The Third Circuit’s opinion on July 16, 2012, in In re K-Dur Antitrust Litigation, sharpened the divide between the circuits on the appropriate antitrust treatment of pay-for-delay patent settlements by rejecting the scope-of-the-patent test and embracing a “quick look” approach that finds these types of settlements prima facie unlawful.
The court’s decision is a major victory for private plaintiffs and the FTC and begs the question of whether the Supreme Court will finally hear the issue.
The Underlying Dispute
At issue in the case were separate patent infringement settlement agreements that Schering-Plough Corporation entered into with Upsher-Smith Laboratories, Inc. and ESI Lederle.
Schering-Plough was the brand patent holder of a sustained-release potassium chloride supplement (K-Dur). The K-Dur patent was set to expire on September 5, 2006.
Before the expiry of the patent, Upsher-Smtih and ESI, two generic competitors, filed abbreviated new drug applications (“ANDAs”) with the FDA, making paragraph IV certifications under the Hatch-Waxman Act that claimed that their products did not infringe Schering-Plough’s patent.
On receiving notice of the ANDAs, Schering-Plough brought infringement actions against the generic competitors.
The lawsuits were “vigorously defended” and the parties eventually settled.
Under the settlement agreements, Upsher-Smith and ESI received payments to delay the entry of their generic products until September 1, 2001 and January 1, 2004, respectively.
The Antitrust Action
The settlement agreements incited litigation from both the FTC and private plaintiffs.1 The Third Circuit case arose from a series of actions brought by private plaintiffs that were consolidated in New Jersey.
In those actions, plaintiffs alleged that the K-Dur settlement agreements violated the Sherman Act as unreasonable restraints on trade. The district court, however, did not agree and granted the defendants’ motion for summary judgment.
In so doing, the court applied the scope-of-patent test and found that the settlement agreements did not extend the permissible monopoly granted to Schering-Plough by its K-Dur patent.
The Third Circuit rejected the District Court’s application of the scope-of-the-patent test and reversed the grant of summary judgment.
According to the Court, “[the scope-of-the-patent test] 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 . . . .”
The purpose of the Hatch-Waxman Act is to increase the availability of low-cost generic drugs. And, according to the court, pay-for-delay settlements do just the opposite.
An FTC report, cited by the Court, found that reverse payment settlements cost consumers $3.5 billion annually. “Thus while [the scope-of-the-patent test] might be good policy from the perspective of the name brand and generic pharmaceutical producers, it is bad policy from the perspective of the consumer.”
Instead of the scope-of-the-patent test, the court instructed the district court to apply a “quick look” rule of reason analysis.
Under that analysis, “the finder of fact must 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, which could be rebutted by showing that the payment (1) was for a purpose other than delayed entry or (2) offers some pro-competitive benefit.”
The Third Circuit’s decision reverses a trend among the courts to shield pay-for-delay settlements from antitrust liability when they do not exceed the scope of the patent.
The three most recent circuit courts to decide the issue, the Eleventh Circuit, Second Circuit, and Federal Circuit, all applied the scope-of-the-patent test in finding that particular pay-for-delay settlement agreements, including the very ones at issue in the Third Circuit case, did not violate antitrust laws.2 Instead of being influenced by those decisions, the Third Circuit joined the D.C. Circuit and the Sixth Circuit in applying stricter antitrust scrutiny to these types of agreements.3
The court’s decision creates an even divide among the circuits that have decided the issue. Although FTC Chairman Jon Leibowitz applauded the Third Circuit for having “gotten it just right,” the fight may not be over.4 This may be the case in which the Supreme Court will finally decide the issue.
This is especially true now that the Eleventh Circuit has denied the FTC’s petition for rehearing en banc in its most recent pay-for-delay case, FTC v. Watson Pharmaceuticals, Inc.
This article was prepared by Layne E. Kruse (firstname.lastname@example.org or 713 651 5194), Pamela Jones Harbour (email@example.com, 202 662 4505 or 212 318 3324), Erika Brown Lee (firstname.lastname@example.org or 202 662 0398) and John J. Byron(email@example.com or 713 651 5261) from Fulbright’s Antitrust and Competition Practice.
To learn more about our antitrust and competition practice, please go to www.fulbright.com/antitrust and to learn more about our pharmaceutical and medical devices practice, please go to www.fulbright.com/pharmaceuticals.
 The FTC’s litigation resulted in an Eleventh Circuit opinion, Shering-Plough v. FTC, 402 F.3d 105 (11th Cir. 2005), that found that pay-for-delay settlements do not violate the antitrust laws unless they exceed the scope of the patent.
 See In re Ciprofloxacin Hydrochloride Antitrust Litig., 544 F.3d 1323 (Fed. Cir. 2008);In re Tamoxifen Citrate Antitrust Litig., 466 F.3d 187 (2d Cir. 2006); Schering-Plough Corp. v. FTC, 402 F.3d 1056 (11th Cir. 2005); Valley Drug Co. v. Geneva Pharms., Inc., 344 F.3d 1294 (11th Cir. 2003).
 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).
 See Melissa Lipman, 3rd Cir. Pay-For-Delay Ruling Opens Door to High Court, Law360.com (July 16, 2012)