Third Circuit Breathes New Life into FTC Efforts to Block Pharmaceutical Patent Settlements

by Wilson Sonsini Goodrich & Rosati

The antitrust debate over the legality of "reverse payment" or "pay-for-delay" pharmaceutical patent settlements has raged on for over a decade. Last week's K-Dur decision has pushed this debate to the boiling point, as the Third Circuit—long considered a plaintiff-friendly antitrust venue—weighed in for the first time with an opinion that stands in stark contrast to prior decisions from the Second, Eleventh, and Federal Circuits. Siding strongly with private plaintiffs and the Federal Trade Commission (FTC), the Third Circuit's decision appears to create a split in the courts, thus substantially increasing the possibility that the Supreme Court may provide its guidance on the legality of these settlements and providing the FTC with an advantageous forum in which to bring future cases.

Below we detail the background of this case and highlight its implications for pharmaceutical companies, including how this decision will impact FTC enforcement and private suits in the near and long term.

Background on K-Dur Litigation

On July 16, 2012, the Third Circuit Court of Appeals released its decision in the case In re K-Dur Antitrust Litigation, holding that "reverse payment" or "pay-for-delay" settlements between branded and generic drug manufacturers are presumptively anticompetitive. The court explicitly rejected the "scope of the patent" test employed by the Federal Circuit, Second Circuit, and Eleventh Circuit, in which reverse payment agreements are only subject to antitrust scrutiny if they exceed the scope of the patent.

This case arises out of two settlement agreements to resolve patent infringement litigation between Schering-Plough Corporation (Schering), the brand-name manufacturer of K-Dur 20 (a sustained-release potassium chloride), and two generic manufacturers, Upsher-Smith Laboratories (Upsher) and ESI Lederle (ESI). In 1995, Upsher (followed by ESI) filed an Abbreviated New Drug Application (ANDA) with the FDA seeking approval to manufacture a generic form of K-Dur. In doing so, Upsher provided a "paragraph IV certification," claiming that its generic would not infringe on Schering's patent due to differences in the chemical composition of the controlled release coating. After receiving notice of these generic applications, Schering filed patent infringement suits against Upsher and ESI. In the fall of 1996, Schering and ESI settled their patent infringement suit in an agreement in which Schering would grant ESI a patent license beginning in 2004 and pay ESI a variable sum, ultimately resulting in a payment of $15 million after ESI's ANDA was approved. The following year, Schering and Upsher settled their patent infringement suit in an agreement in which Schering agreed to pay Upsher $60 million and Upsher agreed to refrain from marketing any products that compete with K-Dur until mid-2001.

In March 2001, the FTC filed a complaint against Schering, Upsher, and ESI alleging that the settlement agreements were unreasonable restraints of commerce in violation of Section 5 of the FTC Act because the reverse payments were intended to delay generic entry and improperly preserve Schering's monopoly. In June 2002, an FTC Administrative Law Judge issued a decision dismissing the FTC's complaint. The FTC then unanimously reversed the decision, finding that there was a direct "nexus" between the payments and the delay of the generic products' competitive entry. This ruling eventually was appealed to the Eleventh Circuit, which reversed the FTC's opinion in 2005 under the "scope of the patent" test.

In re K-Dur Antitrust Litigation arises out of a parallel private suit brought by drug wholesalers and pharmacies attacking these agreements. The district court granted the defendant's motion for summary judgment, holding that the agreements would be subject to antitrust scrutiny only if (1) they exceeded the scope of the patent or (2) the underlying patent suits were objectively baseless.

Third Circuit Analysis and Holding

In reversing the district court's decision, the Third Circuit explicitly rejected the "scope of the patent" test employed by the Federal, Second, and Eleventh Circuits, deeming it an improper restriction on the application of antitrust law, contrary to Supreme Court precedent on patent litigation and competition and contrary to the policies underlying the Hatch-Waxman Act. The court cited the goal of the Hatch-Waxman Act of increasing the availability of generic pharmaceuticals, as well as the general public policy goal of encouraging settlements in lawsuits. Ultimately, the court concluded that judicial preference for settlements should not displace countervailing public policy objectives, such as Congress's determination in passing Hatch-Waxman that litigated patent challenges are necessary to protect consumers from brand-name monopolies.

Finding the "scope of the patent" test lacking, the Third Circuit adopted a quick-look, rule-of-reason analysis, in which the fact finder is directed to "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." The court elaborated that it was possible for the patent holder to "attempt" to rebut the charge by (1) offering evidence that the payment was for something other than delayed entry or (2) demonstrating that the reverse payment creates competitive benefits that could not be achieved absent the arrangement, a possibility the court described as "probably rare."

Ripe for Supreme Court Review

The Third Circuit's ruling appears to create a circuit split with the decisions of the Federal, Second, and Eleventh Circuits. Such a split increases the likelihood that the Supreme Court now will take up review of this issue, even though the Court had denied cert following prior cert petitions. Creating such a split long has been a goal of the FTC, and in particular its current chairman, Jon Leibowitz, who first advocated for bringing enforcement cases to create such a split back in 2006.

Further highlighting the circuit split, two days after the Third Circuit's ruling, the Eleventh Circuit denied rehearing en banc in its recent upholding of the dismissal of the FTC's complaint challenging a patent settlement in FTC v. Watson. Given the en banc denial, the FTC now has the opportunity to seek cert in Watson and would appear likely to do so in light of the Third Circuit's K-Dur opinion. The FTC's decision on whether to seek cert in the Watson case is expected this fall.

FTC to Bring Additional Cases in the Third Circuit

Over the past decade, the FTC has challenged three patent settlements in court. Two of those cases ended up in the Eleventh Circuit, with the appellate rulings strongly rejecting the FTC's theories. At present, one case remains active: FTC v. Cephalon currently is pending in the U.S. District Court for the Eastern District of Pennsylvania, which sits in the Third Circuit. Thus, the K-Dur decision is likely to have implications for that matter as it now moves forward.

Beyond these three cases brought over the past decade, however, FTC enforcement has lapsed substantially in recent years, with Chairman Leibowitz focusing the commission's energies on the passage of federal legislation that would curb pharmaceutical patent settlements. Even with the K-Dur ruling, Chairman Leibowitz is likely to continue to seek a legislative remedy.

However, K-Dur's more immediate and significant impact will be to breathe new life into the FTC's enforcement efforts. This was foreshadowed in April when Markus Meier, the head of the FTC's Health Care Division, stated in relation to K-Dur that "[t]he Third Circuit is the Supreme Court of pharmaceuticals." Meier's reference was an implicit threat that if the K-Dur ruling was favorable to the FTC, the agency would bring new actions in that circuit.

With the Third Circuit now essentially adopting the FTC's legal view on reverse payment patent settlements, not only will pharmaceutical companies need to be careful regarding future settlements, but it is quite possible that cases that have been sitting on the shelf at the FTC may now see the light of day in a federal district court in the Third Circuit. Concerning future settlements, pharmaceutical companies will need to be more careful regarding the terms of their agreements. Settlements that include outright payments and other provisions—such as side agreements involving supply or co-promotion—are now far more likely to be subject to investigation and litigation.

The threat of private litigation by purchasers or consumers also is greater today following the K-Dur decision. Such suits, including K-Dur, previously had been brought in the Third Circuit, as private plaintiffs have viewed this circuit as friendly antitrust territory. Following K-Dur, private suits are even more likely to be brought in this forum given the presumption stated by the Third Circuit.

For More Information

For more information on the In re K-Dur decision or on any issues relating to reverse payments or pharmaceutical antitrust law, please contact Seth Silber (202-973-8824) or Jonathan Lutinski (202-973-8816).


DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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