They cost consumers about $3 billion a year, the Federal Trade Commission (FTC) believes they are illegal, a bipartisan coalition of Senators has introduced legislation to abolish them, and President Barack Obama opposes them, but because federal judges are split on the issue, “pay-for-delay” agreements are widely used in the pharmaceutical industry. Pay-for-delay refers to deals in which a drug manufacturer with a name-brand product funnels a share of its profits to another drug maker in return for its promise not to produce a generic equivalent.

) to sell it, arguing that the patent is invalid. Instead of litigating the patent, the companies settle the case with a deal that pays for delaying the generic. The agreements come about when a generic-drug maker develops a generic equivalent to a brand name drug that is under patent and applies to the Food and Drug Administration ( FDA

Although these schemes are a win-win for both companies—as the name-brand maker continues to enjoy its monopoly while the generic company gets paid to do nothing—Americans lose out on access to cheaper drugs, which the FTC says can save consumers up to 90%. Without them, the annual cost to Americans can be as high as $3.5 billion.

On July 16, however, the U.S. Court of Appeals for the Third Circuit in Philadelphia issued a decision in the “K-Dur Antitrust Litigation” that these deals violate federal antitrust laws . In doing so, the Third Circuit disagreed with three other federal appeals courts—the Eleventh Circuit in Atlanta, the Second Circuit in New York and the Federal Circuit in Washington D.C.—which have held that the agreements are legal so long as the period of delay does not exceed the expiration date of the patent that is being challenged.

By bucking that trend, “the Third Circuit has rebalanced the issue and teed it up for the Supreme Court,” according to Professor Eleanor M. Fox , an antitrust expert at New York University Law School, because two other appeals courts—the District of Columbia Circuit and the Sixth Circuit in Cincinnati—have also ruled against the deals. Settling differences between the appeals courts is one of the main reasons the Supreme Court may take a case, and the Third Circuit case will certainly be appealed to the High Court.

In reaching its decision, the Third Circuit pointed out that in patent infringement suits like those brought by brand-name drug makers against generics, the burden is on the brand-name company, which contradicts the decisions that assume pay-for-delay deals are legal as long as they don’t exceed the patent term. In fact, the FTC has found that generic challenges to drug patents prevailed 73% of the time. The court noted that “these figures add force to the likelihood … that [pay-for-delay deals] enable the holder of a patent that the holder knows is weak to buy its way out of both competition with the challenging competitor and possible invalidation of the patent.”

-Matt Bewig, David Wallechinsky

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