On both sides of the Atlantic, brand-name drug companies have paid generics to delay entering the market. The week of June 17, 2013 will go down as potentially the most important week ever in the history of challenges to this activity.
On Monday, the U.S. Supreme Court found that such “pay for delay” (or “reverse payment”) agreements could present violations of the antitrust laws. And on Wednesday, the European Commission (EC) for the first time issued a fine against companies that enter into such settlements.
U.S. Supreme Court Actavis decision
In the case of Federal Trade Commission v. Actavis, the Supreme Court – in a 5-3 opinion written by Justice Breyer (with Justice Alito recused) – concluded that pay-for-delay settlements are not immune from antitrust scrutiny.
In the case, the Court considered an arrangement by which brand firm Solvay paid generics Watson (now Actavis) and Paddock roughly $30 to $40 million to delay entering the market with generic versions of testosterone gel. The U.S. Court of Appeals for the Eleventh Circuit upheld the activity, concluding that “absent sham litigation or fraud in obtaining the patent, a reverse payment settlement is immune from antitrust attack so long as its anticompetitive effects fall within the scope of the exclusionary potential of the patent.”
The Supreme Court reversed. It concluded that, while a valid patent allows a patentee to charge “higher-than-competitive” prices, “an invalidated patent carries with it no such right.” The Court recognized the policy encouraging settlements. But for five reasons, it found that that policy did not dictate immunity for pay-for-delay settlements.
First, “the specific restraint at issue has the ‘potential for genuine adverse effects on competition’” since “payment in return for staying out of the market . . . keeps prices at patentee-set levels.” Second, “these anticompetitive consequences will at least sometimes prove unjustified,” such as where the payments are not for “avoided litigation costs or fair value for services.”
Third, “where a reverse payment threatens to work unjustified anticompetitive harm, the patentee likely possesses the power to bring that harm about in practice.” Fourth, “an antitrust action is likely to prove more feasible administratively than the Eleventh Circuit believed,” with an “unexplained large reverse payment itself . . . normally suggest[ing] that the patentee has serious doubts about the patent’s survival.” And fifth, “the fact that a large, unjustified reverse payment risks antitrust liability does not prevent litigating parties from settling their lawsuit.”
The Court declined the FTC’s invitation to apply a framework of presumptive illegality since it was not the case that “an observer with even a rudimentary understanding of economics could conclude that the arrangements in question would have an anticompetitive effect on customers and markets.” The analysis is more nuanced since the likelihood of anticompetitive effects depends on a reverse payment’s “size, . . . scale in relation to the payor’s anticipated future litigation costs, . . . independence from other services for which it might represent payment, and the lack of any other convincing justification.” As a result, the “FTC must prove its case as in other rule-of-reason cases.”
Chief Justice Roberts, joined by Justices Scalia and Thomas, dissented, stating that a patent “carves out an exception to the applicability of antitrust laws.” He highlighted the value of settlements and lamented that the majority decision would discourage them. And he worried that the majority ignored patent policy and forced generics to litigate.
European Commission fines Lundbeck and generics
On Wednesday, the EC imposed fines of € 93.8 million ($124 million) on Danish company Lundbeck and € 52.2 million ($69 million) on generics Alpharma (now Zoetis), Merck KGaA/Generics UK (Generics UK now Mylan), Arrow (now Actavis), and Ranbaxy.
The EC found a violation of Article 101 of the Treaty on the Functioning of the European Union (TFEU) as a result of Lundbeck’s agreement with the generics “to delay the market entry of cheaper generic versions of Lundbeck’s branded citalopram, a blockbuster antidepressant.”
Commission Vice-President Joaquín Almunia found it “unacceptable” for a company to “pay[] off its competitors to stay out of its market and delay the entry of cheaper medicines.” As a result of such agreements, “patients and national health systems, which are already under tight budgetary constraints,” are “directly harm[ed].”
The EC found that the generics had “agreed with Lundbeck in 2002 not to enter the market in return for substantial payments and other inducements from Lundbeck amounting to tens of millions of euros.” It pointed to internal documents that referred to the formation of a “club” and “a pile of $$$” to be shared among the participants. And it explained that Lundbeck “paid significant lump sums, purchased generics’ stock for the sole purpose of destroying it, and offered guaranteed profits in a distribution agreement.”
Such conduct was concerning since “Citalopram is a blockbuster antidepressant medicine and was Lundbeck’s best-selling product at the time.” Lundbeck held only process patents after its patent on the citalopram molecule expired. As a result, one company “actually started selling its own generic version of citalopram, and several other producers had made serious preparations to do so.” The settlements “gave Lundbeck the certainty that the generics producers would stay out of the market for the duration of the agreements” without giving them “any guarantee of market entry thereafter.”
The EC explained that such agreements delay the effects of generic competition, which “drives prices down significantly, reducing dramatically the profits of the producer of the branded product and bringing large benefits to patients.” And it pointed to the price of generic citalopram, which “dropped on average by 90% in the UK compared to Lundbeck’s previous price level” after widespread generic entry occurred.
The Commission “based its fines on its 2006 Guidelines” and “took into account the duration of each infringement and its gravity,” while considering the length of the investigation “as a mitigating factor.”
During the press conference in Brussels, Almunia stated that “[t]he practices we are sanctioning are simply unacceptable” and “constitute severe infringements of EU competition law.” He noted that “[t]he pharmaceutical sector is, literally, essential to our lives.” And of the “hundreds of patent settlements” the Commission has monitored in the past few years, it has “only pursue[d] a harmful and small portion of settlements.” Almunia closed by warning that “[w]e have other investigations ongoing and more decisions in this field are likely before the end of my mandate.”
Importance of developments
The two developments ensured that challenges to pay-for-delay settlements would proceed full force on both sides of the Atlantic.
First, the U.S. Supreme Court distinguished itself from most U.S. appellate courts in making crystal clear that such agreements are not immune from antitrust scrutiny. The Court highlighted significant concerns with these agreements, pointing to “genuine adverse effects on competition” that “at least sometimes prove unjustified.”
Second, the EC’s ruling marks the first time it issued fines for pay-for-delay agreements. The EC has been monitoring this activity. And it issued a statement of objections to Servier for a settlement involving cardiovascular drug perindopril. But the issuance of fines marks the next step, the culmination of a searching examination of anticompetitive conduct in the pharmaceutical industry. It shows that the EC is just as serious as its counterparts across the Atlantic in challenging this concerning behavior.
One year ago, those concerned with pay-for-delay settlements were not in such a comfortable spot. Courts in the U.S. had been blessing the agreements and a continued role for the FTC in challenging them was in doubt. At the same time, the EC had not yet issued any Statements of Objections. As a result of the week of June 17, 2013, that has all changed. The U.S. Supreme Court has ensured that there will be antitrust scrutiny of these agreements. And the EC issued significant fines for this activity. Drug companies now must think twice before settling cases with payments for delay so as to not run into the crosshairs of competition enforcement agencies on both sides of the Atlantic.
