In vacating a 2003 U.S. Federal Trade Commission (FTC) decision, the U.S. Court of Appeals for the Eleventh Circuit significantly hampered the agency’s decade-long attack against reverse payment patent settlements in the pharmaceutical industry. Schering-Plough Corp. v. FTC, Case No. 04-10688 (11th Cir. Mar. 8, 2005) (Fay, J.).
In 2003, the FTC ruled that two patent infringement settlements between branded drug manufacturer Schering-Plough Corporation and generic drug manufacturers Upsher-Smith Laboratories, Inc. and American Home Products (AHP) violated the antitrust laws. The settlements arose when Schering-Plough sought to enforce its patent for the drug K-Dur 20, which expires in 2006.
Under its agreement with Upsher-Smith, Schering-Plough agreed to pay $60 million in initial royalty fees to license five unrelated products from Upsher-Smith, and Upsher-Smith agreed to delay entry of its generic drug until 2001. In its agreement with AHP, Schering-Plough agreed to pay AHP $10 million contingent upon the Federal Drug Administration’s (FDA) approval of its generic substitute, and AHP agreed to delay entry of its drug until 2004. The FTC found that Schering-Plough’s payment of $60 million to Upsher-Smith grossly exceeded the fair market value of the licenses and was simply a payment to obtain delayed entry of a generic substitute. Utilizing a rule of reason analysis, the FTC concluded that this reverse payment had no procompetitive benefit and, therefore, was unlawful. The FTC similarly found no legitimate basis for Schering-Plough’s settlement agreement with AHP and held this agreement also violated the antitrust laws.
In a sharply worded decision, the Eleventh Circuit questioned the FTC’s finding that Schering-Plough’s $60 million payment to Upsher-Smith exceeded the fair market value of the licenses. Further, the Court determined that the FTC’s use of the rule of reason analysis in patent settlement cases was inappropriate and held that when assessing potential antitrust liability related to patent settlements, it is necessary to examine: (1) the scope of the exclusionary potential of the patent; (2) the extent to which the agreement exceeds that scope; and (3) the resulting anticompetitive effects. Utilizing this analysis, the Court found that the delays in entry imposed by Schering-Plough’s settlement agreements did not exceed the scope of the exclusionary potential already inherent in the patent and concluded that the agreements were procompetitive and lawful.
Most significantly, the Court found the Hatch-Waxman Act so significantly reduced the cost for generic drug manufacturers to defend patent challenges that reverse payments by patent holders may be necessary to avoid litigation. Recognizing the significant benefits inherent in settlements, the Court rejected the FTC’s reasoning that, in essence, makes reverse payment patent settlements in the pharmaceutical industry presumptively unlawful.
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