By Kevin E. Noonan —

The In re K-Dur Antitrust
Litigation case (formally, Louisiana Wholesale Drug Co. et al. v. Merck & Co. and Upsher-Smith
Laboratories, Inc.) is significant because, for the first time in almost a
decade, the Federal Trade Commission succeeded in convincing a U.S. Circuit
Court of Appeals (here, the Third Circuit) that there was merit in its argument
that "reverse payment" agreements between branded and generic
drugmakers in ANDA litigation under the Hatch-Waxman Act constitutes a per se restraint on trade and should
incur antitrust liability.  Merck, the
branded partner in the reverse payment settlement agreement, filed a petition
for certiorari last month (see "Merck
Asks Supreme Court to Review Third Circuit K–Dur Decision").  Like its branded partner, Defendant
Upsher-Smith Laboratories, Inc. has filed a petition for certiorari.  The Question Presented posed in the petition reads as
follows:

Whether the Third Circuit
erred by holding, contrary to the Second, Eleventh, and Federal Circuits, that
an agreement settling patent litigation that does not restrict competition
outside the scope of the exclusionary right granted by the patent itself may
presumptively violate the antitrust laws.

While Upsher's petition is similar to
Merck's in many respects, the Upsher petition is noteworthy because it presents
reasons why reverse payment agreements are in fact pro-competitive from the
generic drugmaker's point of view.

The facts of the case are these.  The drug K-Dur 20 is a specific formulation
of potassium chloride sold by Schering-Plough Co. (now owned by Merck) 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 ANDA litigation that was settled (under the supervision
of a magistrate judge) by 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 full 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 action below in this case 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 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 rejected what it termed "precedent
from other Circuits," namely cases that have almost unanimously found
reverse payment agreements to be lawful (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)).  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; 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 that it did not
believe that the "scope of the patent" test was the appropriate test
and should not entitle reverse payments to avoid antitrust scrutiny.  The
opinion formed 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
provided 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 cited 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 (sic) 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 limited 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 "agreed[s] 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).

Upsher's
petition minces few words in characterizing the Third Circuit opinion.  The brief contends that the state of the law
as developed in several other Circuits "uniformly" established the
rule that found antitrust liability in reverse payment settlement agreements
only when those agreements exceeded the "scope of the patent," i.e., the "lawful monopoly"
conferred on the patentee.  The
uniformity in these cases was "specifically
and emphatically rejected" by the Third Circuit in repudiating the scope
of the patent standard, according to Upsher, substituting "an entirely
different legal framework in which patent settlements, like the one at issue
[in this case], are presumptively
unlawful" (emphasis in the brief).  The decision creates a circuit split (while also "gut[ting] the
exclusionary right conferred by the patent laws") that is "clear and
acknowledged" and involves "an issue of undoubted national
significance" according to the petition.  Moreover, in this case the Third Circuit decision is in direct conflict
with the Eleventh Circuit decision on "very same settlement agreement" (emphasis in brief).  Thus:

It cannot be that a single
settlement agreement may violate federal antitrust law in Philadelphia but not
in Atlanta.  The Framers established a unitary Supreme Court precisely to avoid
such conflicts on matters of federal law.  If ever there were a clear-cut case
where this Court's review is warranted, it is this one.

So far, these arguments parallel
(indeed, could be substituted for) similar arguments contained in Merck's
brief.  However, Upsher's brief then sets
forth considerations regarding the pro-competitive aspects of reverse payment
settlement agreements decidedly from the generic drugmaker's point of view.

The principal argument in favor of
reverse payment settlement agreements in Upsher's brief is that they encourage
settlements.  A rule that discourages settlement is thus contrary to a general
policy in favor of settlements — which have benefits "to the parties, the
courts, and the public" that have been recognized in patent cases as well
as general civil litigation according to the brief.  In the specific context of ANDA litigation,
Upsher argues that "such a rule would result in diminished competition
because generic companies would face greater hurdles to bringing so-called 'Paragraph
IV' patent challenges and thus would likely challenge fewer drug patents."  The brief supports this argument by reminding
the Court that, under the Hatch-Waxman regime, generic drugmakers avoid
incurring damages by launching a generic drug product at risk.  "Nonetheless," the brief argues that:

[P]atent litigation is, by its
nature, very costly to generic companies operating on thin margins, and forces
generic companies to be selective in choosing which patents to challenge.  This
factor is heightened because the generic company is generating no revenue on
sales of the generic product to fund litigation, while the branded company may
have hundreds of millions of dollars of revenue at stake in the litigation.  If
the ability to settle is restrained, a generic challenger filing a Paragraph IV
certification must be prepared ab initio to litigate its patent
case to the bitter end against the deep-pocketed branded company.  While the
generic company has no risk of damages, the branded company stands to lose its
patent protection if the generic company's challenge is sustained, and it will
accordingly spare no cost in litigation.

This characterization of ANDA
litigation is supported by Upsher's description of the underlying litigation in
this case:  the litigation was "hotly contested" and involved "exhaustive
fact and expert discovery and summary judgment briefing."  Settlement on the eve of trial as occurred
here is not unusual but is something "litigants routinely do."  The settlement agreement at issue not only
did not prevent Upsher from bringing its generic K-Dur product on the market;
it permitted the generic drug to be sold "a full five years earlier that would otherwise have been permitted [under
the patent]" (emphasis in brief).  A similar outcome is described for the
reverse payment settlement agreement between Merck and ESI:  that agreement permitted ESI to enter the
marketplace "over two and a half years before the '743 Patent expired."  In addition, the brief notes not only that
the agreement was the result of "court-supervised mediation suggested by
the presiding Judge," but the payment from Merck to ESI was "[a]t the
urging of the Magistrate Judge supervising the mediation and that the
Magistrate "characterized [the payment] as 'nothing more than legal fees,'
[as well as] the possibility of additional consideration based on when ESI's
ANDA was ultimately approved."

Upsher's brief also describes the
decision in their favor by the Administrative Law Judge who heard the complaint
filed by the Federal Trade Commission as being made after a trial "covered
8,629 pages of transcript, involved forty-one witnesses, and included thousands
of exhibits," citing In re Schering-Plough Corp.,
No. 9297, 2002 WL 1488085 (F.T.C. June 27, 2002).  That decision found that the settlement
agreement "did not contain a reverse payment" (emphasis in brief) but was "a bona fide arms-length
transaction."  According to the
brief, the full Commission, in reversing, not only did not use a "truncated
rule of reason analysis" (as it purported to do) but improperly adopted a per se rule that "that any settlement
involving reverse payments over $2 million . . . would be quid pro quo for
market delay and, thus, illegal."

The Supreme Court should grant their
petition, according to Upsher, because, inter
alia, "allowing uncertainty and confusion to linger over the proper
test will serve only to deter generic companies from making patent challenges
in the first place, thereby resulting in less competition for pharmaceuticals."  That uncertainty stems from "[a] clear
conflict on the seminal — and virtually dispositive — legal question of the
standard by which patent litigation settlements are to be judged," and
this case (where two different circuit courts came to diametrically opposed
outcomes) is the case for the Court
to remove the uncertainty, if only to avoid "inevitable forum shopping, in
which the generic pharmaceutical industry must (try to) abide by the
lowest common denominator."  In
addition, this uncertainty will serve to "chill" generic challenges
under the Hatch-Waxman Act, according to Upsher.  As set forth in the brief, "[i]f the
ability to settle is restrained or even uncertain, a generic challenger filing
a Paragraph IV certification must be prepared to litigate its patent case to
the bitter end — an expensive proposition for any generic company, especially
when facing a branded company who has incentive to 'go to the mat' and to spare
no expense in litigating against the generic company."  This likelihood is exacerbated by the fact
that the Third Circuit is the locus of "[a] substantial number of
pharmaceutical companies."  And the brief also cites Judge Posner of the
Seventh Circuit, to the effect that "[a] ban on reverse-payment
settlements would reduce the incentive to challenge patents by reducing the
challenger's settlement options should he be sued for infringement, and so
might well be thought anticompetitive," citing Asahi Glass Co. Ltd. v.
Pentech Pharm., Inc., 289 F. Supp. 2d 986, 994 (N.D. Ill. 2003).

The brief closes with an argument, once
again consistent with Merck's brief (and, indeed, with arguments any branded
drug company could make) that the Third Circuit's decision below is contrary to
the balance struck under relevant Supreme Court precedent between a patentee's
right to exclude and the proscriptions against anticompetitive behavior embodied
by the antitrust laws.  In this argument
Upsher contends that the uniform "scope of the patent" test is
consistent with this balance and should be affirmed by the Court.  And perhaps anticipating the inevitable amicus brief by the FTC, the brief
identifies the following as the source of the Third Circuit's error:

At bottom, the court of
appeals' decision seems driven by the notion that there must necessarily be
something wrong with settlements in which consideration flows from the patent
holder to the alleged infringer.  That impulse, however, ignores that fact that all
settlements involve an exchange of consideration, and the
form of that consideration should have no bearing on the lawfulness of the
settlement.  . . .  And there is nothing anomalous about the fact that the net
flow of monetary consideration may run to the generic challenger in the
Hatch-Waxman context for the simple reason that the generic company has yet to
begin making infringing sales.  As the Second Circuit has explained, if
anything, "reverse payments are particularly to be expected in the
drug-patent context because the Hatch-Waxman Act created an environment that
encourages them" [citing In re Tamoxifen Citrate Antitrust Litigation].

Finally, the brief reminds the Court
that the Third Circuit's decision, if upheld, would do ("by judicial fiat")
something Congress has so far not done, make reverse payment settlement
agreements unlawful, despite nine bills having been introduced to do just that
over the past five years.

The Court is set to consider these
petitions during an upcoming petition conference.