Pay-for-Delay Contracts

In last month's newsletter, we began discussion of the recently decided case In Re K-Dur Antitrust Litigation, 2012 U.S. App. LEXIS 14527 (3d Cir. 7/16/12), in which the U.S. Court of Appeals for the Third Circuit bucked the trend of U.S. appellate courts rubber-stamping pay-for-delay patent lawsuit settlements between name-brand pharmaceuticals manufacturers and would-be competitors seeking to produce generic versions. What did the Third Circuit have to say about such agreements?

The Presumption of Patent Validity

Before analyzing the facts and the law of the case before it, the Third Circuit pointed out that the U.S. Supreme Court has not yet addressed reverse-payment settlements. However, five other U.S. Circuit Courts have. The first two of those courts to consider the question concluded that such agreements should be subject to strict antitrust scrutiny ' at least where the settling parties attempted to manipulate the 180-day exclusivity period to block all potential generic competition. 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 courts that have addressed the question of reverse payments more recently have reached a contrary result, ruling that as long as the name-brand manufacturer's patent is still in force, and the agreement does not seek to restrain competition beyond the scope of that patent, the agreement will not be subjected to antitrust scrutiny. See, e.g., Valley Drug Co. v. Geneva Pharms. Inc., 344 F.3d 1294 (11th Cir. 2003); In re Tamoxifen Citrate Antitrust Litig., 466 F.3d 187 (2d Cir. 2006); In re Ciprofloxacin Hydrochloride Antitrust Litig., 544 F.3d 1323 (Fed. Cir. 2008). The reasoning goes thusly: If the brand-name manufacturer holds a patent that would preclude another manufacturer from selling a similar product that would breach that patent, a pay-for-delay agreement between these parties is simply cementing the legal status quo. This was the logic employed by the Special Master and the district court in K-Dur.

When K-Dur came up for appeal, the Third Circuit expressed its dissatisfaction with the type of analysis used by the Second, Eleventh and Federal Circuits, and followed by the Special Master and district court in K-Dur, by stating, “In our view, 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.” Specifically, the court found the presumption of patent validity ' which is based only on the fact that a patent has been issued to the name-brand drug manufacturer by the Patent Office ' to be deeply flawed. Why? Because the burden of proof is shifted from the patent holder to the challenger.

The Third Circuit explained that reverse payment agreements are settlements of patent infringement suits; had those suits gone to trial, the burden of proof would have been on the patent holders to show infringement, not on the challengers to show patent invalidity. To illustrate the problem of a presumption in favor of the patent holder, the court pointed to a 2002 Federal Trade Commission study that showed that generic manufacturer paragraph IV Hatch-Waxman challenges to brand-name drug patents were successful in 73% of cases. See FTC, Generic Drug Entry Prior to Patent Expiration 16 (2002), available at www.ftc.gov/os/2002/07/genericdrugstudy.pdf. “These figures add force to the likelihood,” stated the Third Circuit, “that reverse payments enable the holder of a patent that the holder knows is weak to buy its way out of both competition with the challenging competitor and possible invalidation of the patent.” This is especially concerning, said the court, because only the initial generic ANDA filer is eligible to benefit from the 180-day exclusivity period of 21 U.S.C. ' 355(j)(5)(B)(iv). Other potential generic manufacturers thus have less incentive to file ANDAs once the first has settled the patent-holding drug manufacturer's claim against it. And even if additional manufacturers of generics do seek chapter IV certification, there is nothing to keep the brand-name drug producer from buying them off as well. These outcomes tend to squelch competition from generic drug manufacturers, whereas the public good derived from competition is the very thing that the Hatch-Waxman Act sought to promote.

With these considerations in mind, the Third Circuit determined that the presumption of patent validity applied by the Second, Eleventh and Federal Circuits, and by the Special Master and district court in K-Dur, should be abandoned, in favor of a fuller anti-trust violation inquiry.

A Middle Ground

Before remanding K-Dur to the district court for determination of the legality of the pay-for-delay agreement at issue, the Third Circuit considered the standard of review that should be applied to the case. The most common is that which asks not whether a restraint of trade has occurred, but whether that restraint is an “unreasonable” one ' the so-called “rule of reason” test. A plaintiff may prove that an agreement that restrains trade violates the rule of reason if it can first show that the challenged conduct has produced anti-competitive effects within the market. United States v. Brown Univ., 5 F.3d 658 (1993). Once the plaintiff jumps this hurdle, the burden shifts to the defendant to show that a sufficiently pro-competitive aim is promoted by the challenged conduct. Id. If the defendant succeeds on this count, the burden shifts back to the plaintiff to rebut the defendant's contention. Id. The second type of anti-competitive conduct is so obviously contrary to free trade that it is generally deemed unlawful per se. Broad Music Inc. v. CBS Inc., 441 U.S. 1 (1979) (per se rule applicable where a “practice facially appears to be one that would always or almost always tend to restrict competition or decrease output”). Included in this group would be agreements to employ horizontal price-fixing or to limit output.

And then there is a third, intermediate, inquiry, and it is this type that the Third Circuit determined should be applied in K-Dur. This is known as a “quick look” or “truncated rule of reason” inquiry, and the Third Circuit declared that it should be employed in pay-for-delay patent settlement cases. Under the quick-look test, the first prong of the standard rule-of-reason test is dispensed with, and a plaintiff need only show that the underlying patent case was settled by payment from a patent holder to a would-be generic manufacturer that also agreed not to enter the market. The plaintiff need not make a full showing of anti-competitive effects; such would be assumed. Thus, the burden shifts immediately to the defendant to establish pro-competitive justifications for its behavior.

“Specifically,” stated the court, “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.”

Conclusion

Rebutting the presumption that a reverse payment agreement is an unreasonable restraint of trade will be a very tough challenge to overcome, as evidenced by the example the court offered as a pro-competitive benefit of a payment: “a modest cash payment that enables a cash-starved generic manufacturer to avoid bankruptcy and begin marketing a generic drug might have an overall effect of increasing the amount of competition in the market.” Is this a likely scenario?

It was more likely that the K-Dur decision would prompt renewed plaintiff interest in challenging pay-for-delay agreements, and pharmaceutical company consternation' and these it has apparently done. Following the K-Dur decision suits were filed in multiple jurisdictions charging AstraZeneca with antitrust violations in connection with reverse-payment agreements concerning the acid reflux medication, Nexium. For their part, the K-Dur defendants almost immediately requested Supreme Court review, imploring the Court to reconcile the Circuit split. Until then, they asserted, pharmaceuticals manufacturers, once confident in the legality of their reverse-payment agreements, will be forced to operate under a cloud of uncertainty when settling patent disputes.

Janice G. Inman is Editor-in-Chief of this newsletter.

In last month's newsletter, we began discussion of the recently decided case In Re K-Dur Antitrust Litigation, 2012 U.S. App. LEXIS 14527 (3d Cir. 7/16/12), in which the U.S. Court of Appeals for the Third Circuit bucked the trend of U.S. appellate courts rubber-stamping pay-for-delay patent lawsuit settlements between name-brand pharmaceuticals manufacturers and would-be competitors seeking to produce generic versions. What did the Third Circuit have to say about such agreements?

The Presumption of Patent Validity

Before analyzing the facts and the law of the case before it, the Third Circuit pointed out that the U.S. Supreme Court has not yet addressed reverse-payment settlements. However, five other U.S. Circuit Courts have. The first two of those courts to consider the question concluded that such agreements should be subject to strict antitrust scrutiny ' at least where the settling parties attempted to manipulate the 180-day exclusivity period to block all potential generic competition. 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 courts that have addressed the question of reverse payments more recently have reached a contrary result, ruling that as long as the name-brand manufacturer's patent is still in force, and the agreement does not seek to restrain competition beyond the scope of that patent, the agreement will not be subjected to antitrust scrutiny. See, e.g., Valley Drug Co. v. Geneva Pharms. Inc. , 344 F.3d 1294 (11th Cir. 2003); In re Tamoxifen Citrate Antitrust Litig., 466 F.3d 187 (2d Cir. 2006); In re Ciprofloxacin Hydrochloride Antitrust Litig., 544 F.3d 1323 (Fed. Cir. 2008). The reasoning goes thusly: If the brand-name manufacturer holds a patent that would preclude another manufacturer from selling a similar product that would breach that patent, a pay-for-delay agreement between these parties is simply cementing the legal status quo. This was the logic employed by the Special Master and the district court in K-Dur.

When K-Dur came up for appeal, the Third Circuit expressed its dissatisfaction with the type of analysis used by the Second, Eleventh and Federal Circuits, and followed by the Special Master and district court in K-Dur, by stating, “In our view, 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.” Specifically, the court found the presumption of patent validity ' which is based only on the fact that a patent has been issued to the name-brand drug manufacturer by the Patent Office ' to be deeply flawed. Why? Because the burden of proof is shifted from the patent holder to the challenger.

The Third Circuit explained that reverse payment agreements are settlements of patent infringement suits; had those suits gone to trial, the burden of proof would have been on the patent holders to show infringement, not on the challengers to show patent invalidity. To illustrate the problem of a presumption in favor of the patent holder, the court pointed to a 2002 Federal Trade Commission study that showed that generic manufacturer paragraph IV Hatch-Waxman challenges to brand-name drug patents were successful in 73% of cases. See FTC, Generic Drug Entry Prior to Patent Expiration 16 (2002), available at www.ftc.gov/os/2002/07/genericdrugstudy.pdf. “These figures add force to the likelihood,” stated the Third Circuit, “that reverse payments enable the holder of a patent that the holder knows is weak to buy its way out of both competition with the challenging competitor and possible invalidation of the patent.” This is especially concerning, said the court, because only the initial generic ANDA filer is eligible to benefit from the 180-day exclusivity period of 21 U.S.C. ' 355(j)(5)(B)(iv). Other potential generic manufacturers thus have less incentive to file ANDAs once the first has settled the patent-holding drug manufacturer's claim against it. And even if additional manufacturers of generics do seek chapter IV certification, there is nothing to keep the brand-name drug producer from buying them off as well. These outcomes tend to squelch competition from generic drug manufacturers, whereas the public good derived from competition is the very thing that the Hatch-Waxman Act sought to promote.

With these considerations in mind, the Third Circuit determined that the presumption of patent validity applied by the Second, Eleventh and Federal Circuits, and by the Special Master and district court in K-Dur, should be abandoned, in favor of a fuller anti-trust violation inquiry.

A Middle Ground

Before remanding K-Dur to the district court for determination of the legality of the pay-for-delay agreement at issue, the Third Circuit considered the standard of review that should be applied to the case. The most common is that which asks not whether a restraint of trade has occurred, but whether that restraint is an “unreasonable” one ' the so-called “rule of reason” test. A plaintiff may prove that an agreement that restrains trade violates the rule of reason if it can first show that the challenged conduct has produced anti-competitive effects within the market. United States v. Brown Univ. , 5 F.3d 658 (1993). Once the plaintiff jumps this hurdle, the burden shifts to the defendant to show that a sufficiently pro-competitive aim is promoted by the challenged conduct. Id. If the defendant succeeds on this count, the burden shifts back to the plaintiff to rebut the defendant's contention. Id. The second type of anti-competitive conduct is so obviously contrary to free trade that it is generally deemed unlawful per se. Broad Music Inc. v. CBS Inc. , 441 U.S. 1 (1979) (per se rule applicable where a “practice facially appears to be one that would always or almost always tend to restrict competition or decrease output”). Included in this group would be agreements to employ horizontal price-fixing or to limit output.

And then there is a third, intermediate, inquiry, and it is this type that the Third Circuit determined should be applied in K-Dur. This is known as a “quick look” or “truncated rule of reason” inquiry, and the Third Circuit declared that it should be employed in pay-for-delay patent settlement cases. Under the quick-look test, the first prong of the standard rule-of-reason test is dispensed with, and a plaintiff need only show that the underlying patent case was settled by payment from a patent holder to a would-be generic manufacturer that also agreed not to enter the market. The plaintiff need not make a full showing of anti-competitive effects; such would be assumed. Thus, the burden shifts immediately to the defendant to establish pro-competitive justifications for its behavior.

“Specifically,” stated the court, “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.”

Conclusion

Rebutting the presumption that a reverse payment agreement is an unreasonable restraint of trade will be a very tough challenge to overcome, as evidenced by the example the court offered as a pro-competitive benefit of a payment: “a modest cash payment that enables a cash-starved generic manufacturer to avoid bankruptcy and begin marketing a generic drug might have an overall effect of increasing the amount of competition in the market.” Is this a likely scenario?

It was more likely that the K-Dur decision would prompt renewed plaintiff interest in challenging pay-for-delay agreements, and pharmaceutical company consternation' and these it has apparently done. Following the K-Dur decision suits were filed in multiple jurisdictions charging AstraZeneca with antitrust violations in connection with reverse-payment agreements concerning the acid reflux medication, Nexium. For their part, the K-Dur defendants almost immediately requested Supreme Court review, imploring the Court to reconcile the Circuit split. Until then, they asserted, pharmaceuticals manufacturers, once confident in the legality of their reverse-payment agreements, will be forced to operate under a cloud of uncertainty when settling patent disputes.

Janice G. Inman is Editor-in-Chief of this newsletter.