Patent litigation in the pharmaceutical industry impacts billions of dollars in pharmaceutical sales annually. Cases often involve a brand name drug manufacturer seeking to stop a competitor from selling a generic version of the brand name’s drug. In some cases, the parties reach a settlement that includes a delay in the generic entry date and some monetary consideration from the brand name manufacturer. Detractors of such settlements call them “pay-for-delay” or “reverse payment” settlements because consideration flows from the patent holder to the alleged infringer (whereas in other IP litigation settlements the payment typically goes in the other direction). Supporters of these settlements contend, however, that as long as the brand name manufacturer’s patents are valid and being infringed, a settlement agreement restricting the entry date for the generic drug does not have any impact on lawful competition.

The Federal Trade Commission (FTC) has fought a decade-long campaign against such settlements, arguing that in the aggregate they cause $3.5 billion dollars in annual harm to consumers. FTC Chairman Jon Leibowitz testified before Congress that reverse payment cases are “one of the Commission’s top competition priorities” because “agreements to eliminate potential competition and share the resulting profits are at the core of what the antitrust laws proscribe.” However, over the last seven years the agency has consistently lost in these cases. For instance, in the landmark In re Tamoxifen Citrate Antitrust Litigation case in 2004, the 2nd Circuit found that reverse payment settlements do not necessarily violate the antitrust laws. The court enunciated what has become known as the “scope of the patent” test, holding that such deals are not anticompetitive as long as they do not block generics from entering the market after the brand-name manufacturer’s patent rights expire (and as long as the patent was legitimately obtained). The 2nd Circuit confirmed the “scope of the patent” test in a subsequent reverse payment case involving the antibiotic drug Cipro.

The Federal and 11th Circuits have also upheld the same scope-of-the-patent analysis. Most recently, in April, the 11th Circuit affirmed a district court’s dismissal of the FTC’s challenge to a reverse payment settlement involving Solvay Pharmaceutical’s drug Androgel in FTC v. Watson Pharmaceuticals, Inc. This was a significant setback for the FTC because the court rejected a position that was already a retreat from the FTC’s prior arguments in reverse payment cases. The FTC previously had taken the position that reverse payment settlements are generally unlawful regardless of the merits of the patent litigation. In Watson, however, the FTC seemed willing to accept the burden of proving that the branded manufacturer would likely have lost the underlying patent infringement case. The court rejected even that position, holding, consistent with the 2nd and Federal Circuits’ rulings, that defendants need only show the branded manufacturer had a “reasonable basis” for its belief that the generic version infringed its patent.

Despite this consistent string of losses, the FTC continues to pursue reverse payment cases, and now it has finally found a court willing to embrace its position. On July 16, the 3rd Circuit’s In re K-Dur Antitrust Litigation decision rejected the other circuits’ analyses of reverse payment cases and accepted the FTC’s long-held belief that reverse payment settlements are presumptively unlawful. Although K-Dur was between private litigants, the FTC filed an amicus brief in support of the plaintiffs and the court pointedly cited earlier FTC regulatory opinions and data analyses in support of its holding. According to the 3rd Circuit, the “scope of the patent” test created an “almost unrebuttable presumption of patent validity.” The court found that “reverse payments permit the sharing of monopoly rents between would-be competitors without any assurance that the underlying patent is valid,” which violates public policy. In her opinion, Judge Dolores Sloviter wrote that “while such a rule might be good policy from the perspective of name brand and generic pharmaceutical producers, it is bad policy from the perspective of the consumer, precisely the constituency Congress was seeking to protect.” Instead of presuming that reverse payment deals are legitimate, the 3rd Circuit found that courts “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
  2. Offers some pro-competitive benefit

K-Dur represents the first time in almost a decade that an appellate court has sided with the FTC’s position on reverse payments. Moreover, the decision creates a sharp circuit split that gives the FTC an opportunity to bring new cases in the 3rd Circuit with a much greater likelihood of success than it has enjoyed in prior cases. Finally, given the significant financial stakes involved and the FTC’s position that reverse payments are one of its top enforcement priorities, the Supreme Court will almost certainly be invited to resolve this conflict in its next term.