Update - Hatch-Waxman Settlements: The FTC Regains Traction After Third Circuit Rules That Reverse Payments Violate Antitrust Law

By Sheila F. McShane & Jillian A. Centanni

As a follow-up to a previous article, the FTC has finally gotten an Appeals Court to take its view of reverse payments - Wile E. Coyote won this one. The FTC previously unsuccessfully attempted multiple avenues to invalidate reverse payments as part of Hatch-Waxman settlements - via the District Courts, proposed legislation, state court systems, and even the Supreme Court - but the Third Circuit has finally bitten, setting a clear circuit split.

Will the Supreme Court now step in? It could not have a clearer invitation - both the Third and Eleventh Circuits have analyzed the exact settlement agreement with resulting opposite holdings. Cf. Schering-Plough Corp. v. FTC, 402 F.3d 1056 (11th Cir. 2005).

This week, the Third Circuit Court of Appeals held that reverse payments (sometimes referred to as "pay-to-delay") as part of the settlement of Hatch-Waxman litigations are evidence of unreasonable restraints of trade. Specifically, the Court in In re K-Dur Antitrust Litig found that a settlement payment made by a pharmaceutical patent holder to a generic challenger - where there was an agreement to postpone market entry in exchange for the payment - constitutes prima facie evidence of an antitrust violation.

Five circuits previously addressed the legality of reverse payment settlements in Hatch-Waxman actions. While earlier decisions in the D.C. Circuit and the Sixth Circuit held reverse payment settlements to be illegal, those decisions were based on agreements that extended beyond the scope of the patents-in-suit. See Andrx Pharms., Inc. v. Biovail Corp. Int'l, 256 F.3d 799 (D.C. Cir. 2001); and In re Cardizem CD Antitrust Litig., 332 F.3d 896 (6th Cir. 2003). The Eleventh, Second and Federal Circuits held that reverse payments, if limited to the exclusionary zone of the patent, were acceptable. The Third Circuit in In re K-Dur Antitrust Litig., without qualification, held that reverse payments between patent holders and generic competitors constitute prima facie evidence of an antitrust violation. In its decision, the Third Circuit squarely rejected the "scope of the patent test" as limiting antitrust law, and held that reverse payments are contrary to public policy and Supreme Court precedent.

In reaching its decision, the Third Circuit placed a premium on public policy issues, stressing the importance of the Court in eliminating weak patents. Its view is that the scope of the patent test tends to protect companies with bigger wallets, that could pay off multiple challengers rather than risk losses in litigation. The Court rejects the scope of the presumption of patent validity, stating that "this presumption is intended merely as a procedural device and not a substantive right of the patent holder." Slip op. at 27. The Court views patent validity as simply a "legal conclusion reached by the Patent Office," noting that many patents are later found to be invalid or not infringed. Id.

The Third Circuit also emphasized the underlying goal of Hatch-Waxman - to "increase the availability of low cost generic drugs." Slip op. at 31. In rejecting any analysis of the patent suit, the Court instead adopted the FTC's view that any payment represents a quid pro quo for deferring entry beyond that which would have occurred as part of a reasonable litigation compromise. Id. at 33. The Court also sought to buttress its decision with the Supreme Court's decision in Edward Katzinger Co. v. Chi. Metallic Mfg. Co., analogizing reverse payments with the situation where a licensor cannot be estopped from challenging a patent with a violative price fixing provision. Slip op. at 29 (citing 329 U.S. 394 (1947)).

The Third Circuit decided to enter the fray and has set up a clear circuit split, thus inviting the Supreme Court to join the issue. Practitioners should consider the ramifications of this decision for clients on both sides of the negotiation table. Gibbons P.C. will continue to track this reverse payment issue, including the likely certiorari petitions to the Supreme Court.

SheilaMcShane 121x160pxSheila F. McShane, Director
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JillianCentanni 121x160pxJillian A. Centanni,

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