In the U.S. Supreme Court’s ruling Monday on pay-for-delay settlements in the pharmaceutical industry – in which a brand-name drugmaker pays generic rivals to drop challenges to its patent, thus assuring its monopoly – five justices agreed with the Federal Trade Commission that the key question isn’t whether pay-for-delay deals exceed the scope of the brand-maker’s patent. Courts cannot simply rubber-stamp such settlements as presumptively legal, the majority said in FTC v. Actavis. But nor can they assume that pay-for-delay settlements are illegal by their very nature. Instead, according to the majority, trial courts must conduct a “rule of reason” analysis to determine whether reverse-payment settlements violate antitrust law.

Those inquiries, the majority concedes, are probably going to be “time consuming, complex and expensive” – a much less convenient alternative to the simple scope-of-the-patent test endorsed by the 11th Circuit Court of Appeals in the underlying case and by several other federal circuits in previous pay-for-delay suits by the FTC and private plaintiffs. But the scope-of-the-patent approach “throws the baby out with the bath water,” the majority said. A patent holder has monopoly rights only when its patent is valid, the very inquiry that is aborted through pay-for-delay settlements.

The justices concluded that trial judges need not conduct a full-blown inquiry into a patent’s validity to evaluate the anticompetitive impact of a pay-for-delay deal, but can consider (among other factors) the size of the reverse payment as a proxy for the patent’s weakness. “An unexplained large reverse payment itself would normally suggest that the patentee has serious doubts about the patent’s survival,” the majority said, in an opinion written by Justice Stephen Breyer. “And that fact, in turn, suggests that the payment’s objective is to maintain supracompetitive prices to be shared among the patentee and the challenger rather than face what might have been a competitive market – the very anticompetitive consequence that underlies the claim of antitrust unlawfulness.”

In the short term, the ruling will probably make pay-for-delay settlements less popular for pharma companies. The majority seems to assume that antitrust litigation, however costly and time-consuming, is less so than patent litigation. I’m not sure that’s always true. Clearly, that’s going to be a consideration for brand-name drugmakers, which will now have to calculate whether the most economically rational route to prolonging their monopoly is to drag out suits challenging their patents, since reverse-payment settlements will no longer end their litigation costs. In the Actavis ruling, the majority suggested that generics and brand-name makers may be able to come up with different sorts of settlements, perhaps permitting the generic to enter the market before the brand patent expires. Nevertheless, “if the basic reason (for a reverse-payment settlement) is a desire to maintain and to share patent-generated monopoly profits,” the court said, “then, in the absence of some other justification, the antitrust laws are likely to forbid the arrangement.”

The majority believes that in the long run, antitrust scrutiny will boost what it calls the “precompetitive thrust” of the Hatch-Waxman Act, which established the regulatory regime for generic drugmakers seeking to bring their products to market. Pay-for-delay settlements, which the majority said are mostly limited to the pharma industry, were considered an unintended consequence of Hatch-Waxman provisions calling for brand-name drugmakers to sue generics for infringement after generics file applications to introduce competing products; reverse payments typically resolve counterclaims of invalidity by the generics.