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A recent Supreme Court outcome is discussed in Edward Wyatt, “Supreme Court Lets Regulators Sue Over Generic Drug Deals”, New York Times, June 17, 2013. (NY Times link)After reading these articles1:1. Explain how a patent creates a kind of monopoly and what benefits a patent conveys to the owner.2. Explain what happens in a market when patent protection for a technology runs out.3. Explain the effects of pay–for–delay actions on producers and consumers.4. Discuss whether pay–for–delay tactics should no longer be allowed, or should continue. Be sure to support your conclusion using economic arguments.


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Drug Companies and Patents: The Games they Play
Due in NetTutor via the link in Blackboard Sunday, March, 24,
by 11:50 pm (PST)
Module 24 discusses patents and how they create a barrier to entry. A U.S. Supreme Court
case was brought by the US Federal Trade Commission to halt the pay-for-delay tactics
sometimes used by pharmaceutical companies to contractually extend the effective patent
period of pharmaceutical drugs.
The pay-for-delay tactics are more fully described in Federal Trade Commission, “Pay-forDelay: How Drug Company Pay-Offs Cost Consumers Billions”. Staff Study, January 2010.
( )
A recent Supreme Court outcome is discussed in Edward Wyatt, “Supreme Court Lets Regulators Sue Over Generic Drug Deals”, New York Times, June 17, 2013. (NY Times link)
After reading these articles1 :
1. Explain how a patent creates a kind of monopoly and what benefits a patent conveys
to the owner.
2. Explain what happens in a market when patent protection for a technology runs out.
3. Explain the effects of pay–for–delay actions on producers and consumers.
4. Discuss whether pay–for–delay tactics should no longer be allowed, or should continue.
Be sure to support your conclusion using economic arguments.
Grading Rubric
Please include your name, instructor’s name (Dr. Prera), course and section number
(EconS 101) and writing assignment (Assignment 3) on the top of your assignment.
Your essay will be assessed as either ‘Meets expectations’ or ‘Needs improvement’ on each of
the criteria in the table below. If your essay needs improvement, you will be given feedback
from NetTutor to help you revise it.
You have one week from the time you receive your feedback to revise and resubmit the essay to NetTutor for another try – but you only get one second chance.
You’ll need to accumulate three acceptable writing assignments to fulfill the writing portion
of the course requirements.
All documents are provided below.
Meets Expectations
Ideas are well-organized.
Transition sentences effectively
connect one idea to the next.
The essay is free of typos and grammatical errors.
Sources properly cited and referenced.
Explains how a patent is a
monopoly includes benefits to the
producer (patent holder) and impact on consumers and is economically correct.
Explains what happens in the market to both producers and consumers when a patent runs out is
economically correct and coherent
and how pay-for-delay tactics extend patent protect.
Reasoning for support or rejection
of pay-for-delay tactics is well supported by economic reasoning.
Needs Improvement
The writing is difficult to follow
and/ or poorly organized.
Transition sentences are absent or
Typos and/ or grammatical errors
distract the reader.
Source material citations/ references needed, but are missing or
Explains how a patent is a
monopoly, but does not include
benefits to the producer (patent
holder) or impact on consumers, or
is economically incorrect.
Explains what happens in the market to both producers and consumers when a patent runs out is
economically incorrect, incoherent,
or missing.
Reasoning for support or rejection
of pay-for-delay tactics is not supported by economic reasoning.
Articles appear next (total of 68 pages in this document).

Supreme Court Lets Regulators Sue Over
Generic Drug Deals
JUNE 17, 2013
WASHINGTON — Pharmaceutical companies that pay rivals to keep less­
expensive generic versions of best­selling drugs off the market can expect
greater federal scrutiny after a Supreme Court ruling on Monday.
In a 5­to­3 vote, the justices effectively said that the Federal Trade
Commission can sue pharmaceutical companies for potential antitrust
violations, a decision that is likely to increase the number of generic drugs in
the marketplace and benefit consumers.
Specifically, the justices threw out lower­court rulings that said the
agreements were legal, provided that a deal did not keep a generic drug off the
market beyond the term of the brand­name drug’s patent.
The decision is likely to create considerable uncertainty in the drug
business and shift an important balance of power to the generic companies,
industry analysts said. Drug developers may now find it harder to ward off
generics, which typically cost about 15 percent of the brand­name’s price and
cause the original to quickly lose up to 90 percent of its market share.
Consumer groups, drug retailers, wholesalers and insurance companies,
which all benefit from the lower prices of generic drugs, could also step up
their challenges to the agreements under antitrust laws.
The court did not address whether the agreements, called pay­for­delay or
reverse payments, were unlawful on their face. In a standard patent
infringement lawsuit, a settlement payment would be made by an infringer to
the patent holder.
In the case, Federal Trade Commission v. Actavis, No. 12­416, the agency
said that a payment to Actavis by Solvay Pharmaceuticals, the holder of a
patent on a testosterone gel known as AndroGel, represented an unlawful
restraint of trade because it was intended to keep Actavis from producing its
generic version of AndroGel for a certain number of years.
Solvay’s deal with Actavis is known as a reverse­payment agreement
because payment flows from the brand­name drug company to the generic
competitor that is challenging the patent.
Justice Stephen G. Breyer, writing for the majority, said that “a court, by
examining the size of the payment, may well be able to assess its likely
anticompetitive effects along with its potential justifications without litigating
the validity of the patent.”
The stakes in the case are significant. Pharmaceutical sales in the United
States totaled roughly $320 billion in 2011, according to IMS Health, a
research company whose statistics the trade commission cited in its
arguments. Brand­name drugs accounted for 18 percent of the total
prescriptions written by doctors in 2011 but 73 percent of consumer spending,
IMS reported.
“No other decision this term will have as much impact on consumers’
pocketbooks,” said David A. Balto, an antitrust lawyer and a former Federal
Trade Commission policy director.
“It clearly maps out how the F.T.C. can use the law to stop these
anticompetitive schemes and make sure consumers receive the full benefits of
a competitive marketplace,” Mr. Balto added. “At the same time it permits the
broad range of settlements that pose few competitive concerns.”
Officials at the trade commission, which has fought against the pay­for­
delay agreements for several years, were predictably enthusiastic.
“The Supreme Court’s decision is a significant victory for American
consumers, American taxpayers and free markets,” said Edith Ramirez,
chairwoman of the F.T.C. “With this finding, the court has taken a big step
toward addressing a problem that has cost Americans $3.5 billion a year in
higher drug prices.”
Executives at Actavis played down the decision’s significance. “The F.T.C.
did not win anything with this decision,” said Paul M. Bisaro, president and
chief executive of Actavis. “We think these settlements will continue, and we
will continue to enter into these kinds of settlements. We believe all of our
agreements were pro­competitive.”
Justice Breyer’s decision, which was joined by Justices Anthony M.
Kennedy, Ruth Bader Ginsburg, Sonia Sotomayor and Elena Kagan, reversed a
decision of the 11th Circuit Court of Appeals, which had thrown out the F.T.C.’s
case. The appeals court said that because the exclusion of the generic drug did
not extend beyond the term of the brand­name drug’s patent, a “quick look”
could determine that there was no anticompetitive effect.
The Supreme Court’s decision adopted a different standard, known as the
“rule of reason,” which states that the agreements must be considered in the
context of their possible benefits for consumers.
Chief Justice John G. Roberts Jr. wrote a dissenting opinion, which was
joined by Justices Antonin Scalia and Clarence Thomas. Justice Samuel A.
Alito Jr. recused himself from the case.
In their dissent, the justices pointed out that the agreement between
Solvay and Actavis allowed for the generic drug to come to market five years
before the scheduled expiration of Solvay’s patent. The majority’s decision will
discourage the settlement of patent litigation, the justices said.
Congress has encouraged generic drug makers to challenge the patents
protecting lucrative brand­name drugs through the 1984 Drug Price
Competition and Patent Term Restoration Act, also known as the Hatch­
Waxman Act.
A version of this article appears in print on June 18, 2013, on page B1 of the New York edition with
the headline: Justices Rule for the F.T.C. in a Generic Drug Case.
© 2015 The New York Times Company
How Drug Company Pay-Offs
Cost Consumers Billions
An FTC Staff Study
January 2010
Federal Trade Commission |
Brand-name pharmaceutical companies can delay generic competition that lowers
prices by agreeing to pay a generic competitor to hold its competing product off the
market for a certain period of time. These so-called “pay-for-delay” agreements have
arisen as part of patent litigation settlement agreements between brand-name and
generic pharmaceutical companies.
“Pay-for-delay” agreements are “win-win” for the companies: brand-name
pharmaceutical prices stay high, and the brand and generic share the benefits of the
brand’s monopoly profits. Consumers lose, however: they miss out on generic prices
that can be as much as 90 percent less than brand prices. For example, brand-name
medication that costs $300 per month might be sold as a generic for as little as $30 per
The Federal Trade Commission’s (FTC) investigations and enforcement actions against
pay-for-delay agreements deterred their use from April 1999 through 2004.1 In 2003,
an appellate court held that such agreements were automatically (or per se) illegal.2
Since 2005, however, a few appellate courts have misapplied the antitrust law to uphold
these agreements.3 Following those court decisions, patent settlements that combine
restrictions on generic entry with compensation from the brand to the generic have reemerged.
Agreements with Delay and Compensation4
2009 5
Agreements with compensation from the brand to the generic on average prohibit
generic entry for nearly 17 months longer than agreements without payments, where
the average is calculated using a weighted average based on sales of the drugs.6 Most of
these agreements are still in effect. They currently protect at least $20 billion in sales of
brand-name pharmaceuticals from generic competition.7
Pay-for-delay agreements are estimated to cost American consumers $3.5 billion per
year – $35 billion over the next 10 years.8
Pay-for-delay agreements have significantly postponed substantial consumer savings from
lower generic drug prices. The Commission has recommended that Congress should pass
legislation to protect consumers from such anticompetitive agreements.
Pay-for-delay agreements appear in some settlements of patent litigation between brand-name
and generic pharmaceutical companies. That patent litigation usually takes place within the
framework for generic entry established by the Hatch-Waxman Act.9 Under that Act, a generic
competitor may seek entry prior to expiration of the patents on a brand-name drug. Generic
drug entry before patent expiration can save consumers billions of dollars. Generics have an
incentive to challenge brand patents because the first generic to file its application can obtain
180 days of marketing exclusivity during which it is the only generic on the market. To seek
FDA approval for entry before patent expiration, a generic must declare that its product does
not infringe the relevant patents or that the relevant patents are invalid.
Typically, brand-name pharmaceutical companies challenge the generic’s declaration, and
litigation ensues between the brand-name and generic pharmaceutical manufacturers to
determine whether the relevant patents are valid and infringed. For the brand to prevail and
block entry, it must successfully defend the validity of its patents and demonstrate that the
generic’s product would infringe those patents. In 2002, the FTC issued a study showing
that generics prevailed in 73% of the patent litigation ultimately resolved by a court decision
between 1992 and June 2002.10
Given the costs and potential uncertainty of patent litigation, brand-name and generic
pharmaceutical companies sometimes settle their patent litigation before a final court
decision. For example, the parties may agree that the generic can enter at some time before
the patent’s expiration date, but not as soon as the generic seeks through its litigation. Absent
compensation to the generic for the delay in its entry, such settlement agreements are unlikely
to raise antitrust issues.
The FTC’s 2002 study determined, however, that some brand-name and generic
pharmaceutical companies had settled their patent litigation through agreements that
compensated generics for substantial delays in generic entry. The FTC recommended that
Congress pass legislation to require pharmaceutical companies to file certain agreements
with the FTC. The intent of the legislation was “to put an end to this exploitation of the
provision in Hatch-Waxman that grants a short-term protection from competition to the first
manufacturer to bring a generic version of a brand name drug to market.”11
Congress acted on the FTC’s recommendation. Under the Medicare Prescription Drug,
Improvement, and Modernization Act of 2003 (the “MMA”), pharmaceutical companies must
file certain agreements with the FTC and the Department of Justice within ten days of their
Findings from Pharmaceutical
Agreement Filings from FY2004
through FY2009
hh How Many Final Agreements Have Involved Compensation from the Brand to the
Generic Combined with Restrictions on Generic Entry?
From FY2004-FY2009, 66 final agreements involved some form of compensation
from the brand to the generic combined with a delay in generic entry.
hh Can Pharmaceutical Companies Settle Patent Litigation without Pay-for-Delay
Yes. From FY2004-FY2009, pharmaceutical companies filed a total of 218 final
settlement agreements involving brand and generic companies. Seventy percent of
those patent settlements – 152 – did not involve compensation from the brand
to the generic combined with a delay in generic entry. This large number of
settlements not involving compensation from the brand to the generic undermines
brand and generic firms’ arguments that compensation is the only way to settle
patent litigation. In fact, there are a variety of ways to settle litigation that do not
involve these payments.
hh Do Agreements with Compensation from the Brand to the Generic Postpone
Generic Entry Significantly Longer than Other Patent Settlement Agreements?
Yes. Staff analysis of patent settlements restricting generic entry finds that
agreements with compensation on average prohibit generic entry for nearly 17
months longer than agreements without payments, where the average is calculated
using a weighted average based on sales of the drugs.13 This difference in time to
entry is very unlikely to be caused by random variation in the agreements. In fact,
there is less than a 1% chance that this large a difference in average time to entry
would be observed if the amount of delay from the two types of agreements were
drawn from the same statistical distribution.
A hypothetical consumer paying $300 per month for a brand-name drug, instead of
a generic price as low as $30 per month, could pay as much as $270 per month more
for prescription drugs. Over a 17-month period, this could total additional expenses
of $4,590 resulting from the extra delay that occurs, on average and weighted for
hh Is the First Generic to Seek Entry Prior to Patent Expiration Involved in Most of
the Potential Pay‑for‑Delay Settlements?
Yes. Out of the 66 agreements that combined compensation from the brand to the
generic with deferred generic entry, 51 agreements (77%) were between the brand
pharmaceutical company and the generic company that was the first to seek entry
prior to patent expiration for the relevant brand-name drug.
Settlements with first-filer generics can prevent all generic entry. Those agreements
place a “cork in the bottle” that typically ensures the brand-name drug’s lock on the
market. This cork-in-the-bottle effect occurs because every subsequent generic
entrant has to wait until the first generic has been marketed for 180 days. 14
hh Do All Pay-for-Delay Agreements Involve Dollar Payments from the Brand to the
No. Brand-name pharmaceutical companies have found a wide variety of techniques
through which to compensate generic companies for delaying their entry.
Recently, brand-name pharmaceutical companies have sometimes compensated
generics by agreeing not to compete through a so-called “authorized generic.” Under
the Hatch-Waxman Act, the generic that is first to file its approval application can
be entitled to market its generic product for 180 days with no competition from
other generics.15 This rule, however, does not protect the first-filer generic from
competition from an “authorized generic” or “AG” during those 180 days.
AGs are brand-name pharmaceutical products marketed as generics. AG
competition can substantially reduce the revenues a first-filer generic earns during its
180 days of marketing exclusivity.16
About 25% of patent settlement agreements from FY2004-FY2008 that were with
first-filer generics involved an explicit agreement by the brand not to launch an
AG to compete against the first filer, combined with an agreement by the first-filer
generic to defer entry past the date of the agreement.17 In effect, by agreeing not to
launch an AG, the brand agrees not to subtract from the generic’s profits during the
180-day period.
hh Has the FTC Given Up Litigating Pay-for-Delay Cases under the Antitrust Laws?
No. The FTC has multiple investigations underway and currently is litigating two
cases in the trial courts.18 Over the past nine years, the FTC has invested substantial
resources in investigating and, when necessary, litigating cases involving patent
settlements in which brand-name pharmaceutical companies allegedly paid generic
companies to stay off the market, thus depriving consumers of millions of dollars in
cost savings that would otherwise have been available.19
Given the magnitude of consumer harm from pay-for-delay settlements – an
estimated $35 billion over the next ten years – a legislative solution offers the
quickest and clearest way to deter these agreements and obtain the benefits of
generic competition for consumers.
Study Methodology
This study was prepared by staff from the FTC’s Bureau of Competition, Bureau of
Economics, and Office of Policy Planning.
This study is based on patent settlement agreements filed with the FTC between January 1,
2004 and September 30, 2009 pursuant to the Medicare Prescription Drug, Improvement, and
Modernization Act of 2003, Pub. L. No. 108-173, 117 Stat. 2066, codified in relevant part at
42 U.S.C. § 1395w-101 note (section 110), 21 U.S.C. § 355 note (sections 1111-1118), 21
U.S.C. § 355(j)(5) (section 1102).
Staff identified agreements in which restrictions on g …
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