Third Circuit Agrees With FTC In Applying Stricter Reverse-Payment Settlement Test

The U.S. Court of Appeals for the Third Circuit has reversed summary judgment in In re K-Dur Antitrust Litigation, and resurrected claims against defendant drug manufacturers that entered into so-called “reverse-payment” or “pay-for-delay” patent litigation settlements that allegedly delayed the sale of generic drugs.

The Third Circuit held that settlement agreements in which patent holders make payments to settle patent infringement litigation against generic manufacturers may be unreasonable restraints on trade and unenforceable under federal antitrust laws.  The Third Circuit remanded the case to the district court “to apply a quick look rule of reason analysis based on the economic realities of reverse payment settlements rather than the labels applied by the settling parties.”  This is essentially the approach urged by the Federal Trade Commission (“FTC”) in its amicus brief.

The Third Circuit test will apply a stricter level of scrutiny to such settlements than the approach used by the Second, Eleventh, and Federal Circuits, which have adopted a “scope-of-the-patent” test.  Under the scope-of-the-patent test, reverse payment settlements do not violate the antitrust laws if (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.

The plaintiffs are purchasers of K-Dur 20, a sustained-release potassium chloride tablet, and include plaintiffs CVS Pharmacy, Inc., Rite Aid Corporation, and Louisiana Wholesale Drug Company, Inc.  Plaintiffs assert claims on behalf of a class of wholesalers and retailers that purchased the drug directly from defendants.

The plaintiffs are challenging settlements between Schering-Plough Corporation, the patent holder and manufacturer of K-Dur 20, and Upsher Smith Laboratories and ESI Lederle (“ESI”), which sought to market generic versions of the drug.  Per the settlements, Upsher Smith and ESI agreed not to market their generic versions until September 1, 2001, which was some years prior to the expiration of Schering-Plough’s patents.  Schering-Plough also agreed to pay Upsher Smith $60 million in royalty payments for licenses to make cholesterol drug products, and agreed to pay ESI $5 million up-front plus varying amounts depending on FDA approval of ESI’s generic.  Plaintiffs argue that the settlements were shams and that the $60 million in royalties was actually compensation for Upsher Smith’s agreement to delay entry of the generic alternative.

The Third Circuit opinion relies heavily on the goals of the 1984 Hatch-Waxman Act. That legislation was designed to facilitate generic entry and encourage generic manufacturers to challenge pharmaceutical patents. 

The FTC has long believed that reverse-payment settlements are anticompetitive because they may delay generic competition.  According to a 2010 study by the FTC, “‘Pay-for-delay’ agreements are ‘win-win’ for the companies” at the expense of consumers, who are denied the option of lower-priced generics.  The FTC report concluded that as a result of such agreements, “brand-name pharmaceutical prices stay high, and the brand and generic share the benefits of the brand’s monopoly profits.”