Patent License Agreements – Pay for Delay

Today, the Supreme Court will hear oral arguments in a patent related dispute related to whether a drug company should be allowed to pay its competitors under a patent license agreement which is designed to prevent generic drugs from getting on the market.  Some refer to these arrangements as a “pay to delay” payment, and believe it to be a valid settlement agreement.  Others view it as an anti-competitive agreement that harms consumers.  For the first time since this form of settlement appeared nearly a decade ago, the Supreme Court will determine its legality.

A settlement agreement between a band name pharmaceutical company and a generic pharmaceutical company is the basis of the litigation brought by the Federal Trade Commission (“FTC”) on behalf of the United States Government.  The settlement agreement in question was initiated when a brand name pharmaceutical manufacturer, Solvay, paid a generic drug manufacturer to delay entry of its testosterone hormone supplement, into the market place for 9 years.

Arguably, Solvay’s patented product AndroGel is based upon an improvement patent, with a slightly different formula from an old drug with an expired patent.  Some say the improvement patent should have never issued because the slight changes in the formula were not enough to warrant patent protection and because the original patent covering testosterone supplements expired years ago.

Solvay’s sales of AndroGel exceed $400 million annually.  The generic drug companies threatened that their generic versions of the testosterone products would be six times cheaper.  As the introduction of the generic drug was imminent, Solvay entered into a settlement agreement in which they paid $42 million dollars to a generic drug manufacturer to prevent the sale of the generic product in competition with AndroGel.

The FTC is challenging the settlement agreement as being anti-competitive in that it violates the nation’s anti-trust law by preventing competition in the marketplace.  Both generic and branded drug manufacturers view the settlement agreements as a contractual arrangement within their constitutional rights.  They believe if Congress had intended the prevention of such conduct, then Congress should handle the issue, not the FTC.

Today’s oral arguments will help define the proper scope and permissibility of settlement agreements stemming from patent infringement disputes.