Justices heard arguments from the Justice Department against what they call "pay-for-delay" deals or "reverse settlements."
Such deals arise when generic companies file a challenge at the Food and Drug Administration to the patents that give brand-name drugs a 20-year monopoly. The generic drugmakers aim to prove the patent is flawed or otherwise invalid, so they can launch a generic version well before the patent ends.
Brand-name drugmakers then usually sue the generic companies, which sets up what could be years of expensive litigation. When the two sides aren't certain who will win, they often reach a compromise deal that allows the generic company to sell its cheaper copycat drug in a few years -- but years before the drug's patent would expire. Often, that settlement comes with a sizable payment from the brand-name company to the generic drugmaker.
Numerous brand-name and generic drugmakers and their respective trade groups say the settlements protect their interests but also benefit consumers by bringing inexpensive copycat medicines to market years earlier than they would arrive in any case generic drugmakers took to trial and lost. But federal officials counter that such deals add billions to the drug bills of American patients and taxpayers, compared with what would happen if the generic companies won the lawsuits and could begin marketing right away.
The Obama administration, backed by consumer groups and the American Medical Association, says these so-called "pay for delay" deals profit the drug companies but harm consumers by adding $3.5 billion annually to their drug bills.
"What the brand name is attempting to purchase is protection from the possibility that it will have its patent invalidated, and it will suffer a large competitive advantage," Justice Department lawyer Malcolm L. Stewart told the justices.
But it could also just be good business, Justice Antonin Scalia said. Drug companies are saying that "instead of giving them a license to compete, you know, we'll short-circuit the whole thing," Scalia said. "Here's the money. Go away."
"But the point here is that the money is being given as a substitute for earning profits in a competitive marketplace," Stewart said.
What if a brand-name drug company is making $100 million, and a generic drug company says its product will reduce that to $10 million, so both companies agree that the brand name company would give the generic company $25 million to stay off the market, said Justice Elena Kagan.
"It's clear what's going on here is that they're splitting monopoly profits and the person who's going to be injured are all the consumers out there," Kagan said.
Generic drugs account for about 80 percent of all American prescriptions for medicines and vaccines, but a far smaller percentage of the $325 billion spent by U.S. consumers on drugs each year. Generics saved American patients, taxpayers and the healthcare system an estimated $193 billion in 2011 alone, according to health data firm IMS Health.
Justice Sonia Sotomayor said the government seems to be arguing that the generic vs. brand name drug fight should be settled by the generic paying a royalty or negotiating an early release date for the generic drug instead of by the two companies agreeing to share profits. "What's so bad about that?" she said.
Actavis lawyer Jeffrey L. Weinberger said most cases aren't settled like that, and in case of a strong brand-name drug patent, generic drugmakers wouldn't have an incentive to settle with brand name companies.
They would say, "'Why would I drop this lawsuit to get an entry date in 2025 or 2028? That doesn't meet my business needs, I have shareholders, I have investors, I have to run a business, and I'm going to keep on litigating unless you give me something of value,"' Weinburger said. "So that's what these agreements are about."
Justice Ruth Bader Ginsburg pointed out that by settling with a reverse payment, the generic drug maker gets more than it would if it won against the brand-name drugmaker at trial.
"That was my concern, too," said Justice Anthony Kennedy. "What the brand company can lose is much greater than what the generic can make. So why don't you just put a cap on what the generic can make and then we won't have a real concern with the restraint of trade, or we'll have a lesser concern."
The court shouldn't let the government interfere with the ways companies have decided to resolve these disputes, Weinberger said.
Congress wanted to encourage generic drugs, he said. And if the court starts interfering with the ways drug companies settle these patent disputes, "that is going to mean that fewer generics are going to challenge these patents," Weinberger said.
In the case before the court, Brussels, Belgium-based Solvay -- now part of a new company called AbbVie Inc. -- reached a deal with generic drugmaker Watson Pharmaceuticals allowing it to launch a cheaper version of Solvay's male hormone drug AndroGel in August 2015. The patent runs until August 2020.
AndroGel, which brought in $1.2 billion last year for AbbVie, is a gel applied to the skin daily to treat low testosterone in men. Low testosterone can affect sex drive, energy level, mood, muscle mass and bone strength.
Solvay agreed to pay Watson, now called Actavis Inc., an estimated $19 million-$30 million annually, which Actavis says was for help in selling AndroGel, a licensing agreement over Solvay's Androgel patents and compensation for using its sales force to promote AndroGel to doctors.
The FTC called the deal anticompetitive and sued Actavis.
"We believe the FTC's position, if upheld by the court, would harm American consumers ... and impede patient access to generic drugs and the billions of dollars that generic drugs save," Actavis CEO Paul Bisaro said after the arguments.
Eight justices will decide this case later this year. Justice Samuel Alito did not take part in considering whether to take this case and is not expected to take part in arguments but has not disclosed the reason.