Legacy Schering-Plough's K-Dur® 20: A Surprising "Pay For Delay" Loss -- On Appeal

Well, it would seem that with real health care reform, comes a renewed vigor in the enforcement of the antitrust laws, as the same apply to payments made by the branded/innovator (beyond the life of the relevant innovator's patents) to keep generic competitors off the U.S. market-shelves. [My prior coverage of this K-Dur^® 20 case is under that link. Overnight, I've also updated the graphic for the story -- to make plain that the patented drug is simply a coated potassium chloride crystal, and that the '743 patent was issued nearly 23 years ago. Thus, it is fair to ask whether 23 years is "long enough" -- for a monopoly-term that is supposed to run no more than 17 years.]

This is surprisingly bad news for all of branded US pharma -- given the lower federal courts' prior nearly-unanimous deferential stance, in favor of the innovator/branded pharmaceutical manufacturers. No longer. I suspect this issue is now headed to the Supremes for a final word. After the Chief Justice's recent opinions -- I would not expect too much deference at the high court, as to the branded/innovators' stated reasons for signing such agreements.

Here is the Third Circuit's PDF file (all 43 pages of it!) of the just released opinion, and a bit of the "business end" of the new legal analysis:

. . . .After consideration of the arguments of counsel, the conflicting decisions in the other circuits, the Report of the Special Master, and our own reading, we cannot agree with those courts that apply the scope of the patent test. In our view, that test improperly restricts the application of antitrust law and is contrary to the policies underlying the Hatch-Waxman Act and a long line of Supreme Court precedent on patent litigation and competition.

First, we take issue with the scope of the patent test’s almost unrebuttable presumption of patent validity. This presumption assumes away the question being litigated in the underlying patent suit, enforcing a presumption that the patent holder would have prevailed. We can identify no significant support for such a policy. While persons challenging the validity of a patent in litigation bear the burden of defeating a presumption of validity, this presumption is intended merely as a procedural device and is not a substantive right of the patent holder. See Stratoflex, Inc. v. Aeroquip Corp., 713 F.2d 1530, 1534 (Fed. Cir. 1983) (“The presumption, like all legal presumptions, is a procedural device, not substantive law.”). Moreover, the effectively conclusive presumption that a patent holder is entitled to exclude competitors is particularly misguided with respect to agreements – like those here – where the underlying suit concerned patent infringement rather than patent validity: In infringement cases it is the patent holder who bears the burden of showing infringement. See Egyptian Goddess, Inc. v. Swisa, Inc., 543 F.3d 665, 679 (Fed. Cir. 2008).

Rather than adopt an unrebuttable presumption of patent validity, we believe courts must be mindful of the fact that “[a] patent, in the last analysis, simply represents a legal conclusion reached by the Patent Office.” Lear, Inc. v. Adkins, 395 U.S. 653, 670 (1969). Many patents issued by the PTO are later found to be invalid or not infringed, and a 2002 study conducted by the FTC concluded that, in Hatch-Waxman challenges made under paragraph IV, the generic challenger prevailed seventy-three percent of the time. . . .

These figures add force to the likelihood – conceded by the Tamoxifen majority – that reverse payments enable the holder of a patent that the holder knows is weak to buy its way out of both competition with the challenging competitor and possible invalidation of the patent. 466 F.3d at 211 (“The less sound the patent or the less clear the infringement, and therefore the less justified the monopoly enjoyed by the patent holder, the more a rule permitting settlement is likely to benefit the patent holder by allowing it to retain the patent.”).
Moreover, we question the assumption underlying the view of the Second Circuit and other courts that subsequent challenges by other generic manufacturers will suffice to eliminate weak patents preserved through a reverse payment to the initial challenger. Cf., e.g., id. at 211-12. We note that the initial generic challenger is necessarily the most motivated because, unlike all subsequent challengers, it stands to benefit from the 180-day exclusivity period of 21 U.S.C. § 355(j)(5)(B)(iv). Additionally, as the experience of at least one court in this Circuit confirms, the high profit margins of a monopolist drug manufacturer may enable it to pay off a whole series of challengers rather than suffer the possible loss of its patent through litigation. . . .

I must confess -- I honestly did not expect this outcome. It will now be interesting to seek whether cert. will be granted (the innovators are all but certain to seek it) -- and whether the Supremes will take the above approach. Do stay tuned, when we return next year -- to take a look at the 2013-2014 docket of the high court. [Do also go read Ed Silverman's fine piece on this topic.]