On 16 July 2012, the U.S. Court of Appeals for the Third Circuit issued a decision holding that pharmaceutical patent settlements that restrict generic entry and contain a payment to the generic company are presumptively unlawful under the antitrust laws. In a single stroke, the decision dramatically alters the legal landscape with respect to the antitrust treatment of pharmaceutical patent settlements with so-called "reverse payments." By holding that a patent settlement can violate the antitrust laws without proof that it affected competition outside the scope of a valid patent, the court rejected the legal standard that had been applied by the Second, Eleventh, and Federal Circuits, and instead adopted the legal position that the Federal Trade Commission has long advocated (until now, largely unsuccessfully). The decision resuscitates the FTC's enforcement efforts in an area that Chairman Leibowitz has described as his highest priority, and creates a clear split among the circuit courts that begs for Supreme Court review.

There has been considerable litigation and antitrust agency interest in settlements of patent infringement lawsuits brought by a brand manufacturer against a generic manufacturer where the settlement includes an agreed upon date for generic entry (or some other type of restriction on generic entry) plus a payment from the brand to the generic company. The FTC strongly opposes such settlements and believes that they are anticompetitive because, absent the "reverse payment" the parties would have settled their litigation with an earlier entry date for the generic—and thus, in the FTC's view, the "reverse payment" is a "payment for delay." In a line of cases that began with the Eleventh Circuit's decision in Valley Drug, 344 F.3d 1294 (11th Cir. 2003), the courts have largely rejected this view, and held that a patent settlement cannot harm competition so long as (1) the exclusion of the generic does not exceed the patent’s scope; (2) the patent holder's infringement case was not objectively baseless; and (3) the patent was not procured by fraud on the PTO. These courts have reasoned that patents are presumed valid, and therefore a patent settlement that restricts entry from an infringing product merely prevents entry by a party whose product was not legally entitled to be on the market in any case. See id.; Schering-Plough Corp. v. FTC, 402 F.3d 1056 (11th Cir. 2005); In re Tamoxifen Citrate Antitrust Litig., 466 F.3d 187 (2d Cir. 2006); In re Ciprofloxacin Hydrochloride Antitrust Litig., 544 F.3d 1323 (Fed. Cir. 2008).

In In re K-Dur Antitrust Litig., No. 10-2079 (3rd Cir. 2012), the Third Circuit squarely rejected the "scope of the patent" test, and held that patent settlements with reverse payments are presumptively unlawful under the antitrust laws, subject to two exceptions. First, if the parties can show that the payment was for a purpose other than to delay entry—e.g., the payment was part of a "side deal" and did not involve consideration paid to the generic that exceeded the reasonable value of what the generic provided in return—then the settlement might be lawful. Second, the settlement may be lawful if the parties can show a pro-competitive benefit of the settlement that could not be achieved without the payment. Without the "scope of the patent" test, plaintiffs will find it dramatically easier to challenge reverse-payment patent settlements in the Third Circuit.  

The Third Circuit reasoned that the "scope of the patent" test improperly presumes that the underlying patent is valid and infringed, and thus that the holder is entitled to exclude competition. The court found that this presumption conflicts with the Supreme Court’s recognition that "the public interest supports judicial testing and elimination of weak patents." The court also found that having such a permissible legal standard undermines the goal of the Hatch-Waxman Act to increase the availability of low cost generic drugs, and effectively allows "the patent holder to pay its potential generic competitors not to compete". The court was also unconvinced that subsequent challenges by other would-be generic manufacturers would eliminate weak patents preserved through a reverse payment to the initial challenger. The court recognized that the "scope of the patent" test encourages settlement, but found that the laudable preference for settlement cannot supplant "countervailing public policy objectives."

The Third Circuit's decision will not be the final word. As an initial matter, the decision still leaves many questions unanswered, even in the Third Circuit. For example, putting aside liability, wouldn't a private plaintiff still need to show that the generic would have won the patent case in order to obtain damages? But more immediately, the K-Dur decision creates a clear circuit split and a strong case for Supreme Court review (and perhaps en banc review before that). The lack of a clear split in the circuit courts was likely one of the factors that led the Supreme Court to deny certiorari in prior patent settlement cases. Here, the split could not be clearer, and in fact the patent settlement at issue in K-Dur is the very same one that the Eleventh Circuit upheld in the Schering-Plough decision. 

Pharmaceutical companies should be advised to tread extremely carefully in this area. Experienced antitrust counsel continued to advise their clients that patent settlements with payments to the generic company raise significant risks of an antitrust challenge, even as the case law repeatedly came down in favor of the settling parties and against the FTC and other plaintiffs. But now those risks are even more real, and in many cases the plaintiffs and the FTC will be able to choose their preferred forum. Additionally, with its hands full litigating "pure" reverse payment cases, the FTC has not brought cases against related practices, such as patent settlements involving a commitment by the brand manufacturer not to launch an authorized generic. With the Third Circuit now in the FTC's corner, there is increased antitrust risk regarding patent infringement litigation settlements involving anything that might be construed as a "reverse payment," and the uncertainty in this area likely will not be resolved until the Supreme Court addresses these issues.