Deepening a split among the federal courts of appeals, a Third Circuit Panel ruled on July 16, 2012, in In re K-Dur Antitrust Litig., that payments by pharmaceutical patent owners to generic manufacturers in settlement of patent litigation that delay generic market entry are presumptively unlawful restraints of trade in violation of Section 1 of the Sherman Act. The Third Circuit ordered such payments to be analyzed under a Sherman Act quick look rule of reason approach. The decision is contrary to a 2005 Eleventh Circuit ruling involving the very same settlement agreements, which was thereafter followed by two other Circuits -- the D.C. and Sixth Circuits. Under those decisions, socalled "reverse payment" settlements do not violate the antitrust laws so long as market entry is restrained only within the scope of the patent's coverage, and there is no evidence that the applicable patent was obtained by fraud or that the patent holder's infringement suit was objectively baseless.
The Third Circuit now joins the earliest decisions -- by the D.C. and Sixth Circuits -- which considered such settlements to be subject to serious antitrust challenge. Accordingly, at this time there is a 3-3 split among the circuits. Moreover, while not a party to the Third Circuit K-Dur suit, the Federal Trade Commission (FTC) had filed an amicus brief supporting the claims. Thus, the decision is a significant victory for the Agency, which continues to challenge what it calls "Pay-For-Delay" patent litigation settlements both in the courts and before Congress. In fact, FTC Chairman Jon Leibowitz declared the day after the decision that the Third Circuit "seems to have gotten it just right; these sweetheart deals are presumptively anticompetitive."
Background—the First Two Court of Appeals Decisions
The first two courts of appeals that considered the antitrust legality of reverse payment settlements strongly questioned the antitrust validity of such arrangements. First, in 2001 in Andrx Pharms., Inc. v. Biovail Corp. Int'l, the D.C. Circuit reversed dismissal of an antitrust challenge to such an arrangement on the ground that the settlement could "reasonably be viewed as an attempt to allocate market share and preserve monopolistic conditions." 
Two years later, in In re Cardizem CD Antitrust Litig., which involved the same settlement agreement that had been examined in the D.C. Circuit case, the Sixth Circuit ruled that the reverse payment settlement did in fact constitute "a horizontal agreement to eliminate competition in the market for Cardizem CD through the entire United States, a classic example of a per se illegal restraint of trade." 
The History of the K-Dur Litigation
(1) The first K-Dur suit. The next case to be considered in a court of appeals was the initial suit involving Schering-Plough's ("Schering") 1989 patent covering its sustained release formulation of KDur 20, which is used to treat potassium deficiencies. The patent was scheduled to expire in 2006. In 1995, Schering sued Upsher and ESI for patent infringement under the Hatch-Waxman Act after both had sought FDA approval of generic versions of the drug. By filing infringement suits, Schering triggered an automatic 30-month stay of the FDA's approval process for both of the generics.
In June 1997, Schering and Upsher settled pursuant to an agreement that kept Upsher's generic out of the market until September 2001—five years before expiration of the patent. In return, Schering agreed to pay Upsher $60 million in return for three-year licenses to market a number of Upsher products.
In January 1998, Schering and ESI settled their suit as well. Under the settlement, ESI agreed not to commence the marketing of its generic until January 2004—almost three years before expiration of the K-Dur patent. In return, Schering agreed to pay ESI $5 million at that time, and another $10 million after ESI obtained FDA approval of its generic product—which approval was timely obtained.
In March 2001, the FTC sued all three companies, claiming that what the FTC characterized as "payfor- delay" patent infringement settlements unreasonably restrained commerce, and the FTC determined in 2003 that the agreements indeed did constitute antitrust violations. Schering appealed to the Eleventh Circuit, which in 2005 reversed the FTC's decision—declaring that reverse settlement agreements generally did not constitute antitrust violations. In support of its decision, the Eleventh Circuit relied on "the public problems associated with overcrowded court dockets, and the correlative public and private benefits of settlements. "From a substantive standpoint, the Eleventh Circuit declared that because Upsher and ESI would be able to enter their generics into the market before the expiration of the Schering patent, the restrictions fell well within "the protections afforded by" of the patent law.
In response to the FTC's suit, a number of private treble damage antitrust suits were instituted challenging the Schering settlement agreements as well. These suits were consolidated in the District of New Jersey. Relying on the Eleventh Circuit K-Dur decision, the district court ruled in February 2009 that the settlements met the "scope of the patent" test, and granted summary judgment dismissing the suits. Plaintiffs appealed to the Third Circuit.
(2) The interim courts of appeals decisions. In the interim, between the 2005 Eleventh Circuit K-Dur decision and the Third Circuit's July 2012 decision, the Second and Federal Circuits issued three decisions that adopted the Eleventh Circuit's "scope of the patent" test, dismissing antitrust challenges to reverse payment patent suit settlements on the ground that the duration of the restrictions in the settlement agreements fell within the scope of the patents at issue. These courts were of the view that the Hatch-Waxman Act encourages such settlements, particularly because they take place before any damages have accrued to the generic manufacturer. As stated by the Second Circuit, "there is no injury cognizable under existing antitrust law" from a reverse payment settlement "as long as competition is restrained only within the scope of the patent." 
Accordingly, contrary to the D.C. and Sixth Circuit decisions disapproving of reverse payment agreements under the antitrust laws, the later decided Second, Eleventh and Federal Circuit decisions adopted a "scope of the patent" test that permits such arrangements so long as: (1) the applicable restrictions permit generic products to enter the market before the patent at issue expires; (2) the patent was not procured by fraud on the Patent Office; and, (3) the patent holder's infringement claim was not objectively baseless. The Third Circuit's July 2012 K-Dur decision has now created a 3-3 circuit court split.
The Third Circuit K-Dur Decision
After reviewing all the decisions of its sister circuits, the July 16, 2012, Third Circuit decision considering the K-Dur private suits declared as "unpersuasive" the Eleventh Circuit decision approving the very settlement the Third Circuit Panel considered to be presumptively unlawful, as well as the decisions of the Second and Federal Circuits that applied the "scope of the patent" test first enunciated in 2006 by the Eleventh Circuit. The Third Circuit explained that as a practical matter, "the scope of the patent test does not subject reverse payment agreements to any antitrust scrutiny." Instead, it relies improperly on an "almost rebuttable presumption of patent validity," despite the fact that "in infringement cases it is the patent holder who bears the burden of showing infringement."
The Third Circuit pointed out that many patents issued by the Patent Office are later found to be invalid or not infringed, and "courts must be mindful of the fact that ‘[a] patent, in the last analysis, simply represents a legal conclusion reached by the Patent Office.''' The Panel expressed concern that reverse payments can "enable the holder of a patent that the holder knows is weak to buy its way out of both competition with the challenging competitor and possible invalidation of the patent." In that regard, the Panel criticized the view of the courts that have adopted the scope of the patent test "that subsequent challenges by other generic manufacturers will suffice to eliminate weak patents preserved through a reverse payment to the initial challenger." According to the Third Circuit, the high profit margins of a monopolist "may enable it to pay off a whole series of challengers rather than suffer the possible loss of its patent through litigation."
Going further, the Third Circuit Panel declared that the scope of the patent test overlooks Supreme Court recognition "that patents are a limited exception to a general rule of the free exploitation of ideas," and undermines the goal of the Hatch-Waxman Act to increase the availability of low cost generic drugs . "The principal beneficiaries of such an approach will be name brand manufacturers with weak or narrow patents that are unlikely to prevail in court." The Panel did recognize that the judicial preference for settlements is an important judicial policy. It should not, however, "displace countervailing public policy objectives or. . . Congress's determination . . . that litigated patent challenges are necessary to protect consumers from unjustified monopolies by name brand drug manufacturers."
The Third Circuit remanded the suit, directing the district court 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. " Under this test, the reverse payment settlement would be "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." In that regard, the Third Circuit agreed with the view expressed by the FTC in the initial K-Dur case that the merits of the underlying patent suit need not be considered, 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." 
The K-Dur defendants have urged the Third Circuit to issue a Mandate that would defer reconsideration of the suit by the District Court pending a Supreme Court decision or denial of a certiorari Petition. In view of the current 3-3 circuit court split -- with the Second, Eleventh and Federal Circuit's generally approving such settlements under the "scope of the patent" standard, and the Third, Sixth, and DC Circuit considering such settlements as generally impermissible horizontal agreements not to compete--this circuit court split could very well make the issue ripe for Supreme Court review. This is particularly so since the Eleventh Circuit in 2005 dismissed the FTC's challenge to the very same settlement that was seriously questioned by the Third Circuit in July 2012.