The FTC's Beef with Pay For Delay: What's the Fuss?

Yesterday, the Supreme Court heard arguments on the matter of pay-for-delay settlements between patent holders and generic firms. The Federal Trade Commission (FTC) hopes to overturn the 11^th federal circuit’s ruling that such settlements are not anti-competitive on the grounds that these settlements amount to a restraint of trade under the commerce clause of the Constitution and are bad for consumers. Actavis, the generic company that filed an ANDA in 2003 to sell its generic version of Solvay Pharmaceutical’s brand AndroGel, is arguing on behalf of companies that see these settlements as avoidant of costly litigation that congest the courts, that the settlements always allow the generic to enter sooner than the patent expires on the branded drug, and are thus beneficial both to consumers and to the companies involved. Since much of the debate centers around this undeniable logic, what is the FTC’s countering rationale?

If the generic drugs come to market sooner than originally planned, what exactly is the FTC so worried about? The issue for the FTC is not related to that simple fact, but to the multiple agreements that a branded company may bring to the negotiating table in seeking just one outcome… to make the first generic enter as late as possible.

Both brand and generic company alike go into the settlement room having assessed the risk of losing or winning the infringement case, and this risk is weighed on either side in determining when the generic can enter the market. For example, if two parties at present think they have a 50% chance of winning the case, and the patent for the branded medicine expires in 2021, then it is most likely that they will settle on an entry date for the generic halfway between now and then, in this case four years from now, in 2017.

What the branded company often does is it will introduce one or more of the following agreements: a supply agreement where the brand company agrees to pay the generics company to supply an active pharmaceutical ingredient (API) to them, a co-promote agreement where the generic agrees to help the brand to co-promote their product in exchange for payment, an agreement where the brand promises not to market its own authorized generic in direct competition with first-filer generic during its 180 day exclusivity period (where no other generic may enter the market), or an innovation agreement where both companies agree to work together to create an entirely new product.

All of these agreements, along with the most obvious one of an outright payment from the brand to the generic company are construed as weakening the generic party’s resolve to enter the market as soon as possible, commensurate with its assessment of litigation risk. These settlement terms, also known as “transfers of value” are quid pro quo for a later entry date, according to the FTC.

“The rationale here is that the generic company, which wants to sell its version of the branded drug as soon as it can to start earning revenues, will be accommodated and maybe less interested or less severe on the argument that it needs to get in as soon as possible if it’s receiving revenue from some other source,” says Jeffrey W. Brennan, partner at McDermott Will & Emery LLP. If the original argument is to push for a generic entry date (as in the example above) of 2017, suddenly they may not push as hard for four years from the time of negotiation; they may think of waiting five years, if they are getting this alternate source of revenue.

Nevertheless, the argument on the other side is something of a no-brainer: in every case, the generics get to market quicker than the patent exclusivity for the brand expires, and that is ultimately pro-consumer. Moreover, while these settlements between branded and generic companies are a cost of doing business within a questionable regulatory framework, the prospect of settling without exorbitant litigation leaves businesses and the courts alike happy with the absence of a lengthy trial.

As debate sizzles and the court’s decision coming to pasture in June, many pundits have begun to weigh in on how the issue of pay-for-delay settlements will be decided. When asked as to the SC’s final ruling on the case, M. Miller Baker , another partner  at McDermott chimed, “I don’t expect the court to be starkly divided in this case-I expect seven or 8 votes, potentially all 9 votes against the FTC here, with Justice Sotomayor as the wild card.”

So, what’s your verdict?