Last week, the Federal Trade Commission (“FTC”) filed an amicus brief with the U.S. Court of Appeals for the Third Circuit in the In Re K-Dur Antitrust Litigation. A class of direct purchasers initiated this case challenging the settlement between Schering-Plough, owner of key patent for high blood pressure medication K-Dur 20, and generic drug makers, Upsher-Smith and ESI (formerly a division of Wyeth) to delay the market entry of the generic version of K-Dur 20. The plaintiffs in this case alleged that the settlement between Schering-Plough and the generic drug makers violated the Sherman Act. In the lower court, the U.S. District Court for the District of New Jersey granted a summary judgment motion filed by Merck (formerly Schering-Plough). The FTC’s amicus brief requests that the Third Circuit reverse the District Court’s ruling.
This is not the FTC’s first bite at the apple regarding Schering-Plough’s “pay-to-delay” settlement agreement. The FTC previously initiated an action against Schering-Plough challenging the very same settlement with the generic drug makers alleging the settlement violated Section 5 of the FTC Act. That case was also dismissed by a district court. On appeal in 2005, the U.S. Court of Appeals for the Eleventh Circuit upheld the dismissal by the district court. The FTC also submitted an amicus brief in that case.
In its amicus brief to the Third Circuit, the FTC relies on the “Hatch-Waxman Act” to support its request for reversal. Specifically, the FTC argues that the Hatch-Waxman Act provides the ability to challenge patents “that are invalid or too narrow to legitimately prevent the entry of generic drugs.” The FTC asserts that settlements similar to that reached between Schering-Plough and the generic drug makers are costing consumers about $3.5 billion per year by preventing the market entry of low-cost generic drugs.
While this is an issue of first-impression for the Third Circuit, other federal courts have weighed in on the legality of exclusion-payment settlement agreements, taking varied approaches. The Second and Federal Circuits have upheld such settlements, while the Sixth and D.C. Circuits suggested that these settlements may violate anti-trust laws. In its amicus brief, the FTC urges that:
"[p]atent settlement agreements should be assessed under the antitrust rule of reason – a rule that, as recent Supreme Court teachings make clear, is flexible enough both to take into account the patent context and to recognize a presumption of illegality for types of agreements whose likely anticompetitive impact is clear. Parties may settle patent disputes in a variety of ways, and many settlements – e.g., those in which the parties compromise on an entry date, without payment by a patent holder – pose little competitive problem. On the other hand, where a settlement includes a substantial payment, that payment must be a quid pro quo for something; if the challenger is offering a commitment to stay out of the market for a specified time, it follows that the payment is to secure exclusion of a potential competitor. Because such an agreement closely parallels market allocation arrangements universally recognized as unlawful, a presumption of antitrust illegality is justified. Such a presumption is bolstered by the polices of Hatch-Waxman and by experience that shows the vulnerability of many pharmaceutical patents, the weakest of which will be most likely to result in exclusion-payment settlements."
How will the Third Circuit handle this appeal against the backdrop of a circuit split? Will the Third Circuit take the path of the Second and Federal Circuits and uphold the lower court’s ruling? Or, will the Third Circuit reverse and remand for consideration pursuant to the “rule of reason” suggested by the FTC or pursuant to an entirely different framework?