Hot Ticket Item – Patent Settlement Agreement Challenges

By Kurt R. Karst –      

It seems that hardly a day goes by without something new happening concerning patent settlement agreements.  They are generally referred to as “pay-for-delay” agreements; however, that’s a bit of a loaded term, and one we try to avoid.  We just refer to them as patent settlement agreements.  Below is a round-up of sorts of the latest and greatest from ongoing litigation.

K-DUR.  This long-running litigation involves a challenge by direct purchasers of K-DUR (potassium chloride) Extended-release Tablets who allege 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, including Upsher-Smith Laboratories (“Upsher-Smith”).  On March 25, 2010, the U.S. District Court for the District of New Jersey adopted a Special Master’s Report and Recommendation that Merck’s Motion for Summary Judgment be granted.  The direct purchasers appealed the decision to the U.S. Court of Appeals for the Third Circuit (see our previous post here). 

In July, the Third Circuit dropped a bombshell when the Court issued its decision.  Although several Circuit Court decisions have used the so-called “scope of the patent test” when considering whether patent settlement agreements violate the antitrust laws, including the Eleventh Circuit in litigation involving the same K-DUR patent settlement agreement (see Schering-Plough Corp. v. FTC, 402 F.3d 1056 (11th Cir. 2005)), the Third Circuit rejected that approach in favor of a “quick look rule of reason” analysis.  Under the scope of the patent test, “reverse payments are permitted so long as (1) the exclusion does not exceed the patent’s scope, (2) the patent holder’s claim of infringement was not objectively baseless, and (3) the patent was not procured by fraud on the PTO.”  Or, as one scholar has characterized it, “that the total right to exclude includes the partial right to exclude for a period of time pursuant to a payment.”  Under the quick look test, however, “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.” 

Merck and Upsher-Smith promptly filed a Motion to Stay the Third Circuit’s mandate pending the filing of a Petition for Writ of Certiorari in the U.S. Supreme Court.  That motion was denied, and the Court issued the mandate reversing the March 25, 2010 district court decision. 

Now the issue has been placed at the doorstep of the U.S. Supreme Court.  Merck recently filed a Petition for Writ of Certiorari asking the Court to address:

Whether the federal antitrust laws permit a brand-name manufacturer that holds the patent for a drug to enter into a settlement of patent litigation with a prospective generic manufacturer, where the settlement includes a payment from the brand manufacturer to the generic manufacturer but does not exclude competition beyond the scope of the patent.

A similar Petition for Writ of Certiorari from Upsher-Smith will presumably be filed in the near future.

This is not the first time the U.S. Supreme Court has been asked to take up patent settlement agreements.  As we previously reported (here and here), each time the Court has been asked to address patent settlement agreement antitrust issues, it has refused to do so.  But K-DUR might be the case that pushes the Court over the edge.

EFFEXOR XR.  On the heels of the Third Circuit’s K-Dur decision, and perhaps emboldened by that decision, the Federal Trade Commission (“FTC”), which has long opposed patent settlement agreements, sought leave to file an amicus brief in private antitrust litigation before the U.S. District Court for the District of New Jersey concerning Wyeth Pharmaceuticals Inc.’s (“Wyeth’s”) anti-depressant drug EFFEXOR XR (venlafaxine HCl) Extended-release Tablets. 

In a December 2011 Complaint, several direct purchasers allege that Wyeth, acting alone and/or in concert with first generic applicant Teva Pharmaceuticals USA, Inc. (“Teva”) violated Section 2 of the Sherman Act by delaying EFFEXOR XR generic competition. According to the Complaint:

Wyeth’s scheme included (i) fraudulently procuring three patents for extended release formulations of venlafaxine hydrochloride, (ii) wrongfully listing those patents in the FDA Orange Book as covering Effexor XR, (iii) engaging in serial sham litigation to block and delay multiple generic companies, (iv) entering into a horizontal market allocation and price-fixing agreement with generic manufacturer Teva, and (v) negotiating settlements with subsequent generic applicants to preserve and protect its monopoly and market-division agreement with first-filer Teva.

In particular, the direct purchasers note that as part of the settlement agreement, “Wyeth gave Teva an exclusive license to sell a generic version of (instant release) Effexor before the original compound patent for venlafaxine expired.  Wyeth would both forgo marketing its own authorized generic during that period and allow Wyeth’s generic Effexor to come to market early” (emphasis in original).  This sort of arrangement has been referred to as a “No AG” (i.e., no authorized generic) agreement.

As a result of the Third Circuit’s K-Dur decision, and in the context of pending Motions to Dismiss the case filed by Wyeth and Teva, the New Jersey District Court ordered the parties to address the significance of K-Dur.  The direct purchasers contend in a letter submission to the court that K-Dur mandates denial of the Motions to Dismiss, while Wyeth and Teva contend in their submissions (here and here) that even in the wake of K-Dur, the direct purchasers’ Complaint fails to state any plausible claim for relief and should be dismissed.  

The FTC also saw the district court’s Order and decided to chime in.  The Commission sought leave to file an amicus brief 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.  According to the FTC, “[g]iven the proliferation of these non-cash payments, accepting Defendants’ argument that K-Dur is limited to overt cash payments would effectively nullify the Third Circuit’s decision and permit anticompetitive settlements to proceed unchecked.”  Both Wyeth and Teva have vigorously opposed the FTC’s request for leave to file an amicus brief in letter submissions to the district court (see here and here).  That opposition drew a retort from the direct purchasers.

CIPRO.  Another patent settlement case that has been brewing for a while is in California State Court and involves patent settlement agreements between Bayer AG and several generic drug manufacturers with respect to generic versions of Bayer’s antibiotic drug CIPRO (ciprofloxacin HCl). 

As we previously reported, the case, styled as In re Cipro Cases I & II, was initiated in late 2000 and is a proceeding of nine coordinated cases brought by indirect CIPRO purchasers.  In October 2011, the California Court of Appeal, Fourth Appellate District (Division I), ruled that the patent settlement agreements do not violate the Cartwright Act, which is California’s antitrust law and an analogue to Section 1 of the federal Sherman Act.  In December 2011, the indirect purchasers filed a Petition for Review with the California Supreme Court seeking reversal of the appellate court’s decision.  The California Supreme Court granted the petition for review in February 2012. 

With the recent Reply Brief filed by the indirect purchasers, the case has now been fully briefed.  Noting the recent K-Dur decision, the brief goes on to argue that “California law does not permit a patent holder to exclude competition with a naked cash payment so large it casts serious doubt on the patent’s legal ability to exclude.”

NEXIUM.  The latest entrant to patent settlement agreement litigation is a Class Action Complaint filed in the U.S. District Court for the Eastern District of Pennsylvania by the Fraternal Order of Police Miami Lodge 20, Insurance Trust Fund, on behalf of itself and all others similarly situated against AstraZeneca and several generic drug manufacturers.  The drug at issue is the blockbuster proton pump inhibitor NEXIUM (esomeprazole magnesium) Delayed-release Capsules.

Plaintiffs allege, among other things, that AstraZeneca violated Sections 1 and 2 of the Sherman Act (15 U.S.C. §§ 1 and 2) by entering into agreements with the generic drug manufacturers to pay them “substantial sums in exchange for their agreement to delay marketing their less expensive generic versions of Nexium for as many as six years or more, i.e., until May 27, 2014.”  But for the agreements, say Plaintiffs, a generic version of NEXIUM would have been available early as April 14, 2008, when the 30-month stay of FDA approval of Ranbaxy’s ANDA for generic NEXIUM expired.

Interestingly, Plaintiffs assume that Ranbaxy maintains 180-day exclusivity eligibility for generic NEXIUM; however, as we previously noted there has been speculation that Ranbaxy’s ANDA for generic NEXIUM Delayed-release Capsules is one of the unidentified ANDAs in the Consent Decree the United States filed against Ranbaxy earlier this year and for which Ranbaxy agreed to forfeit 180-day exclusivity.