[author: Kevin E. Noonan]
The In re K-Dur Antitrust Litigation case (formally, Louisiana Wholesale Drug Co. et al. v. Merck & Co. and Upsher-Smith Laboratories, Inc.) is significant because, for the first time in almost a decade, the Federal Trade Commission succeeded in convincing a U.S. Circuit Court of Appeals (here, the Third Circuit) that there was merit in its argument that "reverse payment" agreements between branded and generic drugmakers in ANDA litigation under the Hatch-Waxman Act constitutes a per se restraint on trade and should incur antitrust liability. Merck, the branded partner in the reverse payment settlement agreement, filed a petition for certiorari last month (see "Merck Asks Supreme Court to Review Third Circuit K–Dur Decision"). Like its branded partner, Defendant Upsher-Smith Laboratories, Inc. has filed a petition for certiorari. The Question Presented posed in the petition reads as follows:
Whether the Third Circuit erred by holding, contrary to the Second, Eleventh, and Federal Circuits, that an agreement settling patent litigation that does not restrict competition outside the scope of the exclusionary right granted by the patent itself may presumptively violate the antitrust laws.
While Upsher's petition is similar to Merck's in many respects, the Upsher petition is noteworthy because it presents reasons why reverse payment agreements are in fact pro-competitive from the generic drugmaker's point of view.
The facts of the case are these. The drug K-Dur 20 is a specific formulation of potassium chloride sold by Schering-Plough Co. (now owned by Merck) and protected by a formulation patent, U.S. Patent No. 4,863,743. Upsher filed its ANDA as first-filer with a Paragraph IV certification of non-infringement based on alleged chemical differences between Upsher's generic drug and Schering's branded drug product. Schering filed suit and settlement negotiations ultimately resulted in an agreement, entered into on June 18, 1997, wherein Upsher would "refrain from marketing its generic potassium chloride supplement or any similar product until September 1, 2001." In return, Schering agreed to grant Upsher a "non-royalty [bearing] non-exclusive license" and Upsher granted Schering non-exclusive licenses on several of its products (although Schering never marketed any Upsher products). Schering agreed to pay Upsher sixty million dollars over three years, plus additional amounts tied to its marketing of Upsher's products under the non-exclusive license. Finally, the agreement called for Upsher to dismiss the patent litigation and not to enter the market with its KCl product until September 1, 2001, thus forming the predicate for allegations that this was at heart a "pay for delay" agreement.
A second ANDA filer, ESI Lederle, was also involved in a separate ANDA litigation that was settled (under the supervision of a magistrate judge) by an agreement wherein ESI agreed not to market its generic KCl formulation (which, like Upsher, it alleged was not infringing) in return for a $5 million upfront payment and additional payments depending on when ESI's ANDA was approved by the FDA (an amount the District Court said varied from $10 million to $625,000 depending on the ANDA approval date); as it turns out, ESI obtained FDA approval of its ANDA in sufficient time to be entitled to $10 million, which it received from Schering.
An FTC action ensued, with the Commission alleging that the agreements between Schering, Upsher, and ESI amounted to an unlawful restraint of trade under Section 5 of the FTC act. The Administrative Law Judge dismissed, based on his determination that the agreements included separate licensing terms that fell outside a simple "pay for delay" arrangement. The full Commission reversed the ALJ's determination, finding a "direct nexus between Schering's payment and Upsher's agreement to delay its competitive entry" and that this agreement "unreasonably restrain[ed] commerce," and that the Schering-ESI agreement violated the antitrust laws (wherein the Commission rejected the parties' contention that "judicial pressure to settle" was involved in their agreement). The Commission did not review or rule on the merits of the underlying patent suits, creating a per se rule that:
[W]here a name brand pharmaceutical maker pays a generic manufacturer as part of a settlement, "[a]bsent proof of other offsetting consideration, it is logical to conclude that the quid pro quo for the payment was an agreement by the generic to defer entry beyond the date that represents an otherwise reasonable litigation compromise."
Under a "rule of reason" analysis, the Commission found that "the possible existence of a reverse payment raises a red flag and can give rise to a prima facie case that an agreement was anticompetitive." Schering appealed in the Eleventh Circuit, which overturned the FTC.
The action below in this case named as plaintiffs drug wholesalers (Louisiana Wholesale Drug Co.) and retailers (CVS Pharmacy, Rite Aid, Walgreens, Eckerd, Safeway, Kroger, Albertson's, Hy-Vee and Maxi Drug) against Merck & Co. (the successor-in-interest to Schering-Plough) and Upsher-Smith Laboratories. Characterized as "separate from the FTCs challenge" (but no doubt motivated by it), the plaintiffs here filed various lawsuits that were consolidated in the District of New Jersey by the Judicial Panel on Multidistrict Litigation (fortuitously for plaintiffs and the FTC, in an appellate circuit that had not ruled on the reverse payment practice). A Special Master appointed by the Court filed a Report and Recommendation that the lawsuits be dismissed, based on Schering's right under the patents to "exclude infringing products until the end of [the patent's] term," and that reverse payment agreements warrant antitrust scrutiny only if they either exceeded the scope of the underlying patents or if the patent infringement lawsuits brought under the authority of the patents were objectively baseless (grounds that other appellate circuits had also considered in assessing the legality of reverse payment agreements).
The Third Circuit rejected the precedent of its sister circuits, finding reverse payment agreements to be presumptively illegal. The Court set forth its opinion that the proper approach is to evaluate any agreement alleged to be one that restrains trade by the "rule of reason," following its appreciation of applicable Supreme Court precedents. In doing so, the opinion states that "the finder of fact must decide whether the questioned practice imposes an unreasonable restraint on competition, taking into account a variety of factors, including specific information about the relevant business, its condition before and after the restraint was imposed, and the restraint's history, nature, and effect," citing State Oil Co. v. Khan, 522 U.S. 3, 10 (1997). This inquiry has three parts, according to the Third Circuit: there must be a showing of an anticompetitive effect on the market, which (if established) "shifts the burden to the defendant to show that the challenged conduct promotes a sufficiently pro-competitive effect." The antitrust plaintiff can rebut this showing if it can establish that the restraint on trade is not "reasonably necessary to achieve the [purportedly] pro-competitive objective" asserted by the antitrust defendant.
The opinion rejected what it termed "precedent from other Circuits," namely cases that have almost unanimously found reverse payment agreements to be lawful (Valley Drug Co. v. Geneva Pharmaceuticals, Inc., 344 F.3d 1294 (11th Cir. 2003); Schering-Plough Corp. v. Federal Trade Commission, 402 F.3d 1056 (11th Cir. 2005); In re Tamoxifen Citrate Antitrust Litigation, 466 F.3d 187 (2d Cir. 2006), Arkansas Carpenters Health & Welfare Fund v. Bayer AG, 604 F.3d 98, 105 (2d Cir. 2010); and In re Ciprofloxacin Hydrochloride Antitrust Litigation, 544 F.3d 1323 (Fed. Cir. 2008)). The opinion noted that in each case, the appellate court found the reverse payments to be lawful based on the patent's presumption of validity and the patentee's right to exclude, and that the agreements did not involve an improper extension of that exclusionary right (as well as the policy considerations involving favoring settlements). The panel opinion termed these considerations the "scope of the patent" test; in a footnote, the panel acknowledged these decisions but, finding that they are persuasive and not binding authority and that the panel does not find the arguments persuasive, they "decline to follow [them]."
The panel then explained that it did not believe that the "scope of the patent" test was the appropriate test and should not entitle reverse payments to avoid antitrust scrutiny. The opinion formed this conclusion because "that test [in the panel's view] 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 opinion provided three grounds for this conclusion. First, the opinion stated that it creates "an almost unrebuttable presumption of patent validity," due to the fact that the settlement "forces a presumption that the patent holder would have prevailed" in the underlying (and settled) ANDA litigation. This presumption has (or should have) no substantive vitality, according to the panel, because it is merely 'a procedural device and is not a substantive right of the patent holder," citing Stratoflex, Inc. v. Aeroquip Corp., 713 F.2d 1530, 1534 (Fed. Cir. 1983). The opinion also believed using the presumption of validity to uphold reverse payment agreements was "particularly misguided" when the basis for the underlying patent infringement defense is non-infringement (as it was in this case), because the burden is properly on the patentee, not the challenger, to prove infringement. The panel opinion also "question[ed] the assumption" that subsequent ANDA filers will come forward to challenge "weak" patents.
The Third Circuit panel considered perceived pernicious effects on reverse settlements as being directed to first ANDA filers, which it asserts are the "most motivated" due to the promise of 180 days of market exclusivity. The panel also cited several Supreme Court cases for the proposition that patent rights are "a limited exception to a general rule of the free exploitation of ideas" that indicate that "the public interest supports judicial testing and elimination of weak patents" (this in contrast to the 11th Circuit's recognition that:
No matter how valid a patent is -- no matter how often it has been upheld in other litigation or successfully reexamined -- it is still a gamble to place a technology case in the hands of a lay judge or jury. Even the confident patent owner knows that the chances of prevailing in patent litigation rarely exceed seventy percent. Thus, there are risks involved even in that rare case with great prospects.
The panel explicitly limited the scope of its decision to "reverse payments between patent holders and would be (sic) generic competitors in the pharmaceutical industry." It is clear that the panel was motivated at least in part by its perception, as argued by the FTC, that reverse payment settlement agreements were contrary to and in contravention of Congressional goals of "increase[ing] the availability of low cost generic drugs" (despite findings in other circuits that in some circumstances reverse payment settlements do just that). Nevertheless, the panel found that "[t]he line that Congress drew between these competing objectives [of stimulating innovation and furthering the public interest] strongly supports the application of rule of reason scrutiny of reverse payment settlements in the pharmaceutical industry." And the panel limited the scope of its decision only to settlements that involve payments from the patentee to the putative generic competitor: "[n]othing in the rule of reason test that 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." According to the Court, "the vast majority of pharmaceutical patent settlement [will be] unaffected" by its ruling.
The proper procedure under Third Circuit law is thus to use 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" and that "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." In doing so, the Court also "agreed[s] with the FTC that there is no need to consider the merits of the underlying patent suit because '[a]bsent proof of other offsetting consideration, it is logical to conclude that the quid pro quo for the payment was an agreement by the generic to defer entry beyond the date that represents an otherwise reasonable litigation compromise,'" citing the Commission's Final Order in this matter (that was overturned by the 11th Circuit).
Upsher's petition minces few words in characterizing the Third Circuit opinion. The brief contends that the state of the law as developed in several other Circuits "uniformly" established the rule that found antitrust liability in reverse payment settlement agreements only when those agreements exceeded the "scope of the patent," i.e., the "lawful monopoly" conferred on the patentee. The uniformity in these cases was "specifically and emphatically rejected" by the Third Circuit in repudiating the scope of the patent standard, according to Upsher, substituting "an entirely different legal framework in which patent settlements, like the one at issue [in this case], are presumptively unlawful" (emphasis in the brief). The decision creates a circuit split (while also "gut[ting] the exclusionary right conferred by the patent laws") that is "clear and acknowledged" and involves "an issue of undoubted national significance" according to the petition. Moreover, in this case the Third Circuit decision is in direct conflict with the Eleventh Circuit decision on "very same settlement agreement" (emphasis in brief). Thus:
It cannot be that a single settlement agreement may violate federal antitrust law in Philadelphia but not in Atlanta. The Framers established a unitary Supreme Court precisely to avoid such conflicts on matters of federal law. If ever there were a clear-cut case where this Court's review is warranted, it is this one.
So far, these arguments parallel (indeed, could be substituted for) similar arguments contained in Merck's brief. However, Upsher's brief then sets forth considerations regarding the pro-competitive aspects of reverse payment settlement agreements decidedly from the generic drugmaker's point of view.
The principal argument in favor of reverse payment settlement agreements in Upsher's brief is that they encourage settlements. A rule that discourages settlement is thus contrary to a general policy in favor of settlements -- which have benefits "to the parties, the courts, and the public" that have been recognized in patent cases as well as general civil litigation according to the brief. In the specific context of ANDA litigation, Upsher argues that "such a rule would result in diminished competition because generic companies would face greater hurdles to bringing so-called 'Paragraph IV' patent challenges and thus would likely challenge fewer drug patents." The brief supports this argument by reminding the Court that, under the Hatch-Waxman regime, generic drugmakers avoid incurring damages by launching a generic drug product at risk. "Nonetheless," the brief argues that:
[P]atent litigation is, by its nature, very costly to generic companies operating on thin margins, and forces generic companies to be selective in choosing which patents to challenge. This factor is heightened because the generic company is generating no revenue on sales of the generic product to fund litigation, while the branded company may have hundreds of millions of dollars of revenue at stake in the litigation. If the ability to settle is restrained, a generic challenger filing a Paragraph IV certification must be prepared ab initio to litigate its patent case to the bitter end against the deep-pocketed branded company. While the generic company has no risk of damages, the branded company stands to lose its patent protection if the generic company's challenge is sustained, and it will accordingly spare no cost in litigation.
This characterization of ANDA litigation is supported by Upsher's description of the underlying litigation in this case: the litigation was "hotly contested" and involved "exhaustive fact and expert discovery and summary judgment briefing." Settlement on the eve of trial as occurred here is not unusual but is something "litigants routinely do." The settlement agreement at issue not only did not prevent Upsher from bringing its generic K-Dur product on the market; it permitted the generic drug to be sold "a full five years earlier that would otherwise have been permitted [under the patent]" (emphasis in brief). A similar outcome is described for the reverse payment settlement agreement between Merck and ESI: that agreement permitted ESI to enter the marketplace "over two and a half years before the '743 Patent expired." In addition, the brief notes not only that the agreement was the result of "court-supervised mediation suggested by the presiding Judge," but the payment from Merck to ESI was "[a]t the urging of the Magistrate Judge supervising the mediation and that the Magistrate "characterized [the payment] as 'nothing more than legal fees,' [as well as] the possibility of additional consideration based on when ESI's ANDA was ultimately approved."
Upsher's brief also describes the decision in their favor by the Administrative Law Judge who heard the complaint filed by the Federal Trade Commission as being made after a trial "covered 8,629 pages of transcript, involved forty-one witnesses, and included thousands of exhibits," citing In re Schering-Plough Corp., No. 9297, 2002 WL 1488085 (F.T.C. June 27, 2002). That decision found that the settlement agreement "did not contain a reverse payment" (emphasis in brief) but was "a bona fide arms-length transaction." According to the brief, the full Commission, in reversing, not only did not use a "truncated rule of reason analysis" (as it purported to do) but improperly adopted a per se rule that "that any settlement involving reverse payments over $2 million . . . would be quid pro quo for market delay and, thus, illegal."
The Supreme Court should grant their petition, according to Upsher, because, inter alia, "allowing uncertainty and confusion to linger over the proper test will serve only to deter generic companies from making patent challenges in the first place, thereby resulting in less competition for pharmaceuticals." That uncertainty stems from "[a] clear conflict on the seminal -- and virtually dispositive -- legal question of the standard by which patent litigation settlements are to be judged," and this case (where two different circuit courts came to diametrically opposed outcomes) is the case for the Court to remove the uncertainty, if only to avoid "inevitable forum shopping, in which the generic pharmaceutical industry must (try to) abide by the lowest common denominator." In addition, this uncertainty will serve to "chill" generic challenges under the Hatch-Waxman Act, according to Upsher. As set forth in the brief, "[i]f the ability to settle is restrained or even uncertain, a generic challenger filing a Paragraph IV certification must be prepared to litigate its patent case to the bitter end -- an expensive proposition for any generic company, especially when facing a branded company who has incentive to 'go to the mat' and to spare no expense in litigating against the generic company." This likelihood is exacerbated by the fact that the Third Circuit is the locus of "[a] substantial number of pharmaceutical companies." And the brief also cites Judge Posner of the Seventh Circuit, to the effect that "[a] ban on reverse-payment settlements would reduce the incentive to challenge patents by reducing the challenger's settlement options should he be sued for infringement, and so might well be thought anticompetitive," citing Asahi Glass Co. Ltd. v. Pentech Pharm., Inc., 289 F. Supp. 2d 986, 994 (N.D. Ill. 2003).
The brief closes with an argument, once again consistent with Merck's brief (and, indeed, with arguments any branded drug company could make) that the Third Circuit's decision below is contrary to the balance struck under relevant Supreme Court precedent between a patentee's right to exclude and the proscriptions against anticompetitive behavior embodied by the antitrust laws. In this argument Upsher contends that the uniform "scope of the patent" test is consistent with this balance and should be affirmed by the Court. And perhaps anticipating the inevitable amicus brief by the FTC, the brief identifies the following as the source of the Third Circuit's error:
At bottom, the court of appeals' decision seems driven by the notion that there must necessarily be something wrong with settlements in which consideration flows from the patent holder to the alleged infringer. That impulse, however, ignores that fact that all settlements involve an exchange of consideration, and the form of that consideration should have no bearing on the lawfulness of the settlement. . . . And there is nothing anomalous about the fact that the net flow of monetary consideration may run to the generic challenger in the Hatch-Waxman context for the simple reason that the generic company has yet to begin making infringing sales. As the Second Circuit has explained, if anything, "reverse payments are particularly to be expected in the drug-patent context because the Hatch-Waxman Act created an environment that encourages them" [citing In re Tamoxifen Citrate Antitrust Litigation].
Finally, the brief reminds the Court that the Third Circuit's decision, if upheld, would do ("by judicial fiat") something Congress has so far not done, make reverse payment settlement agreements unlawful, despite nine bills having been introduced to do just that over the past five years.
The Court is set to consider these petitions during an upcoming petition conference.