In Re: K-Dur Antitrust Litigation, No. 10-2077 (3d Cir.)
In what antitrust experts are calling a "landmark" decision, the Third Circuit Court of Appeals on Monday held that so-called "pay-for-delay" or "reverse payment" settlement agreements are presumptively anticompetitive and illegal. In 2005, the Eleventh Circuit Court of Appeals, analyzing the same settlement agreements at issue here, but applying a different test, reached essentially the opposite result. Because of the circuit split, many observers believe that with this case, the Supreme Court will finally address the legality of reverse payment settlements.
The two settlement agreements at issue in the case involve Schering's blood pressure drug K-Dur 20. In 1997, Schering and Upsher-Smith settled their paragraph IV case on terms that included a $60 million payment from Schering to Upsher and an agreement by Upsher not to market its generic version of K-Dur until 2001. At about the same time, Schering and ESI Lederle settled their paragraph IV case on terms that included a $10 million payment from Schering to ESI and an agreement by ESI not to market its generic K-Dur until 2004.
The Third Circuit's opinion provides a concise history of court decisions examining reverse payment settlements under the antitrust laws. Since 2001, five other circuit courts have addressed the legality of reverse payment settlements. The D.C. Circuit in 2001 and the Sixth Circuit in 2003 both concluded that such agreements should be subject to strict antitrust scrutiny, at least where the parties attempted to "park" the first ANDA filer's 180-day exclusivity period in order to block subsequent ANDA filers. The Eleventh Circuit in 2003 and 2005, the Second Circuit in 2006, and the Federal Circuit in 2008 each applied the "scope of the patent" test, under which "the essence of the inquiry is whether the agreements restrict competition beyond the exclusionary zone of the patent." More specifically, under the scope-of-the-patent test, "reverse payments are permitted so long as (1) the exclusion does not exceed the patent's scope, (2) the patent holder's claim of infringement was not objectively baseless, and (3) the patent was not procured by fraud on the PTO."
The Third Circuit rejected the scope-of-the-patent test here, stating: "As a practical matter, the scope of the patent test does not subject reverse payment agreements to any antitrust scrutiny. As the antitrust defendants concede, no court applying the scope of the patent test has ever permitted a reverse payment antitrust case to go to trial." According to the court, the "test improperly restricts the application of antitrust law and is contrary to the policies underlying the Hatch-Waxman Act and a long line of Supreme Court precedent on patent litigation and competition."
The court further explained:
In rejecting the scope of the patent test, we are cognizant that such a test encourages settlement, an objective our decisions generally support. However, the judicial preference for settlement, while generally laudable, should not displace countervailing policy objectives or, in this case, Congress's determination--which is evident from the structure of the Hatch-Waxman Act and the statements in the legislative record--that litigated patent challenges are necessary to protect consumers from unjustified monopolies by name brand drug manufacturers. We also emphasize that nothing in the rule of reason test we adopt here limits the ability of the parties to reach settlements based on a negotiated entry date for marketing of the generic drug: the only settlements subject to antitrust scrutiny are those involving a reverse payment from the name brand manufacturer to the generic challenger.
The Third Circuit thus remanded the case to the district court with the following instructions:
to apply a "quick look" rule of reason analysis based on the economic realities of the reverse payment settlement rather than the labels applied by the settling parties. Specifically, the finder of fact must treat any payment from a patent holder to a generic patent challenger who agrees to delay entry into the market as prima facie evidence of an unreasonable restraint of trade, which could be rebutted by showing that the payment (1) was for a purpose other than delayed entry or (2) offers some pro-competitive benefit.
Consistent with the Third Circuit's decision, the FTC has often stated that it is not concerned with settlements in which the brand and generic companies compromise on a generic entry date that is prior to patent expiration but later than would occur if the patent-in-suit were invalidated in court--so long as nothing of value is provided from the brand to the generic as part of the agreement. The FTC has also publicly stated that besides cash payments, it considers an agreement by the brand company not to launch an authorized generic drug at the time of generic entry to be "something of value" that should make the agreement presumptively anticompetitive.