Guest Commentary

By Ry Ellison, a 2012 Judge K.K. Legett Fellow at the Washington Legal Foundation and a student at Texas Tech School of Law.

On July 16, 2012, the Third Circuit handed down its decision in In re K-Dur Antitrust Litigation, and in doing so, gave the Federal Trade Commission (“FTC”) its first major victory in its decade-long crusade against so-called “reverse payment” settlements of patent disputes.  Also called pay-for-delay settlements, such agreements involve private settlements wherein the pioneer drug manufacturer provides monetary consideration to the defendant generic manufacturer in exchange for the specific exclusion of competition in the drug market for a finite period of time.

By reinstating the FTC’s lawsuit, the Third Circuit breathed new life into the argument that reverse payment settlements of patent disputes between pioneer and generic drug manufacturers constitute per se violations of antitrust laws.  Of special significance was the court’s explicit acknowledgement that its ruling squarely contradicted the conclusions reached by its sister courts.  Prior to the Third Circuit’s decision, the Second, Eleventh, and Federal Circuits had all issued major decisions upholding the legality of reverse payment settlement agreements.  Accordingly, the Third Circuit’s clear and intentional establishment of a circuit split has laid the foundation for a Supreme Court showdown between the FTC and drug manufacturers.

The Third Circuit’s decision is a clear setback for drug manufacturers. In July 2011, WLF filed an amicus brief urging affirmance of the district court’s dismissal of the FTC’s lawsuit.  WLF argued that barring drug manufacturers from entering into reverse payment settlements would have “serious deleterious effects on the settlement of patent disputes and, ultimately, on the value of patent protection and on incentives for pioneer drug firms and generic drug firms to bring products to market.”  In short, WLF reasoned that reverse payment settlements, such as the ones entered into in K-Dur, not only abide by the statutory requirements of the Sherman Act, but also equitably resolve patent disputes by maintaining a balance at the intersection of intellectual property rights and free-market competition.

In siding with the FTC, the Third Circuit distinguished the decisions of its sister courts, rejected the widely-accepted “scope of the patent” test–which allows reverse payments so long as the exclusion does not exceed the scope of the patent–and articulated a wholly novel standard by which courts should examine reverse payment settlements.  Specifically, the Third Circuit’s decision comes dangerously close to establishing a per se rule of illegality with respect to reverse payment settlements by holding that such payments presumptively constitute prima facie evidence that drug manufacturers have engaged in an unreasonable restraint of trade.

Although there is no guarantee, legal experts and court watchers have expressed optimism that the Supreme Court will agree to hear the case should the drug manufacturers decide to file a petition for certiorari.  Ultimately, the justices would be forced to decide between the novel views of the Third Circuit (which held that reverse payments are presumptively an unreasonable restraint of trade in violation of antitrust laws), and the more reasoned and free-market oriented decisions of the Second, Eleventh, and Federal Circuits (which upheld the legality of reverse payments by giving credence to the underlying business rationale supporting such settlements).   In any event, WLF has pledged its continued assistance to obtaining Supreme Court review and arguing in support of a ruling that comports with the weight of the jurisprudence on the issue.