SCOTUS and Manufacturing of Generics: Cry Havoc and Let Slip the Dogs of Litigation

One thing is clear from the decision the Supreme Court rendered Monday: There’s going to be more litigation. The Supreme Court ruled 5–3 that the Federal Trade Commission (FTC) has the right to examine “pay for delay” deals between brand and generic manufacturers on antitrust grounds. It did not support the FTC’s contention that pay-for-delay deals are inherently illegal.

Pay-for-delay is the term coined to describe settlements reached between brand manufacturers and generic manufacturers where the brand manufacturer pays the generic manufacturer not to challenge a patent.

The brand manufacturers, in general, defend the practice by saying that it reduces the amount of time they spend in patent protection, which is expensive. They also note that patent expirations can be vague and that they are buying some certainty in their product’s lifecycle by negotiating when a generic version will be available. I also note that reaching a pay-for-delay settlement with one generic manufacturer does not inherently reduce the threat from a different generic house.

Generic manufacturers also gain financial stability and reduce their risk of penalties where they could be found to have violated the patent. These are basically all at-risk launches, which means that the patent may still be valid and the generic manufacturer takes the risk of paying the brand manufacturer extensive damages if it is  found to have violated the patent.

The FTC’s position has been that these deals bring competitors into collusion to reduce consumer choices and that they should be presumed unlawful and a violation of antitrust statutes.

According to the Wall Street Journal, there have been 40 settlements of this kind. These agreements covered drugs with U.S. sales of over $8 billion.

There are three ways this can play out, and they aren’t mutually exclusive:

1. It changes very little. Companies find ways to negotiate at-risk launches and patent protection without resorting to cash payments. These new agreements could take the form of licensed generics, some period of exclusivity to the generic, or even joint ventures for product launch. It’s hard to believe that the manufacturers won’t find ways to continue to protect patents worth billions of dollars.

2. The FTC gets very aggressive, leading to scores of investigations that will be time-eating and costly, leading to negotiated settlements between the manufacturers and the FTC.

3. Generic manufacturers become more cautious about at-risk launches. This would mean fewer generic launches, especially for blockbuster drugs.

I believe that we will see some level of all three, depending on the size and strength of the generic manufacturers. The FTC has been wanting this power for a long time; it would be a mistake to think it won’t use it.

The larger, more secure manufacturers will find ways to negotiate new settlements without cash payments to protect their patents without drawing the scrutiny of the FTC.

Smaller companies with fewer resources will become more cautious and minimize at-risk launches.

The only clear winners are the attorneys handling this work for the manufacturers and the FTC. They just got a windfall.