Well over a century ago, Standard Oil (the corporate ancestor of today’s Chevron), founded by John D. Rockefeller, controlled over 90% of all oil production and 85% of end sales. It was the result of years of mergers, acquisitions, legal machinations and manipulation. The corporation grew like a cancer, and by 1900, didn’t even have to resort to driving out competitors by underselling.

In 1906, the federal government (under the Theodore Roosevelt Administration) determined that Standard Oil had been engaging in “unfair practices…abuse of the control of pipe lines…[and] unfair methods of competition in the sale of refined petroleum products.” In 1909, the U.S. Department of Justice filed suit under the Sherman Anti-Trust Act, and Standard Oil was broken up in 1911.

Today, the Sherman Anti-Trust Act has all but gone out the window under a generation of corporatist lawmakers and judges. However, once in awhile, a corporation still gets held to account under the 1890 statute. Case in point – Cephalon, Inc., maker of the “stay awake!” medication Provigil. In a society that makes more and more demands on workers and sleep is considered a luxury, you’d think such a medication would be a big seller – and you’d be right. The drug made Cephalon almost half a billion dollars in 2005 – and within two years, that figure had doubled. By 2011, Provigil was making over $1 billion a year.

It’s not surprising that Cephalon executives were in a bit of a panic as the expiration date of the patent drew nigh.  In addition, the 1984 Hatch-Waxman Act encourages drug companies to challenge patents on high-priced brand-name prescription drugs. Suddenly, competitors would be flooding the market with their own, cheaper generic versions. Cephalon’s solution? Buy off the competition.

The technical term for this type of  “pay-for-delay” agreement is “reverse payment patent settlement.” Instead of drug companies A, B and C having to possibly challenge drug company X for the right to a patent and having to pay for the right to market their own version of a prescription medication, Company X heads them off at the pass by essentially bribing A, B and C to not produce their own version.  Under U.S. patent laws, patents are generally good for twenty years. In addition, the FDA may grant a drug company a period of “exclusivity” once the drug has been given approval. Patents and exclusivity periods may or may not run concurrently.

Laws and regulations concerning patents and exclusivity are complex. Suffice it to say, Cephalon was facing the loss of its golden-egg laying goose and decided to go the reverse payment patent settlement route. This practice has long been targeted by critics as anti-competitive, harmful to the public and stifling to innovation.

According to a recent decision by the U.S. Supreme Court, it also violates anti-trust regulations (at least, the few that are enforced anymore). In the 2013 case Federal Trade Commission v. Actavis, Inc., the SCOTUS ruled that the FTC could sue drug companies under anti-trust regulations for engaging in  reverse payment patent settlements, overturning a lower court ruling. Despite the ruling, Actavis CEO Paul Bisaro told the New York Times that “…these settlements will continue, and we will continue to enter into these kinds of settlements….all of our agreements were pro-competitive.”

The current case involving Cephalon (now a subsidiary of Teva) was considered a test determining how lower courts would apply the 2013 SCOTUS ruling. In order to avoid the possibility of high monetary penalties and the loss of its subsidiary’s huge Provigil profits, Teva agreed to settle the charges against for the comparatively modest sum of  $1.2 billion – minus $512 billion the company paid recently to settle allegations of overcharging wholesale customers (hospitals, health care clinics, etc.)  The settlement is a “consent degree,” meaning Teva is not obligated to admit to any wrongdoing.

The current settlement dwarfs the next largest settlement in FTC history, in which Countrywide Financial settled for a paltry $108 million for its alleged role in the subprime mortgage debacle in 2010. It’s still a fraction of what Teva would have paid had the case gone to trial and the court had ruled in favor of the FTC.  In that scenario, the FTC could have sought disgorgement (surrender) of the profits Cephalon made on Provogil in the five-year period between 2007 and 2012 – which would have run into several billions.

All things considered, Teva and Cephalon got off pretty easy.

K.J. McElrath is a former history and social studies teacher who has long maintained a keen interest in legal and social issues. In addition to writing for The Ring of Fire, he is the author of two published novels: Tamanous Cooley, a darkly comic environmental twist on Dante's Inferno, and The Missionary's Wife, a story of the conflict between human nature and fundamentalist religious dogma. When not engaged in journalistic or literary pursuits, K.J. works as an entertainer and film composer.