Justice Dept says reverse payments illegal

WASHINGTON, July 6 (Reuters) - The Justice Department argued on Monday that drug company payments to prevent generic competition were "presumptively unlawful," a shift from the Bush administration which had not opposed the deals.

In a brief filed to the 2nd Circuit Court of Appeals in New York, the Justice Department joined with the Federal Trade Commission, which has been crusading against the settlements.

In this case, Bayer BAYG.DE paid Barr Laboratories to prevent it from bringing a generic version of Cipro to market. The case was filed by Arkansas Carpenters Health and Welfare Fund, CVS Pharmacy, Inc, Rite Aid (RAD.N) and others against Bayer, AG, and Barr Laboratories, Inc.

"A settlement involving a payment to the alleged drug patent infringer in exchange for its agreement to withdraw its challenge to the patent and delay bringing its generic drug to market is presumptively unlawful and requires the defendant to offer justifications in order to avoid antitrust liability," said the brief, which was signed by Christine Varney, the new head of the Justice Department's Antitrust Division.

The brief is a sign that the tide may be turning against the payments. Bills pending in the U.S. Congress would ban the deals. And the Federal Trade Commission has filed suit against several of the settlements, hoping to find one that the Supreme Court would find illegal.

President Barack Obama supports a ban.

Consumers, insurance companies and the federal government spend an extra $3.5 billion for prescription drugs every year because brand-name companies pay generic producers to stay out of the market, according to a FTC study released last month.

The FTC has challenged the deals in court with mixed success.

In 2006 it failed to convince the Supreme Court to hear its case against Schering-Plough Corp SGP.N for a deal with Upsher-Smith because of opposition from the Justice Department.

The first known "pay for delay" was in 1994 when Bristol-Myers Squibb Co (BMY.N) paid $290 million to Schein Pharmaceutical to delay the sale of a generic version of the Bristol-Myers anxiety drug Buspar.

(Reporting by Diane Bartz; Editing by Richard Chang)