Enter to open, tab to navigate, enter to select
Third Circuit Finds Generic Drug Reverse Payment Settlements Presumptively Anti-competitive
Practical Law Legal Update 3-520-4142 (Approx. 5 pages)
Third Circuit Finds Generic Drug Reverse Payment Settlements Presumptively Anti-competitive
by PLC Intellectual Property & Technology
| Published on 19 Jul 2012 • USA (National/Federal) |
The US Court of Appeals for the Third Circuit's July 16, 2012 opinion in In re K-Dur Antitrust Litigation held that reverse payment agreements in the pharmaceutical industry are presumptively anti-competitive and should be analyzed under a "quick look" rule of reason test.
Key Litigated Issues
The key issue on appeal before the US Court of Appeals for the Third Circuit in In re K-Dur Antitrust Litigation was whether reverse payment agreements are an unreasonable restraint of trade in violation of Section 1 of the Sherman Act.
A secondary issue was whether the district court's certification of the class of antitrust plaintiffs in this case was appropriate.
Background
K-Dur is Schering's brand-name sustained-release potassium chloride supplement. Schering owns formulation patent number 4,863,743 ('743 patent) on the coating it applied to potassium chloride to develop K-Dur's controlled release properties.
In 1995, generic drug manufacturer Upsher filed an Abbreviated New Drug Application (ANDA) with the Food and Drug Administration (FDA) seeking approval of its generic version of K-Dur. Upsher filed a paragraph IV certification under the Hatch-Waxman Act (21 U.S.C. § 355(j)(2)(A)(vii)(IV)) certifying that its generic would not infringe Schering's '743 patent. Schering then sued Upsher for patent infringement and later agreed to settle.
Schering's and Upsher's settlement agreement prohibited Upsher from marketing its generic or any similar product until September 2, 2001, when it would receive a royalty-free, non-exclusive license under the '743 patent to make and sell a generic version of K-Dur. Upsher also granted Schering a cross-license to make and sell several Upsher drug products. In return, Schering agreed to pay Upsher $60 million over three years, plus additional smaller sums based on Schering's sales of Upsher's drug products.
In 2001, the FTC filed a complaint alleging that the Schering-Upsher settlement violated Section 5 of the Federal Trade Commission Act. In Schering-Plough Corp. v. FTC, the US Court of Appeals for the Eleventh Circuit held that the settlement payment was not a reverse payment but a payment for the licenses and therefore not an antitrust violation.
The antitrust suits filed by various private parties attacking the settlements were consolidated in the US District Court for the District of New Jersey. In 2008, the court-appointed Special Master certified a class of plaintiffs (wholesalers and retailers who purchased K-Dur directly from Schering). In 2009, the Special Master issued a Report and Recommendation granting Schering's and Upsher's motions for summary judgment and denying the plaintiffs' motions for partial summary judgment.
In reaching its decision, the Special Master presumed that the '743 patent was valid and therefore gave Schering the right to exclude infringing products from the market until the end of the patent's term, including through reverse payments. The Special Master found that no antitrust scrutiny was required because the settlements did not exceed the scope of the '743 patent and the underlying patent suits were not objectively baseless (the scope of the patent test).
The district court adopted the Special Master's Report and Recommendation in its entirety, and the plaintiffs appealed the decision to the Third Circuit.
Outcome
The Third Circuit reversed and remanded the district court's order, finding that the district court erred by applying the scope of the patent test. Instead, the Third Circuit held that the "quick look" rule of reason test applies when analyzing reverse payments from patent holders to generic pharmaceutical manufacturers under federal antitrust law (see Adoption of "Quick Look" Rule of Reason Test). In its decision, the Third Circuit reviewed the standards adopted by other circuit courts on reverse payments and expressly rejected the scope of the patent test followed by the district court adopted by the US Courts of Appeal for the Second Circuit, Eleventh Circuit and Federal Circuit (see Rejection of Scope of the Patent Test). The Third Circuit also declined to follow the Eleventh Circuit's decision in Schering-Plough Corp. v. FTC finding that the same settlement agreement did not violate the FTC Act.
Rejection of the Scope of the Patent Test
The Third Circuit rejected the scope of the patent test on the basis that it:
- Improperly restricts the application of antitrust law to unreasonable anti-competitive practices.
- Is contrary to the Hatch-Waxman Act policy favoring the availability of low cost generic drugs and US Supreme Court precedent encouraging challenges to weak patents.
The court found persuasive evidence that generic challengers prevailed 73% of the time in Hatch-Waxman challenges under paragraph IV. It also questioned the assumption made by other courts that subsequent challenges by other generic manufacturers are sufficient to invalidate weak patents preserved by a previous reverse payment settlement. Instead, the court noted that the initial generic challenger was the most motivated to challenge the patent as it benefits from the 180-day market exclusivity period barring the FDA from approving the competing generic drug manufacturers' ANDA applications. In addition, high profit margins derived from the market exclusivity enjoyed by patented brand-name drug manufacturers allow them to pay off multiple generic challengers rather than risk the invalidation of the patent in litigation.
Adoption of "Quick Look" Rule of Reason Analysis
The Third Circuit instead adopted a "quick look" rule of reason analysis for reverse payments that falls between a "rule of reason" and the per se unlawful rule. Under the "quick look" rule of reason approach, once the plaintiff has shown that the defendant has engaged in practices similar to those subject to per se treatment, the defendant has the burden of demonstrating pro-competitive justifications.
In the case of reverse payments, the Third Circuit held that the assumption may be rebutted by showing that the payment either:
- Was for a purpose other than delayed entry, for example the payment was a licensing fee for one of the generic manufacturer's drugs.
- Offered some pro-competitive benefit, for example, the payment enabled a cash-starved generic manufacturer to avoid bankruptcy and begin marketing a generic drug.
Practical Implications
For over a decade, pay-for-delay arrangements have been in the FTC's cross-hairs. The FTC had early successes in the DC and Sixth Circuits but the scope of the patent test adopted by the Eleventh Circuit and others in recent years resulted in wins for the patent holders. The circuit split is now ripe for US Supreme Court review given the Third Circuit's opinion in K-Dur and the Eleventh Circuit's refusal to rehear the FTC's case in a separate pay-for-delay case just days later (for more on the Eleventh Circuit's recent decision in FTC v. Watson Pharmaceuticals, see Legal Update, Eleventh Circuit Approves Patent "Pay for Delay" Settlements). It is likely that the FTC will seek cert in the Watson case, and the defendants in K-Dur may do the same.
Until the US Supreme Court decides the proper test for analyzing pay-for-delay arrangements under the federal antitrust law, parties entering into or defending a reverse payment settlement should continue to proceed carefully. Where Third Circuit law might potentially apply, the parties must be able to rebut the presumption that the agreement is anti-competitive by proving that the settlement was for a purpose other than delayed entry (for example, the payment was a licensing fee for one of the generic manufacturer's drugs or offered some pro-competitive benefit).