Supreme Court Allows Antitrust Challenge to Pay-for-Delay Drug Settlements Costing Consumers $3.5 Billion Annually

The Supreme Court ruled 5-3 in FTC v. Actavis that the Federal Trade Commission could bring antitrust challenges against “pay-for-delay” agreements where brand-name drug manufacturers pay generic competitors to delay bringing cheaper alternatives to market. The decision reversed lower court rulings that had granted these anticompetitive settlements immunity from antitrust scrutiny as long as they fell within the “scope of the patent.” FTC analysis estimated these collusive settlements cost American consumers and taxpayers $3.5 billion annually in higher drug costs—$35 billion over ten years—making this one of the most financially significant antitrust decisions in modern history.

The Androgel Case: A Template for Industry-Wide Abuse

The case involved Solvay Pharmaceuticals’ brand-name drug AndroGel, used for treating low testosterone. When generic manufacturers Actavis, Paddock, and Par filed applications to produce generic versions and certified that Solvay’s patent was invalid, Solvay sued for patent infringement. Rather than litigate the patent validity, Solvay paid the generic companies enormous sums to abandon market entry: $60 million to Par, $12 million to Paddock, and an estimated $19-30 million annually for nine years to Actavis. The FDA had already approved Actavis’s generic product, but instead of bringing it to market and competing on price, Actavis accepted payment to delay entry and even agreed to promote AndroGel to doctors on Solvay’s behalf—turning a would-be competitor into a paid marketing agent.

The “Cork in the Bottle” Effect

Pay-for-delay settlements create what the FTC calls a “cork in the bottle” effect that blocks all generic competition, not just the settling company. Under the Hatch-Waxman Act, the first generic manufacturer to file receives 180 days of marketing exclusivity. When brand-name companies pay the first-filer to delay market entry, that 180-day clock never starts, preventing all subsequent generic manufacturers from entering the market. A single pay-for-delay settlement with one generic company can thus preserve a branded drug monopoly worth hundreds of millions or billions of dollars annually. The brand-name company shares a small portion of these monopoly profits with the first-filer generic, while consumers and taxpayers continue paying monopoly prices that can be 10-50 times higher than competitive generic prices.

Decades of Failed Lower Court Challenges

The FTC had been fighting pay-for-delay settlements since 2001, but federal appellate courts consistently ruled that these agreements were immune from antitrust scrutiny as long as they fell within the patent’s scope. The Eleventh Circuit in particular adopted a “scope of the patent” test that effectively blessed any settlement agreement that did not extend beyond the patent’s expiration date or broaden its claims. This legal standard allowed pharmaceutical companies to openly collude to divide markets and eliminate price competition, turning patent litigation into a mechanism for cartel formation. By 2012, the number of potentially anticompetitive pay-for-delay deals had reached 40 annually—up from just a handful in the early 2000s—as pharmaceutical companies exploited the legal immunity created by appellate court rulings.

Justice Breyer’s Economic Analysis Prevails

Justice Breyer’s majority opinion rejected the “scope of the patent” test and applied straightforward economic analysis to demonstrate the anticompetitive harm. He noted that large reverse payments from brand-name to generic companies strongly suggest that both parties understand the patent would likely not survive a validity challenge, yet both profit by preventing that challenge from occurring. The brand-name company pays to eliminate the risk of losing patent protection, while the generic accepts payment rather than compete. Consumers lose access to competitive pricing that would result if the weak patent were invalidated. Breyer emphasized that patent rights do not include the right to eliminate competition through payments to potential competitors, and that the size of the reverse payment provides evidence that the parties are dividing monopoly profits rather than settling good-faith patent disputes.

A Partial Victory with Limited Impact

While the Supreme Court rejected absolute immunity for pay-for-delay settlements, it stopped short of declaring them presumptively illegal—the rule advocated by the FTC. Instead, the Court held that such agreements should be evaluated under the “rule of reason,” requiring case-by-case analysis of whether anticompetitive harms outweigh any procompetitive justifications. This more forgiving standard has allowed pharmaceutical companies to continue entering pay-for-delay settlements, though the number dropped from 40 in FY 2012 to 29 in FY 2013 and 21 in FY 2014 after the Actavis decision. The FTC’s estimate of $3.5 billion in annual consumer harm represented roughly one-third of costs borne by the federal government alone, which paid about one-third of the nation’s $235 billion prescription drug bill—meaning the government could save $1.2 billion annually if such settlements were prohibited.

Significance

FTC v. Actavis exposed how pharmaceutical companies had turned patent litigation from a system for protecting innovation into a mechanism for collusive market division and price-fixing. The decision revealed that “settlements” of patent disputes were often shams—agreements where both parties acknowledged the patent was likely invalid but preferred to share monopoly profits rather than compete. The $3.5 billion annual consumer harm figure understates the full damage, as it reflects only those settlements the FTC could identify and quantify. The case demonstrated how corporate legal strategy can transform statutory rights into tools of monopoly preservation, with consumers bearing costs through both higher drug prices and taxpayer-funded government drug purchases. The Court’s refusal to adopt the FTC’s proposed presumption of illegality—despite clear evidence of systematic consumer harm—illustrated how even “victories” for antitrust enforcement often preserve corporate flexibility to continue extractive practices through more sophisticated legal engineering. The pay-for-delay scandal exemplified regulatory capture at the judicial level, where decades of pro-corporate appellate rulings had created a legal safe harbor for behavior that would be per se illegal in any other industry.