Legality of Pay-For-Delay Settlement Agreements

The intersection of intellectual property law with competition law is something we're fairly familiar with. While the former seeks to grant exclusionary rights, the latter strives to uphold the statutory edict against monopoly. This is yet another area of law where the two clash head-on. 

Pay-for-delay settlement agreements are a type of patent dispute settlement agreement where a sum of money is paid by the originator pharmaceutical company (the patentee) to the generic manufacturer to stay away from the market for a specific period of time. Sai Deepak has recently blogged on the issue here.

This practice of delaying market entry of generic drugs has been called into question both in Europe and in the US. In 2008, the European Commission conducted an investigation focussing on the competition law aspects of such contractual arrangements which seek to keep players off the market, thus having a potential impact on competition. 

In the US, in a judgment delivered just hours ago, the Supreme Court sought to settle the 'circuit-split' regarding the legality of such agreements. While the Eleventh circuit preferred what is called the 'scope-of-the-patent' rule, the Third Circuit favored what it terms as the 'quick-look' approach. 

The scope-of-the-patent rule deems 'pay-for-delay' agreements lawful so long as they do not go beyond the temporal or substantive limitations of the patent grant or the unless the underlying patent litigation is a sham. To put it succinctly, the Eleventh Circuit held such reverse payments to be lawful so long as their anticompetitive effects fall within the scope of the exclusionary potential of the patent. The Third Circuit, on the other hand held that such agreements should be subject to a 'quick-look-of-reason-analysis' and states that any such payments made by a patentee to a generic manufacturer to delay the latter's entry into the market is per se unlawful as it amount to an unreasonable restraint of trade. 

In the present case of Federal Trade Commission v. Actavis, the FTC challenged the Eleventh Circuit's ruling arguing that the scope-of-the-patent rule is a 'paradigmatic antitrust violation' that results in increased prescription costs of customers. Instead, it chose to endorse the quick-look rule, comparing reverse payments to price-fixing. 

As a counter, the respondents argued that reverse payments are not per se anticompetitive and can be seen in the same light as agreements wherein infringers bargain for lower royalty rates in return for delayed entry into the market. 

The Supreme Court, today, rejected the quick-look approach argued for by the FTC by a 5 to 3 vote and held that reverse agreements are not presumptively unlawful. It ruled in favor of the 'rule of reason' and left it to lower courts to decide upon whether advantages of the settlement outweighs the harm caused to consumers. 

In my opinion, even if one is to view it from a competition law angle, it is better to have a late entrant into the market than not have one at all. The delayed entry in no case goes beyond the life of the patent. The FTC's approach seems to take it for granted that the generic manufacturer would win the lawsuit, had there been one. If one is to assume the opposite, an agreement of this sort is bound to benefit consumers in the long run as opposed to risking the generic manufacturer from being ousted by a court's decision. 

If one can resist the temptation to argue on the merits of these approaches, logically speaking, there is no way one can determine in whose favor the balance would have tilted if a lawsuit had ensued. And thus, there is no way to determine whether the agreement is anticompetitive or not, with certainty. 

To reiterate what Sai Deepak has said, there have been no reported instances of pay-for-delay agreements in India making it difficult to gauge whether they would be legal here. It sure will be worth the wait to see how the Competition Commission would decide if such a case were to come up.