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For the second time in recent months, a federal appeals court has ruled that cash payments are not the only way to determine whether a patent settlement between drug makers deserves antitrust scrutiny.

The ruling, which was made this week, focused on a so-called pay-to-delay deal that was reached in 2009 between Warner Chilcott, and two generic companies, Watson Pharmaceuticals and Lupin Pharmaceuticals.

The ruling, which was in response to an antitrust lawsuit filed by payers, may go a long way toward resolving a controversial issue left unresolved by a 2012 US Supreme Court decision on the legality of pay-to-delay deals. In these agreements, a brand-name drug maker settles a patent lawsuit by paying cash or transferring something else of value to a generic rival, which agrees to delay launching a copycat medicine.


The Supreme Court ruled the deals may be subject to antitrust review, but left open to interpretation whether only a cash payment should be considered questionable when a settlement is reached. Drug makers argue the ruling limited the definition only to cash payments. But regulators and payers maintain other settlement terms also have value and, therefore, deserve antitrust scrutiny.

In the case decided this week, Watson and Lupin wanted to sell generic versions of Loestrin, an oral contraceptive, which prompted Warner Chilcott to file patent infringement lawsuits. Warner reached deals with both drug makers, but did not make cash payments. Instead, Warner offered various licenses and fees. For instance, Lupin was awarded rights to sell copycat versions of other Warner products. (Both Warner and Watson are now owned by Allergan).


Warner also agreed with Watson not to sell its own so-called authorized generic version of Loestrin, which would have provided substantial competition to a generic. Such terms are central to arguments by payers, whose lawsuit against the drug makers contends that pay-to-delay deals — whether or not cash is involved — unfairly caused them to pay more than if lower-cost generics had become available.

A federal district court ruled that since a cash payment was not involved, there was no anticompetitive behavior. But the US Court of Appeals for the First Circuit disagreed, citing the terms Warner offered to the generic companies. “We conclude that the district court erred in determining that non-monetary reverse payments” do not fall under the scope of the Supreme Court ruling.

The ruling further bolsters the long-standing position taken by the US Federal Trade Commission, which has argued pay-to-delay deals cost Americans about $3.5 billion annually in higher health care costs. But drug makers argue that these deals are not only legal, but allow lower-cost generic drugs to reach consumers faster than if patent litigation dragged on for years.

Last month, the FTC issued a report in which the agency found that drug makers entered into fewer pay-to-delay deals in fiscal year 2014, reflecting industry concerns that such settlements may violate antitrust laws. Most patent disputes were resolved without compensation to the generic rival or restrictions on generic competition.

Experts say the downturn already reflects heightened industry vigilance and, going forward, such deals are more likely to be pursued by specialty pharma companies with only a few big-selling products they hope to protect from generic competition.

In any event, now that two federal appeals courts have determined that settlement terms other than cash payments may be subject to antitrust scrutiny, the pharmaceutical industry, overall, can be expected to exercise even more caution entering into patent settlements.

“The courts have made clear that (antitrust review) may apply to cash and to other types of transfers that have value,” Michael Carrier, a Rutgers University School of Law professor who specializes in intellectual property issues, told us. He also filed a friend-of-the-court brief on behalf of Consumers Union and the American Antitrust Institute in another case that hinges on whether anything other than a cash payment is anticompetitive. “I think this puts the issue to rest.”

Maybe not, though.

In a related development, GlaxoSmithKline late last week petitioned the Supreme Court to review a ruling made last June by another federal appeals court. In that case, the US Court of Appeals for the Third Circuit determined that a deal between Glaxo and Teva to delay a generic version of a medicine was problematic, even though cash was not exchanged.

Of course, just because Glaxo is seeking such a review is no guarantee the Supreme Court will agree. Moreover, as Carrier noted, two federal appeals courts have now reached the same conclusion, suggesting the Supreme Court may not see a need to review the Glaxo case. Nonetheless, the petition illustrates how contentious the issue remains for some companies.