Antitrust Law - Rejecting the "Scope of the Patent" Test in Analysis of Reverse Payments in Pharmaceutical Industry

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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. …