By Kurt R. Karst –
The Federal Trade Commission’s (“FTC”) drumbeat of opposition to patent settlement agreements (or what opponents call “pay-for-delay” or “reverse payment” agreements) grew louder last week with the Commission’s submission of an amicus brief with the U.S. Court of Appeals for the Third Circuit in In Re K-Dur Antitrust Litigation, Case Nos. 10-2077, 10-2078, 10-2079. The FTC requests that the Court reverse a 2010 ruling from the U.S. District Court for the District of New Jersey in which the court adopted a Special Master’s Report and Recommendation in the long-running patent settlement dispute concerning K-DUR (potassium chloride). In that case, direct purchasers of K-DUR alleged that Merck & Co., Inc. (“Merck”) (formerly Schering-Plough Corporation) restricted competition in violation of the Sherman Act by settling patent infringement lawsuits against potential generic K-DUR entrants. Merck filed a motion for summary judgment and the Special Master appointed to preside over the case recommended that the motion be granted.
The In Re K-Dur Antitrust Litigation followed an FTC action against Schering challenging the same settlements. In 2005, the U.S. Court of Appeals for the Eleventh Circuit upheld in Schering-Plough Corp. v. FTC, 402 F.3d 1056 (11th Cir. 2005), a district court dismissal of that case. In addition to the FTC, amicus briefs were submitted to the Third Circuit by the Department of Justice, Attorneys General from various states, the National Association of Chain Drug Stores, Inc., and the American Antitrust Institute – all decidedly in favor of a reversal of the New Jersey District Court’s decision.
The FTC says in its amicus brief that the New Jersey District Court’s decision “is problematic in that it conflicts not only with basic antitrust principles, but with patent law and the policies of the Hatch-Waxman Act.” First, according to the FTC, “[a]greements made by patent holders are subject to antitrust scrutiny, particularly where, as here, they eliminate potential competition by splitting monopoly rents with would-be competitors.” Second, the FTC says that “[t]he district court’s rule – which allows such agreements as long as the patent infringement claim rises above the level of a ‘sham’ – is especially inappropriate in light of the policies of Hatch-Waxman, in which Congress expressly sought to encourage challenges to weak or narrow patents, and thereby spur early generic entry.” The District Court’s rule would, according to the FTC, “negate such challenges by allowing a branded company simply to pay generic filers to stay out of the market until the patent expires. Economic realities make such deals irresistible as long as they are condoned by the courts.”
Instead, the FTC says in its brief that the Third Circuit should adopt a “rule of reason”:
Patent settlement agreements should be assessed under the antitrust rule of reason – a rule that, as recent Supreme Court teachings make clear, is flexible enough both to take into account the patent context and to recognize a presumption of illegality for types of agreements whose likely anticompetitive impact is clear. Parties may settle patent disputes in a variety of ways, and many settlements – e.g., those in which the parties compromise on an entry date, without payment by the patent holder – pose little competitive problem. On the other hand, where a settlement includes a substantial payment, that payment must be a quid pro quo for something; if the challenger is offering a commitment to stay out of the market for a specified time, it follows that the payment is to secure exclusion of a potential competitor. Because such an agreement closely parallels market allocation arrangements universally recognized as unlawful, a presumption of antitrust illegality is justified. Such a presumption is bolstered by the policies of Hatch-Waxman and by experience that shows the vulnerability of many pharmaceutical patents, the weakest of which will be the most likely to result in exclusion-payment settlements.
The FTC’s amicus brief follows the U.S. Supreme Court’s March 7, 2011 denial of a Petition for Writ of Certiorari in Louisiana Wholesale Drug Co., Inc., et al. v. Bayer AG, et al., Case No. 10-762, which involved manufacturers of Ciprofloxacin HCl (CIPRO) and whether a particular patent settlement agreement was per se lawful under the Sherman Act. The Supreme Court was asked to review the case after the U.S. Court of Appeals for the Second Circuit denied without comment in September 2010 a Petition for Rehearing and Rehearing En Banc that a panel of the judges on the Court invited in their April 2010 decision affirming (3-0) a 2005 decision by the U.S. District Court for the Eastern District of New York granting summary judgment for defendants (i.e., Ciprofloxacin HCl manufacturers).
FTC Commissioner J. Thomas Rosch discussed pending patent settlement challenges during a May 11th speech at the Sixth Annual In-House Counsel Forum on Pharmaceutical Antitrust, and again during a May 18th speech titled “The Intersection of Antitrust and Intellectual Property: The Quest for Certainty in an Uncertain World.” During the May 11th speech, Commissioner Rosch expressed his pleasure that the Supreme Court denied Certiorari in the Cipro Case, saying “[t]hat is because Justices Sotomayor and Kagan recused themselves from the case. Challengers to pay-for-delay agreements would likely have a far better chance at the highest court if all nine Justices were available to hear the case.”
Commissioner Rosch also addressed rumors about a so-called FTC “Plan C” for addressing patent settlement agreements if the Commission is unsuccessful in the courts and in Congress, where retiring Senator Herb Kohl (D-WI) has pending legislation that would effectively ban patent settlement agreements. Commissioner Rosch commented:
So does the Commission have a “Plan C” if we continue to be unsuccessful before both the judiciary and Congress? At this point, the answer is no. But, as I’ve said, one possibility would be for the Commission to exercise its rulemaking authority under Section 6(g) of the FTC Act. Under this provision, the Commission can “make rules and regulations for the purpose of carrying out” the FTC Act. It strikes me that the agency could issue a rule that would deem pay-for-delay agreements as inherently suspect. The Commission would have the initial burden of production demonstrating the existence of a reverse payment settlement. At that point, the burden of production would shift to the parties to justify the practice. If they do so, the burden would shift back to the Commission, which would have to show under the full rule of reason that the agreement is anticompetitive. Because the burden of proof ultimately rests with the Commission, I think this approach would pass muster under the Administrative Procedures Act, which governs Section 6(g) rulemakings.