Antitrust law - rejecting the "scope of the patent" test in analysis of reverse payments in pharmaceutical industry.

• Author: Coffin, Abbey P.
• Position: Case note

Antitrust Law--Rejecting the "Scope of the Patent" Test in Analysis of Reverse Payments in Pharmaceutical Industry--In re K-Dur Antitrust Litigation, 686 F.3d 197 (3 Cir.), petition for cert. filed, 81 U.S.L.W. 3090 (U.S. Aug. 29, 2012) (No. 12-265); 81 U.S.L.W. 3090 (U.S. Aug. 24, 2012) (No. 12-245)

The Sherman Antitrust Act (Sherman Act) prohibits businesses from contracting, combining, and conspiring to restrain trade or commerce. (1) Reverse-payment-patent-settlement agreements between brand-name and generic pharmaceutical companies--whereby a brand-name-patent holder pays its generic competitor to drop a pending patent suit and refrain from producing its generic drug for a definite period of time--are generally subject to antitrust review under the Sherman Act. (2) In In re K-Dur Antitrust Litigation, (3) the Court of Appeals for the Third Circuit considered whether reverse-payment agreements between Schering-Plough Corporation (Schering) and its generic competitors Upsher-Smith Laboratories (Upsher) and ESI Lederle (ESI) amounted to an unreasonable restraint on trade. (4) Parting with other circuits that more recently addressed the issue, the court expressly rejected the common scope-of-the-patent test and held that reverse-payment agreements between a pharmaceutical patent holder and a potential generic competitor constitute a prima facie violation of the Sherman Act's proscription against unreasonable restraints on trade. (5)

On September 5, 1989, Schering was granted a patent ('743 Patent) on the controlled-release potassium-chloride supplement, K-Dur 20 (K-Dur). (6) In late 1995, Upsher and ESI filed individual Abbreviated New Drug Applications (ANDA) with the Food and Drug Administration (FDA) seeking approval to make and sell generic versions of K-Dur. (7) In response to notification of the ANDA filings, Schering initiated separate patent-infringement suits against Upsher and ESI in the United States District Courts for the District of New Jersey and for the Eastern District of Pennsylvania. (8) Prior to adjudicating the merits of either infringement suit, however, Schering negotiated settlements with Upsher and ESI. (9)

In 2001, the Federal Trade Commission (FTC) filed a complaint against Schering, Upsher, and ESI, alleging that the parties' patent-litigation settlements unreasonably restrained trade because the reverse-payment provisions were intended to improperly preserve Schering's drug-patent monopoly. (10) The FTC Administrative Law Judge originally dismissed the complaint; however, in December 2003, the FTC unanimously reversed, concluding that the reverse payments at issue violated antitrust laws because the parties could not demonstrate their procompetitive effects, or that they were for a purpose other than delaying market entry. (11) After Schering appealed the FTC's ruling, the Eleventh Circuit reversed on grounds that Schering had the right to exclude competitors as the K-Dur patent holder, and that public policy favors settlement of costly litigation. (12)

Wholly independent of the FTC's complaint, a group of wholesalers and retailers that purchased K-Dur directly also filed suit under antitrust law for the alleged illegality of Schering's settlement agreements with Upsher and ESI. (13) These cases were consolidated into the instant class action, In re K-Dur Antitrust Litigation. (14) The district court adopted the recommendation of the Special Master and granted summary judgment to Schering, Upsher, and ESI, finding that the settlements were subject to antitrust scrutiny only if they exceeded the scope of Schering's patent or if the underlying claims of patent infringement were objectively baseless. (15) On appeal, the Third Circuit rejected the district court's application of the scope-of-the-patent test and, on remand, directed the district court to instead use a "quick look" rule-of-reason analysis. (16) The Third Circuit further held that the trier of fact must treat any reverse payment to a generic competitor as prima facie evidence of an unreasonable restraint on trade. (17)

When Congress passed the Drug Price Competition and Patent Term Restoration Act--commonly known as the Hatch-Waxman Act (HatchWaxman)--its ostensible purpose was to jump-start drug competition and increase availability of low-cost generic drugs to consumers. (18) Hatch-Waxman attempted to balance competing objectives of providing patent protection to stimulate innovation, and creating incentives for competition in the pharmaceutical industry. (19) In its patent jurisprudence, the Supreme Court has also emphasized careful balance between these objectives--specifically the importance of testing and eliminating weak patents. (20)

In the years following enactment of Hatch-Waxman, reverse-payment agreements were used to resolve a number of patent-infringement suits arising under its regulatory framework. (21) In response to concerns about the anticompetitive effects of such agreements, Congress amended Hatch-Waxman, requiring brand-name and generic pharmaceutical companies to file all patent-litigation settlements with the FTC and Department of Justice (DOJ) for antitrust review. (22) The FTC has made reverse-payment settlements a top enforcement priority, estimating these settlements cost consumers billions of dollars annually in prescription-drug savings. (23)

For nearly a decade, the Supreme Court had declined to comment on the legality of reverse-payment agreements, allowing the issue to percolate in the lower courts. (24) Initially, the lower courts reacted to reverse-payment settlements by subjecting them to strict antitrust scrutiny. (25) In later cases, however, the courts tended to apply the scope-of-the-patent test, permitting reverse-payment agreements so long as: market exclusion does not exceed the patent's scope; the patent holder's infringement suit is not objectively baseless; and the patent was not procured by fraud. (26) Members of Congress, who have generally been unhappy with judicial tolerance of reverse-payment agreements, have proposed a number of bills attempting to address the issue. (27) On December 7, 2012, however, the Supreme Court finally agreed to review a recent reverse-payment agreement case in FTC v. Watson Pharmaceuticals, Inc. ,28 presumably to resolve the intercircuit conflict over the competitive effects of these agreements. (29)

In In re K-Dur Antitrust Litigation, the Third Circuit considered whether the reverse-payment agreements between Schering, Upsher, and ESI constituted unreasonable restraints on trade. (30) While recognizing the limited monopolies afforded by patent law, the Third Circuit concluded that the scope-of-the-patent test afforded an "almost unrebuttable presumption of patent validity" and, as a practical matter, failed to subject the reverse-payment agreements to any antitrust analysis. (31) The court reasoned that the presumption of patent validity undercut the very issue of the underlying patent litigation and was misguided by the line of Supreme Court precedent on general patent competition. (32) The Third Circuit also reasoned that applying the scope-of-the-patent test in legal challenges to brand-name patents was contrary to the congressional goals of Hatch-Waxman. (33) The court further relied on the balanced goals of Hatch- Waxman in rationalizing the adoption of the "quick look" rule-of-reason analysis on remand. (34)

In reaching its conclusion, the Third Circuit acknowledged its holding ran counter to prevailing judicial policies promoting settlement. (35) Nonetheless, the court determined that the countervailing public-policy objectives outlined in Hatch-Waxman--that patent challenges are necessary to protect consumers from unfettered brand-name-drug-monopoly rents--justified its deviation. (36) The court was also unpersuaded by the Second Circuit's suggestion that subsequent generic challenges would be able to eliminate weak patents preserved through reverse payments; instead, the court embraced the Federal Circuit's conclusion that payment flowing from the brand-name patent holder to a generic manufacturer strongly suggests anticompetitive intent. (37)

In analyzing anticompetitive effects of reverse-payment agreements, the Third Circuit properly rejected the scope-of-the-patent test. (38) Both Upsher's and ESI's paragraph IV certifications claimed that their respective generic products did not infringe Schering's '743 Patent. (39) Under traditional patent- infringement analysis, the burden lies with the plaintiff to prove that the patent was valid and was otherwise infringed. (40) Presumption of patent validity under the scope-of-the-patent test not only circumvents the plaintiff's burden of proving infringement, but also improperly affords him the power to exclude generic competitors without adjudicating the merits of the infringement issue--the essence of the underlying litigation. (41) Similarly, the scope-of- the patent test cannot account for the nuanced implications of whether the generic competitor or patent holder would prevail in patent litigation. (42)

By adopting the "quick look" rule-of-reason analysis, the Third Circuit essentially retreated to the application of a per se rule and held that reverse- payment agreements are presumptively...