THE “RULE OF REASON” PREFERRED TO “SCOPE …sites.law.duq.edu/blj/wp-content/uploads/2013/08/7-postol.pdfIn re K Dur Antitrust5 dealt with a putative class action suit brought

File: 7- Postol Created on: 8/27/2013 5:12:00 PM Last Printed: 8/27/2013 10:36:00 PM

289

THE “RULE OF REASON” PREFERRED TO “SCOPE

OF PATENT” ANALYSIS WHEN DETERMINING

WHETHER A REVERSE PAYMENT IS LEGAL IN THE

THIRD CIRCUIT: IN RE K DUR ANTITRUST

LITIGATION

Linda M. Postol*

ANTITRUST AND TRADE REGULATION – PATENTS – DRUG PRICE

COMPETITION AND PATENT TERM RESTORATION ACT OF 1984–

The Third Circuit held that the district court must apply a quick

look rule of reason analysis that treats the payment from the pa-

tent holder to the challenger as prima facie evidence of an unrea-

sonable restraint of trade, which may be rebutted by showing that

the payment: (1) was for a purpose other than delayed entry; or

(2) offers some pro-competitive benefit. In re K-Dur Antitrust

Litigation, 686 F.3d 197, 203-204 (3d Cir. 2012).

INTRODUCTION ........................................................................... 290

I. The In re K Dur Antitrust Litigation Decision .............. 291

A. Facts ..................................................................... 291

B. The District Court ................................................. 295

C. The Third Circuit .................................................. 295

II. The History of the Hatch Waxman Act .......................... 300

A. Antitrust Standard History ................................... 302

III. Analysis of In re K Dur Antitrust Litigation Decision ... 304

A. Marketing, Research and Development ............... 305

CONCLUSION ............................................................................... 309

* J.D. Candidate Spring 2013, Duquesne University School of Law, B.S.

Mathematics, University of Pittsburgh 2001, B.S. Psychology, University of Pitts-

burgh, 2006.


290 Duquesne Business Law Journal Vol. 15.2

INTRODUCTION

The Sherman Antitrust Act, passed by Congress in 1890, was a

landmark decision aimed at regulating business practices that unfairly

restrict trade in the marketplace.1 More recently, Congress passed the

Drug Price Competition and Patent Term Restoration Act of 1984,

commonly known as the Hatch Waxman Act aimed at facilitating the

availability of lower priced generic drugs in the market by allowing a

generic manufacturer a quicker route to approval by relying on safety

testing done by the brand name manufacturer along with an exclusive

time period where no other generic manufacturer can apply for ap-

proval.2

Fairly recently, generic and brand name manufacturers have begun

to make settlement agreements pursuant to patent infringement suits

filed against the generic competitors.3 In these settlement agreements,

the brand name manufacturer pays the generic competitor to restrain

from marketing its product for a specified time period in exchange for

dropping the infringement suit. Such suits have come under the scru-

tiny of the FTC and private plaintiffs alleging they unfairly restrict

free trade by delaying the entry of lower priced product into the mar-

ket, costing consumer billions of dollar each year.4

This case note explores the relationship between patent protection

of brand name pharmaceuticals and the history and Congressional

intent of the Sherman Antitrust Act and the Hatch Waxman Act. It

contends that the decision In re K Dur Antitrust Litigation aligns itself

with the Congressional intent of these Acts. Furthermore, due to the

lucrative nature of the pharmaceutical industry, the argument that drug

research and development costs make necessary strong patent protec-

tion of brand name drugs comes under fire when up against a strong

Congressional Intent to support the consumer constituency against

high cost medication.

1. 15 U.S.C. §§ 1-7.

2. In re K-Dur Antitrust Litigation, 686 F.3d 197, 203-204 (3d Cir. 2012).

3. Id. at 206.

4. Id. at 207. See The FTC found reverse settlement agreements cost consum-

ers $3.5 billion per year. FTC, Pay for Delay: How Drug Company Pay Offs Cost

Consumers Billons, www.ftc.gov/os/2010/01/100112payfordelayrpt.pdf (accessed

April 20, 2013).


2013 IN RE K DUR ANTITRUST LITIGATION 291

I. The In re K Dur Antitrust Litigation Decision

In re K Dur Antitrust5 dealt with a putative class action suit brought

against a name-brand drug pharmaceutical company and a generic

drug manufacturer by wholesale and retail purchasers claiming set-

tlement agreements between the name-brand and generic manufactur-

ers unreasonably restrained trade.6 The United States District Court

for the District of New Jersey appointed a Special Master to handle

motions including class certification and summary judgment motions.7

The Special Master certified the class of forty-four wholesale and

retail plaintiffs.8 The United States District Court for the District of

New Jersey adopted the class certification decision of the Special

Master.9 The Special Master recommended granting defendants’ mo-

tion and denying plaintiffs’ motions for partial summary judgment

employing the presumption that the challenged patent was valid

whereby a settlement would only come under antitrust scrutiny only if

the settlement went beyond the scope of the patent or the patent in-

fringement suit did not have a basis.10

Finding neither of the latter

restrictions to be present, strict scrutiny was not applied by the Special

Master.11

The District Court adopted these recommendations and

Plaintiffs appeal.12

A. Facts

The plaintiffs in this case included the Louisiana Wholesale Drug

Company, Inc., a class of wholesale and retail purchasers of the pre-

scription K Dur 20 (“K Dur”) and nine individual plaintiffs that in-

cluded CVS Pharmacy, Inc. and Rite Aid Corporation (“Plaintiffs”).13

Defendant Schering Plough Corporation (“Schering”) manufactured

and held the patent for the prescription drug K Dur.14

Defendant

5. In re K-Dur, 686 F.3d at 201.

6. Id.

7. Id. at 207.

8. Id. at 208.

9. Id.

10. In re K-Dur, 686 F.3d at 208.

11. Id.

12. Id.

13. Id. at 202.

14. Id.



Upsher Smith Laboratories (“Upsher”) was the generic drug manufac-

turer of K Dur.15

Before a new drug may be approved for use on the market, its man-

ufacturer must first obtain approval from the Food and Drug Admin-

istration (“FDA”) by submitting information including research, safe-

ty, and patents.16

Patent information is then published by the FDA in

what is commonly referred to as the Orange Book.17

In efforts to fa-

cilitate generic competition with patented drugs, Congress passed the

Drug Price Competition and Patent Term Restoration Act of 1984,

commonly known as the Hatch Waxman Act.18

According to this Act,

a generic manufacturer can file an Abbreviated New Drug Application

(“ANDA”) with the FDA that utilizes the information provided to the

FDA by the patent holder describing the drug’s safety and efficacy.19

Along with the ANDA, a generic manufacturer is also required to

submit a certification that the generic drug does not infringe on any

patent.20

Four methods can be used to satisfy this requirement includ-

ing the common paragraph IV certification.21

In a paragraph IV certi-

fication, the generic manufacturer certifies that the name brand patent

is either invalid or that the generic drug will not infringe on the name

brand patent.22

When the paragraph IV method is used, notice must

be given to the owner of every patent listed in the Orange Book.23

Pursuant to 35 U.S.C. § 271(e)(2)(A), this method of certification

technically constitutes patent infringement whereby the patent holder

is entitled to commence an infringement suit within forty-five days of

the generic manufacturer filing its ANDA and certification.24

When

the patent holder initiates suit, an automatic stay begins so that the

15. In re K-Dur, 686 F.3d at 205.

16. Id. at 203.

17. Id.

18. Id. See Drug Price Competition and Patent Term Restoration Act of 1984,

Pub. L. No. 98-417, 98 Stat. 1585 (1984) (codified as amended 21 U.S.C. § 355

(2012)).

19. In re K-Dur, 686 F.3d at 203.

20. In re K-Dur, 686 F.3d at 203.

21. Id. The four methods of certification include paragraph “(i) that such patent

information has not been filed, (ii) that such patent has expired, (iii) [by certifying]

the date on which such patent will expire, or (iv) that such patent is invalid or will

not be infringed by the manufacture, use, or sale of the new drug for which the ap-

plication is submitted.” U.S.C. § 355(j)(2)(A)(i-iv).

22. In re K-Dur, 686 F.3d at 203.

23. Id. at 204.

24. Id.



FDA cannot approve the generic drug until either thirty months or

until the court hearing the infringement suit holds that the patent is

either invalid or not infringed upon; whichever occurs first.25

Schering held a patent for a controlled-release coating used in their

sustained-release potassium chloride supplement K Dur.26

The patent

was assigned to a subsidiary company called Key Pharmaceuticals,

Inc. and was set to expire on September 5, 2006.27

Upsher filed an

ANDA and paragraph IV certification in August 1995 seeking to

manufacture a generic version of the drug.28

Schering subsequently

filed suit in the District Court for the District of New Jersey for patent

infringement invoking the thirty-month automatic stay.29

Upsher

claimed their generic version did not infringe on the patent because

the chemical structure of their controlled-release coating was differ-

ent.30

Settlement discussion began in May 1997 and by June 18, 1997

the parties had reached an agreement.31

The terms of the agreement

stated that while Upsher did not infringe on Schering’s patent, it

would not market its product until September 1, 2001.32

In purported

consideration for $60 million, Upsher gave Schering licenses to manu-

facture and sell several of its products including the drug Niacor SR

used to treatment high cholesterol.33

Subsequent to the settlement

agreement ratification, Schering ultimately made the decision not to

manufacture and market Niacor SR.34

In December 1995, another generic manufacturer, ESI Lederle,

(“ESI”) filed its ANDA and paragraph IV certification to manufacture

and market its generic version of K Dur.35

Schering brought suit in

the District Court for the Eastern District of Pennsylvania alleging

patent infringement and again reached a settlement agreement where-

by ESI would receive a license on the patent beginning January 1,

25. In re K-Dur, 686 F.3d at 204 (citing 355(j)(5)(B)(iii)(I)).

26. In re K-Dur, 686 F.3d at 203. The patent involved use of a “technique called

‘microencapsulation,’ a process in which small particles of a drug are coated to

make them disperse over time.” Id. at 204-205.

27. Id. at 203.

28. Id. at 205.

29. Id.

30. In re K-Dir, 686 F.3d at 205.

31. Id.

32. Id.

33. Id.

34. Id. at 206.

35. In re K-Dur, 686 F.3d at 206.



2004 in exchange for cash.36

ESI would receive $5 million initially

and based upon the time in which the FDA approved it’s ANDA, ESI

would receive an additional dollar amount ranging from $625,000 to

$10 million.37

The Federal Trade Commission (“FTC”) charged Schering, Upsher,

and ESI with restricting commerce pursuant to 15 U.S.C. § 45 in re-

sponse to the settlement agreements with Schering.38

The FTC char-

acterized these settlement agreements as reverse payments that result-

ed in the generic drugs hitting the market at a later date allowing

Schering to be the exclusive seller for a longer period of time.39

Fol-

lowing trial, the Administrative Law Judge dismissed the FTC com-

plaint finding these agreements did not constitute reverse payments

with regard to either Upsher or ESI.40

The FTC then reversed the holding of the Administrative Law

Judge.41

The FTC held that the agreement between Schering and

Upsher restrained commerce by allowing Schering more time to be

the exclusive seller of K Dur thus limiting competition for the drug

until the agreed upon date of the settlement.42

The FTC also held that

Schering violated antitrust law pursuant to its settlement agreement

with ESI because Schering made no attempt to rebut the presumption

that it paid ESI only in order to delay its generic version of K Dur

from entering the market.43

The FTC explained their ruling by noting

that when a payment is made with no other form of consideration, it is

logical to assume it was made in order to delay the generic drug from

entering the market.44

The FTC applied this so called rule of reason

analysis and held that reverse payments constitute a prima facie case

that the agreement is anticompetitive.45

Because neither party could

show another reason for the payment or that the payment would foster

competition in some way, the FTC held that the payment was illegal.46

36. Id.

37. Id.

38. Id. at 206-207. The complaint alleged violation of Section 5 of the Act.

39. Id. at 207.

40. In re K-Dur, 686 F.3d at 207.

41. Id.

42. Id.

43. Id.

44. Id.

45. In re K-Dur, 686 F.3d at 207.

46. Id.



The Eleventh Circuit subsequently reversed the FTC’s holding on ap-

peal.47

B. The District Court

In addition to the FTC, private parties filed suits involving these

settlement agreements as well.48

The suits were consolidated in the

District of New Jersey by the Judicial Panel on Multidistrict Litiga-

tion.49

A Special Master was appointed by the district court to preside

over motions.50

The Special Master certified a class of plaintiffs on

April 14, 2008 and the district court adopted the Special Master’s de-

cision on December 30, 2008.51

The class of plaintiffs certified in-

cluded forty-four wholesale and retail merchants that purchased K Dur

from Schering.52

defendants sought interlocutory appeal of the certi-

fication pending decision of summary judgment motions filed by both

parties.53

The Special Master issued a Report and Recommendation, which

the district court adopted, finding that defendant’s motion for sum-

mary judgment should be granted.54

The Special Master relied on a

presumption that Schering held a valid patent to the drug; therefore

antitrust scrutiny would only be applied to the settlement agreement if

the settlement went beyond the scope of the patent or if the infringe-

ment suit itself was without merit.55

Finding neither of these to be the

case, the Special Master reasoned antitrust scrutiny should not apply.56

C. The Third Circuit

The Third Circuit began its analysis with precedent from five other

circuits that have examined the issue of whether reverse payments are

47. Id. See Schering Plough Corp. v. FTC, 402 F.3d 1056 (11th Cir. 2005).

48. Id.

49. Id.

50. In re K-Dur, 686 F.3d at 207.

51. Id. at 208.

52. Id.

53. Id. at 219.

54. Id. at 208.

55. In re K-Dur, 686 F.3d at 208.

56. Id.



legal as this was an issue of first impression in this circuit.57

Two of

the five circuits determined that reverse payments should be viewed

under strict antitrust scrutiny when the settlement agreement results in

a delay of generic competition entering the market.58

The three most

recent decisions found that reverse payment agreements resulting in

delayed entry are allowed provided they do not exceed the scope of

the patent.59

The Special Master applied this scope of the patent test that allows

reverse payments provided they do not go beyond the scope of the

patent, the infringement suit was not objectively baseless, and there

was no fraud in obtaining the patent.60

After consideration of deci-

sions from the other circuits and the Special Master’s Report, the

Third Circuit did not agree that the scope of the patent test should be

applied because it restricts antitrust law and is contrary to public poli-

cy regarding market competition and patent litigation.61

The Third Circuit further disagreed with the presumption made that

the brand name manufacturer holds a valid patent.62

The court con-

tended that this presumption was procedural in nature rather than sub-

stantive in that it placed the burden on the party challenging the pa-

57. Id. at 209. The D.C. Circuit, The Sixth Circuit, The Eleventh Circuit, The

Second Circuit, and the Federal Circuit have all previously addressed the issue. Id.

at 209-214.

58. Id. at 210. See Andrx Pharmaceuticals, Inc. v. Biovail Corp. Intl., 256 F.3d

799, 813 (D.C. Cir. 2001), cert. denied, 535 U.S. 931(2002) (holding that payment

from name brand manufacturer to generic manufacturer constituted prima facie

evidence of an agreement not to compete). See also In re Cardizem CD Antitrust

Litigation, 332 F.3d 896, 908 (6th Cir. 2003), cert. denied, 543 U.S. 939 (2004)

(holding that an agreement between a name brand manufacturer and a generic manu-

facturer removing competition in the market amount to per se illegal restraint on

trade).

59. Id. at 210-211. See Valley Drug Co. v. Geneva Pharmaceuticals, Inc., 344

F.3d 1294, 1312 (11th Cir. 2003), cert. denied, 543 U.S. 939 (2004) (holding that

agreement to pay generic manufacturer to delay market entry until the brand name

manufacturer’s patent expired was not subject to strict scrutiny because it did not

exceed the scope of the patent). See also In re Tamoxifen Citrate Antitrust Litiga-

tion, 466 F.3d 187, 213 (2d Cir. 2006), cert. denied, 551 U.S. 1144 (2007) (applied

the scope of the patent test). See also In re Ciprofloxacin Hydrochloride Antitrust

Litigation, 544 F.3d 1323, 1336 (Fed. Cir. 2008), cert. denied, 129 S.Ct. 2828

(2009) (applied the scope of the patent test).

60. In re K-Dur, 686 F.3d at 214.

61. Id.

62. Id.



tent’s validity.63

However, in cases such as the one at bar where in-

fringement, not validity, was at issue, such a presumption was espe-

cially illogical because it was the patent holder who had the burden to

prove infringement.64

The court went on to explain that patents are in essence conclusions

of law reached by the Patent Office, of which many are found to be

not infringed upon or invalid when challenged by generic manufactur-

ers.65

With this is mind, the court reasoned that it is likely that reverse

payments operate in such a way as to allow a brand name manufactur-

er to pay off the generic competitors when it is aware its patent is

weak and may not be upheld and at the same time keep its exclusivity

in the marketplace.66

Furthermore, the court rejected the argument

posited by the Second Circuit stating that additional challenges by

other generic manufacturers will eliminate weak patents maintained

by the initial settlement agreement.67

Instead, the Third Circuit

opined that the profit made in dominating the market would give these

brand name manufacturers the resources necessary to pay off any sub-

sequent challengers as well.68

The court found support for its reasoning in several United States

Supreme Court decisions finding valid patents rare and the idea that it

serves the public interest to eradicate weak patents.69

The Third Cir-

cuit went on to hold that allowing reverse payments would contradict

public policy by allowing weak patent holders to eliminate competi-

tion while maintaining a weak patent.70

However, the Third Circuit

63. Id.

64. Id.

65. In re K-Dur, 686 F.3d at 215. (quoting Lear, Inc. v. Adkins, 395 U.S. 653,

670 (1969)).

66. Id.

67. Id.

68. Id.

69. Id. See. Edward Katzinger Co. v. Chicago Metallic Manufactuing Co., 329

U.S. 394, 399 (1947) (holding that when a patent licensor was under a license

agreement stipulating a price fixing term and the patent was invalid the price fixing

term would constitute a violation of federal antitrust law so that it could not estop

the licensor from challenging the patent’s validity). The Court in Katzinger empha-

sized the idea that public interest is great in keeping the market free from restraints

on trade arising from invalid patent agreements containing price fixing terms. Id. at

400. The Court went on to state that the interest in challenging a patent is a public

interest extending beyond the right of the individual challenger that needs to be

defended by allowing such challenges to take place. Id. at 401.

70. In re K-Dur, 686 F.3d at 216.



clearly limited its decision to reverse payment agreements made be-

tween brand name pharmaceutical patent holders and generic pharma-

ceutical manufacturer competitors citing the Congressional intent of

the Hatch Waxman Act.71

The intent of Hatch Waxman was to balance the need to protect in-

tellectual property while also allowing generic pharmaceutical manu-

facturers to compete in the market in order to facilitate lower cost ge-

neric drug options.72

Congress sought to accomplish its public policy

objective of providing lower cost generic drugs by fostering litigation

of weak patents in suits between brand name and generic manufactur-

ers.73

If the scope of the patent test were to be applied, the brand

name manufacturer would be permitted to pay off its generic competi-

tion; thus, undercutting what Congress sought to accomplish in pro-

tecting the consumer constituency.74

Instead, this would benefit both

brand name patent holders and their potential generic competition at

the expense of consumers.75

In a final note, while the court recog-

nized the preference of settlement to litigation, the preference to set-

tlement should not contravene Congressional intent to protect con-

sumers.76

The court reversed the District Court’s decision and rejected the

scope of the patent test in favor of a rule of reason analysis and re-

manded.77

The rule of reason analysis held a payment from a brand

name patent holder to a generic manufacturer challenging the patent

was prima facie evidence of unreasonable trade restraint which can

only be overcome by a showing that the payment was not made in

order to delay the entry of the generic drug into the market or that the

payment was made in exchange for something fostering competition.78

Furthermore, there is no need to consider the merits of the original

patent suit under this analysis without proof that the payment was any-

thing more than quid pro quo to delay market entry.79

71. Id. at 216-217.

72. Id.

73. Id. at 217.

74. Id.

75. In re K-Dur, 686 F.3d at 217.

76. Id.

77. Id. at 218.

78. Id.

79. Id. (quoting In re Schering Plough Corp., Final Order, 136 F.T.C. 956, 988

(2003)).



The next issue the court addressed was class certification.80

After

the District Court certified the class adopting the Report and Recom-

mendation of the Special Master, the defendants sought an interlocu-

tory review giving the Third Circuit jurisdiction.81

Under the standard

of review for abuse of discretion, the Third Circuit looked at predomi-

nance and adequacy issues both of which were necessary for class

certification.82

To satisfy the predominance condition in an antitrust case, the

plaintiff must show by a preponderance of the evidence that the neces-

sary elements of the cause of action predominate over issues specific

to the individual plaintiffs.83

The first sub-issue the court examined

surrounding predominance was whether lost profits were the relevant

antitrust injury.84

The defendants argued that plaintiffs must show lost

profits and these lost profits can only be shown by an analysis of each

plaintiff individually.85

The court rejected this argument and held that

lost profits are not required in order to show antitrust injury.86

The next sub-issue dealt with whether there was common evidence

of injury to all class members.87

The defendants contended that plain-

tiffs could not prove injury with common evidence because of price

and purchasing differentials among the plaintiffs with respect to K

Dur.88

Defendants argued that plaintiffs would need to show individ-

ual evidence in order to establish injury and thus failed to meet the

requirement of common evidence.89

The court rejected this argument, finding that plaintiff need only

show that an actual antitrust injury occurred.90

Differences between

plaintiffs could be dealt with accordingly at the trial in terms of dam-

80. In re K-Dur, 686 F.3d at 218.

81. Id. at 219. Jurisdiction is proper pursuant to 28 U.S.C. § 1292(e).

82. Id.

83. Id. at 219-220. (quoting In re Hydrogen Peroxide, 552 F.3d 305, 311 (3d Cir.

2008)). Other conditions necessary for plaintiff class certification include numerosi-

ty, commonality, typicality, and adequacy. Id. at n. 6.

84. Id. at 220.

85. In re K-Dur, 686 F.3d at 221.

86. Id. (quoting Hanover Shoe, Inc. v. United Shoe Machinery Corp., 392 U.S.

481, 494 (1968)).

87. Id.

88. Id.

89. Id.

90. In re K-Dur, 686 F.3d at 222 (quoting In re Hydrogen Peroxide, 552 F.3d

305, 311 (3d Cir. 2008)).



ages.91

The Special Master applied the correct standard by rigorously

analyzing the proposal submitted by the plaintiffs to demonstrate

through common evidence the injury they sustained.92

The plaintiffs

offered evidence that once a generic drug hit the market, the price of

that drug dropped.93

Because the market affects the entire industry,

plaintiffs did not need to rely on individual evidence.94

The court af-

firmed the Master’s decision that plaintiffs satisfied their burden for a

showing of common evidence.95

The second issue dealt with adequacy in terms of class certifica-

tion.96

The question was whether the class faced inherent conflicts

that would impede adequate representation of the class.97

Defendants

claimed that the national wholesalers benefited from delayed market

entry of generic drugs because they experienced more sales and prof-

its during that time thus causing a conflict among the class members.98

The court reasoned it would be cumbersome for the plaintiffs to calcu-

late lost profits for each class member, so instead, the damages should

be determined from the amount all plaintiffs were overcharged for the

drug due to delayed entry of generics into the market.99

All plaintiffs

would then have the same amount of damages so that the defendant’s

contention was without merit.100

Therefore, the Third Circuit affirmed

the District Court’s ruling on class certification.101

II. The History of the Hatch Waxman Act

Congress passed the Hatch Waxman Act so that Americans would

be given greater access to more low cost generic drugs.102

In order to

facilitate this objective, the Act was meant to encourage generic

91. Id.

92. Id.

93. Id.

94. Id.

95. In re K-Dur, 686 F.3d at 222.

96. Id. at 223.

97. Id.

98. Id.

99. Id. The court relied on the logic of Hanover Shoe where the Supreme Court

allowed the plaintiffs to recover damages for the amount they were overcharged

instead of what they lost individually in profits since this would be less cumber-

some. Hanover Shoe, Inc., 392 U.S. at 493.

100. Id. at 223.

101. In re K-Dur, 686 F.3d at 224.

102. Id. at 204. See H.R.Rpt. 98-857(l) at 14-15 (June 21, 1984).



pharmaceutical manufacturers to enter the market and challenge the

patents of brand name pharmaceutical manufacturers.103

The Act al-

lowed the first generic manufacturer to complete an ANDA and para-

graph IV certification a 180-day window in which the FDA will not

approve subsequent ANDA applications.104

The 180-day period

would commence when the first generic manufacturer to complete an

ANDA and paragraph IV certification began marketing its drug.105

This period of exclusive marketing was only made available to the

first generic manufacturer.106

Even if the first generic manufacturer

subsequently settles or loses a suit with the brand name manufacturer,

the next generic manufacturer to file an ANDA and paragraph IV cer-

tification will not be given the exclusive 180-day window.107

The Hatch Waxman Act was an amendment to the Federal Food,

Drug, and Cosmetic Act.108

Prior to the Act, a generic manufacturer

had to conduct its own safety and efficacy testing before seeking ap-

proval from the FDA.109

The Hatch Waxman Act allowed a perspec-

tive generic manufacturer to file the shortened ANDA application us-

ing the information provided to the FDA by the name brand manufac-

turer to show the safety and efficacy of the generic drug.110

However, after the Act was passed, infringement suits stemming

from the generic competitors were being settled in what were called

reverse payment agreements.111

Under reverse agreements, the per-

spective generic competitor was paid in exchange for dropping the

patent challenge and waiting until an agreed upon time before manu-

facturing the generic drug.112

With the advent of these reverse agreements, Congress worried

about the effects on competition in the marketplace.113

In an effort to

103. Id.

104. Id.

105. Id.

106. In re K-Dur, 686 F.3d at 204.

107. Id. See C. Scott Hemphill, Paying for Delay: Pharmaceutical Patent Set-

tlement as a Regulatory Design Problem, 81 N.Y.U. L.Rev. 1553, 1583 (2006).

(suggesting that the first generic manufacturer to challenge the patent is the most

motivated).

108. Id. at 203. See 21 U.S.C. § 301.

109. Id.

110. Id.

111. In re K-Dur, 686 F.3d at 204.

112. Id.

113. Id. See S.Rpt. 107-167 at 4 (June 20, 2002).



curtail the anticompetitive effects, Congress amended the Hatch

Waxman Act in 2003 requiring the generic and brand name manufac-

turers to file their settlement agreements with the FTC and the De-

partment of Justice (“DOJ”) for examination.114

Such agreements

seem to be unique to the Hatch Waxman Act context.115

In recent

years, the FTC has made investigation of reverse payments a top pri-

ority.116

These settlement agreements have been shown to cost con-

sumers billions of dollars each year.117

The FTC also determined that

on average one year after a generic drug enters the market, it sells for

approximately fifteen percent of the cost of the name brand drug and

yields over ninety percent of the brand name’s sales.118

A. Antitrust Standard History

The Sherman Act set the standard for defining what constitutes re-

straint of trade.119

While a literal reading of the Sherman Act would

make virtually all agreements restrictive of free trade, the Supreme

Court has interpreted the Sherman Act more narrowly.120

The Court

has held that only unreasonable restraints of trade would violate the

Sherman Act.121

The rule of reason was the test the court adopted to

pronounce whether a restraint on trade was unreasonable and thus il-

legal.122

This test allowed the finder of fact to determine whether the

restraint was unreasonable based upon a number of factors such as

information concerning the business, the state of the business before

and after the restraint was implemented, the effects on the business by

the restraint, and the history of the restraint.123

114. Id. These amendments were part of the Medicare Prescription Drug, Im-

provement, and Modernization Act of 2003. (codified as amended at 21 U.S.C. §

355(j)). Id.

115. Id. at 208.

116. In re K-Dur, 686 F.3d at 208.

117. FTC, supra n. 4.

118. Id.

119. In re K-Dur, 686 F.3d at 208. “The Sherman Act provides, in part, that

‘[e]very contract, combination in the form of trust or otherwise, or conspiracy, in

restraint of trade of commerce among the several States, or with foreign nations, is

declared to be illegal.’” (quoting 15 U.S.C. § 1).

120. Id. at 208-209.

121. Id. at 209. See State Oil v. Khan, 522 U.S. 3 10 (1997).

122. In re K-Dur, 686 F.3d at 209.

123. Id.



Under the rule of reason analysis, the plaintiff had the initial burden

of the proving the restraint created anti-competitive effects on the

market.124

Once this burden was satisfied, the burden then shifted to

the defendant to prove the restraint had an adequate pro-competitive

effect on the market.125

If the defendant was able to make this show-

ing, the plaintiff was allowed to rebut the defendant’s evidence of a

pro-competitive effect by showing the effect could be achieved by

other nonrestrictive means.126

However, some restraints are so notably anti-competitive in nature

that courts have deemed them to be unlawful per se.127

In other situa-

tions, courts have applied a type of intermediate review.128

While not

as lenient as the rule of reason, the intermediate test was not as strict

as the per se rule.129

This test is known as the quick look or truncated

rule of reason analysis and was employed where the plaintiff made a

showing that the defendant participated in behavior similar to the type

of behavior required for the per se rule to apply.130

Under this ap-

proach, the plaintiff did not bear the burden of showing the anti-

competitive effects on the market from the defendant’s behavior; ra-

ther the burden shifts to the defendant to show the restraint had an

adequate pro-competitive effect on the market.131

In 2006, the Second Circuit adopted a test known as the scope of

the patent test in their decision In re Tamoxifen Citrate Antitrust Liti-

124. In re K-Dur, 686 F.3d at 209 See U.S. v. Brown Univ., F.3d 658, 668 (3d

Cir. 1993).

125. Id.

126. Id.

127. Id. “Some types of restraints . . . have such predictable and pernicious anti-

competitive effect, and such limited potential for pro-competitive benefit, that they

[should be] deemed unlawful per se.” (quoting State Oil, 522 U.S. at 10. “The per

se rule is applied where a ‘practice facially appears to be one that would always or

almost always tends to restrict competition or decrease output.’” In re K-Dur, 686

F.3d at 209. (quoting Broadcast Music, Inc. v. CBS, Inc., 441 U.S. 1, 19-20 (1979)).

128. In re K-Dur, 686 F.3d at 209. The court sometimes applied a truncated rule

of reason in which the plaintiff need not show anti-competitive effects in the market.

Instead, it required the plaintiff demonstrate the defendant “has engaged in practices

similar to those subject to per se treatment.” The defendant then carried the burden

of proof that the effects had a pro-competitive aspect.

129. Id.

130. Id.

131. Id.



gation.132

This case dealt with the settlement agreement over a patent

infringement suit surrounding the drug Tamoxifen that was used to

treat breast cancer.133

The district court found the patent to be invalid

yet while on appeal, the parties reached a settlement agreement.134

The agreement gave the generic manufacturer a license to sell their

version of the drug along with $21 million in exchange for a vacatur

of the district court’s ruling that the patent was invalid.135

The district

court dismissed the plaintiffs’ claims and the Second Circuit af-

firmed.136

In their affirmation, the Second Circuit applied the pre-

sumption that the patent was valid and held that when competition is

restrained strictly within the scope of the patent, there is no violation

of any antitrust law.137

The court held the only exception to this rule

was when fraud was used in order to obtain the patent or when the suit

against the patent had no basis.138

III. Analysis of In re K Dur Antitrust Litigation Decision

In a CBS interview in 1995, Edward R. Murrow questioned Jonas

Salk who owned the patent to the polio vaccine.139

Salk replied,

“Well, the people, I would say. There is no patent. Could you patent

the sun?”140

Patent protection is not a new concept; it has been around

since the time the framers wrote the Constitution giving this power to

Congress.141

Patent law today affords twenty years of protection to

the grantee.142

However, this twenty-year window can be misleading

since many pharmaceutical companies apply for patent protection ear-

ly on to protect their investment during the research and development

132. In re Tamoxifen Citrate Antitrust Litigation, 466 F.3d 187, 211 (2d Cir.

2006), cert. denied, 551 U.S. 1144 (2007).

133. Id. at 190..

134. Id.

135. Id. at 213.

136. Id.

137. In re Tamoxifen Citrate Antitrust Litigation, 466 F.3d at 213.

138. Id.

139. . Wikiquote, Jonas Salk, http://en.wikiquote.org/wiki/Jonas_Salk (accessed

May 19, 2013).

140. Id.

141. U.S. Const. art I. § 8, cl. 8.

142. 35 U.S.C § 154(a)(2) (2006).



phase.143

Often times, half of the twenty-year time period has lapsed

by the time the product comes into fruition.144

Clearly today, the pharmaceutical industry is big business. One

would be hard pressed to find a scientist as altruistic as Dr. Salk. The

United States is home to thirty-seven percent of the global pharmaceu-

tical market with an estimated $286 billion in sales in 2008.145

Glob-

ally, the pharmaceutical industry is valued at $300 billion.146

Moreo-

ver, that number is expected to increase to $400 billion in the next

three years.147

A. Marketing, Research and Development

Pharmaceutical manufacturers spent an estimated $20.4 billion a

year on marketing in 2007.148

In 2011, the amount of money spent on

face-to-face marketing of prescription drugs to office and hospital

based physicians was approximately $15.7 billion dollars accounting

for more than half of the total marketing costs spent in the industry.149

Prescription drug samples accounted for $6.2 billion dollars while

direct consumer marketing accounted for $3.7 billion.150

Promotion of prescription medicine goes beyond marketing to phy-

sicians and patients. The pharmaceutical industry’s main trade group,

PhRMA, spent $22 million in 2007 on federal government lobby-

143. Amy C. Waltz, Closing the Deal: Making the Right Congressional Decision

about Patent Settlement Agreements, 5 Ind. Health L.Rev. 155, 158 (2008).

144. Id.

145. Katelyn J. Nernier, Obviating the Obvious? An appraisal of Pharmaceutical

Patents, 10 J. High Tech. L. 208. 208 (2010).

146. World Health Organization, Pharmaceutical Industry, http://www.who.int/

trade/ glossary/story073/en/index.html (accessed Nov. 8, 2012).

147. Id.

148. Pew Charitable Trusts, Pharmaceutical Industry Marketing: How much does

the pharmaceutical industry spend to market its drugs?, http://www.pewhealth.org/

reports-analysis/issue-briefs/pharmaceutical-industry-marketing-85899367994 (ac-

cessed Nov. 8, 2012). This estimate was obtained from Verispan, a marketing re-

search company that collects data from the industry.

149. Pew Charitable Trusts, Persuading the Prescribers: Pharmaceutical Industry

Marketing and its Influence on Physicians and Patients,

http://www.pewhealth.org/other-resource/persuading-the-prescribers-

pharmaceutical-industry-marketing-and-its-influence-on-physicians-and-patients-

85899439814 (accessed May 19, 2013).

150. Id.



ing.151

These lobbying efforts included the issues of price setting for

senior medications as well as the importing of drugs.152

Moreover,

individual pharmaceutical manufacturers spent $225 million on feder-

al government lobbying not to mention money spent by both individu-

al manufacturers and PhRMA on state government lobbying efforts.153

Aside from costs associated with marketing prescription drugs,

pharmaceutical manufacturers claimed to have spent an estimated

$802 million to create a new drug in 2003; some estimates now claim

that number has risen to between $1.3 and $1.7 billion.154

These estimates on research and development have been the subject

of debate and skepticism.155

Pharmaceutical companies claim the

high cost associated with research and development accounts for the

high cost of their products.156

However, given these manufacturers

are not required to release their financial information, it is not possible

for consumers to know the true costs associated with research and

development.157

For example, drug manufacturers routinely include

in the costs for research and development lost profits that would have

been made had that capital been invested elsewhere when the drug

fails to make it to market.158

Another very common industry practice

is to include the cost of research from which no drug is developed.159

However, by the time a new drug reaches Phase III trials, where two-

thirds of the costs of research and development are spent, the odds of

that drug coming to market are very high, approximately 3 in 5.160

151. Pew Prescription Project, Pharmaceutical Industry Marketing, http://www.

pwhealth.org/uploadedFiles/PHG/Supporting_Items/IB_FS_PPP_Pharmaceutical_In

dustry_Marketing.pdf (accessed Nov. 8, 2012).

152. Id.

153. Id.

154. Roger Collier, Drug Development Cost Estimates Hard to Swallow,

http://www.cmaj.ca/content/180/3/279.full (accessed Nov. 8, 2012).

155. According to Donald Light, professor of comparative health care at the Uni-

versity of Medicine and Dentistry of New Jersey, “these high estimates are all from

industry-supported studies done by industry-supported economists who, as far as I

can tell, compete to see who can come up with the higher number.” J Health Econ

2005; 24[5]: 1030-1033.

156. Collier, supra n. 154, at 279.

157. Id.

158. Id.

159. Id.

160. Id. In the first phase of a clinical trial, research is done on a small population

of volunteers to look for side effects and a safe dosage. In phase two, the focus



Most fledging drugs do not ever make it to the costly clinical trial

phase; instead they end after the early inexpensive trials.161

Such

numbers make it more difficult to justify a hardship on the manufac-

turer where these high costs are associated with high return.162

The argument has been that because research-based pharmaceutical

companies expend so much money on research and development of

new drugs, that without patent protection allowing them to recover

that expense, research and innovation into new drug discoveries

would be impossible.163

Yet, profits seem to show another story. In

2002, when the economy took a major hit, the pharmaceutical industry

showed profits greater than five times the median of all other Fortune

500 industries.164

In 2002, Fortune 500 drug companies spent only

14.1 percent of revenue on research and development while utilizing

seventeen percent of revenue as profit.165

Furthermore, drug compa-

nies often fail to publicize a phenomenon known as me-too drug for-

mulation where the manufacturer merely modifies one of its highly

profitable drugs slightly and markets the revised formulation.166

Be-

cause the drug had already been developed, the cost involved in

tweaking the compound is minimal, yet the new drug yields a maxi-

mum return.167

shifts to effectiveness and a larger population is tested to evaluate effectiveness and

safety. Phase three entails large groups of volunteers to monitor safety and effec-

tiveness. Finally, phase four studies are conducted once the drug has already been

marketed. At this point, information can be gathered about how the drug works

within different populations and also long-term side effects information can be ob-

tained. See U.S. National Library of Medicine, National Institutes of Health, What

are Clinical Trial Phases, http://www.nlm.nih.gov/services/ctphases.html (accessed

Nov. 8, 2012).

161. Collier, supra n. 154, at 279.

162. Critics contend that “[p]romoting a link between long odds and big costs . . .

makes high drug prices more palatable.” Id.

163. See Gregory J. Glover, M.D., J.D., Pharm. Research and Mfrs. of Am., Com-

petition in the Pharmaceutical Marketplace, Part II, Address Before the Federal

Trade Commission and the Department of Justice - Antitrust Division,

http://www.ftc.gov/opp/intellect/020319gregoryjglover.pdf (accessed May 19,

2013).

164. Public Citizen, 2002 Drug Industry Profits: Hefty Pharmaceutical Company

Margins Dwarf Other Industries, http://www.citizen.org/documents/Pharma_ Re-

port.pdf (accessed Nov. 8, 2012).

165. Id. at 5.

166. Id.

167. Id. (quoting Aravind Adiga, Pharmaceutical Stocks Are Supposed to be Sure

Things,”Money Magazine (April 1, 2003). “It was an addictive formula: Offer a



The balance between supporting innovation while allowing access

to lower cost drugs was the idea behind the Hatch-Waxman Act.168

The FTC has also recommended that Congress pass legislation to pro-

tect consumers from the delay in saving money with lower cost gener-

ic drugs.169

The decision in In re K Dur Antitrust, was aligned with

both of these goals.

This Third Circuit ruling made it harder for reverse payment

agreements to be made by holding that any payment from the brand

name manufacturer to the generic manufacturer was prima facie evi-

dence of unreasonable trade restraint, which can only be overcome by

a showing that the payment was not made in order to delay the entry

of the generic drug into the market or that the payment was made in

exchange for something fostering competition.170

Eliminating reverse agreements will make generic drugs available

to consumers more quickly. The popular argument that the high cost

of research and development is what drives the patent holders to

charge high prices does not make sense in light of the high profit mar-

gins patent-holding manufacturers continue to enjoy. Reverse settle-

ments agreements are merely a business arrangement allowing these

manufacturers to monopolize the market longer and gain more profits.

Due to the lucrative nature of the pharmaceutical industry, it is hard, if

not impossible, to justify allowing reverse payment agreements where

both the brand name and challenging generic manufacturer win at the

expense of the consumer. The decision in In re K-Dur will go a long

way to make it much more difficult for this practice to continue and

help to ensure the goal of low cost generic drugs intended by the

Hatch-Waxman Act continues.

simple variation on an existing medicine, turn it over to the marketing machine and

watch the money roll in. Indeed, marketing, as much as science, was responsible for

creating the blockbuster phenomenon).

168. Ashlee B. Mehl, The Hatch-Waxman Act and Market Exclusivity for Generic

Drug Manufactueres: An Entitlement or an Incentive? 81 Chi.-Kent L. Rev. 649,

650 (September 2006).

169. FTC Staff Study, Pay-for-Delay: How Drug Company Pay-Offs Cost Con-

sumers Billions 2, http://www.ftc.gov/os/2010/01/100112payfordelayrpt.pdf (Janu-

ary 2010).

170. In re K-Dur, 686 F.3d at 218.



CONCLUSION

The In re K Dur Antitrust Litigation case held that when deciding

whether a reverse settlement agreement is legal, the court should ap-

ply the rule of reason analysis. The rule of reason analysis held that a

payment from a brand name manufacturer to a generic manufacturer

who is challenging the validity of the patent is prima facie evidence of

an unreasonable restraint of trade. This presumption can only be

overcome by a showing that either the payment was made in exchange

for something other than to delay the generic entry into the market or

for something that would serve to encourage market competition.

Absent such a showing, the reverse agreement is illegal.

Keeping in line with the congressional intent of the Sherman Anti-

trust and Hatch Waxman Acts, this decision will no longer permit

brand name pharmaceutical manufacturers to keep their monopoly of

the market longer by paying off generic competitors that could other-

wise take a share of the profits. Eliminating such reverse payment

agreements will provide consumers with medication at a lower cost in

a shorter amount of time. Further, the brand name manufacturers’

argument that the high cost of drug development and design justifies

powerful patent protection of their products simply does not comport

when the cost of production versus profit margins are compared. The

court’s holding will preserves Congress’ intent to make drugs afforda-

ble for Americans more quickly.

Documents

THE “RULE OF REASON” PREFERRED TO “SCOPE …sites.law.duq.edu/blj/wp-content/uploads/2013/08/7-postol.pdfIn re K Dur Antitrust5 dealt with a putative class action suit brought