The Federal Trade Commission Finally Wins One

By Kevin E. Noonan --

The Federal Trade Commission (FTC) has been on a mission over the past decade, to eradicate a practice it believes is anticompetitive.  That practice relates to so-called "reverse payments" (also known as "pay-for-delay" arrangements, ala those who term non-practice entities "trolls") between innovator pharmaceutical companies and generic drugmakers in ANDA litigation brought under 35 U.S.C. § 271(e)(2).  Despite a ban on such agreements being part of the Obama administration's budget for the past few years, neither Congress nor the courts have been willing to adopt the FTC's stance on the purported anticompetitiveness of such agreements.  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.

That was the situation until yesterday, where a three-judge panel of the Third Circuit agreed with the FTC's position and reversed a finding by the District Court that the reverse payment agreement at issue was not barred by the antitrust laws.  The case, In re K-Dur Antitrust Litigation, 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 (which the decision says is "set to expire on September 5, 2006").  Upsher filed its ANDA as first-filer (and thus eligible for the statutory 180-day exclusivity) and filed 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 within 45 days of receiving notice of Upsher's ANDA filing, triggering the statutory 30-month stay of ANDA approval by the FDA.  Settlement negotiations 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."  Upsher also 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.

The plaintiffs here include 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.  Amici include the American Antitrust Institute, the FTC, the Pharmaceutical Research and Manufacturers of America (PhRMA), the Washington Legal Foundation, the U.S. Department of Justice, and the National Association of Chain Drug Stores.  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).  Not so fortuitously, 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 opinion then provided what it characterized as an "Economic Background and [] History of Reverse Payment Settlements" based largely upon FTC Reports and recommendations (including the 2010 report entitled Pay-for-Delay: How Drug Company Pay-offs Cost Consumers Billions (see "FTC Disapproves of 'Pay-for-Delay' Drug Deals"), a title more appropriate for a supermarket tabloid than a government report).  Thereafter, exercising its "plenary review" of the District Court's summary judgment decision, the opinion sets forth its view of antitrust law and its application to the reverse payment agreements before it.  It is clear from this explication of the law that the panel believes 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 then turns to "precedent from other Circuits," namely the cases noted above that have almost unanimously found reverse payment agreements to be lawful.  The opinion begins with the two earliest cases -- Andrx Pharmaceuticals, Inc. v. Biovail Corp. (D.C. Circuit 2001), and In re Cardizem CD Antitrust Litigation (6th Cir. 2003), both of which found that reverse payment agreements should be subjected to strict antitrust scrutiny (and both having facts that distinguish them from the later cases where reverse payments were found to be lawful).  These cases are related, in that they both considered the antitrust implications of the same agreements relating to generic Cardizem.  Turning to the later cases, the opinion notes 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 terms these considerations the "scope of the patent" test, which it identifies from the Second Circuit's In re Tamoxifen Antitrust Litigation decision.  In a footnote, the panel acknowledges 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 explains 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 as it characterizes it, 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 states 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 thinks using the presumption of validity to uphold reverse payment agreements is "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.  A decade of rhetoric on the "broken" patent system is evident in the court's exhortation that "courts must be mindful of the fact that "[a] patent, in the last analysis, simply represents a legal conclusion reached by the Patent Office," citing Lear, Inc. v. Adkins, 395 U.S. 653, 670 (1969), for the proposition (the best that can be said about this citation is that it has nothing to do with the correctness of Patent Office determinations); this statement is "supported" by yet another FTC Report from 2002, which indicated that generic challengers in ANDA litigation prevailed 73% of the time (Generic Drug Entry Prior to Patent Expiration 16 (2002)).  Curiously, the opinion also supports these assertions with a law review article by now-Circuit Judge Moore, which showed that generic challengers prevailed only 42% of the time; the disparity goes unaddressed in the opinion.

The panel opinion also "question[s] the assumption" that subsequent ANDA filers will come forward to challenge "weak" patents (what the court in FTC v. Watson colorfully characterized as:  "though a patent holder may be able to escape the jaws of competition by sharing monopoly profits with the first one or two generic challengers, those profits will be eaten away as more and more generic companies enter the waters by filing their own paragraph IV certifications attacking the patent").

Here, the Third Circuit panel considered its 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 Court shows its prejudices by then noting that "the high margins of a monopolist drug manufacturer may enable it to pay off a whole series of challengers rather than suffer the possible loss of its patent through litigation," citing King Drug Co. of Florence, Inc., 702 F. Supp. 2d 514, 521-22 (E.D. Pa. 2010).

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.

Significantly, several (albeit not all) of these cases come from earlier times when the Court was less enlightened regarding the salutary effects of patents in innovation (including United States v. Masonite Corp., 316 U.S. 265, 277 (1942), Sola Elec. Co. v. Jefferson Elec. Co., 317 U.S. 173, 177 (1942), and Edward Katzinger Co. v. Chicago Metallic Manufacturing Co., 329 U.S. 394 (1947)).  The "logic" of these cases, that the public interest is best protected by "judicial challenge" of patents is persuasive, according to the panel, "because reverse payments permit the sharing of monopoly rents between would-be competitors without any assurance that the underlying patent is valid."

The panel explicitly limits the scope of its decision to "reverse payments between patent holders and would be generic competitors in the pharmaceutical industry" (rather unnecessarily, in view of the fact that these types of agreements stem exclusively from agreements involving the Hatch-Waxman statutory scheme).  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 finds 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."  Again relying on an FTC Report (Agreements Filed with the Federal Trade Commission under the Medicare Prescription Drug, Improvement, and Modernization Act of 2003: Overview of Agreements Filed in FY 2010, 2 (2011)), the opinion asserts that "the vast majority of pharmaceutical patent settlement [will be] unaffected" by its ruling.

Accordingly, the Court directs the District Court to reconsider plaintiffs' evidence using 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.

With this decision, the FTC now has an opportunity to have the Supreme Court decide the issue.  The posture of the decision raises a clear circuit court split between the Third Circuit and the Second, Eleventh, and Federal Circuits.  But it may take awhile, provided there is no reconsideration en banc by the circuit court:  the case has been remanded to the District Court, and should the defendants decide not to petition for certiorari the FTC has no basis for doing so.  If the sentiments voiced by Justice Breyer in Mayo v. Prometheus hold, the Supreme Court may be inclined to agree with what the FTC has been arguing for almost a decade.  However, the solid legal and business decisions underlying reverse payment agreements, as well as the more realistic, less ideological underpinnings of the decisions contrary to this one in the earlier decisions in the Second, Eleventh, and Federal Circuits, could test the extent to which the Roberts Court is willing to let these considerations guide its jurisprudence.

Comments

[EG]

Kevin,

Nice review of this case and the FTC's "never ending" effort to find a circuit that agrees with its position on reverse payments. As others have noted, the Third Circuit's view about what the "presumption of patent validity" means is, at the very least, problematic. Also, the Third Circuit's view that reverse payments are "presumptively" an unreasonable restraint of trade is in complete conflict with other decisions on reverse payments and is pretty close to a per se rule of illegality. Now the interesting questions are will the Third Circuit hear this case en banc, and will SCOTUS enter the fray to resolve the obvious circuit conflict?

[patent litigation]

I think it's good news that we've finally seen an end to knee-jerk deference to reverse-payment settlement agreements. In my opinion, these so-called pay-for-delay arrangements are potentially abusive of consumers, wildly undemocratic, and poster children for antitrust concerns. Bravo.
http://www.generalpatent.com/blog

[Kevin E. Noonan]

Dear PL:

Except when they are not. I am not taking an ideological position: the courts that have found the reverse payment arrangements to be lawful have based their decisions on the pertinent economics of those agreements and their effects, while courts that have not have done so in situations where there were factors that sugggested (or showed) that the agreement was in fact anti-competitive.

Until now. I do object to the FTC encouraging consumer groups to be their stalking horses, if that happened, and also to the "knee-jerk" reaction by the FTC that the practice should be per se illegal.

I also consider the situation in the context of other reports (having nothing to do with reverse payments) that show the economic cost of the Hatch-Waxman regime in terms of monies spent on litigation rather than, say, drug development. We may weigh those costs against the "savings" generic drugs have brought US consumers and may decide those costs are worth it.

But almost nothing is an unalloyed good (or evil) so the place where the Third Circuit landed is probably a reasonable compromise. It puts the burden onthe parties to the agreement to make their case without the assumption that the patent is valid or not or that the generic drugmaker will prevail or not. But is does focus the inquiry on the economic effects of the agreement, and so the parties should be able (if not particularly willing) to set forth the bases for entering into an agreement rather than pursuing the ANDA litigation.

And I also think that all these considerations are more relevant in ANDA litigation that does not assert invalidity or unenforceability but rather non-infringement. Much of the rationale for the 2d, 11th and Fed. Cir. opinions falls aside under those facts.

Thanks for the comment.