Patents and Payoffs or How Generics are Kept Off the Market: Op-Ed by AAI Senior Fellow Rudy Peritz

Jun 25 2012

A federal appeals court recently dismissed a case that could have saved consumers hundreds of millions of dollars. Solvay Pharmaceutical, the maker of a synthetic form of testosterone called Androgel, had sued several generic drug companies for patent infringement but agreed to settle the case if those companies would accept up to $200 million dollars to stay off the Androgel market. Seeing this settlement as an agreement in restraint of trade, the Federal Trade Commission filed an antitrust suit to bar the settlement and, in their brief, noted that such settlement agreements are costing drug consumers $3.5 billion dollars annually.

The federal appeals court rejected the FTC’s claim that the settlement is a violation of the antitrust laws, concluding that agreements like the one in Solvay are shielded from antitrust scrutiny as long as they “fall within the scope of the patent.” In short, the court decided that Solvay’s patent rights in Androgel trump the antitrust prohibition against agreements that restrain competition. But this decision and the unbroken line of others like it since 2003 are wrong as a matter of law.

Although Solvay does have a right to stop the production and sale of generics that fall within the scope of its Androgel patent, the appeals court neglected the Supreme Court’s teaching in a landmark 2006 patent decision. According to that eBay opinion, there is nothing automatic or absolute about a patent holder’s remedies. Obtaining injunctions to stop others from making and selling their inventions requires patent holders to persuade the court that the specific circumstances of each case justify the exclusion.

The Supreme Court’s unanimous eBay decision has widely influenced lower courts in patent infringement cases to issue fewer injunctions. The result has been more competition. But since the decision has not been understood in terms of competition, its mandate has gone unrecognized in antitrust cases.

It makes perfect sense to apply eBay’s patent logic to antitrust cases like the Solvay suit because the legal questions and economic stakes are the same. In both, patent owners seek judicial enforcement of efforts to restrain competition on the grounds that a patent justifies the restraint. But rightly understood, the eBay decision would require the branded drug maker in Solvay to persuade the court that the settlement agreement, particularly the pay-for-delay provision, meets patent law’s test to enjoin competitors – that on balance, the benefits and harms, public and private, tip in favor of keeping the generic drug makers off the market. Only then would the settlement “fall within the scope of the patent,” as prescribed by the Supreme Court in its eBay decision.

In antitrust cases like Solvay, this balancing test would call for courts to reject the settlement agreements. Rejecting them would not cause irreparable harm to the drug companies; they would still have their lawsuits and the full range of private legal remedies. The remaining issue would be whether it is in the public interest to reject them. Here too there is no doubt: The public would benefit from rejecting settlements that keep generics off the market. In short, the balance would clearly tip in favor of rejecting pay-for-delay settlement agreements. The result of applying eBay’s patent logic to cases like Solvay would be more trials on the merits in drug patent infringement suits, trials that so far have invalidated patent claims more than seventy percent of the time.

Seventy percent more competition in the drug market would lower health care costs by as much as $3.5 billion dollars annually. That is precisely what Congress intended when it expedited the FDA approval process for generic drugs. It is time to make antitrust and patent law work together, time to stop the drug companies from subverting the competitive process.

Rudolph J.R. Peritz is a professor of law at New York Law School and a Senior Fellow at the American Antitrust Institute. He is the author of Competition Policy in America: History, Rhetoric, Law (Oxford U. P. 2001)

This op-ed originally appeared in the FTC:WATCH no. 8-9, for June 18, 2012 (reprinted with permission)