Third Circuit Subjects Reverse Payments to Strict Antitrust Scrutiny
By Jie Zhang – Edited by Charlie Stiernberg
In Re: K-Dur Antitrust Litigation, No. 10-2077 (3d Cir. July 16, 2012)
The Third Circuit Court of Appeals reversed the summary judgment of the United States District Court for the District of New Jersey, which had rejected an antitrust challenge to a reverse payment agreement between the K-Dur patent holder Schering-Plough Corporation (“Schering”) and the generic drug manufacturer Upsher-Smith Laboratories (“Upsher”) to delay Upsher’s market entry.
The Third Circuit held that the rule of reason analysis should be applied in antitrust claims involving reverse payments and remanded the case to the district court for further proceedings. The rule of reason analysis requires the court to treat reverse payments as prima facie evidence of unreasonable restraint of trade, with the possibility of rebuttal by showing that the payment was not for delayed market entry or had pro-competitive effects. In so holding, the Third Circuit emphasized Congress’ intent in passing the Hatch-Waxman Act — to provide incentive for competition in the pharmaceutical industry and increase availability of generic drugs.
In 1989, Schering obtained a patent on K-Dur, a controlled-release potassium chloride supplement used to treat potassium deficiencies. In 1995, Upsher filed an Abbreviated New Drug Application (“ANDA”) seeking FDA approval to manufacture a generic version of K-Dur. ANDA is a short form application for approval of generic drugs under 21 U.S.C. § 355(j), which was created to encourage early generic drug entry and reduce consumer costs. The first generic manufacturer to file the ANDA also enjoys a 180-day exclusive right of marketing the generic drug. In response to Upsher’s ANDA application, Schering filed a patent infringement claim against Upsher, leading to an automatic stay of FDA’s approval of any generic versions of the drug for 30 months pursuant to 21 U.S.C. § 355(j)(5)(B)(iii)(I). Before the court ruled on the infringement issue, the parties reached a settlement agreement, which provided that Upsher would refrain from producing the generic drug for a period of time in exchange for Schering’s cash payment.
Several wholesalers and retailers initiated an antitrust class action against Upsher and Schering, alleging that their reverse payment agreement unlawfully preserved a monopoly. The United States District Court for the District of New Jersey granted the defendants’ motion for summary judgment, reasoning that the K-Dur patent gave Schering the right to exclude generic manufacturers from the market.
The Third Circuit criticized the district court’s “scope of the patent test,” which permitted reverse payments as long as the exclusion did not exceed the patent scope and involved no fraud or baseless infringement claim. The Third Circuit stated that the scope of the patent test was based on the unsound presumption of patent validity and improperly allowed holders of weak patents to buy out competitors, which was against the spirit of antitrust law. The Court noted that because subsequent generic ANDA filers could not benefit from the 180-day exclusivity period, the reverse payment agreement between the patent holder and the initial generic challenger effectively blocked generic competition. By contrast, the rule of reason analysis adopted by the Third Circuit examines reverse payments under strict antitrust scrutiny and calls for an assessment of the economic realities of payment settlements. Although the Third Circuit recognized the importance of encouraging settlements between litigating parties, it concluded that, on balance, public policy favored judicial review and elimination of weak patents to promote free economy.
Prior to this case, five circuits had ruled on the antitrust implication of reverse payments. The D.C. Circuit and Sixth Circuit adopted the rule of reason analysis while more recent cases in the Eleventh Circuit, Second Circuit, and Federal Circuit applied the scope of the patent test. The Third Circuit’s adoption of the rule of reason test deepens the circuit split. The FTC believes that the court’s restriction on reverse payments will save consumers money by increasing the availability of low-cost generic drugs, whereas brand name drugmakers contend that prohibiting reverse payment settlements actually increases consumer costs.