Patent Settlement Agreements: The Next Barrage

September 17, 2012

By Kurt R. Karst –      

In our recent post, “Hot Ticket Item – Patent Settlement Agreement Challenges,” we provided a round-up of the latest and greatest from ongoing litigation concerning patent settlement agreements (or “pay-for-delay” agreements if you prefer that term – we don’t).  It’s only been about three weeks since that post, but a lot more has already happened to warrant another update.  And it all relates back – in some way, shape, or form – to the July 16, 2012 decision by the U.S. Court of Appeals for the Third Circuit in In Re: K-DUR Antitrust Litigation.  In that case, the Court rejected the so-called “scope of the patent test” when considering whether patent settlement agreements violate the antitrust laws, and instead applied a “quick look rule of reason” analysis under which “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.”

For starters, we forgot to mention in our last post that just two days after the Third Circuit issued its K-Dur decision, and one day after the Federal Trade Commission (“FTC”) filed the decision as a supplemental authority in litigation before the U.S. Court of Appeals for the Eleventh Circuit involving ANDROGEL (testosterone gel), the Eleventh Circuit denied the FTC’s Petition for Rehearing en banc.  The petition requested en banc review of an April 2012 decision in which a panel of judges from the Eleventh Circuit affirmed a February 2010 decision by the U.S. District Court for the Northern District of Georgia largely dismissing multidistrict litigation brought by the FTC (and others not involved in the appeal) challenging certain patent settlement agreements in which Solvay Pharmaceuticals, Inc. allegedly paid some generic drug companies to delay generic competition to ANDROGEL (see our previous post here).  The FTC had argued that the April 2012 panel decision “puts the law of this Circuit into conflict with principles underlying antitrust law that prohibit a potential competitor from agreeing not to enter a market,” and therefore merits rehearing en banc.

Of course, the big news since our last post is a second Petition for Writ of Certiorari asking the U.S. Supreme Court to take up the Third Circuit’s K-Dur decision.  Both  Merck & Co., Inc. (“Merck”) and Upsher-Smith Laboratories (“Upsher-Smith”) are Appellants in the Third Circuit case.  Curiously, Merck filed the first Petition for Writ of Certiorari (Supreme Court Docket No. 12-245) without a simultaneous Petition from Upsher-Smith.  Upsher-Smith’s Petition (Supreme Court Docket No. 12-265) was filed several days later and presents the Court with the following question: “Whether the Third Circuit erred by holding, contrary to the Second, Eleventh, and Federal Circuits, that an agreement settling patent litigation that does not restrict competition outside the scope of the exclusionary right granted by the patent itself may presumptively violate the antitrust laws.”  Upsher-Smith argues for the Court to take up the case, saying that the Third Circuit’s decision creates a clear circuit split and “guts the exclusionary right conferred by the patent laws . . . .”  Moreover, writes Upsher-Smith, the Third Circuit’s decision fails to understand that patent settlement agreements like the one at issue in the case “are a natural by-product” of Hatch-Waxman. 

As a result of the possibility that the Supreme Court might grant the Merck and Upsher-Smith Petitions for Writ of Certiorari and finally take up Hatch-Waxman patent settlement agreements, one court has already stayed litigation.  The U.S. District Court for the Eastern District of Pennsylvania recently issued an Order staying litigation over generic PROVIGIL (modafinil) agreements.  The U.S. District Court for the District of New Jersey is still considering a Motion to Stay litigation over EFFEXOR XR (venlafaxine HCl) Extended-release Tablets and a “No AG” (i.e., no authorized generic) agreement.  The FTC filed an amicus brief in that case stating that a No-AG agreement is a “convenient method” for brand-name drug companies to pay generic patent challengers to delay their entry into the market, and that the Third Circuit’s K-Dur decision should not be limited to overt cash payments.

Moving over to the scholarship front, Michael A. Carrier, a professor at the Rutgers University School of Law – Camden, has written an article for the Stanford Technology Law Review, titled “Why the ‘Scope of the Patent’ Test Cannot Solve the Drug Patent Settlement Problem.”  According to Professor Carrier, there are three primary problems with the “scope of the patent” test: “First, the version used today has shed any potential nuance in morphing into a test granting automatic legality.  Second, the test is based on the crucial assumption that the relevant patent is valid.  Third, it cannot address the issue of infringement.”  As the title of his piece suggests, Professor Carrier does not believe the “scope of the patent” test is appropriate for analyzing complex issues presented by Hatch-Waxman patent settlement agreements:

The scope test applied by courts today cannot resolve the issue of whether drug patent settlements violate the antitrust laws.  The test has ventured far beyond its initial version employed for the narrow purpose of punishing conduct reaching products clearly outside the scope of the patent.

The simplistic version used today is employed to give automatic immunity to conduct that might – or might not – be justified.  The test assumes issues of validity and infringement that cannot possibly be determined from the mere issuance of the patent.  With all potential nuance stripped out of the scope test, courts today are relegated to the role of traffic cops shooing agreements through an antitrust light always flashing green.

All of the litigation over and interest in Hatch-Waxman patent settlement agreements is not unexpected.  As a recent 2012 Patent Litigation Study from PricewaterhouseCoopers LLP shows, in recent years the chances at winning a patent infringement lawsuit are not much greater than 50%.  Perhaps that’s why “the majority of ANDA litigations continue to end in settlement.”