Circuit Court Strikes Down Generic Drug Pay-for-Delay

July 24, 2012 — The U.S. Court of Appeals for the Third Circuit has ruled that brand-name pharmaceutical companies are not allowed to pay generic drug companies to delay marketing generic drugs. The Federal Trade Commission (FTC) has hailed the decision, which overruled a lower district court decision that upheld the legality of the practice. The FTC says it violates basic antitrust principles and costs the U.S. taxpayer billions in healthcare costs per year.

The lawsuit involves K-Dur 20, a potassium supplement that is used to prevent side effects of other drugs used for congestive heart failure and high blood pressure. The drug company Schering-Plough manufactures the drug and owns a patent on the drug’s special time-release coating. Shortly before the patent expired, Schering-Plough paid one generic drug competitor $60 million, and another competitor $15 million, in exchange for agreements that the companies would not market lower-cost generic alternatives.

The legal tactic is also known as “pay-for-delay” and it is used by brand-name drug companies to delay the introduction of lower-cost competing generic drugs. The brand-name drug companies continue to have a monopoly, and continue to profit by charging brand-name drug prices.

The FTC has vigorously opposed the legality of the practice, saying the victims are sick people, insurance companies, and the U.S. taxpayer — all of whom are forced to pay needlessly high costs for brand-name drugs instead of cheaper, generic alternatives. An FTC study found that these anticompetitive deals cost taxpayers and consumers an extra $3.5 billion every year.

After the FTC challenged the practice, drug companies appealed the decision and won. Two lower district courts upheld pay-for-delay, finding that do-not-compete settlements were a legitimate way to settle patent disputes.

The Third Circuit over-ruled these lower court decisions, finding that “pay-for-delay” illegally restricts trade. They did note that these payments are not illegal if the brand-name drug companies can prove that the payments were made for a purpose other than delaying the entry of generic competitors. A further appeal would take the matter to the U.S. Supreme Court.

Jon Leibowitz, FTC Chairman, responded to the decision with the following statement:

“The Third Circuit Court of Appeals seems to have gotten it just right: These sweetheart deals are presumptively anticompetitive. As our Bureau of Economics has estimated, they cost American consumers $3.5 billion a year in higher health care costs. Restricting these arrangements, as many in Congress have proposed, would reduce federal government debt by $5 billion over 10 years, according the Congressional Budget Office. It’s time for the pharmaceutical companies to return to the side of consumers.”

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