In re K-Dur Antitrust Litigation, No. 10-2077; Third Circuit; opinion by Sloviter, U.S.C.J.; filed July 16, 2012. Before Judges Sloviter, Vanaskie and Stengel, District Judge, sitting by designation. On appeal from the District of New Jersey. [Sat below: Judge Brown.] DDS No. 59-8-xxxx [43 pp.]

This appeal involves the antitrust implications of an agreement by a manufacturer of a generic drug that, in return for a payment by the patent holder, agrees to drop its challenge to the patent and refrain from entering the market for a specified period of time.

A secondary issue concerns the certification by the district court of a class of antitrust plaintiffs. Specifically, the issue is whether the antitrust injury allegedly suffered by class members can be shown through common proof, i.e., proof applicable to all plaintiffs, and whether there are insurmountable conflicts preventing named plaintiffs from adequately representing the members of the class.

These appeals arise out of the settlement of two patent cases involving the drug K-Dur 20 (K-Dur), which is manufactured by Schering-Plough Corporation. Plaintiffs are Louisiana Wholesale Drug Company Inc., on behalf of a class of wholesalers and retailers who purchased K-Dur directly from Schering, and nine individual plaintiffs, including CVS Pharmacy Inc., Rite Aid Corporation, and other pharmacies. Defendants are Schering and Upsher-Smith Laboratories.

Held: Rejecting the scope-of-the-patent test, the circuit panel directs that 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.

The scope-of-the-patent test was applied by the special master in this case and has been applied by at least one other district court in this circuit. Under the test, reverse payments are permitted so long as (1) the exclusion does not exceed the patent’s scope, (2) the patent holder’s claim of infringement was not objectively baseless, and (3) the patent was not procured by fraud on the PTO. As a practical matter, the test does not subject reverse payment agreements to any antitrust scrutiny.

After consideration of the arguments of counsel, the conflicting decisions in the other circuits, the report of the special master, and its own reading, the circuit panel cannot agree with the application of the test. That 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 on patent litigation and competition.

First, the circuit panel takes issue with the test’s almost unrebuttable presumption of patent validity. This presumption assumes away the question being litigated in the underlying patent suit, enforcing a presumption that the patent holder would have prevailed. Moreover, the panel questions the assumption that subsequent challenges by other generic manufacturers will suffice to eliminate weak patents preserved through a reverse payment to the initial challenger.

This analysis is supported by Supreme Court cases recognizing that valid patents are a limited exception to a general rule of the free exploitation of ideas. It follows that the public interest supports judicial testing and elimination of weak patents. This logic is persuasive with respect to the situation at bar because reverse payments permit the sharing of monopoly rents between would-be competitors without any assurance that the underlying patent is valid. It appears that these aspects of the Supreme Court’s general patent jurisprudence were overlooked by the special master and others adopting the scope-of-the-patent test.

The goal of the Hatch-Waxman Act is to increase the availability of low-cost generic drugs. One method Congress employed was to encourage litigated challenges by generic manufacturers against the holders of weak or narrow patents. That goal is undermined by application of the scope-of-the-patent test that entitles the patent holder to pay its potential generic competitors not to compete. The principal beneficiaries of such an approach will be name-brand manufacturers with weak or narrow patents that are unlikely to prevail in court. Thus, 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, the constituency Congress was seeking to protect.

The judicial preference for settlement should not displace countervailing public policy objectives or, in this case, Congress’s determination — which is evident from the structure of the Hatch-Waxman Act and the statements in the legislative record — that litigated patent challenges are necessary to protect consumers from unjustified monopolies by name-brand drug manufacturers.

The circuit panel rejects the scope-of-the-patent test. In its place, the district court is directed to apply 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. Specifically, 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 other issue in this appeal concerns plaintiffs’ effort to certify a class of persons who purchased K-Dur directly from Schering between Nov. 20, 1998, and Sept. 1, 2001, and subsequently purchased a generic version of K-Dur. The district court adopted the special master’s report and recommendation and formally certified the class. The circuit panel rejects defendants’ arguments and affirms the district court’s determination approving maintenance of the class action.

For appellants: in No. 10-2077 — Daniel Berger, Daniel C. Simons, David Francis Sorensen (Berger & Montague); Bruce E. Gerstein, Kimberly Hennings, Joseph Opper, Barry S. Taus (Garwin Gerstein & Fisher); and Peter S. Pearlman (Cohn, Lifland, Pearlman, Herrmann & Knopf); in Nos. 10-2078, 10-4571 — Barry L. Refsin and Steve D. Shadowen (Hangley, Aronchick, Segal, Pudlin & Schiller); in Nos. 10-4571, 10-2079 — Deborah S. Corbishley, Scott E. Perwin, Lauren C. Ravkind and Kenny Nachwalter. For appellees: in Nos. 10-2077, 10-2078 — Gage Andretta, William E. Goydan, Robert L. Tchack (Wolff & Samson); Jennifer K. Conrad, Steven W. Copley, A. Gregory Grimsal (Gordon, Arata, McCollam, Duplantis & Eagan); Jaime M. Crowe, Christopher M. Curran (White & Case); Ashley E. Bass, Thomas A. Isaacson, John W. Nields, Jr.; Alan M. Wiseman (Covington & Burling); Mark A. Cunningham, David G. Radlauer (Jones Walker); Richard H. Gill, George W. Walker (Copeland Franco Screws & Gills); Richard Hernandez, William J. O’Shaughnessy (McCarter & English); Charles A. Loughlin (Baker Botts). For amicus appellant American Antitrust Institute Proposed Amicus Appellants, Nos. 10-2077, 10-2078 — Ellen Meriwether (Cafferty Faucher). For amicus appellee Pharmaceutical Research and Manufacturers of America, No. 10-2077 — Adam R. Lawton, Jeffrey I. Weinberger (Munger, Tolles & Olson). For amicus appellant Federal Trade Commission, No. 10-2077 — Imad D. Abyad, John F. Daly ( Federal Trade Commission). For amicus appellee Washington Legal Foundation, No. 10-2077 — Richard A. Samp (Washington Legal Foundation). For amicus appellants, No. 10-2077 — Werner L. Margard III (Office of Attorney General). For amicus appellant United States, No. 10-2077 — Catherine G. O’Sullivan, U.S. Department of Justice, Appellate Section; David Seidman, U.S. Department of Justice, Antitrust Division; Malcolm L. Stewart, U.S. Department of Justice, Office of Solicitor General. For amicus appellant Nat’l Ass’n Chain Drug Stores Inc., Nos. 10-2077, 10-2078 — Donald L. Bell II, National Association of Chain Drug Stores.