By Kevin E. Noonan —

Last month, the Federal Trade
Commission accomplished a decade-long goal:  getting a Federal Circuit Court of Appeal (the 3rd Circuit) to
support its position that so-called "reverse
payments" (also known as "pay-for-delay" arrangements) between
innovator pharmaceutical companies and generic drugmakers in ANDA litigation
brought under 35 U.S.C. § 271(e)(2) are anticompetitve and barred by Federal
antitrust law, in In re K-Dur Antitrust Litigation.  Such a ban on these agreements have been part
of the Obama Administration's budget for the past few years, but neither
Congress nor the courts have been willing to adopt the FTC's stance on their
purported anticompetitiveness.  Indeed, most courts that have considered
the issue disagreed with the FTC's position, based on their assessment that, on
average, generic drugs actually come on the market sooner than they would if the patentee retained its exclusivity for
the full scope of the patent term.  This rationale has been applied, in
varying degrees, by the Second, Eleventh, and Federal Circuits, in Valley Drug Co. v. Geneva Pharmaceuticals, Inc.,
344 F.3d 1294 (11th Cir. 2003); Schering-Plough Corp. v. Federal Trade Commission,
402 F.3d 1056 (11th Cir. 2005); In re Tamoxifen Citrate Antitrust Litigation,
466 F.3d 187 (2d Cir. 2006), Arkansas Carpenters Health & Welfare Fund v. Bayer AG,
604 F.3d 98, 105 (2d Cir. 2010); and In re Ciprofloxacin Hydrochloride Antitrust Litigation,
544 F.3d 1323 (Fed. Cir. 2008).  Where a court has found a reverse
payment agreement to be anticompetitive, In re Cardizem CD Antitrust Litigation,
332 F.3d 896 (6th Cir. 2003), the facts of the case distinguished the behavior
of these parties from the behavior of the other parties involved in such
agreements.

To recap, the K-Dur
case involved the drug K-Dur 20, a specific formulation of potassium chloride
sold by Schering-Plough Co. and protected by a formulation patent, U.S. Patent
No. 4,863,743. 
Upsher filed its ANDA as first-filer with a Paragraph IV certification of
non-infringement based on alleged chemical differences between Upsher's generic
drug and Schering's branded drug product.  Schering filed suit and settlement
negotiations ultimately resulted in an agreement, entered into on June 18,
1997, wherein Upsher would "refrain from marketing its generic potassium
chloride supplement or any similar product until September 1, 2001." 
In return, Schering agreed to grant Upsher a "non-royalty [bearing] non-exclusive
license" and Upsher granted Schering non-exclusive licenses on several of
its products (although Schering never marketed any Upsher products). 
Schering agreed to pay Upsher sixty million dollars over three years, plus
additional amounts tied to its marketing of Upsher's products under the
non-exclusive license.  Finally, the agreement called for Upsher to
dismiss the patent litigation and not to enter the market with its KCl product
until September 1, 2001, thus forming the predicate for allegations that this
was at heart a "pay for delay" agreement.

A second ANDA filer, ESI Lederle, was also
involved in a separate litigation that was settled (under the supervision of a
magistrate judge) with an agreement wherein ESI agreed not to market its
generic KCl formulation (which, like Upsher, it alleged was not infringing) in
return for a $5 million upfront payment and additional payments depending on
when ESI's ANDA was approved by the FDA (an amount the District Court said
varied from $10 million to $625,000 depending on the ANDA approval date); as it
turns out, ESI obtained FDA approval of its ANDA in sufficient time to be
entitled to $10 million, which it received from Schering.

An FTC action ensued, with the Commission
alleging that the agreements between Schering, Upsher, and ESI amounted to an
unlawful restraint of trade under Section 5 of the FTC act.  The
Administrative Law Judge dismissed, based on his determination that the
agreements included separate licensing terms that fell outside a simple "pay
for delay" arrangement.  The Commission reversed the ALJ's
determination, finding a "direct nexus between Schering's payment and Upsher's
agreement to delay its competitive entry" and that this agreement "unreasonably
restrain[ed] commerce," and that the Schering-ESI agreement violated the
antitrust laws (wherein the Commission rejected the parties' contention that "judicial
pressure to settle" was involved in their agreement).  The Commission
did not review or rule on the merits of the underlying patent suits, creating a
per se rule that:

[W]here a name brand pharmaceutical maker pays a generic manufacturer as
part of a settlement, "[a]bsent proof of other offsetting consideration,
it is logical to conclude that the quid pro quo for the payment was an
agreement by the generic to defer entry beyond the date that represents an
otherwise reasonable litigation compromise."

Under a "rule of reason"
analysis, the Commission found that "the possible existence of a reverse
payment raises a red flag and can give rise to a prima facie case that an
agreement was anticompetitive."  Schering appealed in the Eleventh
Circuit, which overturned the FTC.

This action named as plaintiffs drug
wholesalers (Louisiana Wholesale Drug Co.) and retailers (CVS Pharmacy, Rite
Aid, Walgreens, Eckerd, Safeway, Kroger, Albertson's, Hy-Vee and Maxi Drug)
against Merck & Co. (the successor-in-interest to Schering-Plough) and
Upsher-Smith Laboratories.  Characterized as "separate from the FTCs
challenge" (but no doubt motivated by it), the plaintiffs here filed
various lawsuits that were consolidated in the District of New Jersey by the
Judicial Panel on Multidistrict Litigation (fortuitously for plaintiffs and the
FTC, in an appellate circuit that had not ruled on the reverse payment practice). 
A Special Master appointed by the Court filed a Report and Recommendation that
the lawsuits be dismissed, based on Schering's right under the patents to "exclude
infringing products until the end of [the patent's] term," and that
reverse payment agreements warrant antitrust scrutiny only if they either
exceeded the scope of the underlying patents or if the patent infringement
lawsuits brought under the authority of the patents were objectively baseless
(grounds that other appellate circuits had also considered in assessing the
legality of reverse payment agreements).

The Third Circuit rejected the precedent
of its sister circuits, finding reverse payment agreements to be presumptively
illegal.  The opinion sets forth its view
of antitrust law and its application to the reverse payment agreements before
it.  The Court set forth its opinion that the proper approach is to
evaluate any agreement alleged to be one that restrains trade by the "rule
of reason," following its appreciation of applicable Supreme Court
precedents.  In doing so, the opinion states that "the finder of fact
must decide whether the questioned practice imposes an unreasonable restraint
on competition, taking into account a variety of factors, including specific
information about the relevant business, its condition before and after the
restraint was imposed, and the restraint's history, nature, and effect,"
citing State Oil Co. v. Khan, 522 U.S. 3, 10 (1997).  This inquiry
has three parts, according to the Third Circuit:  there must be a showing
of an anticompetitive effect on the market, which (if established) "shifts
the burden to the defendant to show that the challenged conduct promotes a
sufficiently pro-competitive effect."  The antitrust plaintiff can
rebut this showing if it can establish that the restraint on trade is not "reasonably
necessary to achieve the [purportedly] pro-competitive objective" asserted
by the antitrust defendant.  The opinion also notes that there is a class
of activities that have been deemed "unlawful per se" that
includes "horizontal price fixing, output limitations, market allocation,
and group boycotts," citing Copperweld Corp. v. Independence Tube
Corp., 467 U.S. 752, 768 (1984).

The opinion rejected what it termed "precedent
from other Circuits," namely the cases noted above that have almost
unanimously found reverse payment agreements to be lawful.  The opinion
noted that in each case, the appellate court found the reverse payments to be
lawful based on the patent's presumption of validity and the patentee's right
to exclude, and that the agreements did not involve an improper extension of
that exclusionary right (as well as the policy considerations involving
favoring settlements).  The panel opinion termed these considerations the "scope
of the patent" test, which it identified from the Second Circuit's In
re Tamoxifen Antitrust Litigation decision.  In a footnote, the panel acknowledged
these decisions but, finding that they are persuasive and not binding authority
and that the panel does not find the arguments persuasive, they "decline
to follow [them]."

The panel then explained its analysis of
this case law and why it is unpersuaded.  Put simply, the panel does not
believe that the "scope of the patent" test is the appropriate test
and should not entitle reverse payments to avoid antitrust scrutiny.  The
opinion forms this conclusion because "that test [in the panel's view] improperly
restricts the application of antitrust law and is contrary to the policies
underlying the Hatch-Waxman Act and a long line of Supreme Court precedent on
patent litigation and competition."  The opinion provides three
grounds for this conclusion.  First, the opinion stated that it creates "an
almost unrebuttable presumption of patent validity," due to the fact that
the settlement "forces a presumption that the patent holder would have
prevailed" in the underlying (and settled) ANDA litigation.  This
presumption has (or should have) no substantive vitality, according to the
panel, because it is merely 'a procedural device and is not a substantive right
of the patent holder," citing Stratoflex, Inc. v.
Aeroquip Corp., 713
F.2d 1530, 1534 (Fed. Cir. 1983).  The opinion also believed using the
presumption of validity to uphold reverse payment agreements was "particularly
misguided" when the basis for the underlying patent infringement defense
is non-infringement (as it was in this case), because the burden is properly on
the patentee, not the challenger, to prove infringement.  The panel
opinion also "question[ed] the assumption" that subsequent ANDA
filers will come forward to challenge "weak" patents.

The Third Circuit panel considered perceived
pernicious effects on reverse settlements as being directed to first ANDA
filers, which it asserts are the "most motivated" due to the promise
of 180 days of market exclusivity.  The panel also cites several Supreme
Court cases for the proposition that patent rights are "a limited
exception to a general rule of the free exploitation of ideas" that
indicate that "the public interest supports judicial testing and
elimination of weak patents" (this in contrast to the 11th Circuit's
recognition that:

No matter how valid a patent is — no matter how often it has been
upheld in other litigation or successfully reexamined — it is still a gamble
to place a technology case in the hands of a lay judge or jury.  Even the
confident patent owner knows that the chances of prevailing in patent
litigation rarely exceed seventy percent.  Thus, there are risks involved
even in that rare case with great prospects.

The panel explicitly limited the scope of
its decision to "reverse payments between patent holders and would be
generic competitors in the pharmaceutical industry." It is clear that the
panel was motivated at least in part by its perception, as argued by the FTC,
that reverse payment settlement agreements were contrary to and in
contravention of Congressional goals of "increase[ing] the availability of
low cost generic drugs" (despite findings in other circuits that in some
circumstances reverse payment settlements do just that).  Nevertheless,
the panel found that "[t]he line that Congress drew between these
competing objectives [of stimulating innovation and furthering the public
interest] strongly supports the application of rule of reason scrutiny of
reverse payment settlements in the pharmaceutical industry."  And the
panel limits the scope of its decision only to settlements that involve
payments from the patentee to the putative generic competitor:  "[n]othing
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."  According to the Court, "the vast majority
of pharmaceutical patent settlement [will be] unaffected" by its ruling.

The proper procedure under Third Circuit
law is thus to use a "quick look" rule of reason analysis "based
on the economic realities of the reverse payment settlement rather than the
labels applied by the settling parties" and that "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." 
In doing so, the Court also "agrees [] with the FTC that there is no need
to consider the merits of the underlying patent suit because '[a]bsent proof of
other offsetting consideration, it is logical to conclude that the quid pro
quo for the payment was an agreement by the generic to defer entry beyond
the date that represents an otherwise reasonable litigation compromise,'"
citing the Commission's Final Order in this matter that was overturned by the 11th
Circuit.

Merck has now petitioned for
certiorari; the Question Presented is:

Whether the federal antitrust laws permit a
brandname manufacturer that holds the patent for a drug to enter into a
settlement of patent litigation with a prospective generic manufacturer, where
the settlement includes a payment from the brand manufacturer to the generic
manufacturer but does not exclude competition beyond the scope of the patent.

According to the petition, there
are three reasons why certiorari should be granted.  First, the Third Circuit's decision creates a
"circuit split" below regarding the "appropriate standard"
to be applied in assessing antitrust liability for settlements of ANDA
litigation between branded and generic drug makers.  Second, this case is an "ideal vehicle"
for the Court to consider the question. 
The "divergent legal standard" applied by the Third and
Eleventh Circuits were applied "in
reviewing the very settlements at issue [in this case]" (emphasis in petition), a circumstance
where "the Court can be not only confident, but certain, that a circuit
conflict concerning the appropriate legal standard is squarely implicated,
because two courts of appeals have applied different legal standards to the same
facts," citing United States v. American Can Co., 280 U.S.
412, 415-16 (1930).  In addition, in
this case the Court would have the benefits of an extensive record, including
the proceedings before the FTC, the District Court and two appellate
courts.  Finally, the petition asserts
that the Court will hear from all interested parties — branded and generic drug
makers, private plaintiffs including wholesale and retail drug stores, and the
government.  Third, the petition
characterizes the Question Presented as "an exceptionally important and
recurring one" with great "legal and practical significance."  Moreover, "[f]urther percolation []
would serve no useful purpose."  And, "if
left undisturbed, the decision of the Third Circuit — a circuit with jurisdiction
over many of the Nation's major pharmaceutical companies — promises to have a
chilling effect on patent settlements between brand manufacturers and generic
manufacturers."  But while the Third
Circuit's decision may appear to be limited to settlements where there is an
actual payment from the branded drug maker to one or more generic companies,
the petition notes that, "[s]eemingly emboldened by the Third Circuit's decision,
however, the FTC has recently taken the position in litigation that 'payments'  include terms of settlements that cannot
meaningfully be characterized as payments at all, such as terms concerning the
entry of brand manufacturers' own generic versions, citing the FTC Brief in In
re Effexor XR Antitrust Litig., Civ. No. 11-5479 (D.N.J.) (filed Aug. 10,
2012).

It is unlikely that any of the
parties — or the government — will oppose this petition, making it likely for
that reason alone that the Court will grant cert.  And insofar as this is in many respects a "patent"
case, it seems even less likely that the Court will resist the siren call of
another opportunity to consider this area of the law.