Waiting is the Hardest Part: Why the Supreme Court Should Adopt the Third Circuit's Analysis of Pay-for-Delay Settlement Agreements

Abstract

In March 2013, the U.S. Supreme Court will hear Federal Trade Commission v. Watson Pharmaceuticals, Inc., giving the Court the opportunity to answer the multibillion-dollar question of whether brand-name pharmaceutical companies violate antitrust laws when they pay generic drug manufacturers to delay entering the drug market. The Supreme Court’s decision in this case could have a significant impact on rising health care costs in this country. The high cost of prescription drugs has put crippling economic pressure on the U.S. health care system. In 2010, forty-eight million Americans sacrificed filling essential drug prescriptions due to cost - often leading to life-threatening consequences and further increased health care expenses. Although many factors contribute to high drug prices, collusive settlements between brand-name pharmaceutical companies and generic drug manufacturers play a major role by presenting a barrier to lowering drug costs. Brand-name pharmaceutical companies have long been settling patent litigation by paying generic manufacturers large sums of money to drop patent lawsuits, thereby delaying generic drugs from entering the market. These settlement arrangements, known as “reverse payments” or “pay-for-delay” agreements, derive from the regulatory framework of the Drug Price Competition and Patent Term Restoration Act of 1984, otherwise known as the Hatch-Waxman Act. Though Hatch-Waxman’s goal was to increase generic drug competition in the pharmaceutical drug market while still fostering patent innovation, reverse payment settlements largely prevent timely generic drug entrance into the marketplace. As a result, drug prices remain inflated and American healthcare consumers bear the burden. According to the Federal Trade Commission (“FTC”), these anticompetitive agreements, which rose to a record number in 2012, cost consumers $3.5 billion per year. Due to the complex intersection of the regulatory scheme of Hatch-Waxman, antitrust principles, and patent law, circuit courts have reached divergent conclusions on whether reverse payment settlements are anti-competitive. Three circuit courts applied antitrust scrutiny to find that the reverse payments were unreasonable restraints of trade and violated Section 1 of the Sherman Act. Conversely, three circuit courts reasoned that a reverse payment was legal so long as it remained within the “scope of the patent.” In fact, last year, the Third Circuit reviewed the same settlement agreement as the Eleventh Circuit did in 2005 and yet reached an opposite conclusion. While the Eleventh Circuit applied the scope of the patent test to find that the payments were legal, the Third Circuit expressly rejected the scope of the patent test and found that the payments constituted prima facie evidence of an antitrust violation. Beyond settling the differences in opinion among the lower courts, the U.S. Supreme Court decision will have significant implications for the pharmaceutical industry and American consumers. This Comment contains four Parts. Part I of this Comment provides background information regarding the reverse payment settlement problem, including Congress’s intent for passing the Hatch-Waxman Act, the Act’s basic mechanisms, principles of antitrust and patent law, and the first two cases to deal with reverse payments stemming from the Act. Next, Part II discusses how the Eleventh Circuit, Second Circuit, and Federal Circuit applied the scope of the patent test to reverse payment settlement agreements, and how the Third Circuit rejected the test. Part III then analyzes these circuit court decisions, reasoning that the Third Circuit properly considered reverse payments as prima facie evidence of an unreasonable restraint of trade. Finally, Part IV proposes that the Supreme Court should adopt the Third Circuit’s reasoning and considering additional factors regarding the reasonableness of reverse payments.