When a drug
company pays a manufacturer to delay launching a generic, is it the act of an
illegal monopoly or merely a settlement benefiting both parties?
The U.S.
Court of Appeals for the 3rd Circuit recently ruled on these so-called
“pay-for-delay” deals, splitting from three other circuits. If not revised en
banc, the decision will likely warrant Supreme Court review.
Schering-Plough
(now Merck) manufactures K-Dur, a patented high blood pressure medication. More
than a decade before Schering’s patent was set to expire, two manufacturers
attempted to enter the market early via generic versions of K-Dur. Schering
sued for patent infringement.
The parties
settled the patent cases. The manufacturers agreed not to bring the generics to
market for several years, while Schering agreed to pay them millions. Supporters
argue that such agreements are simply dispute settlements, which courts
generally favor.
The Federal Trade
Commission disagrees. According to the FTC website, pay-for-delay deals are a
top priority for the agency, since they are “anticompetitive” and “cost
consumers and taxpayers $3.5 billion in higher drug costs every year.” The FTC filed
an amicus brief in the 3rd Circuit, in support of plaintiffs challenging the
K-Dur agreements.
Those
plaintiffs include CVS, Rite Aid, wholesale drug companies, and others. They
argue that pay-for-delay deals violate antitrust law and prevent competitive
pricing.
On July 16, a
unanimous three-judge 3rd Circuit panel deciding In
Re: K-Dur Antitrust Litigation found that pay-for-delay deals are “prima facie evidence of an unreasonable
restraint of trade.” Showing that the payment has a purpose other than delaying
generic entry or has some pro-competitive benefit can rebut this evidence.
The 3rd
Circuit rejected the “scope of the patent test” adopted by the Federal,
2nd,
and 11th
Circuits. (The Federal Circuit, with its specialized docket, is not frequently
involved in circuit splits, but this case is an exception.)
The court
also pointed to other circuit cases, but acknowledged that they did not address
settlement of patent litigation, the backdrop of the K-Dur fight.
The patent-scope
test accepted in other circuits focuses on the patent holder’s exclusive rights
to the patent before it expires. If a patent holder company can exclude everyone
else during that period, why can’t it fend off litigation to protect its exclusivity?
Citing an NYU Law Review article, the 3rd Circuit
said that “this approach nominally protects intellectual property, not on the
strength of a patent holder’s legal rights, but on the strength of its wallet.”
“Many
patents,” the 3rd Circuit explained, “are later found to be invalid or not
infringed.” A pay-for-delay deal preserves a monopoly “without any assurance
that the underlying patent is valid.” It is in the public interest to
judicially test and eliminate weak patents, the court wrote.
Because of
the circuit split, the tremendous financial stakes, and the FTC’s pay-for-delay
priority, the 3rd Circuit decision could very well catch the Supreme Court’s
attention, unless it is reversed en banc.
The Supreme
Court has declined to review cases that accepted the patent-scope test, which
may indicate that the Court does not object to the test and perhaps sees it as
the companies do—as allowing settlement. The Court could, of course, reach a
different result after briefing and argument.
*Update: On August 3, after this
article was originally published in the National Law Journal, Merck gave notice
to the 3rd Circuit that it intends to proceed directly to the Supreme Court with
a petition for certiorari.
