California is the first state to examine whether pharmaceutical companies can pay competitors to not make or sell cheaper generic versions of their prescription drugs.
The California Supreme Court last month agreed to review a 10-year-old class-action lawsuit involving the antibiotic Cipro (ciprofloxacin), which originally was manufactured by drugmaker Bayer. The suit argues that it was illegal for Bayer to pay a competitor to stay out of the market as part of a settlement in a legal dispute over the Cipro patent.
The deal forced hundreds of thousands of Californians to collectively overpay millions of dollars for the drug, the lawsuit claimed.
“Without generic competition, drug prices are enormously high,” said Joseph Saveri, an attorney with Lieff Cabraser Heimann & Bernstein, who is representing California consumers in the case. “These agreements are instrumental in keeping them enormously high.”
The class-action case stems from a 1996 settlement of a patent dispute over Cipro between Bayer and Barr Laboratories, which was planning to sell a generic version of the antibiotic. After five years of litigation – and in light of projections that Bayer could lose about $1 billion in profits over several years if a generic were to step into the market – the companies settled the case.
The terms of the agreement involved Bayer paying Barr nearly $400 million to delay making or selling the generic until after the expiration of the patent in December 2003. Between 1997 and the end of 2003, Bayer raised the price of Cipro by 16 percent and made a profit of about $5 billion, according to court documents.
This practice of paying pharmaceutical competitors to delay entry into the market is not unusual. In fiscal year 2011, 28 of these so-called "pay-for-delay" arrangements were inked. They involved 25 drugs that had combined annual U.S. sales of more than $9 billion.
These types of settlements have been criticized by government agencies ranging from the Federal Trade Commission [PDF] to the U.S. Department of Justice and California attorney general’s office. The FTC estimates that as a result of these pay-for-delay deals, American consumers pay an additional $3.5 billion for prescription drugs each year.
Drugmakers have largely prevailed when these arrangements are challenged in federal courts. Over the course of defending against the class-action case in California courts in the past decade, Bayer has won in both the trial and appeals courts with judges relying on federal case law. Bayer said the rulings illustrate the legality of these settlements.
“Bayer believes that the decisions of the trial and appellate courts are correct and will vigorously defend those decisions before the Supreme Court of California,” Bayer spokeswoman Marcy Funk wrote in an e-mail.
Drugmakers Hoechst Marion Roussel, The Rugby Group and Watson Pharmaceuticals, which subsequently purchased The Rugby Group, also are named in the lawsuit because they supposedly received a portion of the Bayer payments to Barr. They did not return requests for comment through their attorneys.
In making the recent argument for California Supreme Court review, attorneys representing the state's consumers argued that while some federal courts may find these payment settlements permissible, they’re ultimately illegal under California antitrust law.
“California law does not authorize or condone settlements that violate public policy, particularly a settlement where competitors are paid off to prevent competition,” stated documents filed by attorneys for consumers.
Legal experts said the Cipro case is an example of the ways that federal and state antitrust legal case law and trends have diverged.
Federal antitrust law "moves around with trends in politics, economic theory," said University of San Francisco law professor Jesse W. Markham Jr. while state antitrust statutes like California’s Cartwright Act have tended to take a broader view of what is considered an illegal, monopolistic practice.
“We live under a federal judiciary that has widely adopted a laissez-faire economic theory, so the federal antitrust laws that we have now are the most feeble that we’ve ever had,” Markham said.
Given this general split between state and federal courts on antitrust law, the Cipro case is “potentially very significant,” Mark A. Lemley, a law professor at Stanford University, wrote in an e-mail.
“If reverse payments are declared illegal in California, it may affect the behavior of pharmaceutical companies nationwide, because they will face liability in California if they continue to enter into such agreements,” wrote Lemley, who wrote an amicus brief on behalf of 78 law professors arguing that the settlements are illegal.
A ruling in this case could come as early as this fall, and regardless of the outcome, the financial effects won’t be nominal. According to a January Government Accountability Office report, Americans spent $307 billion on prescription drugs in 2010, which accounted for about 12 percent of all health care spending. The study also noted that substituting generic drugs for brand-name versions between 1999 and 2010 saved consumers more than $1 trillion.