Devising Antitrust Responses to Pharmaceutical Pay-for-Delay Settlements

[Aditya Singh is a third year law student at Rajiv Gandhi National University of Law]

Introduction

Pharmaceutical patent-settlements, wherein branded drug manufacturers (originator) pay a would-be generic drug manufacturer in exchange for delayed market entry (pay-for-delay) have drawn scrutiny in several jurisdictions but await explicit resolution in India. Although reports about the Competition Commission of India (CCI) opening inquiries into pay-for-delay settlements made rounds, there have been no subsequent public follow-up or a final ruling on those investigations. At the same time, compulsory licensing provisions under the Patents Act, 1970 (Patents Act) are intended to safeguard public health by permitting third party generics to produce and market patented inventions under defined criteria.

This article aims to identify and fill the regulatory gap by crafting a liability framework that takes the Indian pharmaceutical industries into account: it treats any payment from originator to generic tied to delayed launch as prima facie unlawful, permitting rebuttals for genuine technology or service exchanges that include concrete consumer-facing commitments, and provides for a streamlined referral to the Patent Controller for compulsory licensing where the presumption stands.

Typically, a generic manufacturer challenges a drug patent either by filing for regulatory approval before expiry or defending against an infringement suit prompting the brand to offer a settlement. In a pay-for-delay deal, the originator transfers value (largely monetary) to the generic in exchange for a promise to postpone its market launch by a defined period. Companies pursue this route to avoid protracted and costly litigation while securing revenues through continued monopoly. However, these agreements effectively extend exclusivity beyond the patent’s natural term, delaying price-driven competition along, raising drug costs, and postponing patient access to cheaper generics - hence their global antitrust significance.

Comparative Background: Rule of Reason v. By Object

In the United States (US), the Supreme Court in FTC v. Actavis rejected the idea that settlements to delay within the patent term are automatically lawful. It recognized that a brand’s reverse payment (called so because, unlike a typical patent suit or patent opposition proceeding where the alleged infringer pays the patent holder, here the patent holder pays the would-be generic to stay out) could extend monopoly rents beyond what a valid patent alone would justify, having the potential to harm consumers and market competition. Rather than relitigate patent validity, the Court held that a large, unexplained payment warrants a “rule-of-reason” inquiry, wherein courts must assess whether the payment carries a significant risk of anticompetitive effects, then require the parties to show justified efficiencies such as genuine litigation-cost reimbursement or pro-competitive effects, before upholding the deal.

The European Union (EU), through a series of analysis done in Generics UK, Lundbeck and Servier, chose a different route, classifying reverse-payment settlements as anticompetitive “by object” i.e, once a significant inducement to delay entry is shown, no initial effects analysis is required. This approach is grounded in potential competition i.e. a generic that has the realistic ability and firm intent to enter is already a competitor in antitrust terms; paying it to postpone entry removes that competitive constraint, so the deal is treated as anticompetitive by object. Once such significant inducement is established, the settlement is presumed to be illegal. Only then may parties rebut by proving a bona fide, non-delay business rationale (for example, a valid technology-licensing fee), and broad efficiencies emerge exclusively at the separate Article 101(3) exemption stage.

The Indian Legal Landscape

It is essential to assess the existing legal framework to identify both its enforcement gaps and the statutory foundations available for addressing pay-for-delay settlements.

The Competition Act, 2002 (Act), addresses anti-competitive agreements and abuse of dominance under Sections 3 and 4. Section 3(3) elucidates that certain agreements, those that significantly restrict competition, are presumed to be unlawful, while Section 3(5) carves out an Intellectual Property (IP) exemption for agreements “reasonably necessary” to protect patent rights. However, this exemption requires that the arrangement be no more restrictive than the patent itself, a threshold that pay-for-delay deals often fail. This exemption fails because pay-for-delay settlements do not satisfy the three pre-conditions laid down in Shamsher Kataria v. Honda Siel Cars India Ltd., the landmark CCI ruling that for the first time laid out the mandatory tests for an IP-based carve-out under Section 3(5), thereby setting the benchmark for what counts as “reasonably necessary” protection of patent rights. Firstly, the “right” asserted, the power to defer generic entry by transferring value, is not a statute-conferred patent right but a private bargain that substitutes payment for judicial determination of infringement. Secondly, the formal requirements for maintaining the patent monopoly without resorting to reverse payments, showing that such deals are not “reasonably necessary” to protect the patentee’s statutory privileges. Lastly, the patentee retains full ability to enforce its patent through suit even in the absence of any payment-forbearance clause, confirming that these settlements go beyond what the Patents Act authorizes.

On the patents side, Sections 25(1) and 64 of the Patents Act allow any “person interested” to oppose a pending application or seek revocation of a granted patent on grounds such as lack of novelty or inventive step while Section 83(f) makes clear that nothing in the Act entitles a patentee to engage in practices that “unreasonably restrain” trade, implicitly forbidding pay-for-delay arrangements. Section 84 empowers the Patent Controller to grant compulsory licences when public needs go unmet and prices are unreasonable and Section 84(6)(iv) expressly waives the six-month negotiation period where antitrust violation is shown.

In practice, originators gravitate towards reverse-payment settlements when the patent position is uncertain due to being under litigation and the economics of delay i.e. preserving monopoly revenues outweigh the costs of a payoff. In contrast, where a core, defensible patent and clear infringement exist, patentees typically rely on ordinary enforcement through injunctions, royalty-bearing licences, or field-of-use restrictions because these fall within Section 3(5)’s “reasonably necessary” shelter. The distinction matters: a value-for-delay bargain is a competition restraint not conferred by the Patents Act and so sits outside Section 3(5), whereas a royalty-based early-entry licence or non-exclusive supply arrangement tailored to the patent’s scope can remain compliant.

Indian courts have oscillated on whether the CCI can proceed against patentees under Sections 3 and 4 when the conduct arises from patent licensing. A single judge of the Delhi High Court in the Monsanto and Ericsson matter allowed a CCI probe to continue, rejecting the argument that patent enforcement ousts competition scrutiny. This stance shifted when a Division Bench (in the consolidated Ericsson/Monsanto appeals) quashed the CCI investigations, holding that the Patents Act is a complete code for unreasonable licensing conditions and therefore prevails where the alleged abuse stems from exercising patent rights. The CCI has appealed to the Supreme Court. Thus, for now, the jurisdictional balance between the two statutes remains under consideration.

Public-Interest & Market Realities

Understanding the market realities of the Indian pharmaceutical sector is essential in order to devise an India-specific approach. India’s healthcare financing remains heavily out-of-pocket with nearly half of all medical expenditures coming directly from patients’ pockets rather than insurance or government schemes. A US based study shows that when generics enter, prices can plunge by 80–90% within months. These benefits often evaporate if branded originators succeed in delaying entry. In Natco v. Bayer, the Bombay High Court upheld the Patent Controller’s decision to grant a compulsory licence for Sorafenib after finding the patentee’s price was unaffordable, cutting the drug’s monthly cost from approximately ₹3.1 lakh to ₹9,800. This case illustrates both the welfare issues at stake and the practical power of compulsory licensing to restore competition.

Yet, generics account for nearly 75% of India’s pharmaceutical sales by volume and 90% by value, highlighting the reliance of consumers on generics in the country. In such a market, even short-lived pay-for-delay settlements can impose aggregate consumer costs measured in hundreds of crores of rupees, disproportionately affecting low-income and rural populations with minimal insurance coverage. These realities shed light on the issues that plague the Indian pharmaceutical market and are testament to the fact that ex-post litigation alone is insufficient. Thus, it is important that a clear, proactive liability rule backed by compulsory-licensing remedies be implemented in order to safeguard access, affordability, and the timely  entry of generics into the market.

Proposed Liability Standard

To prevent branded originators from using pay-for-delay settlements as a back-door monopoly extension, India should adopt a presumption-based, multi-stage test grounded in existing law. Under this model; first, any settlement, be it in pursuance of a patent litigation by virtue of any opposition proceedings, infringement suit or compulsory licensing, in which value flows from the originator to the generic and is expressly conditioned on delayed entry should give rise to a prima facie presumption of illegality under Section 3(3) of the Act. No detailed economic or patent-strength inquiry should be required at this stage; regulators and courts would only need to confirm that the agreement contains both a transfer of value and a deferred market entry clause. This bright-line test speeds up enforcement by stopping suspect deals at the contract-review stage rather than after lengthy economic or patent battles, letting generics enter sooner and prices fall faster. It cuts compliance and litigation costs, while giving companies clear rules to follow; thus, deterring covert pay-offs.

Once this threshold is met, the burden shifts to the originator to dispel the presumption by producing contemporaneous evidence that the payment served a bona fide, arm’s-length commercial purpose and was not made with the aim of postponing competition or procompetitive justifications. Acceptable proof can include a valid technology-licensing agreement, non-exclusive co-manufacturing contract with clear performance milestones or demonstrating any concrete consumer-facing benefits. If satisfactory evidence is provided, the settlement can be allowed to subsist; otherwise, it should be condemned. It is pertinent to note that the threshold will remain much higher in compulsory licensing proceedings as opposed to opposition or infringement proceedings.

Upon condemnation, the CCI can exercise its remedial powers under Section 27 of the Act to direct the generic to apply for a compulsory license under Patents Act if it deems necessary. Through Section 21-A, it can transmit its order to the Patent Controller that the originator has been found in contempt for anti-competitive practices, as Section 84(6)(iv) expressly waives the usual 6 month negotiation period once anticompetitive practices are proven, either for the generic or any other private applicant.

To ensure transparency, it is suggested that the framework mandate an ex-post notification of any patent-settlement involving originator-to-generic value be transferred within 30 days of execution. By anchoring each step in statutory authority, this staged test combines the deterrent force of a presumption-based approach with the flexibility of rebuttals, making clear that paying generics to stay out of the market is no longer a legally safe option in India.

After the Delhi High Court’s Division Bench ruling in Ericsson/Monsanto calling the Patents Act a “complete code” for licensing disputes, a simple way forward is to split roles clearly. When a settlement has a value-plus-delay clause, the CCI should assess the agreement under Section 3 and simultaneously send a brief Section 21-A reference to the Patent Controller for any patent-side remedy. If the CCI finds a violation, it can issue a cease-and-desist order under Section 27 and forward its order; the Controller can then handle a compulsory-licence application under Section 84, with section 84(6)(iv) waiving prior negotiations where anti-competitive conduct is shown. This keeps patent validity and licensing with the Controller, competition effects with the CCI, and delivers quicker, more predictable outcomes for users. The CCI’s appeal from Ericsson/Monsanto is pending before the Supreme Court; until the same is decided, this coordination model is the most workable. For the avoidance of doubt, this coordination protocol does not alter the proposed presumption or rebuttal standards; it only allocates remedies on the patent’s side to the Controller while the CCI decides on questions of competition.

Conclusion and the Way Forward

The proposed liability framework for pay-for-delay settlements carefully balances the need for rapid intervention with respect for bona fide commercial collaboration. By treating any payment from an originator to a generic conditioned on delayed entry as prima facie unlawful, it imposes a stricter stance than the United States’ rule-of-reason, which often allows large reverse payments to persist through lengthy economic inquiries and thereby prolongs high drug prices for consumers. At the same time, by preserving a document-based rebuttal, which includes both genuine commercial reasons and procompetitive justifications, offers a more flexible alternative to the EU’s by-object presumption, which forecloses all but the most exceptional efficiency defences and relies on a post-infringement exemption process.

A balanced approach is the need of the hour in India for several reasons. Firstly, with nearly half of healthcare expenditure being paid out of pocket, even brief delays in generic entry can materially harm patients. Secondly, given a generic-dominated market and anti-evergreening safeguards, adopting a presumptive stance, as proposed, is unlikely to freeze genuine research and development. Thirdly, preserving a narrow window for pro-competitive justifications ensures that efficiency-enhancing collaborations and consumer benefits are not foreclosed. Fourthly, deploying India’s compulsory-licensing powers enables condemnatory findings to translate swiftly into market entry rather than prolonged appeals. Lastly, anchoring each step in existing statutes ensures administrative feasibility, predictability for industry, and a clear, coherent path for regulators.