If ever there was an issue that cried out for the attention of the U.S. Supreme Court, it's pay-for-delay settlements in which brand-name pharmaceutical companies pay their generic rivals to drop patent challenges, thus preserving the branded drug's exclusive hold on the market. As Merck's new lawyers at Williams & Connolly discussed in a new petition for Supreme Court review of last month's shocker of a ruling from the 3rd Circuit Courtof Appeals, the 3rd Circuit created a black-and-white split with three other federal circuits when it ruled that pay-for-delay settlements are presumptively anticompetitive. With tens of billions of dollars spent every year on pharmaceuticals in the United States, Merck argued, the controversy over pay-for-delay settlements demands resolution. Even the federal government and antitrust plaintiffs have to agree, according to Merck: They may oppose cert in this case since they won at the 3rd Circuit, but they've previously asked the Supreme Court to review appellate rulings that upheld the legality of pay-for-delay settlements. "This is the rare situation in which all of the interested parties -- private plaintiffs, defendants and the federal government -- agree that the issue presented is of enormous legal and practical significance," the Merck brief, filed Friday, said.

It will be interesting to see if the Federal Trade Commission and the Justice Department oppose cert in the Merck case, which involves long-running litigation over t w o settlements of generic challenges to Schering-Plough's patent protection on a potassium-release drug called K-Dur. The FTC, in particular, has been campaigning for more than a decade to end pay-for-delay settlements, which supposedly cost American consumers some $3.5 billion a year. Both the FTC and DOJ participated in the K-Dur case at the 3rd Circuit, but since the appeals court gave pay-for-delay challengers everything they want -- and they did it in the circuit that's home to many of the big drug companies -- the government may argue against Supreme Court review this time around. (I left a message with an FTC spokesman but didn't hear back; I also reached out to a lawyer for plaintiffs in the 3rd Circuit case but he didn't return my call.)

But equally interesting is the Merck brief's explanation of what brand manufacturers consider the root cause of pay-for-delay settlements: the 1984 Hatch-Waxman Act, which established the framework for generic drugs to enter the marketplace. Under Hatch-Waxman, a generic drugmaker files an application with the Food and Drug Administration to introduce its version of a brand-name drug, with the incentive of 180 days of market exclusivity for the first generic to go on sale. Typically -- and I'm stripping away a lot of complications here -- generics assert that the patents protecting brand-name pharmaceuticals are invalid. And typically, the brand maker responds to that assertion with a patent infringement suit against the generic, thereby triggering an automatic 30-month stay of the generic's product introduction while the validity of the brand-name patent is litigated.

Merck's brief asserted that the Hatch-Waxman framework skews the incentives in patent litigation in a way that makes pay-for-delay settlements inevitable. (I should note that Merck does not employ the term "pay-for-delay," preferring instead to discuss "Hatch-Waxman settlements.") In typical patent litigation, the brief argued, patent validity isn't tested until the alleged infringer has a product on the market. That means both the patent challenger and the patent holder have skin in the game, the brief said, since "the alleged infringer will have to pay the patentee's lost profits or other damages (and potentially lose its investment in developing, manufacturing, and marketing the product) in the event it is found to have infringed," Merck argued. "Such litigation therefore often ends with the alleged infringer agreeing to pay a portion of its profits to the patentee in return for the patentee's dropping the litigation (and forgoing the remainder of its damages claim against the alleged infringer)."

But when generics challenge brand-name patents within the Hatch-Waxman framework, they have nothing to lose, since they're not actually selling the allegedly infringing products. As a result, they're not on the hook for damages if the validity challenge fails. Brand manufacturers, on the other hand, have much more to fear from Hatch-Waxman litigation than normal patent suits, according to Merck. "A brand manufacturer with patent rights will run the risk of losing the protection of its patent -- and, with it, the opportunity to recoup the enormous investment required to develop, obtain FDA approval for and market a new drug," the brief said.

Those Hatch-Waxman "asymmetric litigation risks" result in the kinds of settlements that have provoked the FTC and antitrust plaintiffs, according to Merck. "It is often the patentee that is willing to make a concession to the alleged infringer," the brief argued. "That concession typically takes the form of a license to market a generic version for some portion of the remaining patent term -- coupled, in some cases, with a monetary payment."

Merck isn't the only one raising questions about the unintended warping effect of the Hatch-Waxman framework. As the 2nd Circuit wrote in its seminal 2004 pay-for-delay ruling, Inre: Tamoxifen Citrate Antitrust Litigation, several lower courts have noted that the redistribution of risk in Hatch-Waxman patent litigation prompts reverse-payment, or pay-for-delay, settl e ments. The 2nd Circuit said that just because the peculiarities of the law makes reverse-payment settlements "a natural by-product," that doesn't necessarily mean they're lawful. But it also held that under the circumstances of Hatch-Waxman's risk-shifting, "we see no sound basis for categorically condemning reverse payments employed to lift the uncertainty surrounding the validity and scope of the holder's patent."

For Merck, it makes good sense to assert that Congress created the scenario that has led to pay-for-delay settlements, since there's no clear constitutional reason for the Supreme Court to strike them down. (The antitrust laws cited by the 3rd Circuit are also congressional creations.) If the Supreme Court agrees to take up the issue, look for Merck and its fellow brand-name pharma companies to argue that if antitrust plaintiffs and the federal government don't like the way Hatch-Waxman has played out, they should ask Congress to change the law.

(Reporting by Alison Frankel)

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