Citing the dire consequences for companies seeking to comply with antitrust law in the wake of a direct circuit split, major pharmaceutical makers are asking the Supreme Court to review a Third Circuit decision that declared settlement payments by brand-name pharmaceutical companies to their generic rivals to be anticompetitive. Merck & Co., Inc. recently filed a petition for a writ of certiorari,1 and all eyes in the pharmaceutical industry are watching to see whether the Supreme Court will agree to hear the case.
The Third Circuit in July ruled that reverse payment agreements — the so-called "pay-for-delay" settlements in which brand-name pharmaceutical companies pay generic rivals to drop patent challenges, thereby preserving exclusivity in the market — presumptively violate antitrust law. See In re K-Dur Antitrust Litig., 686 F.3d 197 (3d Cir. 2012). The decision directly conflicts with rulings in three other circuits,2 setting up a well-defined circuit split that could garner Supreme Court attention.
The landmark antitrust decision is possibly the second-most important decision in the health care field in recent years, analysts said, trailing only the Supreme Court ruling that upheld the Patient Protection and Affordable Care Act. In its petition for review, Merck now seeks to have the Court define the appropriate antitrust standard for evaluating settlements of patent litigation between brand-name and generic manufacturers when the settlement between them includes a payment.
Observers, including some federal judges, anticipate a Supreme Court decision would resolve the uncertainty surrounding reverse payments that was created after the Third Circuit's ruling. One district court already stayed cases regarding an alleged reverse payment deal for a narcolepsy drug until the Supreme Court decides whether to hear the case.3
The K-Dur case concerns the high blood pressure medication K-Dur 20, developed by Schering-Plough Corp. in the 1980s and now manufactured by a Merck subsidiary. The drug, which treats potassium deficiency, was the subject of multiple patent infringement actions brought against generic manufacturers beginning in 1985. Schering-Plough eventually settled, allowing the generic makers to license the product before the patent's expiration and paying them a total of $75 million. Schering-Plough merged with Merck in 2009.
The Federal Trade Commission issued a complaint for unfair competition against the brand-name and generic manufacturers, but the settlement was upheld by the Eleventh Circuit in 2005, and the Supreme Court denied review.4 Private plaintiffs filed a number of antitrust actions against the drug makers, which were consolidated in multidistrict litigation in the District of New Jersey. The district court granted summary judgment for the pharmaceutical defendants, and the Third Circuit reversed and remanded in July.
The Third Circuit now squarely rejects the "scope of the patent" test used in the Second, Eleventh and Federal circuits in favor of a "quick look" rule of reason analysis. Under this stricter analysis, a fact finder should "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." This presumption can be rebutted by showing that the payment "(1) was for a purpose other than delayed entry or (2) offers some pro-competitive benefit."5
The decision could have profound effects in the Third Circuit — covering New Jersey, Pennsylvania, and Delaware, an area that is home to a number of large pharmaceutical companies — and elsewhere. Earlier this month, for example, three new direct purchaser class actions in New Jersey and Massachusetts targeted AstraZeneca over the acid reflux drug Nexium, alleging that the pharmaceutical company conspired with generic manufacturers to keep their drugs off the market.
Similarly, Pfizer is involved in multidistrict litigation over allegations concerning its payment deals with generic drug makers regarding the cholesterol drug Lipitor.6 And plaintiffs in a class action against Bayer over the antibiotic Cipro filed a brief with the California Supreme Court citing the Third Circuit's K-Dur opinion to seek reversal of summary judgment for the pharmaceutical defendants.7
The impact of the decision, for now, appears limited to the pharmaceutical industry, as the Third Circuit was quick to note: "We caution that our decision today is limited to reverse payments between patent holders and would be generic competitors in the pharmaceutical industry."8 But plaintiffs may attempt to extend its logic to other areas of antitrust law in coming years.
The Third Circuit emphasized "that nothing in the rule of reason test that we adopt here limits the ability of the parties to reach settlements based on a negotiated entry date for marketing of the generic drug; the only settlements subject to antitrust scrutiny are those involving a reverse payment from the name brand manufacturer to the generic challenger."9 Thus, it appears that even under K-Dur analysis, companies may avoid this scrutiny by curtailing the use of reverse payments.
The Federal Trade Commission and the Department of Justice both filed amicus briefs with the Third Circuit contending that reverse payments violate federal antitrust law because of the anticompetitive potential of the settlements. After the decision, FTC Chairman Jon Leibowitz issued a statement in which he applauded the decision and called on Congress and the pharmaceutical companies to eliminate the agreements.
"The Third Circuit Court of Appeals seems to have gotten it just right: These sweetheart deals are presumptively anticompetitive," Leibowitz said. "It's time for the pharmaceutical companies to return to the side of consumers."
Merck, however, contends that Congress actually created the incentive for companies to engage in reverse payment settlements in the Drug Price Competition and Patent Term Restoration Act of 1984, also known as the Hatch-Waxman Act.10 Merck argues that by lowering barriers for generic drug companies, the law created asymmetrical litigation risk because the patent would be litigated before the generic drug enters the market. Thus, Merck contends, the generic drug makers have little to lose in patent litigation because there are no lost profits or other damages recoverable for brand-name manufacturers, who themselves face the potential loss of their patent in litigation and agree to reverse payment agreements precisely to avoid this unbalanced risk.11 Merck's petition warned that "payments" could be read broadly in the future to include non-monetary settlements.
Upsher-Smith Laboratories, Inc., the generic drug maker that received the $60 million reverse payment at issue and is now a co-defendant in the case, is also seeking review. Its petition was pointed in its request for a Supreme Court hearing: "If ever there were a clear-cut case where this Court's review is warranted, it is this one."12
Although its full impact remains unclear, the K-Dur opinion already represents a new way for plaintiffs to challenge so-called "pay-for-delay" settlements. Even with the issue now teed up for the Supreme Court, companies across all industries seeking to settle patent cases should be wary of the antitrust implications of K-Dur.
Footnotes
1 Merck & Co., Inc. v. Louisiana Wholesale Drug Co., Inc., No. 12-245, 2012 WL 3645102 (Aug. 24, 2012).
2 See FTC v. Watson Pharm., Inc., 677 F.3d 1298, 1312 (11th Cir. 2012); Arkansas Carpenters Health & Welfare Fund v. Bayer AG, 604 F.3d 98, 105 (2d Cir. 2010); In re Ciprofloxacin Hydrochloride Antitrust Litig., 544 F.3d 1323, 1336 (Fed. Cir. 2008); In re Tamoxifen Citrate Antitrust Litig., 466 F.3d 187, 213 (2d Cir. 2006); Schering-Plough Corp. v. FTC, 402 F.3d 1056, 1066 (11th Cir. 2005); Valley Drug Co. v. Geneva Pharm., Inc., 344 F.3d 1294, 1310 (11th Cir. 2003). Previously, the Sixth and D.C. circuits found reverse payments unlawful horizontal agreements with the purpose of eliminating competition. See In re Cardizem CD Antitrust Litig., 332 F.3d 896 (6th Cir. 2003); Andrx Pharms. Inc. v. Biovail Corp. Int'l, 256 F.3d 799 (D.C. Cir. 2001).
3 See Vista Healthplan, Inc. v. Cephalon, Inc., No. 2:06-cv-01833-MSG (E.D. Pa. Aug. 29, 2012) (Goldberg, J.).
4 See Schering-Plough v. FTC, 402 F.3d 1056 (11th Cir. 2005).
5 K-Dur, 686 F.3d at 218.
6 See In re Lipitor Antitrust Litig., MDL No. 2332 (D. N.J.).
7 See In re Cipro Cases I & II, 269 P.3d 653 (Cal. 2012).
8 K-Dur, 686 F.3d at 216.
9 Id. at 217-18.
10 Pub. L. No. 98-417, 98 Stat. 1585.
11 Petition for Writ of Certiorari, Merck, 2012 WL 3645102, at *21 (No. 12-245).
12 Petition for Writ of Certiorari, Upsher-Smith Laboratories Inc. v. Louisiana Wholesale Drug Co., Inc., No. 12-265, 2012 WL 3766964, at *2 (Aug. 29, 2012).
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