Rejecting the test established by three separate courts of appeal, the Third Circuit's recent decision in In re K-Dur Antitrust Litigation has created a circuit split regarding the legality of, and application of antitrust law to, "pay-for-delay" settlements to patent lawsuits. See 2012 WL 2877662 (3rd Cir. 2012). The case is significant because it represents a reversal of fortune for pharmaceutical companies that had sought to settle patent litigation, and had – to date – largely escaped antitrust liability. The newly-created split, however, is likely to garner attention from the Supreme Court.

"Pay-for-delay" or "reverse payments" suits arise when a branded pharmaceutical manufacturer and the generic manufacturer settle patent litigation. Many such settlements include a payment by the branded firm to the generic manufacturer and an agreement by the generic manufacturer to begin marketing before the expiration of the nominal term of the patent (but at a point later than when, plaintiffs have argued, the generic would have entered). The payment works "in reverse" because the money flows from the patent owner to the potential infringer, not in the opposite direction, as is the case in most patent settlements.  The Federal Trade Commission, and plaintiffs like those in the K-Dur case (e.g., retail pharmacies), have long argued that such terms should not be viewed as a "settlement" of litigation, but as a payoff to prevent or delay competition.

Courts addressing this issue initially expressed skepticism of these settlements, but of late – at least until K-Dur – have upheld them. The general rule developed by courts reviewing reverse payment suits in recent years has been to examine whether the term requiring the generic to forego market entry exceeds the "scope of the patent." Under this test, courts examine whether the settlement blocks entry beyond what the patent on its face could have prevented. In other words, because in the Patent Act Congress declared patent grants presumptively valid, a settlement within the Congressional grant does not create competitive effects beyond or in addition to the Congressional grant. Thus under this test there is no antitrust claim, even if the reverse payment was expressly designed to prevent generic entry (upon a finding of patent invalidity) and the competition that would ensue.

Notably, the "tipping point" in this area was the Eleventh Circuit's decision in a predecessor case to K-Dur, involving the same drug and manufacturers. The drug, K-Dur, is a branded drug produced by Schering Plough. After Schering settled patent litigation brought by Upsher (the generic challenger), the FTC issued an order finding the reverse payment unlawful. Schering appealed, and the Eleventh Circuit held that the payment could be construed as a fee for a separately licensed drug and, in any event, that a settlement permitting entry before the patent expiration was a "reasonable implementation" of the protections afforded by patent law. Schering Plough Corp. v. FTC, 402 F.3d 1056, 1072 (11th Cir. 2005). The Eleventh Circuit recently reaffirmed its rule in FTC. v. Watson Chemicals, No. 10-12729 (11th Cir. April 25, 2012). Following Schering, the Second Circuit in In re Tamoxifen, 466 F.3d 187 (2d Cir. 2006), and the Federal Circuit, in In re Ciprofloxacin, 544 F.3d 1323 (Fed. Cir. 2008), reached similar conclusions.

After Schering, generic and innovator companies have entered into a number of additional "reverse payment" settlements. The FTC has continued to rally against these types of settlements, seeking legislative solutions and launching investigations. But its hands have largely been tied because any final order of the Commission could be appealed to the circuit of the pharmaceutical company's choosing. This meant that defendants would always choose the Eleventh Circuit, effectively preventing the FTC from creating a circuit split.

The K-Dur case, however, changes the landscape. The plaintiffs there were private parties, with the right to sue in their chosen forum. Thus, though the Eleventh Circuit upheld the same settlement in the FTC challenge, the private plaintiffs were able to try their luck in the Third Circuit, a forum generally viewed as more antitrust plaintiff-friendly. Last week, they succeeded.

In K-Dur, the Third Circuit not only held that reverse payment settlements are subject to antitrust challenge, but are presumptively unlawful. In the Third Circuit's view, the "scope of the patent test" improperly "restricts the application of antitrust law and is contrary to  … a long line of Supreme Court precedent on patent litigation and competition."  In the court's view, that test  may indeed foster settlements, but at the cost of permitting the continuation of questionable patents (which might otherwise be found invalid or not infringed) and, more importantly, the continuation of monopoly products in the marketplace.

In place of the "scope of the patent" test, the Third Circuit instructed courts in its circuit to apply a "quick look rule of reason analysis based on the economic realities of the reverse payment settlement." In particular, courts should now treat the reverse payment itself as "prima facie evidence of an unreasonable restrain of trade."  That presumption may be rebutted if defendants can show the payment "was for a purpose other than delayed entry" or "offers some pro-competitive benefit." In practice, given that the court agreed that it was unnecessary to consider the merits of the underlying patent suit, it will be difficult for a defendant to overcome the presumption unless it receives significant value for the generic in addition to delayed entry, like a license to valuable intellectually property belonging to the generic, a distribution arrangement, etc.

What appears to be a plaintiff-friendly rule in the Third Circuit may be short-lived, however. Back when the FTC lost Schering in the Eleventh Circuit, it sought certiorari from the Supreme Court. In a rare case of division among federal departments, the Solicitor General filed a brief opposing the FTC's petition, primarily because there was no split among the circuits. That split, once absent, is now stark. As such there is a significant chance that the petition of Schering Plough (the company is now owned by Merck) will be granted.

Staff Attorney, Scott Abeles, assisted in preparing this alert.