Pay-for-Delay Settlements: When Patent Principles Trump Antitrust Concerns . . . And Should They?
Pay-for-delay lives on. According to the Blog of Legal Times, ethically questionable settlement agreements between generic and brand-name pharmaceutical companies, or “pay-for-delay” settlements, are alive and well. What is fascinating is that these deals would be completely illegal as violating antitrust law, were it not for the fact that patent terms were involved, thus highlighting the stark contrast between the two conflicting principles of our law. The FTC agrees, and Congress should act and pass a proposed bill that would end this anticompetitive practice.
Basically, in patent litigation between a brand-name drug innovator and a follow-on generic manufacturer, the generic company will agree to “sit out” and not produce their generic version, even if the patent the innovator pharma company holds is weak, could be invalidated, or the generic drug might not even infringe.
To explain: in a free market, the price of goods is constrained by supply and demand, as well as the cost of manufacture and competition. In order to turn a profit in a competitive market, the manufacturer needs to charge more than the cost of manufacture, but with a large number of competitors, there is often a “race to the bottom,” where competing companies lower prices to lure customers away from competitors. Thus, companies’ profits suffer, because they are forced to compete with competitors who can underbid them.
In a constrained market, however, where there are less competitors, prices can rise higher, and are constrained only by how much the market will pay for the goods. In a patented, regulated market like pharmaceuticals, where the brand-name company is often the only good in the market for a particular need, the price of each good will generally be the maximum amount that many people will pay, thus maximizing profits for the company.
For example: If a drug costs $1 to make, but the drug is patent-protected and the only drug that has received premarket approval, and individuals will pay up to $10 for it, the cost will be fixed at $10, because there is no competition. However, the introduction of competition in the form of generics will quickly lower the cost of the drug to at-or-near the cost of manufacture, or say, $2. For the generic companies, it all realized profit, as they undercut the brand-name manufacturer.
Pay-for-delay settlements are when the generic and the brand name company sit down and agree: The generic company will stay out of the market, the brand name will continue to charge $10, and the brand name will pay you $4. We get $6, you get $4. Basically, it is authorized collusion.
It is judicially allowed because, as the FTC writes: “Due regard for patent rights is . . . a fundamental premise of the Hatch-Waxman Act’s framework.” See, for instance, the Sixth Circuit’s decision in In re Cardizem CD Antitrust Litig., 332 F.3d 896, 908 (6th Cir. 2003). However, the FTC, the President, and some key members of Congress disagree with the courts. The Federal Circuit and the Second Circuit issued similar rules, but the Eleventh Circuit disagreed.
Hence, there is a strong push against it in Congress as in the academic community. Senators have introduced a bill to ban the practice, and the bill has the support of the Obama administration and should save the Federal Government money if passed. There is nothing in the patent law theory of “permitted monopolies” that should allow this collusive practice to continue. It is time that either the Supreme Court or Congress acted to close the loophole once and for all.