In stark contrast to recent decisions by other circuits, the Third Circuit holds that patent law does not insulate patent settlements from antitrust scrutiny.
On July 16, the U.S. Court of Appeals for the Third Circuit reversed a lower court's dismissal of a private antitrust challenge to a patent settlement agreement between Schering-Plough Corporation (Schering) and two generic competitors. In re K-Dur Antitrust Litig., Nos. 10-2077, 10-2078, 10-2079, 10-4571 (3d Cir. July 16, 2012), available here. The decision, while premised on a private suit, comes on the heelsof a series of defeats for the Federal Trade Commission (FTC) involving challenges to so-called "reverse payment settlements" or "pay-for-delay settlements" in the pharmaceutical industry. The Third Circuit rejected the notion that the settlement should be reviewed within the "scope of the patent" and instead upheld the view championed by the FTC that "any payment from a patent holder to a generic patent challenger who agrees to delay entry into the market [i]s prima facie evidence of an unreasonable restraint of trade." K-Dur, slip op. at 33.
When a manufacturer wishes to commercialize a generic version of a product that is patent protected, it must either challenge the validity of the patent or state that its product does not infringe on the patent when making its Abbreviated New Drug Application (ANDA). Under the Drug Price Competition and Patent Term Restoration Act of 1984, 35 U.S.C. § 271(e)(1), commonly known as the Hatch-Waxman Act, the innovator patent holder is notified that an ANDA has been filed and has 45 days to file a patent infringement suit, which delays the ANDA's approval for 30 months or until the first generic competitor wins its suit. Patent litigation between innovator pharmaceutical manufacturers and potential generic competitors is frequently resolved by settlements in which generic competitors receive licenses to sell their products before the applicable patents expire, but not immediately. The settlements allow the parties to end costly litigation and ensure entry of the generic drug at a certain date, which would not happen prior to the patent expiry if the innovator won the case.
The FTC is notified of these settlements within 10 business days and reviews the settlements to determine if they violate antitrust laws. The FTC advocates that settlements where the generic competitor receives a cash payment or something else of value (e.g., a supply agreement) as part of the settlement are illegal agreements among competitors not to compete and delay the entry of generics into the market—a practice the FDA has labeled "pay for delay." The FTC has mounted a number of challenges to such settlements. As with many other governmental investigations, pharmaceutical companies also face private lawsuits from plaintiffs alleging harm premised on these same settlements.
The Schering dispute revolves around K-Dur, the company's patented treatment for potassium deficiency—a frequent side effect of diuretics used to treat high blood pressure. In 1989, Schering received approval from the U.S. Food and Drug Administration (FDA) for its formulation of the active ingredients in K-Dur. In 1995, Upsher-Smith Laboratories (Upsher) and ESI Lederle (ESI) sought approval from the FDA to manufacture, market, and sell generic versions of K-Dur, claiming that their products would not infringe on Schering's patent. Schering responded by filing separate lawsuits against each potential generic entrant for patent infringement. These suits were litigated for more than a year, with the Upsher lawsuit settling in June 1997 and the ESI lawsuit settling in the fall of 1996.
Under the terms of the settlement agreements, Upsher agreed not to market generic versions of K-Dur until September 1, 2001, and granted Schering several licenses to make and sell certain Upsher products, including Niacor-SR (the parties subsequently abandoned plans to market Niacor-SR). In exchange, Upsher received a nonexclusive license to the K-Dur patent at the end of the period and $60 million. As part of the Schering-ESI settlement, ESI promised that it would not develop a potassium chloride product. In return, ESI, which filed its ANDA after Upsher, received a nonexclusive license to the K-Dur patent beginning on January 1, 2004, and $15 million.
Following on the heels of an FTC lawsuit, which was ultimately dismissed by the U.S. Court of Appeals for the Eleventh Circuit, Schering-Plough Corp. v. FTC, 402 F.3d 1056 (11th Cir. 2005), a group of direct-purchaser private plaintiffs brought a class action lawsuit against Schering, alleging harm resulting from violations of the Sherman Antitrust Act, 15 U.S.C. §§ 1-7, which prohibits agreements "in restraint of trade."
The Third Circuit Decision
In deciding the private plaintiff action, the Third Circuit rejected the prevailing view of three other circuits, including the recent decision of the Eleventh Circuit in Federal Trade Commission v. Watson Pharmaceuticals, Inc., which found that reverse payment settlements, absent fraud or sham litigations, are immune from antitrust scrutiny provided that the anticompetitive effects fall within the scope of the patent. In K-Dur, the Third Circuit instead held that "the finder of fact must 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." K-Dur, slip op. at 33.
This latest decision from the Third Circuit adds to the lack of certainty companies face when forced with the decision of whether to settle or litigate pharmaceutical patent cases. "Pay for delay" is an area of high priority for the FTC, and this recent decision will only embolden its efforts to stop a practice that it views as presumptively illegal. FTC Chairman Jon Liebowitz has pledged to seek clarity in the law by seeking certiorari from the U.S. Supreme Court or lobbying Congress to ban the practice.