On July 16, 2012, the U.S. Court of Appeals for the Third Circuit, which includes Delaware, New Jersey and Pennsylvania, issued a long-anticipated decision in In re K-Dur Antitrust Litigation, finding that settlement agreements in which payments are made to the generic manufacturers challenging the patents to settle the litigation may be unreasonable restraints on trade and unenforceable under federal antitrust laws. As noted by the In re K-Dur court, these types of settlements have been a "top enforcement priority" of the Federal Trade Commission (FTC) for the last several years, leading to a number of key decisions regarding their enforceability. The Third Circuit's decision results in a clean circuit court split among the U.S. circuit courts.1 Therefore, innovator and generic manufacturers may want to carefully assess such settlements now more than ever.

In re K-Dur arose from abbreviated new drug application (ANDA) patent litigation between Schering-Plough and two generic manufacturers, Upsher-Smith Laboratories ("Upsher") and ESI Lederle ("ESI") in which Upsher's and ESI's patent challenges claimed their respective prosed formulations would not infringe the Orange Book patents listed by Schering-Plough for K-Dur 20 or, alternatively, that the Orange Book patents were invalid.

Schering-Plough eventually entered into separate settlement agreements with Upsher and ESI. In the settlement agreements, Upsher and ESI agreed to refrain from marketing their generic K-Dur 20 until a certain date in exchange for consideration.2

The FTC filed a complaint against Schering-Plough, Upsher and ESI challenging the settlements in March 2001, and the In re K-Dur plaintiffs eventually followed suit, challenging the settlements under the federal antitrust laws.3

In analyzing similar settlements under the antitrust laws, the Second, Eleventh and Federal Circuits have used a "scope of the patent" test, and concluded such agreements did not violate the antitrust laws "so long as (1) the exclusion does not exceed the patent's scope, (2) the patent holder's claim of infringement was not objectively baseless, and (3) the patent was not procured by fraud on the [patent and trademark office]."4

The Third Circuit rejected this test for several reasons. First, it found that there was "no significant support" for the policy underlying the "scope of the patent" test that patents enjoyed an almost unrebuttable presumption of validity.5 Second, the Third Circuit disagreed with the Second Circuit's view that weak patents would be eliminated through subsequent challenges by other generic manufacturers. Similarly, the court found that these type of settlements and the "scope of the patent" test undermine the goal of increasing availability of low-cost generics by "entitl[ing] the patent holder to pay its potential generic competitors not to compete."6 Thus, the Third Circuit found that the interests of the public were preserved by judicial testing of weak patents through the ANDA litigation process.7

The Third Circuit therefore adopted the "rule of reason" test, which requires the fact-finder 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."8 The court likewise agreed with the FTC that the merits of the underlying patent suit need not be considered in the "rule of reason" test because the fact of settlement itself was evidence of a "reasonable litigation compromise."9

With such an even circuit court split on the legality of "pay-to-delay" settlements under antitrust laws, this issue appears to be ripe for U.S. Supreme Court review. In the meantime, generic and brand manufacturers should continue to carefully monitor the FTC's enforcement efforts related to settlement agreements.