A nasty taste in the mouth

The US Federal Trade Commission (FTC) has long campaigned for pay-for-delay agreements to be presumed illegal by US courts. The blocking of a generic competitor from entering the market with a low-cost medicine through such deals has long drawn the ire of the regulatory body, which has argued that such deals are an unfair extension of a party’s patent rights.

Patents restrict competition by granting exclusive rights to an inventor or company to commercialise a certain idea: this is the trade-off society has accepted. Inventors are incentivised by the commercial gains with a limited monopoly of 20 years. After the expiration of a patent, market forces facilitate competition between companies over the sale of the product.

But pay-for-delay, or reverse settlement, agreements upset this balance. Put simply, these deals are entered into by branded drug companies and generic manufacturers. Typically, in exchange for dropping a challenge to an existing patent, generic companies are paid by brands to keep their version off the market and often receive exclusive marketing rights later on. The FTC views such deals with suspicion and monitors them vigorously.

In a hearing held by the Senate Judiciary Subcommittee on Antitrust, Competition Policy and Consumer Rights in March, Edith Ramirez, chair of the FTC, affirmed that tackling pay-for-delay agreements remains a high priority for the regulator. She said that “protecting American consumers from anti-competitive conduct by pharmaceutical companies continues to be one of the FTC’s most important responsibilities”.

Pay-for-delay deals are not illegal, but there are restrictions in place that make it difficult for life sciences companies to navigate both competition and patent laws when negotiating reverse settlements. But with such restrictions and an ever vigilant FTC, brand companies and generics are now less inclined to enter into such settlements.

It was perhaps no surprise that the FTC triumphantly declared earlier this year that the number of pay-for-delay agreements had dropped for a third year running. According to its data published in January, the total number of settlements in 2014 was 21, eight fewer than the previous year. In 2012, the number of pay-for-delay deals was 40. Debbie Feinstein, director of the FTC’s bureau of competition, commented that “consumers are better off when there is more competition from lower-priced generic medicines”.

A pivotal moment

While Feinstein also cautioned against drawing too many strong conclusions from the small sample, she noted that the trend was encouraging and she attributed the steady decline to the 2013 US Supreme Court’s decision in FTC v Actavis.

Joe Lavelle, partner at law firm DLA Piper, agrees that the FTC has had a major influence in reducing the number of pay-for-delay agreements. He says that such deals had become increasingly unpopular before the 2013 ruling and that this reduction is “perhaps due in no small part to the FTC”.

“The perception that it is not desirable and carries competitive risk is probably the right assessment. People were trying not to do these deals and find ways to be sure that any payment was for value and that real value was exchanged. The potential to be sued was obvious and counting on a court of appeals somewhere is an expensive bet,” he adds.

The 2013 Supreme Court decision in Actavis stands as a pivotal moment in patent and competition law history. In its 5-3 ruling, the court ruled that such agreements are not “presumptively unlawful”. But Justice Stephen Breyer said that even if an agreement falls within the patent’s “exclusionary potential”, it does not mean that the parties are immune from competition claims.

Courts must apply the “rule of reason” standard in reviewing whether a reverse settlement is anti-competitive, instead of the “quick look” approach. The quick look assessment begins when an observer “with even a rudimentary understanding of economics” can determine that a deal has anti-competitive effects. If a deal is understood to be anti-competitive, the burden of the argument shifts to the defence. Under the rule of reason inquiry, courts assess the intent and motive and determine whether the deal unfairly prohibits competition.

Breyer outlined five factors that courts must consider when determining if a pay-for-delay agreement violates the Sherman Act. These are whether: the deal will adversely affect competition; the anti-competitive effects will prove to be unjustified; the patent owner is likely to inflict harm to the market; a competition claim is more feasible than a lower court believed; and the deal deters legal settlements in the future.

Writing in dissent, Chief Justice John Roberts argued that imposing such restrictions would decrease the number of settlements that generics and brand companies would reach. The restrictions, he argued, would force generic companies to pursue costly litigation due to fears of a deal proving to be in breach of competition laws.

"branded and generic companies are still trying to work out what is acceptable under US law, forcing some to be more creative in their approaches.”

The split in the high court demonstrated the difficulty of assessing whether such agreements are unlawful. Roberts likened the deals to licensing agreements, which occur all the time between companies in the life sciences industries and other sectors and do not typically arouse such controversy.

The conventional pay-for-delay deal follows a generic manufacturer’s filing of an Abbreviated New Drug Application (ANDA). Once an ANDA is filed at the Food and Drug Administration, the branded drug manufacturer can sue for infringement. As soon as the lawsuit is filed, a 30-month stay is triggered, halting the marketing of the generic product. Rather than contest a patent revocation claim, branded drug companies sometimes choose to pay the generic company large sums to withdraw its challenge.

Working around restrictions

Since Actavis, a number pharma companies and generics have become more creative at getting around certain restrictions on pay-for-delay deals.

GSK and Teva entered into an agreement in 2005 that did not involve the transfer of cash. After Teva filed its ANDA, GSK proposed a deal to end litigation and in exchange allow Teva to market a generic version of the epilepsy medicine Lamictal (lamotrigine) before the patent expired. GSK also promised not to sell its own authorised generic once the patent expired, otherwise known as a “no-authorised generic (AG) commitment”.

The US District Court for the District of New Jersey found the deal lawful, despite a challenge from the King Drug Company and the Louisiana Wholesale Drug Co.

However, the US Court of Appeals for the Second Circuit reversed this on appeal, noting that a no-AG agreement “may represent an unusual, unexplained reverse transfer of considerable value from the patentee to the alleged infringer and may therefore give rise to the inference that it is a payment to eliminate the risk of competition”.

A similar divergence between courts over no-AG commitment deals occurred earlier this year. The US Court of Appeals for the First Circuit remanded a case involving Warner Chilcott’s cash-free pay-for-delay settlements with generic companies Lupin and Watson Pharmaceuticals.

The US District Court for the District of Rhode Island rejected claims that the deal delaying generic entry of the Loestrin 24 Fe (ethinyl estradiol, norethindrone and ferrous fumarate) drug was anti-competitive, stating that the Actavis ruling applied only to cash settlements. The first circuit described this as a “narrow construction” of the 2013 ruling and remanded the case.

The FTC complained of another allegedly erroneous interpretation of Actavis by a district court. The US District Court for the Eastern District of Pennsylvania dismissed claims that a deal between GSK and generic companies Teva and Anchen was unlawful because health insurer Aetna failed to show the deal was anti-competitive. The district court added that because the deal included a provision that would void it if the FTC expressed concerns, it was not necessary to conduct a rule of reason inquiry. The FTC has since filed a brief arguing that the assessment was out of step with the Actavis precedent.

Jeremy Oczek, member of law firm Bond, Schoeneck & King, says that the misunderstanding among US courts is down to the ambiguous Supreme Court judgment.

“The Actavis decision left it to district courts to sort out the guidance of the anti-competition analysis. This was one of the common critiques of the Supreme Court’s decision. It told courts to apply the rule of reason and traditional antitrust analysis and notions, but didn’t specifically give a bright line as to what would, or would not, qualify as a legal settlement.

“While the US Court of Appeals for the Third Circuit says the fact that you don’t have money alone doesn’t mean it passes the anti-competition muster, it could be that you have different circuits coming to different conclusions. If that is the case then I would not be surprised in the not-too-distant future that the Supreme Court will look at this issue again,” he adds.

Confusion reigns, but what is the antidote? In September 2015, senators Amy Klobuchar and Chuck Grassley reintroduced the Preserve Access to Affordable Generics Act. The bill, if passed, would require parties entering into pay-for-delay deals to demonstrate that they do not impede competition in the sector.

Even more radical, also in September last year presidential hopeful Bernie Sanders introduced the Prescription Drug Affordability Act, which would ban any pay-for-delay deal outright. While such bills may have stalled due to the elections this year (and with Sanders having higher priorities), it is clear that pay-for-delay deals leave a bad taste in the mouths of law makers.

“We’re in the aftermath of the Actavis decision where branded and generic companies are still trying to work out what is acceptable under US law, forcing some to be more creative in their approaches,” says Oczek.

And Chief Justice Roberts’ message to the district courts tasked with keeping up with these novel attempts to ensure they are not in breach of competition law? “Good luck.”