-of-patent” test, which had been adopted by some courts and virtually immunized pay-for-delay settlements from antitrust scrutiny.

The Federal Trade Commission decided that the Commission will continue to challenge anticompetitive pay-for-delay court settlements in the pharmaceutical industry, and that the recent U.S. Supreme Court decision in FTC v. Actavis “is an important victory for consumers and a vindication of basic antitrust and free market principles.”