The U.S. Supreme Court has held that the antitrust laws may forbid patent settlements that delay the market entry of generic drugs in return for large payments from manufacturers of competing branded drugs. The Court’s ruling rewarded the dogged efforts of the Federal Trade Commission (FTC) to expose those settlements — which the FTC labels “pay for delay” — to antitrust scrutiny.

Under the Hatch-Waxman Act, manufacturers can bring generic drugs to market through an accelerated approval procedure by the Food and Drug Administration (FDA), if the generic manufacturer asserts that the patent on the branded drug is either invalid or not infringed. Makers of patented drugs, however, can hold up FDA approval of the generic by filing patent infringement litigation. Those infringement cases often are settled when the branded manufacturer pays large sums — sometimes hundreds of millions of dollars — to the generic manufacturer in return for its agreement that it will not bring the generic to market for several years. In the interim, the branded drug manufacturer can earn substantial profits free from generic competition. These settlements often are referred to as “reverse payments” because they are based on payments by the branded drug manufacturer plaintiff to the generic manufacturer defendant, unlike the more common pattern in which defendants pay plaintiffs to settle litigation.

The FTC has argued for a decade that such settlements amounted to noncompetition agreements of the sort long condemned by the antitrust laws. Several federal courts of appeal, however, held that the settlements were lawful so long as their effects fell within the scope of the patent, i.e., that the exclusion of the generic was no greater than what would have resulted anyway from a valid patent.

The Supreme Court, in a 5-3 opinion by Justice Breyer, held that the settlements could not be judged strictly on the basis of the potential scope of the drug patent; that patent, he wrote, “may or may not be valid, and may or may not be infringed.” Instead, the Court said, courts must evaluate such settlements by application of the antitrust rule of reason, balancing the anticompetitive effect of exclusion of the generic product against the benefits of the settlement. Otherwise, the Court said, “payment in return for staying out of the market . . . simply keeps prices at patentee-set levels, potentially producing the full patent-related . . . monopoly return while dividing that return between the challenged patentee and the patent challenger. The patentee and the challenger gain; the consumer loses.”

The Court, however, also rejected the FTC’s argument that reverse payment settlements should be regarded as presumptively unlawful and should be evaluated under a “quick look” approach rather than the rule of reason’s potentially complex weighing of net competitive effects. The Court said that “the likelihood of a reverse payment bringing about anticompetitive effects depends upon its size, its scale in relation to the payor’s anticipated future litigation costs, its independence from other services for which it might represent payment, and the lack of any other convincing justification.”

The case represents the third straight 2013 victory for the FTC in high-profile litigation. Earlier this year, the Supreme Court agreed with the FTC that a general grant of governmental powers to a local hospital authority did not shield an allegedly anticompetitive hospital acquisition from antitrust challenge. Only last month, the U.S. Court of Appeals for the Fourth Circuit upheld the FTC’s conclusion that a state dental board made up almost entirely of dentists could not forbid nondentist providers from performing tooth-whitening services. For more information concerning these cases, please see the February 21, 2013, and June 13, 2013, issues of the Health Law Update.

All three cases have a common core. In each instance, at the FTC’s request, courts rejected attempts to carve out economic preserves in which the antitrust laws would not apply. Moreover, in each instance, the courts appear to have been influenced by the FTC’s arguments that application of the antitrust laws would help reduce healthcare costs.