"Pay-for-Delay" Agreement Reviewed by Federal Appeals Court

ISSUE OF THE CASE

A brand name pharmaceutical manufacturer and a generic firm entered into an agreement regarding which company would market a generic equivalent of a brand name pharmaceutical when the patent expired. The agreement involved no exchange of funds, as would a traditional “pay-for-delay” agreement. When legally challenged, is that contract to be considered like a traditional pay-for-delay agreement and subject to conventional antitrust legal analysis applied in such cases?

FACTS OF THE CASE

The brand name manufacturer held a patent covering its product, and the patent had not expired when the generic pharmaceutical manufacturer filed an application with the FDA seeking approval to market a generic version. The brand name firm sued the generic firm for patent infringement, and the matter went to trial in a federal district court.

The federal judge hearing the case without a jury issued a partial ruling on some of the claims and said he would deliberate on the remaining claim. However, the parties reached an out-of-court settlement that did not involve a cash payment, but provided that the brand name manufacturer would not launch an authorized generic version of the medication and the generic firm would be permitted to introduce a chewable version to the marketplace.

Two purchasers of the product in question filed suit, claiming that the manufacturers’ agreement was subject to antitrust assessment even though there was no exchange of funds involved. They pointed to a provision in the settlement agreement that gave the generic manufacturer a 180-day exclusive period to produce a generic product. They argued that the brand name manufacturer’s concurrence and agreement to absence of an authorized generic during this key period would result in less price competition and more revenue.

The challengers of this agreement based their arguments on federal antitrust statutes. The claim they advanced was that the agreement violated the principal federal antitrust statute, the Sherman Antitrust Act of 1890, which prohibits any “contract, combination or conspiracy … that restrains trade.” Those mounting the challenge to the settlement agreement relied on an earlier ruling from the US Supreme Court in a different pay-for-delay case involving pharmaceuticals.

The trial court judge received a motion from the defendant manufacturers that the case should be dismissed because it did not involve cash payments. He granted that motion, and the firms challenging the settlement agreement as being anticompetitive appealed to the appropriate US Court of Appeals.

THE COURT’S RULING

Although the trial court had agreed with the manufacturers that only agreements involving cash payments were subject to antitrust scrutiny, the US Court of Appeals took an opposite view, ruling the agreement illegal.

THE COURT’S REASONING

The appellate court interpreted the precedent from the earlier US Supreme Court case as dictating that each of the cases in this category be considered on a caseby- case basis rather than applying an across-the-board approach. The court considering this case, using guidance from the highest court in the land, interpreted the Supreme Court’s stance to be that these pay-for-delay cases were not just about payment of money. Rather, the issue was marketplace leverage that could be present in a number of ways, including the version it detected in the agreement that was the basis for this court case. Accordingly, the appeals court concluded that the judge in the lower court had erred when he misinterpreted the Supreme Court ruling as limiting anticompetitive impact only to instances in which cash payments were made.

The Supreme Court had ruled that pay-for-delay cases, and the contracts that gave rise to them, were to be analyzed using what is known as the “Rule of Reason.” This approach balances the procompetitive effects of the contract against the anticompetitive impact. That balancing assessment is to be conducted by the jury. In this case, the appellate court ruled that the trial court judge overstepped his role when he decided the case; the balancing of competing positive and negative impacts should have been done by a jury. The decision of the judge to dismiss the case resulted in it never reaching the jury.

The final outcome at the appellate level was to vacate the decision of the lower court, and the matter was sent back to the trial court for further proceedings.

END NOTE

Pay-for-delay cases have been in the courts for decades and likely will continue to be as companies and courts sort through what is legally permissible and what is not.

Dr. Fink is a professor of pharmacy law and policy and the Kentucky Pharmacists Association Endowed Professor of Leadership at the University of Kentucky College of Pharmacy, Lexington.