The Supreme Court has agreed to review the legality of “reverse payment,” also known as “pay-to-delay,” settlements. These agreements, most commonly arising in the pharmaceutical industry, involve patent holders making payments to generic drug manufacturers in return for an agreement not to put competing generic drugs on the market during at least part of the term of a patent on a brand-name drug. The Federal Trade Commission (FTC) argues that such arrangements should be presumptively illegal as anti-competitive; many drug companies argue that they are legitimate settlement arrangements in patent litigation – an area of law in which many traditional anti-trust doctrines are inoperative – so long as they do not expand the patent-holder’s rights.

In 2000, Solvay Pharmaceuticals won US Food and Drug Administration (FDA) approval to sell AndroGel, a drug for the treatment of low testosterone in men. The FDA granted Solvay three years of market exclusivity. Solvay filed for a patent on AndroGel, which was granted in 2003, one month before its FDA market exclusivity expired (U.S. Patent No. 6,503,894). The patent would nominally grant Solvay the exclusive right to make and sell AndroGel in the U.S. until 2020. AndroGel was commercially successful, enjoying sales of $1.8 billion in the U.S. between 2000 and 2007.

After the ‘894 patent issued in 2003, Watson Pharmaceuticals file applications with the FDA for approval of generic versions of AndroGel, claiming Solvay’s patent was invalid or that their products would not infringe it. Based on this FDA application, Solvay sued Watson for patent infringement. The lawsuit triggered an automatic 30-month stay of FDA approval for sale of the generics. After this 30-month period expired, Solvay’s patent was the only thing preventing Watson from marketing a generic version of AndroGel. Before they did that, the parties settled the patent infringement lawsuit. Under the settlement agreement, Solvay agreed pay Watson up to $42 million per year for promotional services and backup manufacturing capacity, and Watson agreed not to market an AndroGel generic before 2015. When the parties presented the settlement agreement to the FTC for approval, it sued both parties to block it.

The FTC, applying traditional anti-trust doctrines, has long believed that reverse payment agreements should be presumed to be illegal restraints of trade under federal antitrust law. Their reasoning is that a company with market dominance, whose patent is probably invalid, is paying competitors to stay out of the market. This allows it continue to charge higher prices to consumers than a freely competitive market would set. The FTC would prefer the parties fully litigate the infringement issue, settling both the validity and infringement issues with certainty.

Solvay and Watson argue that the settlement agreement does not expand Solvay’s patent rights – indeed, it allows the marketing of generic drugs sooner than if Solvay enforced its patent for the full term. Rather than admission of invalidity or non-infringement, they argue that the payments under the settlement agreement reflect recognition of the risk of litigation, and terminate its ongoing costs and business distraction. These are common concerns which motivate many settlement agreements.

The district court dismissed the FTC’s case, and the Court of Appeals for the Eleventh Circuit affirmed that decision. In a 2011 case, involving the drug maker Merck, the Third Circuit came to the opposite conclusion, refusing to approve a reverse payment settlement agreement in a patent infringement lawsuit. The Supreme Court took the case to resolve this split in the circuits. Resolution of this question will have important repercussions for drug marketing and pricing, as well as patent infringement litigation. The Court will hear oral arguments March 26.