Last week, Teva Pharmaceuticals agreed to pay $1.2 billion to settle an antitrust suit brought by the Federal Trade Commission. The FTC alleged that Cephalon, Inc. (acquired by Teva in 2012) violated antitrust law when it paid $300 million to generic drug companies to settle several patent lawsuits in 2005 and 2006. These payments required the generic drug companies to forego marketing generic versions of the patented drug Provigil until April 2012.
This type of settlement is called a “pay-for-delay” agreement, because the patent owner pays a competitor to stay out of the market for a period of time while the patent is still in force. In a typical patent settlement, the alleged infringer pays the patent owner a sum of money to compensate the patent owner for the infringement. Pay-for-delay turns this idea on its head. So just why did Cephalon pay hundreds of millions of dollars to its competitors?
One significant benefit to the patent owner is that the alleged infringer drops any claim that the patent is invalid. In this case, the original patent covering the active ingredient in Provigil expired in 1997—Cephalon’s patent covered only the particle size of the active ingredient. Cephalon’s $300 million payment to its competitors bought it the security of knowing that nobody would question the validity of its patent. An obvious implication is that Cephalon was afraid that its patent wouldn’t withstand scrutiny. (Indeed, a federal judge later found the patent invalid and unenforceable.)
In the 2013 case FTC v. Actavis, the U.S. Supreme Court held that this type of agreement can violate antitrust law. Actavis argued that pay-for-delay agreements only prevent competing manufacturers from marketing their generic drugs during the term of the patent—consistent with patent law—and therefore such agreements were immune from antitrust liability. The Supreme Court disagreed, reasoning that even though the patent owner has a right to exclude others from marketing the invention, antitrust law still prevents the patent owner from illegally conspiring with its competitors to maintain its monopoly.
Cephalon’s pay-for-delay agreements ran afoul of the antitrust laws because they allowed Cephalon to maintain its monopoly in Provigil by paying off its competitors. The fact that Provigil was patented does not affect the antitrust analysis. Antitrust law and patent law serve two different purposes: patent laws are intended to foster innovation by providing an economic incentive to inventors who create new and useful inventions, while antitrust laws are intended to protect consumers by prohibiting certain actions that restrict competition in economic markets.
This distinction is crucial. Patent law is sometimes described as an exception to antitrust law, but pay-for-delay agreements demonstrate that this description is wrong. Just because a company owns a patent doesn’t mean it can use the patent to eliminate its competition. As one court put it: “That is no more correct than the proposition that use of one's personal property, such as a baseball bat, cannot give rise to tort liability.”
The public has an interest in maintaining competition within the pharmaceutical industry so that drug prices stay low. If pharmaceutical patent owners were allowed to sell their drugs at inflated prices by paying generic competitors not to challenge the validity of their patents, the patent owners and competitors win, but the public loses. The Teva settlement is great news for consumers.
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