Portfolio Media. Inc. 860 Broadway, 6th Floor New York, NY 10003 www.law360.com Phone: +1 646 783 7100 Fax: +1 646 783 7161 customerservice@law360.com Reverse Payment Settlements In Pharma Industry: Revisited Law360, New York (August 16, 2012, 1:02 PM ET) -- In December 2011, I wrote that despite a number of losses in different federal courts of appeal, the Federal Trade Commission continued to advocate for a rule that would make so called reverse payment settlements between branded and generic pharmaceutical companies presumptively unlawful. I also pointed out that in pharmaceutical cases, courts have not tended to use either of the traditional antitrust tests ( per se or the rule of reason ), instead adopting a scope of the patent test to review competition issues raised by patent settlements challenged under the antitrust laws.[1] Now, a pair of recent decisions, one from the U.S. Court of Appeals for the Third Circuit in its K-Dur decision[2], and one from the Eleventh Circuit in its Androgel decision[3], has caused commentators to declare a circuit split that may finally cause the U.S. Supreme Court to take interest in this issue, despite having denied certiorari several times. While the Eleventh Circuit followed its own prior precedent and other circuits in adopting the scope of the patent test, the Third Circuit adopted a quick look rule of reason. The differences in these tests are discussed below, as well as the evidence that the Third Circuit used to move away from the trend, along with the key differences in approaches future courts and parties will have to grapple with. The quick look rule of reason test adopted by the Third Circuit starts with a presumption that a reverse-payment settlement is prima facie evidence of an unreasonable restraint of trade, which can be rebutted by proof showing the payment or other benefit was for a purpose other than delayed entry or had some other pro-competitive benefit.[4] The scope of the patent test, explained most recently by the Eleventh Circuit in Androgel, takes into account the particularized regulatory and patent enforcement framework under the Hatch-Waxman Act that governs both the relationship between branded and generic competitors and generic competitors among themselves.
Unlike situations where no patent exists, since patents create an environment of exclusion, therefore the anti-competitive effect is already present, but is lawful. The three-step process in the scope of the patent test thus looks to: The scope of the exclusionary potential of the patent; The extent to which the challenged agreement exceeds that scope; and a Any resulting anti-competitive effects. Only if the settlement reaches beyond the reasonable scope of what is patented does the court engage in a balanced review of the reasons a settlement has been entered into, and whether the bargained-for consideration in such deals is driven by anti-competitive motives and has anti-competitive impact. The Eleventh Circuit adopted this approach in the Androgel decision; the Third Circuit rejected it in the K-Dur decision, despite an earlier Eleventh Circuit decision from 2005 on the same exact settlements upholding the very same agreements. Two days after K-Dur was decided, the Eleventh Circuit denied the FTC s petition for hearing en banc in Androgel. The following differences in the treatment by the two courts will be the subject of debate as the two cases either continue their way through the courts or, if not appealed further, in subsequent cases. 1. The Third Circuit s decision not to adhere to the finding of the Eleventh Circuit s 2005 decision upholding the exact same agreements relating to K-Dur.[5] The only real difference between the two cases factually is their procedural posture: The earlier case was brought by the settling parties against the FTC in an appeal from an FTC decision; the Third Circuit case was brought by private plaintiffs, and the FTC filed an amicus brief which the court s decision borrows from heavily. While stating merely that it found the Eleventh Circuit s Schering-Plough decision unpersuasive, the Third Circuit further cited a string of Supreme Court decisions from the 1940s that it said appear to have been overlooked by the other circuits adopting the scope of the patent test. On the other hand, a review of the full decisions and briefing in the prior decisions reveals that those same 1940 s decisions were cited by the parties or the FTC, and thus the courts did not overlook them but, rather, found them inapposite.[6] 2. The Third Circuit relied on data cited by the FTC which postdated the district court s opinion and therefore was not before it, and which has not been tested by either a Daubert motion or crossexamination. In K-Dur, the district court entered an order on March 25, 2010, adopting the 55-page Report & Recommendation of a Special Master dated Feb. 6, 2009.[7] Despite the fact that the evidentiary record closed in 2008, the Third Circuit accepted and relied on statistics cited in the FTC s appellate brief from a 2010 FTC report not considered below.[8] In that study, the FTC claimed that the category of settlements where a reverse payment is included cost consumers $3.5 billion per year.[9]
The Third Circuit also accepted the conclusion of the FTC from the same 2010 report that one year after market entry an average generic pharmaceutical product takes over 90 percent of the patent holder s unit sales and sells for 15 percent of the name brand product. [10] By contrast, the Eleventh Circuit considered those same statistics cited by the FTC, but did not find them pertinent to its analysis.[11] 3. The Third Circuit appears to have accepted the proposition advocated to it that under the scope of the patent standard, despite its adoption in several other circuits, there would never be a case that could succeed on the merits. Yet at least one district court within the Third Circuit two years earlier denied a motion to dismiss using the very same scope of the patent test, demonstrating that in an appropriate case, that standard can result in liability.[12] The Third Circuit cited this earlier district court decision, but nevertheless concluded that the scope of the patent test does not subject reverse payment agreements to any antitrust scrutiny. [13] By contrast to this blanket statement in K-Dur, the Eleventh Circuit recognized in Androgel that antitrust liability can be found under the scope of the patent test.[14] 4. Neither court needed to address the 2003 amendments to the Hatch-Waxman Act made by the Medicare Prescription Drug, Improvement and Modernization Act (MMA), which substantially, if not completely, eliminated any ability of first-filing generics to park 180-day exclusivity by providing for forfeiture in most circumstances that the FTC has deemed anti-competitive.[15] However, an open question remains when such cases do come to pass, whether they will be cabined in by case law dealing with a different regulatory regime that allowed for such parking. With the standard that may apply in a given case now somewhat unsettled, what then is the advice for the client or practitioner when addressing proposed settlement terms in a negotiation? Essentially, the advice has not changed from 2011. If each party documents its true expectations of its range of litigation outcomes, it will be that much easier to justify a settlement in the face of a later challenge. By its nature, the branded company is usually going to be more risk-averse and thus willing to avoid the risk of an adverse court ruling by making a payment. For one thing, it has put more at risk, with the cost of bringing a blockbuster drug to market estimated at more than $1.3 billion the generic s investment is a fraction of that. For another, generics are, on average, successful more of the time in fully litigated cases. On the flip side, a poorly capitalized generic or a brand-new firm with limited liquidity may be stabilized quicker by a settlement than a launch; indeed, without a cash payment, it may not be able to survive either the litigation or until the negotiated entry date and still be able to afford production. In that circumstance, the eventual generic output would decrease absent the payment. Even the Third Circuit recognizes that such a circumstance could be a sufficient reason to uphold a reverse payment settlement due to its overall pro-competitive effect on the market.[16] Patent strength only tells a part of the story why, other than an anti-competitive purpose, parties would agree to particular dollar amounts and dates of entry in a settlement.
Such alternative explanations should be documented by the parties at the time of agreement to insulate against an assumption that the payment represents an unlawful splitting of the market. Parties entering settlements should consider documenting how the agreement does not limit output or does not result in consumers paying a higher price.[17] In sum, relationships between branded and generic companies in the real world market place spawned by the Hatch-Waxman Act are far more complicated than the two variables entry date and payment that have been the focus of court decisions and FTC actions thus far. As the courts take more rigorous views of the economic forces at issue in specific cases, rather than addressing generalities, other factors will emerge. The party who has well documented an evidentiary basis for the lack of anti-competitive effects of its agreements will have more success in the forthcoming environment than one who doesn t take such care. --By David Leichtman, Robins Kaplan Miller & Ciresi LLP David Leichtman is a partner in Robins Kaplan's New York office. His practice focuses on intellectual property, antitrust, and business litigation, with a particular emphasis on the life sciences and media industries. The opinions expressed are those of the author and do not necessarily reflect the views of the firm, its clients, or Portfolio Media Inc., or any of its or their respective affiliates. This article is for general information purposes and is not intended to be and should not be taken as legal advice. [1] David Leichtman, Scrutinizing Reverse-Payment Settlements, Law 360, Dec. 16, 2011. [2] In re K-Dur Antitrust Litigation, Appeal Nos. 10-2077, 2078, 2079 and 4571 (3d Cir. July 16, 2012) ( K- Dur ). [3] FTC v. Watson Pharmaceuticals, Inc. et al., Appeal No. 10-12729 (11th Cir. April 25, 2012) ( Androgel ). [4] In so holding, the Third Circuit (slip. op. at 33) purported to follow an early D.C. Circuit decision, Andrx Pharms., Inc. v. Biovail Corp. Int l, 256 F.3d 799 (D.C. Cir. 2001) (see also In re Cardizem CD Antitrust Litigation, 332 F.3d 896 (6th Cir. 2003), addressing the same agreement concerning the drug, Cardizem), but failed to recognize the special facts of that case where the agreement at issue restricted the generic from entering the market for products that went well beyond what was covered by the patent. That distinction has caused numerous other courts to reject the applicability of the Cardizem cases beyond their specific facts. See Valley Drug Co. v. Geneva Pharms, Inc., 344 F.3d 1294 (11th Cir. 2003); Schering-Plough Corp. v. FTC, 402 F.3d 1056 (11th Cir. 2005); 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); Asahi Glass Co, Ltd. v. Pentech Pharms, Inc., 289 F. Supp.2d 986 (N.D. Ill. 2003) (Posner, J., sitting by designation); In re K-Dur Antitrust Litig., 2009 WL 508869 (D. N.J. Feb. 6, 2009). Even the FTC has acknowledged, begrudgingly, the likely limited applicability of the Cardizem cases. (See FTC s Petition For Rehearing En Banc, dated June 11, 2012, at 7, in Androgel litigation). [5] K-Dur, slip. op. at 22-23; compare Schering-Plough Corp. v. FTC, 402 F.3d 1056 (11th Cir. 2005), cert. denied, 548 U.S. 919 (2006).
[6] For example, U.S. v. Masonite Corp., 316 U.S. 265 (1942), heavily relied on by the FTC in its briefing in both K-Dur and Androgel and relied on by the Court in K-Dur involved pure price fixing between the patentee and its licensees with respect to the re-sale by the licensees of the patentee s products not even a remotely similar situation to the pharmaceutical reverse payment cases. Indeed, the Androgel court even cited to Masonite affirmatively as demonstrating the difference between a situation where the contract at issue goes beyond the exclusionary power of the statutory patent grant and one where the contract falls within it. See Androgel, slip op. at 22-23. [7] K-Dur, slip. op. at 16; see id., Civ. No. 01-1652, Dkt. No. 758 (D.N.J. March 25, 2010), adopting id., Dkt. No. 733 (Feb. 6, 2009). [8] K-Dur, slip. op. at 16 (citing 2010 FTC study). [9] Not only was that study not before the Special Master or the District Court, but the scientific validity of the methodology used by the FTC to calculate its numbers, explained in an earlier January 2010 FTC Staff Study, has been questioned. For example, the FTC assumes all of the price savings for drugs subject to such settlements would otherwise get passed on to consumers. But there is no basis for such a conclusion. In reality, given the way that consumers pay for health insurance and medicine, the difference between the branded price and generic price is rarely as large as projected in the FTC study. Moreover, both the actual price reduction and the market share that a generic can capture in the real world are extremely variable, dependent upon such factors as: the remaining life of the patent; the number of generics on the market; the number and price of competing products on the market and their relative efficacy and safety; whether any of the competing products are generic products; whether there are any OTC alternatives; whether the branded company launches an authorized generic; the number of years the product has before other alternative treatments replace it; etc. Yet the FTC s study takes none of those variables into account. [10] K-Dur, slip op. at 16. [11] Androgel, slip op. at 5-6. As noted, this data was not tested before the District Court in either case, and numerous other studies cite to a wide range of outcomes after generic entry that hardly suggest that the FTC s numbers are anywhere close to the norm. [12] King Drug Co. of Florence, Inc. v. Cephalon, Inc., 702 F. Supp. 2d 514 (E.D. Pa. 2010). [13] K-Dur, slip op. at 26. [14] Androgel, slip op. 28-30 (discussing Andrx Pharmaceuticals, Inc. v. Elan Corp., 421 F.3d 1227 (11th Cir. 2005) (where the agreement at issue would have prevented generic competition after the expiration of the patent and also because the settlement allowed the generic to park its 180-day exclusivity). [15] See K-Dur, slip op. at 28 (assuming that the first generic manufacturer to file can park its 180-day exclusivity); but see Leichtman, supra note 1, describing the changes to the Hatch-Waxman Act and pointing out that none of the lawsuits brought by either the FTC or by private plaintiffs thus far have involved settlements entered into where the MMA Amendments applied. [16] K-Dur, slip op. at 33. [17] Some examples are provided in Leichtman, supra n. 1. All Content 2003-2012, Portfolio Media, Inc.