The Antitrust Loophole That Keeps Generic Drugs Off the Market

Antiretroviral drugs are one of the pharmaceutical industry’s great achievements. They have turned HIV/AIDS from a death sentence into a treatable condition. Still, even after being on the market for decades, effective antiretrovirals cost tens of thousands of dollars a year, making them unaffordable for many patients.

One reason for persistently high drug costs, according to many experts, is the exclusion of generic competition. Using a tactic known as “pay for delay,” brand-name drug companies who hold the patents to blockbuster medications pay other companies to put off introducing generic equivalents. This lets them keep charging high prices.

Pay for delay is maddening—the sort of thing that makes people say “There ought to be a law against this.” What’s truly maddening, however, is the fact that there already is a law against pay-for-delay deals: antitrust. The original federal antitrust law, the Sherman Act of 1890, outlaws “every contract, combination, or conspiracy … in restraint of trade.” Shouldn’t pay-for-delay agreements be a clear antitrust violation? According to a group of plaintiffs that include prominent HIV/AIDS advocates, the answer is yes. Their antitrust lawsuit, filed in 2019, accuses Gilead Sciences, the leading marketer of antiretrovirals, of striking deals with competitors to keep cheaper generic drugs out of the market. Gilead has denied the allegations, telling The Washington Post, “Any assertion that we worked to delay availability of lifesaving medication to patients is absolutely false.” The case went to trial last month.

On the surface, the plaintiffs appear to have the law on their side. Under the Sherman Act, it’s illegal for two independent rivals to make a deal not to compete with each other. And yet even if the plaintiffs can prove that their factual allegations are true, they’re not guaranteed a victory. That reality illustrates just how much the courts have watered down antitrust law—and how hard it has gotten to win cases challenging even the most blatantly unfair competitive tactics.

[Read: Big Pharma’s go-to defense of soaring drug prices doesn’t add up]

Drug companies like Gilead have an obvious interest in keeping out generic rivals. Patents give drugmakers a 20-year monopoly. After the patent is up, however, other companies can produce generic versions, introducing price competition. The U.S. Food and Drug Administration has found that when just one generic firm enters the market, it can drop the price of a drug by more than 30 percent. Further generic entry leads to even greater price decreases. Most patients eventually switch from the brand-name drug to a generic counterpart.

In 1984, Congress streamlined the process for generic-drug entry and determining whether a generic drug infringed existing patents. The law helped expand the generic sector, but the big drugmakers came up with a way to dilute Congress’s plan. They would sue companies making generics for patent infringement, and then settle the lawsuits by paying those companies in exchange for not selling the generic version. Normally, when someone violates a patent, they’re the one who must pay the patent holder—not the other way around. For that reason, this new technique is often called a “reverse-payment settlement.”

Consider Gilead’s alleged reaction to one generic competitor. When the Israeli drug company Teva Pharmaceuticals indicated that it would enter the market for Truvada, one of Gilead’s top antiretrovirals, Gilead sued for patent infringement. But in the eventual settlement, Teva somehow came out ahead. According to the plaintiffs, Teva made $1.5 billion in exchange for staying out of the Truvada market for more than five years.

This is not how intellectual-property law ordinarily works. If I start a podcast and use a copyrighted song for theme music without permission, the record label won’t pay me to stop. I’m the one who will be forced to pay. Pay-for-delay schemes look like something different: a way to prop up an invalid or expired patent. For the patent holder, it can be cheaper to pay rivals to stay out of the market than it would be to actually compete with them on price.

The plaintiffs in the antitrust lawsuit argue that Gilead knew its patents might not hold up in court. In other words, Gilead may not have had a legal right to keep Teva out of the market. This sort of thing is not uncommon. When challenged in court, many patents on brand-name drugs are found to be invalid or not infringed. To keep the profits from its patent monopoly flowing, according to the lawsuit, Gilead effectively paid Teva not to compete against it for several years. (Gilead rejects this allegation, arguing that its patents were valid and that the settlements actually allowed generics to arrive sooner. Teva, which is also a defendant in the suit, says that it settled with Gilead because it didn’t think it could win a patent-infringement case.)

Under traditional antitrust principles, this should be unlawful. The courts have long held that price-fixing and agreements not to compete among rivals are categorically, or “per se,” illegal, unless they have an express authorization from Congress or a state government. This per se rule is strict when it’s applied. The Supreme Court held in 1990, for example, that a group of low-paid public defenders in Washington, D.C., had engaged in illegal price-fixing when they went on strike seeking better pay. In 2004, the Court declared collusion among rivals to be “the supreme evil of antitrust.”

But cases challenging pay-for-delay agreements have had mixed results, with different federal courts reaching conflicting conclusions. One circuit court of appeals held that pay-for-delay agreements are a form of collusion and therefore always illegal, but another disagreed. In 2013, the Supreme Court finally ruled on the issue in a case called Federal Trade Commission v. Actavis. In a decision by Justice Stephen Breyer, the Court ruled that the antitrust laws apply to pay-for-delay agreements. The case went back down to the lower court for resolution.

[Read: How two common medications became one $455 million specialty pill]

So that settled that—except it didn’t. The Actavis ruling was a Pyrrhic victory, because instead of finding pay for delay per se illegal under the Sherman Act, the Court held that the agreements should be evaluated using a legal standard known as the “rule of reason.” Under the rule of reason, courts don’t simply ask whether companies engaged in a prohibited practice. Instead, they decide the legality of the practice on a case-by-case basis: assessing whether it hurt consumers and, if it did, whether the businesses had some legitimate reason for it. The Actavis decision opened the door to speculative business theories that might excuse collusive agreements.

In that way, the ruling is a poster child for how antitrust law went off the rails more generally. Beginning in the 1970s, the Supreme Court refashioned antitrust to be much more lenient toward powerful corporations. One key way it did this was by replacing existing per se rules with the rule of reason in more and more situations. This changed the question in many antitrust cases from something simple—“Did the business engage in a certain practice?”—to something painfully complicated: “Because the practice has a hypothetical justification, did the government or private plaintiff show that it had an adverse effect on consumers, suppliers, or distributors, and if so, did the business have a good reason for doing it in this particular case?” That might sound like a technical distinction, but in antitrust cases, it can be the whole ball game. As one prominent conservative federal judge has put it, the rule of reason amounts to “de facto legality” for unfair competitive practices of corporations. Empirical research backs up his point.

In the pharmaceutical context, Actavis provided drugmakers with a blueprint for designing pay-for-delay deals that would hold up in court. Drug companies now know that a pay-for-delay agreement embedded in a larger, more complex arrangement is more likely to be excused by the courts. In the Gilead case, the company did not pay Teva and other generic rivals in cash, but instead allegedly agreed to refrain from licensing other generic firms, thus granting these rivals temporary monopolies of their own—promises potentially worth billions of dollars.

Because of the Actavis decision, the plaintiffs in the lawsuit against Gilead face uncertain odds. What they have alleged, particularly the agreement between Gilead and Teva, appears to be a classic noncompete agreement among rivals. When two providers of bar-review courses agreed not to compete in the same parts of the country in the 1980s, the Supreme Court had no difficulty condemning their agreement as per se illegal. But in their trial against Gilead, AIDS activists will proceed under the less friendly rule of reason standard.

Still, the situation is not hopeless. Although most rule-of-reason cases are unsuccessful, the plaintiffs suing Gilead survived motions to dismiss and made it to trial. If they win, they will be entitled to substantial damages, which may deter other companies from making pay-for-delay agreements. And notwithstanding the mixed results of its past litigation, the FTC still could solve the problem. Under the FTC Act, the agency can make rules outlawing unfair competitive practices. America’s pharmaceutical industry claims to be incredibly dynamic. It shouldn’t be afraid of a little healthy competition.

Support for this article was provided by the William and Flora Hewlett Foundation.

Older Post Newer Post