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Reverse Payment Home Run for Pharma Antitrust Enforcement

Written by Michael Carrier
Professor, Rutgers School of Law (Camden)
Author, Innovation for the 21st Century
Posted: July 16, 2012 @ 3:50 pm

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For the past nine years, every appellate court to analyze the issue applied deferential analysis to “reverse payment” settlements.  Court upon court lined up to support the agreements, and plaintiffs were down to their last batter. Today, the United States Court of Appeals for the Third Circuit stepped up to the plate and hit a home run in favor of antitrust scrutiny when it released its decision in In re K-Dur Antitrust Litigation.

First, some context. One of the most complex issues in antitrust and patent law today involves agreements by which brand-name drug companies pay generics to delay entering the market. In the past decade, with the Supreme Court showing no interest in wading into the area, the Federal, Second, and Eleventh Circuits have upheld these agreements. And, with each court relying on its sister court, a momentum had developed that made it nearly impossible to discern a role for antitrust scrutiny.

Until today. The Third Circuit just found that a reverse payment was “prima facie evidence of an unreasonable restraint of trade.” An appellate court had not offered such a skeptical treatment of these agreements since 2003, when the Sixth Circuit found one to be per se illegal.

This case involves K-Dur, a potassium chloride supplement that treats conditions including high blood pressure. The Special Master (in an opinion adopted by the district court) had concluded that the settlements were not unlawful because they did not “exceed the exclusionary scope” of the patent.

One of the most far-sighted aspects of the Third Circuit opinion was its thoughtful treatment of the foundation on which so many other appellate courts have relied. These courts have claimed that payments fall within the scope of the patent – that the total right to exclude includes the partial right to exclude for a period of time pursuant to a payment.

But what these courts have failed to recognize is what I wrote in 2009, that the “scope of the patent” test applied by the courts assumes the very validity that is at issue in these cases. If the patent is valid, then the brand can legitimately claim that its payment lies within the array of rights provided by the patent. But if, in contrast, the patent is invalid, there is no scope at all.

It is for this reason that the Federal, Second, and Eleventh Circuits were not correct in relying on patent scope in upholding reverse payments. And it is for this reason that the Third Circuit was correct in its conclusion that “[a]s a practical matter, the scope of the patent test does not subject reverse payment agreements to any antitrust scrutiny.”

The court instead articulated a “quick look rule of reason analysis based on the economic realities of the reverse payment settlement.” In particular, “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 court supported this analysis by pointing to “a long line of Supreme Court cases recognizing that valid patents are a limited exception to a general rule of the free exploitation of ideas” and that “the public interest supports judicial testing and elimination of weak patents.”

The game isn’t over. But the unending deference to reverse-payment settlements has, at least temporarily, been called to a halt. For anyone believing that these agreements present concern, a ray of hope shines after a decade in the wilderness.

 

NOTE: Michael A. Carrier, Professor of Law, Rutgers School of Law-Camden, was the Author of Amicus Brief on Behalf of American Antitrust Institute and 26 Professors.

 

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Posted in: Antitrust, Authors, IP News, IPWatchdog.com Articles, Michael Carrier, Patents, Pharmaceutical

About the Author

Michael A. Carrier is a Distinguished Professor at Rutgers Law School. Professor Carrier is a leading authority in antitrust, copyright, patent, and innovation law. He has been quoted in numerous media outlets throughout the world, and is the author of Innovation for the 21st Century: Harnessing the Power of Intellectual Property and Antitrust Law, the editor of Critical Concepts in Intellectual Property Law: Competition, and the author of more than 55 book chapters and law review articles in leading journals. On the topic of pharmaceutical antitrust law, Professor Carrier has written 15 articles, testified before the Senate Judiciary Committee’s Antitrust Subcommittee, and submitted amicus briefs on behalf of hundreds of professors and antitrust/consumer organizations in courts throughout the country.

9 comments
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  1. Thanks for the worthwhile read Michael.

    “But if, in contrast, the patent is invalid, there is no scope at all.”

    However, this statement ignores the critical, foundational precept that all patents are presumed valid.

    And since such is the case, each patent has all the scope it claims / discloses.

    Respectfully, you’re going to need some other rack to hang your hat on.

  2. I haven’t read the decision, but the presumption of validity would appear to be rebutted when the patent holder pays the challenger to settle the case. That’s all but an admission that the patent was weak and the holder was better off not receiving a verdict. I can’t tell you off the top of my head which legal doctrines would support this, but common sense certainly would.

  3. You’re wrong, and so is the Third Circuit. I have a patent; by statute, it’s presumed valid. I sue XYZ for infringement; in response XYZ alleges the patent is invalid; I pay XYZ to drop its invalidity challenge and to promise I won’t sue XYZ for infringement if XYZ stays off the market until future date X which is before the date on which the patent will expire. What you’re saying is not only that I can’t pay the other party to drop its suit, but that once the spectre of invalidity is raised, the other side MUST pursue it. That’s ridiculous – a party can choose to defend (or settle) a suit however it wants; in this case the validity of the patent remains, hence no presumption of an antitrust violation. Shoot, if we litigate it may turn out that the judge or jury sides with me and decides the patent is valid and infringed (in which case there wasn’t a possible antitrust violation to begin with); why should XYZ have to bear that risk if I’m willing to settle (and will even pay XYZ to settle)? I think SCOTUS just said that the commerce clause doesn’t give Congress the power to force people to buy insurance, only to tax them if they don’t; are you saying that antitrust sanctions are a form of tax?

    Might the patent be found invalid if we proceed? It might. But that’s the whole point of the statute: until there’s a final disposition saying it’s invalid it remains valid, so I can reach a settlement which keeps XYZ off the market for not longer than the duration of the patent. End of discussion.

    Here’s an even more ridiculous hypo: same set-up, but now XYZ knows darn well that it has no case against the validity of the patent, so it only alleges non-infringement. (There are certainly Hatch-Waxman cases that follow this fact pattern.) By your reckoning, we still can’t settle, because doing so will keep XYZ off the market and therefore is a presumptive antitrust violation. Huh? The validity of patent isn’t even in question – the parties agree it’s valid and that it confers exclusionary power upon me, and I’m agreeing to let XYZ into the market before the patent expires. There’s no extension of my rights beyond what the patent confers, so where’s your argument now?

  4. Jerod-

    I have to disagree. Without knowing how much is being paid it is impossible to make any assumptions. You leap to the nefarious, which is typically not the case.

    Why is it any less logical that there was a reasoned cost-benefit analysis from a business standpoint wholly independent of the patent? Patents are business assets. If it makes business sense to defend then they would. If it makes business sense to settle then they would settle. To suggest that a business decision like that suggests anything about the quality or strength of the patent is an extraordinary leap.

    -Gene

  5. Thank you for your responses — it’s been awhile since I thought about this issue, so I had forgotten what the counterarguments were.

    Neither of you have given a reason for why a holder of a valid patent would pay an alleged infringer unless the risk assessment suggested he might fail to successfully defend the patent (XYZ can always drop its invalidity claim or pay the holder a nominal fee to settle). That being the case, the presumption of validity would appear to be waived. If the holder believes there is enough of a chance that he will lose the validity challenge that he is willing to pay the alleged infringer, why should there be a presumption? The holder can still establish validity, or that the reverse payment was in fact for some other benefit.

  6. What’s got both yours and Carrier’s goats is that in your view, he’s paying to avoid a validity challenge and thus maintain the presumption of validity, so according to you the payment must ipso facto be an admission of lack of validity and the presumption of validity must be deemed waived. But Gene’s right (and without going John Madden like he often does): BOTH sides may decide that that’s a better deal than proceeding to trial, which is fraught with risks for both sides. If you have a problem with there being a statutory presumption of validity, then wine and dine Pat Leahy and Lamar Smith, but the fact that a patentee would pay someone to settle a lawsuit (and in so doing, drop a validity challenge) doesn’t constitute a waiver of the presumption, either logically or, more importantly, legally.

  7. I COMPLETELY and absolutely agree with you that it’s good news that we’ve finally seen an end to knee-jerk deference to reverse-payment settlement agreements. In my opinion, these so-called pay-for-delay arrangements are abusive of consumers, wildly undemocratic, and poster children for antitrust concerns. Bravo.
    http://www.generalpatent.com/blog

  8. […] According to Michael Carrier, a professor of law at Rutgers School of Law (Camden), the Supreme Court has for a decade refused to get involved in cases where reverse payments have been alleged to violate U.S. antitrust law.  In fact, the overwhelming majority of courts that have heard such challenges have found no role for antitrust scrutiny, but recently that changed.  The Third Circuit in July did find a reverse payment was “prima facie evidence of an unreasonable restraint of trade.”  For more on this case see Professor Carrier’s article, which we published earlier this year — Reverse Payment Homerun for Pharma Antitrust Enforcement. […]

  9. […] In the past several years, the Second, Eleventh, and Federal Circuits have upheld these settlements (known as “reverse payment” agreements since the money flows from the patentee to the alleged infringer rather than the other way around). These courts have focused on the benefits of settling cases and the presumption of patent validity, and they have explained that payments fall within the “scope of the patent.” In contrast, the Third Circuit recently applied more aggressive scrutiny, rejecting the scope test and finding that payments for delay were “prima facie evidence of an unreasonable restraint of trade.” See Reverse Payment Home Run for Pharma Antitrust Enforcement. […]