Holmes' "Path Of The Law" Emerges -- On "Pay For Delay" Agreements

These lower court decisions (summary by one of legacy Schering-Plough's own lawfirms -- Covington & Burling) are only binding inside the circuit in which they are decided, but little by little, various federal district trial courts are advancing what Justice Oliver Wendell Holmes, Jr. called, 113 years ago, the "path of the law". This time, in a Pennsylvania federal district court (a district in which New Merck has substantial operations), a holding that antitrust claims against Cephalon's pay for delay deals, may proceed to the discovery phase. This is decidedly bad news for any branded pharmaceutical makers in the district which have struck, or are contemplating aggressive "patent settlement" terms. That is the euphemism under which "pay for delay" travels, in these cases.

These are a consolidated set of related cases -- but the lead case is King Drug Co. of Florence, Inc., et al. v. Cephalon, Inc., et al. (Case No. 06-CV-1797, Dist Ct., E.D. PA). The plaintiffs in these cases are companies which, directly or indirectly, purchased Provigil^® from Cephalon for re-distribution, or ultimate sale, at allegedly artificially-inflated prices. The defendants in each of these cases are the parties that entered into four reverse settlement agreements: Cephalon, and the generics -- Barr Laboratories, Mylan Laboratories, two Teva entities and two Ranbaxy entities.

In any event, here is the full decision (as a 47 page PDF file) -- and a snippet from Covington & Burling's review:

. . . .[T]he court held that plaintiffs’ cases should proceed to discovery under the “scope of the patent” standard. According to the court, plaintiffs had alleged that the settlements exceeded the scope of Cephalon’s patent in four different ways:

1. the underlying litigation was a “sham” because Cephalon knew that its patent was invalid, unenforceable, and/or not infringed;

2. through operation of the Hatch-Waxman Act the settlements created a bottleneck preventing entry into the market by other generic companies;

3. the agreements were part of a larger antitrust conspiracy that allocated all sales of modafinil in the U.S. to Cephalon; and

4. the settlement agreements prohibit the sale of generic versions of modafinil beyond those at issue in the underlying patent litigation.

In permitting the case to proceed to discovery, the court concluded that if "a factual basis exists on any of these theories, Plaintiffs may be able to prevail under a scope of the patent test and move forward with their antitrust claims. . . . Consequently, plausible antitrust allegations have been pled. . . ."

I will keep you informed as this one progresses to trial. It should be interesting, and should help advance Justice Holmes' path. Branded manufacturers will increasingly have to thoughtfully consider the substantial costs of defending discovery -- involving, in many cases, tens of thousands of pages of documentary evidence -- on antitrust claims, should any purported patent settlement exceed the scope of the patents-in-issue (or if the patent is very weak, in the first instance).