Reverse Payment Home Run for Pharma Antitrust Enforcement

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.

[Bio-Pharma]

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.