In a "reverse payment" agreement between a brand-name drug manufacturer and a potential generic competitor, a patent holder (the brand-name manufacturer) agrees to pay a large sum of money to an accused infringer (its would-be competitor), and the competitor agrees that it will no longer challenge the patent and will not enter the market for a specified period of time.
Source: Petition for a Writ of Certiorari
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 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.
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.
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
How Drug Company Pay-Offs Cost Consumers Billions (FYC)