Reverse-Payment Settlements: Appellate Court Says “Not So Fast”

Reverse-Payment Settlements: Appellate Court Says “Not So Fast”

Schering-Plough Corps, the maker of the popular drug K-Dur, recently settled a patent case with Upsher-Smith Laboratories over an allegedly infringing generic version of K-Dur that Upsher-Smith was hoping to bring to market. Unusually, both sides of the case appear to have won out in this settlement. Following a trend that began with the 2003 case Valley Drug Co v. Geneva Pharms Inc., the two pharmaceutical companies agreed to what has become known as a “reverse-payment settlement,” in which the patentee pays the allegedly infringing party to retain exclusive rights to produce the patented drug, creating a win-win for both parties. Schering-Plough Corps will be making a $60 million payment to Upsher-Smith Laboratories, far more than Upsher-Smith stood to gain from selling the generic version of K-Dur, while Upsher-Smith has agreed not to bring its generic version to market, preserving Schering’s golden goose.

The FTC has long argued that reverse payment settlements like this constitute anti-competitive behavior, but the 2nd and 11th Federal Circuit Courts have repeatedly held that the right of a patentee to settle insulates it from virtually all antitrust scrutiny. This may be changing soon with the 3rd Circuit’s July ruling in an antitrust suit involving the previous K-Dur settlement, which explicitly rejects the “scope of patent” test used by the 2nd and 11th circuits that enabled reverse-payment settlements. Instead, the 3rd Circuit created a new “quick look rule of reason analysis” test. These new criteria state that any reverse-payment settlement is prima facie evidence of an unreasonable restraint to trade, and any parties seeking to rebut this evidence must prove that the settlement had a purpose other than delaying generic drug entry to the market, or that the payment somehow promoted competition.

This new test places the bar for engaging in a reverse-payment settlement much higher than before, and it marks the first time an appellate court has explicitly critiqued the ‘scope of patent’ test. The proponents of the new ‘quick look rule of reason analysis test,’ including the FTC, argue that because the ‘scope of patent test’ assumes the validity of the patent, companies can essentially buy off their competition even if their original patent was invalid or did not cover the drugs at issue. Unhappy with the possibility of antitrust litigation, Schering has filed a cert petition which some experts say has a good chance of being accepted because of the disagreement among the lower courts. The experts are less certain about how The Supreme Court may rule.

Some argue that if the K-Dur standard is upheld that governments, health insurance providers, and anyone who pays for drugs could benefit because cheaper generic drugs could enter the marketplace more quickly. On the other hand, it could delay generics and increase costs because companies would be more likely to go through the lengthy and expensive trial process rather than settling. This potential drawback may be partially mitigated because generic drug producers could overcome weak or invalid patents. If this case makes its way to the Supreme Court, it will certainly merit keeping an eye on for its potential to dictate the future of many high-profile Pharmaceutical IP cases.

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