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SCOTUS Refuses to Sink Pay-for-Delay Settlements

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By Mari Serebrov
Washington Editor

Tacking toward the middle, the Supreme Court gave the FTC some berth Monday in challenging pay-for-delay settlements between generic and brand drugmakers, but it closed the hatch on a "quick look" approach that would presume all such agreements are unlawful.

While the ruling doesn't toss the settlements overboard, it clears the way for more antitrust challenges, both by the FTC and third parties. It also could churn up some rough seas for existing settlements that may now face potential class-action consumer lawsuits, David Tellekson, a partner at Fenwick & West, told BioWorld Today.

The court's 5-3 opinion, written by Justice Stephen Breyer, holds that the U.S. Court of Appeals for the 11th Circuit was wrong when it affirmed a lower court's dismissal of an FTC challenge to a 2006 settlement between Solvay Pharmaceuticals Inc. and Actavis Inc., Paddock Laboratories Inc. and Par Pharmaceutical Cos. (Justice Samuel Alito recused.) As part of the settlement, which ended patent litigation involving Solvay's Androgel (testosterone gel), Actavis and the other companies agreed to delay the marketing of generic versions of the drug until Aug. 31, 2015 – more than five years before Androgel patent protection ended. (See BioWorld Today, Oct. 8, 2012.)

The agreement also called for Solvay to pay $12 million to Paddock, $60 million to Par and $19 million to $30 million annually, for nine years, to Actavis in exchange for promotional and other services.

Rather than dismissing the FTC's challenge, the lower court should have given the commission the opportunity to prove the settlement violated antitrust law, Breyer wrote for the majority. "There may be justifications for reverse payment that are not the result of having sought or brought about anticompetitive consequences, but that does not justify dismissing the FTC's complaint without examining the potential justifications," the Supreme Court ruled.

No More Quick Looks

The decision settles a circuit split created last year when the U.S. Court of Appeals for the Third Circuit used the quick look approach to determine that pay-for-delay, or reverse payment, settlements are, on their face, anticompetitive, striking down two Merck & Co. Inc. agreements that the 11th Circuit had upheld. (See BioWorld Today, July 18, 2012, and Aug. 28, 2012.)

In reaching its decision, the Third Circuit rejected the quick "scope-of-the-patent" test the other circuits had used to determine that such settlements are legal – so long as they don't delay market access to a generic beyond the patent expiration of the brand drug. Neither approach provided a deep look at the agreement itself.

The Supreme Court threw both approaches out, telling the lower courts to instead apply the "rule of reason." Rather than giving a pay-for-delay settlement a superficial look, courts must dive into the details, weighing the following considerations:

the settlement's potential for genuine adverse effects on competition;

justification for anticompetitive consequences;

the size of the payment as an indicator of the brand drugmaker's power to "work unjustified anticompetitive harm";

use of a large, unjustified payment as a surrogate for a weak patent.

The Supreme Court also created a safe harbor of sorts for other types of patent settlements between drugmakers. "The fact that a large, unjustified reverse payment risks antitrust liability does not prevent litigating parties from settling their lawsuits," it said. As an example, it noted a brand company could simply allow the generic early entry, without putting any money on deck.

The court insisted that the lower courts, in looking at the agreements, don't need to litigate the validity of the challenged patent. They should be able to tell by the size of the settlement payment if the patent is weak, Breyer wrote.

But that raises the question of how big is too big for a payment. The court's only guidance is basically "you'll know it when you see it," Tellekson said.

He and Glenn Engelmann, senior counsel with McDermott Will & Emery, agreed that the size of the payment isn't an adequate measure of the strength of the patent. Often, a significant payment may merely reflect the value of the drug involved, as well as the cost of avoiding lengthy patent litigation, Engelmann told BioWorld Today.

Some drugmakers are so risk averse that they'd rather pay to settle than take even a 5 percent chance that their patents could be overturned, Tellekson said. Because of the other factors that could lead to a larger payment, he thinks lower courts will, indeed, have to look at the validity of the patent.

Future Challenges

Meanwhile, Monday's ruling in FTC v. Actavis Inc. is likely to release a flood of challenges to existing pay-for-delay settlements, Tellekson said, especially since antitrust cases offer the potential for treble damages.

The FTC indicated Monday that it is studying the decision and assessing how best to proceed in other pay-for-delay cases. It also will have to decide if it will continue to press Congress to pass a law to ban the settlements. (See BioWorld Today, March 26, 2013.)

Given the lack of clarity in the ruling, new challenges to existing settlements will probably raise other issues that may end up at the Supreme Court. "There's still a lot to be decided going forward," Engelmann said.

However, there may not be as many new patent challenges in the future. "No matter how you look at it, [the decision] will have a chilling effect on Hatch-Waxman litigation," Tellekson said.

In the past, the likelihood of a pay-for-delay settlement encouraged generic companies to challenge brand patents, knowing they probably wouldn't face full-blown litigation. Now, "merely by settling, you're not going to see certainty anymore," because the settlement itself will be open to litigation, Engelmann noted.

Going forward, Engelmann and Tellekson expect to see fewer settlements that just involve a cash payment and early entry. Instead, payments will need to be tied to manufacturing, distribution or promotional services.

Monday's ruling sends Actavis back to the district court for a full hearing. It also is likely to result in the Supreme Court sending the two Merck cases back to the Third Circuit with instructions to reconsider them in light of Actavis.

The Parsippany, N.J.-based generics giant "will continue to defend the propriety of such settlements against any further legislative or judicial challenges," Actavis President and CEO Paul Bisaro said, noting the "additional and unnecessary administrative burden" the court's ruling has placed on the biopharmaceutical industry.