Third Circuit rekindles uncertainty in patent settlements under Hatch-Waxman Act

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In a dramatic departure from the prevailing standard for analyzing the antitrust implications of reverse-payment settlements in Hatch-Waxman Act patent disputes, the Third Circuit has squarely rejected the “scope-of-the-patent test” and adopted, instead, a rebuttable presumption that any such settlement involving a payment from the branded pioneer to a generic manufacturer violates federal antitrust law. In In re K-Dur Antitrust Litigation, the Third Circuit crafts a new rule, under which parties to a reverse-payment settlement may rebut the presumption of illegality only by showing that either (a) the payment from the pioneer to the generic was for a purpose other than delaying the generic’s entry; or (b) the payment offers a pro-competitive benefit that sufficiently offsets the anti-competitive effect of delayed generic entry. As a practical matter, the rule creates a formidable obstacle to reverse-payment settlements in the Hatch-Waxman context and represents a significant policy victory for federal agencies (primarily the Federal Trade Commission) that have opposed such settlements for years without success.

The Third Circuit’s decision comes on the heels of the Eleventh Circuit’s April 2012 decision in Federal Trade Commission v. Watson Pharmaceuticals, Inc., which rejected an antitrust challenge to a reverse-payment settlement by applying a form of the “scope-of-the-patent” test. The Third Circuit decision effects a clear split among the federal circuits (three of which have adopted the scope-of-the-patent test) and, unless it is vacated by an en banc panel, creates a significant opportunity for the Supreme Court to address these issues. As the Eleventh Circuit refused to rehear Watson en banc on July 18, either or both of these decisions could become the vehicle for Supreme Court review.

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