The arrangements, known as "pay-for-delay" or "reverse payments," have for more than a decade vexed antitrust enforcers, including the Federal Trade Commission (FTC), which have been stung until recently by a series of court decisions allowing such practices.

In a typical case, a generic rival challenges the patent of a brand-name competitor, which then pays the rival a sum of money to drop its challenge. Defenders of the practice call it a legitimate means to resolve patent litigation.

The court accepted an appeal by the FTC, which had challenged annual payments of $31 million to $42 million by Solvay Pharmaceuticals Inc, now owned by Abbott Laboratories, to stop generic versions of AndroGel, a treatment for the underproduction of testosterone, until 2015.

These payments went to rivals such as Watson Pharmaceuticals Inc, Paddock Laboratories Inc and Par Pharmaceutical Cos, and were intended to help Solvay preserve annual profits estimated at $125 million.

The 11th U.S. Circuit Court of Appeals in Atlanta ruled against the FTC and upheld the arrangement in April. Two other circuit courts have also upheld such arrangements.

But the federal appeals court struck down a similar arrangement in July involving Merck & Co Inc. The Supreme Court often steps in to resolve such splits.

"This will be one of the most important business decisions that the court will have issued in quite some time," said Michael Carrier, a professor at Rutgers Law School in Camden, New Jersey. "These agreements cost consumers billions of dollars a year."

'WIN-WIN' FOR DRUGMAKERS

According to the FTC, 127 reverse payment arrangements were struck between 2005 and 2011, at an annual cost to consumers of $3.5 billion.

The agency calls the arrangements a "win-win" for drug companies that can share the benefits of high prices, while consumers, pharmacies and insurers miss out on generic drug prices that could be as much as 90 percent lower.

And in November 2011, the nonpartisan Congressional Budget Office said a U.S. Senate bill to ban reverse payments would save the government $4.79 billion and lower U.S. spending on prescription drugs by $11 billion over a decade. (here)

That bill has not become law.

Under the Hatch-Waxman Act, the first company to win U.S. Food and Drug Administration approval to sell a generic drug before the underlying patent expires has a 180-day exclusive right to market that product.

This typically results in litigation by the brand-name rival, which can lead to reverse payment settlements.

MERCK CASE

In the Merck case, the 3rd U.S. Circuit Court of Appeals had struck down payments by Schering-Plough Corp, later bought by Merck, to rivals to delay generic versions of its potassium supplement K-Dur 20. Upsher-Smith Laboratories Inc was paid more than $60 million, court records show.

The U.S. Department of Justice, acting on the FTC's behalf, urged that the Supreme Court accept the FTC case for review and reverse the 11th Circuit decision.

It said the 3rd Circuit was correct to conclude that reverse payment agreements are presumptively anticompetitive and unlawful. Thirty-one states led by New York also urged the Supreme Court to hear the FTC appeal.

"The court has an opportunity to clarify the law," said Keith Hylton, a professor at Boston University School of Law. "It's very important to the drug industry because companies have many investments tied up in these drugs and that would be put at risk if pay-for-delay agreements were overturned."

The FTC case will be decided by an eight-member court. Justice Samuel Alito recused himself, without giving a reason.

A decision is expected by the end of June.

The case is Federal Trade Commission v. Watson Pharmaceuticals Inc et al, U.S. Supreme Court, No. 12-416.

(Reporting by Jonathan Stempel in New York; Editing by Kevin Drawbaugh, Andre Grenon and Tim Dobbyn)

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