The Supreme Court v. Cheaper Medicine

Drug A and B are the same.  They have the same ingredients, same pills, and the same purpose.  But, one is a name brand and the other is a generic.  So, the only difference between the two is the price.
Every year, pharmaceutical companies pour billions of dollars into the research, development, and approval of new drugs. In order to protect the economic incentive to create these medications, companies patent them, giving them exclusive rights to their manufacture and sale for about 20 years. Now, many of the patents from decades past are beginning to expire; for some, this means competing with new competitors.
“Within last decade or so,” Professor Mary Ruggie, a Professor of Public Policy at the Harvard Kennedy School of Government, told the HPR, “there has been a whole slew of drugs that have become either [over-the-counter] or generic.” Among these are the big names, including many anti-depressant and anti-cholesterol drugs. Coupled with the passage of the Hatch-Waxman Act in 1984, which allowed abbreviated procedures for the approval of generics, or “bioequivalents,” a wave of off-brand drugs is entering the market.
If generic drug companies begin producing generic versions before the patents have expired, brand name, patent-holding pharmaceutical companies can bring suit for infringement. In some cases, however, the two parties will settle the litigation with what is referred to as a “reverse-payment” or “pay-for-delay” agreement. Basically, the generic company takes a sum of money and agrees not to enter the market for a set amount of time. In some agreements, the bioequivalent will actually be able to enter the market before the patent on the original drug expires.  If the litigation had continued and the generic company had won, though, the drug would be able to enter the market immediately. These settlements leave questions on the table. For one: where are consumers—patients—left in their wake?

FTC v. Actavis
On March 25, 2013, the Supreme Court heard arguments on this very issue, in the case Federal Trade Commission. v. Actavis.
Androgel, a drug made by Solvay International Chemical Group, is a testosterone replacement therapy drug with a patent set to expire in 2023. But in 2006, Solvay and Actavis, a company that had created a bioequivalent to Androgel, settled a patent dispute over the testosterone drug, in which Actavis agreed to wait to enter the market until 2015 in exchange for a monetary settlement. In response to the settlement, the FTC brought a complaint against the drug company for violating anti-trust laws. They reasoned that in allowing the settlement, Solvay had created an unfair monopoly. In fairness, some, such as Jacob Sherklow in his recent article on the subject in Nature Biotechnology, argue that with the reverse patent agreement in this case, the generic enters the market six years earlier than the normal scope of the patent, and thus these deals are not anti-competitive.
When the case reached the Eleventh Circuit, the court dismissed the complaint, upholding the settlement. Following the logic explained by Sherklow, because the “anticompetitive effects fell within the scope of the exclusionary potential of the patent,” the Eleventh Circuit held the agreement was “immune from antitrust attack.” Yet, in a 5-3 decision (Justice Alito did not take part) the court reversed the Eleventh Circuit decision and held that the FTC’s lawsuit should have been allowed to continue.
A Cure for Consumers?
In debating the role of patents and settlement tactics of drug manufacturers in the abstract, consumers are often forgotten.  While companies quibble over rights, monopolies, and profits, consumers in need of these potentially life-saving drugs are left to pocket the bill or else lose access to the medication. In the entire 57-page transcript of Supreme Court oral arguments, patients in need of the drug weren’t mentioned once. The closest reference is Justice Kagan’s response, “It’s clear what’s going to happen here [when the agreement is not in good faith], is that they’re splitting monopoly profits and the person who is going to be injured are all the consumers out there.”
The Court’s decision in FTC v. Actavis began to acknowledge a concern for patients. Justice Breyer, in writing the opinion for the majority, echoed Justice Kagan’s sentiments, stating that in pay-for-delay deals, “[t]he patentee and the challenger gain; the consumer loses.” The Court, however, did not take a definitive side in the case and maintained a narrow ruling for this particular set of circumstances. While decision of the Court, “brings these agreements firmly within the scope of the antitrust laws,” as Commissioner Joshua D. Wright of the FTC observed in a speech this September, “The Court did not deliver a complete victory.” The court refused to say categorically that these “pay-for-delay” settlements are unlawful, rejecting the FTC’s plea for a “quick-look” approach.
Instead, the Court chose to use the “rule of reason” that is typically applied in antitrust cases. In considering the “rule of reason,” courts should look at the “genuine adverse effects on competition” of the reverse payments, if those effects are unjustified, and if the paying company has the power to bring anticompetitive harm.  The Court specifically stated that courts need not consider the validity of the patent.  Through the analysis of the adverse effects on competition the Court indirectly protected consumers, yet the Court stopped too soon.  The harm in reverse payments occurs when the brand-name company’s patent is invalidated, and in turn, the bioequivalent would win the suit and enter the market immediately.  But instead, the payment allows the brand name to retain the patent, preventing the cheaper equivalent from entering the market.
Once again, the failure to allow courts to consider the validity of the patent leaves only the consumers vulnerable.  The majority opinion, citing a brief from a group of Law, Economics and Business Professors, noted that “there are indications that patentees sometimes pay the generic challenger a sum even larger than what the generic would gain in profits.” This explains the many briefs filed by the pharmaceutical industry, including the Generics Pharmaceutical Association, in support of the “pay-for-delay” settlements.  With its explicit refusal to use patent validity in determining the legality of the payments, the Court removed the one mechanism to examine the likelihood of harm to the consumers directly.
Instead, the majority suggested the courts consider the size of the payment.  A larger payment, to the Court’s logic, could be a sign of a weak patent.  So, courts cannot look at the validity of the patent, but can look at a proxy of the same measure, a proxy that pharmaceutical companies have much more control over.  Still, it is much easier to explain an unusually large settlement in terms of costs of litigation, then to have to defend the validity of a patent.
The Court does not give a reason for the distinction it draws. However the Pharmaceutical Research and Manufacturers of America ranks in the top ten for lobbying expenditures. As Professor Ruggie told the HPR, pharmaceuticals have become “a medically necessary part of life, and an expensive part of life.”  This case and the Court’s decision, however, seem to leave the consumers to foot the bill.
Photo Credit: Wikimedia Commons/ User “Sponge”