On this past Monday morning, Malcolm L. Stewart, the current Deputy Solicitor General for the Department of Justice, handled the FTC's oral argument very ably, I think. At the end of the argument, using his previously-reserved five minutes, he succinctly explained that -- in effect -- it is the consuming public that is being forced (without any say in the matter) to "kick-in" to help reach agreement, in almost all of these "reverse payment" branded/generic drug patent settlements
The notion is that each of the branded "innovator", and the first-to-file generic "copier", seek payments that, in total, exceed what a natural market would produce as total market profits.
So (absent the "enhanced" payments) the two cannot seem to divide the market pie amiably (for each feels its slice is going to be too small). The solution the pair have hit upon in recent years, at least, is to subvert the Hatch-Waxamn process, and reduce overall competition (even though Hatch-Waxman explicitly intended to strengthen competiton, and reduce the prices consumers pay for life-saving medicines) -- at least for the 180 day exclusivity period -- forcing the public to pay extra during that time, and thus both the innovator, and the copier recover a windfall. [This is accomplished, the FTC claims, by the first-to-file generic copier agreeing to wait to enter the market, and the innovator reaping additional profits during the then-delayed-180 day window -- and then effectively splitting those additional profits with the copier -- at the expense of the consumer.]
Specifically, at page 55 of the oral argument transcript (that's a rather large PDF file), Mr. Stewart summed up -- in a simple example -- why these reverse payments are antithetical to our notion of promoting free market competition, in order to benefit the consumer.
. . . .[O]ur system encourages settlement, but not to the nth degree. And so, for instance, if you had two firms fighting over a million dollars and each firm decided internally, $600,000 is the least I will accept. If they stuck to their guns, the case couldn't be settled.
Now, if the public could be made to kick in an additional 200,000, then each of the firms could get its 600,000 and walk away content. But we don't pursue the policy in favor of settlement to that degree.
But that's essentially what's happening here. The way these payments facilitate settlement is by inducing the generics to agree to a later entry date by increasing the total pool of profits that are available to the two firms combined and thereby maximizing the likelihood that each firm will find its own share of the profit satisfactory. . . .We now await the reading out of the opinion(s) -- probably early in this coming summer -- but the above crystallizes the FTC contention nicely. It is certain that this sort of an agreement would violate the anti-trust laws, were it made in the oil industry, or in the tech industry. And that is telling.
This notion seemed to trouble Justices Sotomayor, Breyer, Ginsburg, Kennedy, Kagan and (to some extent) the Chief Justice -- Mr. Roberts. [That was essentially the line-up -- of the majority -- in the Obamacare/individual mandate cases, too, by the way.] We shall see -- but I would not expect that the court will hold such arrangements are presumptively (essentially always) unlawful. On balance, I would expect an intermediate level of scrutiny, to be articulated in some newly-announced test of the arrangements.
But as ever, these are merely guesses -- part of the fun of watching the Supremes is to make parlor bets about outcomes. So there is mine. Your mileage may vary. In fact, it probably does.
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