In Re K-Dur Antitrust Litigation , 686 F.3d 197 ( 2012 )

PRECEDENTIAL
UNITED STATES COURT OF APPEALS
FOR THE THIRD CIRCUIT
_____________
No. 10-2077
_____________
In Re: K-DUR ANTITRUST LITIGATION
Louisiana Wholesale Drug Co., Inc.,
on behalf of itself and all others similarly situated,
Appellants
_____________
No. 10-2078
_____________
In Re: K-DUR ANTITRUST LITIGATION
CVS Pharmacy, Inc.; Rite Aid Corporation,
Appellants
_____________
No. 10-2079
_____________
In Re: K-DUR ANTITRUST LITIGATION
Walgreen Co., Eckerd Corporation, The Kroger Co.,
Safeway Inc., Albertson's Inc., Hy-Vee, Inc.,
and Maxi Drug, Inc.,
Appellants
_____________
No. 10-4571
_____________
In Re: K-DUR ANTITRUST LITIGATION
Merck & Co., Inc.;
Upsher-Smith Laboratories, Inc.,
Appellants
________
On Appeal from the United States District Court
for the District of New Jersey
(D.C. No. 2-01-cv-01652)
District Judge: Honorable Garrett E. Brown, Jr.
_______
Argued December 12, 2011
Before: SLOVITER, VANASKIE, Circuit Judges
and STENGEL *, District Judge
(Filed: July 16, 2012)
______
Daniel Berger
Daniel C. Simons
David Francis Sorensen (Argued)
Berger & Montague
Philadelphia, PA l9l03
Bruce E. Gerstein
Kimberly Hennings
Joseph Opper
Barry S. Taus
Garwin Gerstein & Fisher
New York, NY 10036
Peter S. Pearlman
Cohn, Lifland, Pearlman, Herrmann & Knopf
Saddle Brook, NJ 07663
*
Hon. Lawrence F. Stengel, United States District Court
for the Eastern District of Pennsylvania, sitting by
designation.
2
Attorneys for Appellants, No. 10-2077
Barry L. Refsin
Hangley, Aronchick, Segal, Pudlin & Schiller
Philadelphia, PA l9l03
Steve D. Shadowen (Argued)
Hangley, Aronchick, Segal, Pudlin & Schiller
Harrisburg, PA 17101
Attorneys for Appellants, Nos. 10-2078, 10-4571
Deborah S. Corbishley
Scott E. Perwin
Lauren C. Ravkind
Kenny Nachwalter
Miami, FL 33131
Attorneys for Appellants, Nos. 10-4571, 10-2079
Gage Andretta
William E. Goydan
Robert L. Tchack
Wolff & Samson
West Orange, NJ 07052
Jennifer K. Conrad
Steven W. Copley
A. Gregory Grimsal
Gordon, Arata, McCollam, Duplantis & Eagan
New Orleans, LA 70170
Jaime M. Crowe
Christopher M. Curran
White & Case
Washington, DC 20005
Ashley E. Bass
Thomas A. Isaacson
John W. Nields, Jr. (Argued)
Alan M. Wiseman
3
Covington & Burling
Washington, DC 20004
Mark A. Cunningham
David G. Radlauer
Jones Walker
New Orleans, LA 70170
Richard H. Gill
George W. Walker
Copeland Franco Screws & Gills
Montgomery, AL 36101
Richard Hernandez
William J. O’Shaughnessy
McCarter & English
Newark, NJ 07102
Charles A. Loughlin
Baker Botts
Washington, DC 20004
Attorneys for Appellees, Nos. 10-2077, 10-2078
Ellen Meriwether
Cafferty Faucher
Philadelphia, PA l9l03
Attorney for Amicus Appellant
American Antitrust Institute
Proposed Amicus Appellants, Nos. 10-2077, 10-2078
Adam R. Lawton
Jeffrey I. Weinberger
Munger, Tolles & Olson
Los Angeles, CA 90071
Attorneys for Amicus Appellee Pharmaceutical
Research and Manufacturers of America, No. 10-2077
Imad D. Abyad
4
John F. Daly
Federal Trade Commission
Washington, DC 20580
Attorneys for Amicus Appellant Federal Trade
Commission, No. 10-2077
Richard A. Samp
Washington Legal Foundation
Washington, DC 20036
Attorney for Amicus Appellee Washington Legal
Foundation, No. 10-2077
Werner L. Margard, III
Office of Attorney General
Columbus, OH 43266
Attorney for Amicus Appellants, No. 10-2077
Catherine G. O’Sullivan
United States Department of Justice
Appellate Section
Washington, DC 20530
David Seidman
United States Department of Justice
Antitrust Division
Washington, DC 20530
Malcolm L. Stewart (Argued)
United States Department of Justice
Office of Solicitor General
Washington, DC 20530
Attorneys for Amicus Appellant United States,
No. 10-2077
Donald L. Bell, II
National Association of Chain Drug Stores,
Alexandria, VA 22314
5
Attorney for Amicus Appellant Nat’l Ass’n Chain
Drug Stores, Inc., Nos. 10-2077, 10-2078
___________
OPINION OF THE COURT
____________
SLOVITER, Circuit Judge.
In this appeal, we consider the antitrust implications of
an agreement by a manufacturer of a generic drug that, in
return for a payment by the patent holder, agrees to drop its
challenge to the patent and refrain from entering the market
for a specified period of time.
A secondary issue concerns the certification by the
District Court of a class of antitrust plaintiffs. Specifically,
we must determine whether the antitrust injury allegedly
suffered by class members can be shown through common
proof, i.e. proof applicable to all plaintiffs, and whether there
are insurmountable conflicts preventing named plaintiffs from
adequately representing the members of the class.
These appeals arise out of the settlement of two patent
cases involving the drug K-Dur 20 (“K-Dur”), which is
manufactured by Schering-Plough Corporation (“Schering”).
Plaintiffs are Louisiana Wholesale Drug Company, Inc., on
behalf of a class of wholesalers and retailers who purchased
K-Dur directly from Schering and nine individual plaintiffs,
including CVS Pharmacy, Inc., Rite Aid Corporation, and
other pharmacies. Defendants are Schering and Upsher-
Smith Laboratories (“Upsher Smith”). 1
1
In appeals numbered 10-2077, 10-2078, and 10-2079,
Appellants challenge the District Court’s grant of summary
judgment on behalf of defendants, relying on their patents. In
No. 10-4571, defendants challenge the District Court’s
certification of a class of plaintiffs.
6
I. STATUTORY AND REGULATORY
FRAMEWORK
K-Dur is Schering’s brand-name sustained-release
potassium chloride supplement. 2 Sustained-release potassium
chloride is used to treat potassium deficiencies, including
those that arise as a side effect of the use of diuretic products
to treat high blood pressure.
Schering did not hold a patent for the potassium
chloride salt itself, as that compound is commonly known and
not patentable. Instead, Schering held a formulation patent on
the controlled release coating it applied to the potassium
chloride crystals. Schering identified patent number
4,863,743 (“the ‘743 patent”) as the patent that would be
infringed by the production of a generic version of K-Dur.
Schering assigned the ‘743 patent to its subsidiary Key
Pharmaceuticals, Inc. The ‘743 patent was set to expire on
September 5, 2006.
By statute, a pharmaceutical company must obtain
from the Food and Drug Administration (“FDA”) approval
before it may market a prescription drug. 21 U.S.C. § 355(a).
For a new drug, the approval process requires submission of a
New Drug Application (“NDA”), which includes exhaustive
information about the drug, including safety and efficacy
studies, the method of producing the drug, and any patents
issued on the drug’s composition or methods of use. Id. §
355(b)(1). The FDA publishes the patent information
submitted in NDAs in the “Approved Drug Products with
Therapeutic Equivalence Evaluations,” otherwise known as
the “Orange Book.” See FDA Electronic Orange Book,
http://www.fda.gov/cder/ob/.
In 1984, attempting to jumpstart generic competition
with name brand pharmaceuticals, Congress passed the Drug
2
After the facts at issue in this case, Merck & Co.
acquired Schering, the named defendant in these actions.
However, in keeping with the practice of the parties and
amici, the court will refer to Schering.
7
Price Competition and Patent Term Restoration Act,
commonly known as the Hatch-Waxman Act. Pub. L. No.
98-417, 98 Stat. 1585 (1984). The Hatch-Waxman Act
amended the Federal Food, Drug, and Cosmetic Act, 21
U.S.C. §§ 301-399, to permit a potential manufacturer of a
generic version of a patented drug to file an abbreviated
application for approval with the FDA. See 21 U.S.C. §
355(j). This short form application, known as an Abbreviated
New Drug Application (“ANDA”), may rely on the FDA’s
prior determinations of safety and efficacy made in
considering the application of the patented drug. Id. §
355(j)(2)(A).
When a generic manufacturer files an ANDA, it is also
required to file a certification that, “in the opinion of the
applicant and to the best of his knowledge,” the proposed
generic drug does not infringe any patent listed with the FDA
as covering the patented drug. Id. § 355(j)(2)(A)(vii). The
generic manufacturer can satisfy this requirement by
certifying one of the following four options with respect to
the patent for the listed drug: “(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 application is submitted.” Id. § 355(j)(2)(A)(vii).
The generic manufacturers at issue here, Upsher and ESI,
used the fourth of these certification options, the so-called
“paragraph IV certification.” Id. § 355(j)(2)(A)(vii)(IV).
When a would-be generic manufacturer submits a paragraph
IV certification, it must consult the Orange Book and provide
written notice to each listed patent owner impacted by the
ANDA. Id. § 355(j)(2)(B)(iii)(I). By statute, a paragraph IV
certification constitutes a technical act of patent infringement.
35 U.S.C. § 271(e)(2)(A).
Upon receiving notice of a paragraph IV certification
with respect to one of its pharmaceutical patents, the patent
holder may initiate an infringement suit based on the filing of
the paragraph IV certification alone within forty-five days
after the generic applicant files its ANDA and paragraph IV
8
certification. 21 U.S.C. § 355(j)(5)(B)(iii). Filing suit by the
patent holder within that window effects an automatic stay
that prevents the FDA from approving the generic drug until
the earlier of (1) thirty months have run or (2) the court
hearing the patent challenge finds that the patent is either
invalid or not infringed. Id. § 355(j)(5)(B)(iii)(I).
Congress explained that the purpose of the Hatch-
Waxman Act is “to make available more low cost generic
drugs.” H.R. Rep. No. 98-857(I), at 14-15, reprinted in 1984
U.S.C.C.A.N. 2647, 2647-48. In order to encourage generic
entry and challenges to drug patents, the Hatch-Waxman Act
rewards the first generic manufacturer who submits an
ANDA and a paragraph IV certification by providing it with a
180-day period during which the FDA will not approve
subsequent ANDA applications. 21 U.S.C. §
355(j)(5)(B)(iv). The 180-day exclusivity period is triggered
on the date on which the first ANDA applicant begins
commercial marketing of its drug. Id. Notably, the 180-day
exclusivity window is only available to the first filer of an
ANDA with a paragraph IV certification, meaning that even
if the first filer never becomes eligible to use its 180-day
exclusivity period because it settles, loses, or withdraws the
litigation, that potential benefit will not pass to subsequent
filers. 21 U.S.C. § 355(j)(5)(D)(iii). It has been suggested
that the first filer is usually the most motivated challenger to
the patent holder’s claimed intellectual property. See C. Scott
Hemphill, Paying for Delay: Pharmaceutical Patent
Settlement as a Regulatory Design Problem, 81 N.Y.U. L.
Rev. 1553, 1583 (2006) (noting “a sharp difference in
incentives . . . between [the first paragraph IV] filer and all
other generic firms”).
As explained further below, in the years after the
passage of Hatch-Waxman, some of the patent infringement
suits occurring under the Hatch-Waxman framework were
resolved through settlement agreements in which the patent
holder paid the would-be generic manufacturer to drop its
patent challenge and refrain from producing a generic drug
for a specified period. These agreements are known as
“reverse payment agreements” or “exclusion agreements.”
9
Concerned about the possible anticompetitive effects of
reverse payment agreements, see S. Rep. No. 107-167, at 4
(2002), Congress amended Hatch-Waxman as part of the
Medicare Prescription Drug, Improvement, and
Modernization Act of 2003. Those amendments require
branded and generic pharmaceutical companies who enter
into patent litigation settlements to file those settlement
agreements with the Federal Trade Commission (“FTC”) and
the Department of Justice (“DOJ”) for antitrust review. Pub.
L. No. 108-173, §§ 1111-1118, 117 Stat. 2066, 2461-64
(codified as amended at 21 U.S.C. § 355(j)).
II. FACTUAL AND PROCEDURAL
BACKGROUND
A. Approval of the ‘743 Patent
The patented invention claims a controlled-release
dispersible potassium chloride tablet. The ‘743 patent was
developed using a technique called “microencapsulation,” a
process in which small particles of a drug are coated to make
them disperse over time. The research supporting the ‘743
patent built on work that Schering had done for an earlier
patent for a controlled-release aspirin tablet, Patent No.
4,555,399 (“the ‘399 patent”). The application for what
became the ‘743 patent was initially rejected by the Patent
and Trademark Office (“PTO”) as obvious in light of the ‘399
patent and other prior art. In order to circumvent the prior art,
Schering amended its application for what became the ‘743
patent to clarify that the controlled release coating in the
invention contained ethylcellulose with a viscosity of greater
than 40 cp, 3 whereas the ‘399 patent called for the use of
ethylcellulose with a viscosity of 9-11 cp. Schering argued
that a coating containing ethylcellulose of greater than 40 cp
was not obvious under the prior art. After this amendment,
the PTO granted the ‘743 patent on September 5, 1989.
3
Centipoise, abbreviated “cp”, is a measure of viscosity.
McGraw-Hill Dictionary of Scientific and Technical Terms
354 (6th ed. 2003).
10
B. The Schering-Upsher Litigation and
Settlement
In August 1995, Upsher filed the first ANDA seeking
approval to produce a generic version of K-Dur to be called
Klor-Con M20. Upsher provided a paragraph IV certification
to Schering in November 1995, certifying that its generic
would not infringe Schering’s ‘743 patent. On December 15,
1995, within the forty-five-day window provided by Hatch-
Waxman, Schering sued Upsher in the District of New Jersey
for patent infringement, triggering the 30-month automatic
stay in FDA approval of Upsher’s generic.
Upsher’s defense against Schering’s patent
infringement suit was based on differences between the
chemical composition of the controlled release coating in its
generic product and that of the invention claimed in the ‘743
patent. Throughout the litigation, Upsher vigorously
defended against Schering’s infringement claims, at one point
telling the court that Schering’s claims of infringement “are
baseless and could not have been made in good faith.” App.
at 3610.
The parties began trying to settle the infringement case
at least as early as May 1997. During settlement negotiations,
Upsher requested both a cash payment and an early entry date
for its generic product. However, Schering expressed
concern about possible antitrust problems that might arise if it
made a reverse payment.
In the early morning of June 18, 1997, just hours before
the District Court was to rule on the pending cross motions for
summary judgment and begin, if necessary, a patent trial,
Upsher and Schering agreed to settle the case. The settlement
was memorialized in an eleven-page short-form agreement dated
June 17, 1997 (“the Schering-Upsher agreement”). That
agreement provided that, while Upsher did not concede the
validity, infringement, or enforceability of the ‘743 patent, it
would refrain from marketing its generic potassium chloride
supplement or any similar product until September 1, 2001, at
which point it would receive a non-royalty non-exclusive license
11
under the ‘743 patent to make and sell a generic form of Klor-
Con. Additionally, Upsher granted Schering licenses to make
and sell several pharmaceutical products Upsher had developed,
including Niacor-SR, a sustained-release niacin product used to
treat high cholesterol. In return, Schering promised to pay
Upsher sixty million dollars ($60,000,000) over three years, plus
additional smaller sums depending upon its sales of Niacor-SR
in defined markets. While the parties to this litigation dispute
whether the payment was solely for the licensing of Upsher
products or instead formed part of the consideration for
dropping the patent action, the agreement lists Upsher’s
promises to dismiss the patent infringement action and not to
market any sustained-release microencapsulated potassium
chloride tablet until September 1, 2001, as part of the
consideration for the payment.
The settlement agreement and the acquisition of
licenses from Upsher were ratified by Schering’s board of
directors on June 24, 1997. Subsequent to the settlement,
Upsher and Schering abandoned plans to make and market
Niacor-SR.
In this action, the parties dispute the facts related to the
Niacor-SR license. Plaintiffs contend that the license was a
sham and that the $60 million paid as royalties for Niacor-SR
was actually compensation for Upsher’s agreement to delay
the entry of its generic extended-release potassium tablet. On
the other hand, defendants contend that Schering’s board
valued the license deal separately and that $60 million was its
good faith valuation of the licenses at the time.
C. The Schering-ESI Litigation and
Settlement
In December 1995, ESI Lederle 4 (“ESI”) filed an
ANDA seeking FDA approval to make and sell a generic
4
ESI is the generic division of American Home Products,
Inc., which changed its name to Wyeth in 2002. Melody
Peterson, American Home Is Changing Name to Wyeth, New
York Times, Mar. 11, 2002. Wyeth was subsequently
12
version of K-Dur along with a paragraph IV certification
stating that its proposed generic did not infringe the ‘743
patent. Within the forty-five-day period provided by the
Hatch-Waxman Act, Schering sued ESI for patent
infringement in the Eastern District of Pennsylvania. ESI
defended on the ground that, unlike K-Dur, its generic
equivalent did not employ a “coating material with two
different ingredients” as specified by the ‘743 patent, but
rather was made by a “different technology which produces a
multi-layered coating with each layer comprised of a separate
material having only a single ingredient.” App. at 1696-97.
In the fall of 1996, Schering and ESI agreed to
participate in court-supervised mediation before a magistrate
judge. The settlement agreement the parties eventually
reached (“the Schering-ESI agreement”) called for Schering
to grant ESI a royalty-free license under the ‘743 patent
beginning on January 1, 2004. In exchange, Schering would
pay ESI $5 million up front and a varying sum depending on
when ESI’s ANDA was approved by the FDA. Specifically,
Schering agreed to pay ESI an amount ranging from a
maximum of $10 million if ESI’s ANDA was approved
before July 1999 down to a minimum of $625,000 if the
ANDA was not approved until 2002. As part of the
settlement, ESI also represented that it was not developing
and had no plans to develop any other potassium chloride
product.
The FDA approved ESI’s generic K-Dur product in
May 1999, and Schering paid ESI the additional $10 million
as required under the settlement agreement.
D. The FTC Action
acquired by Pfizer, Inc. in 2009. Pfizer, “Wyeth
Transaction,” http://www.pfizer.com/investors/
shareholder_services/wyeth_transaction.jsp (last visited May
8, 2012). Plaintiffs settled their claims against ESI’s
corporate parent Wyeth in January 2005.
13
In March 2001, the FTC filed a complaint against
Schering, Upsher, and ESI alleging that Schering’s
settlements with Upsher and ESI unreasonably restrained
commerce in violation of Section 5 of the Federal Trade
Commission Act, 15 U.S.C. § 45. Specifically, the FTC
alleged that the settlement payments from Schering to Upsher
and ESI constituted reverse payments intended to delay
generic entry and improperly preserve Schering’s monopoly.
In June 2002, after a lengthy trial, the Administrative
Law Judge (“ALJ”) issued an initial decision dismissing the
FTC’s complaint and finding that neither agreement violated
Section 5 of the FTC Act. In re Schering-Plough Corp.,
Initial Decision, 136 F.T.C. 1092, 1263 (2002). The ALJ
found that there was no reverse payment in the Schering-
Upsher agreement because the licensing deal included in that
agreement was separately valued and was not a payment to
Upsher to delay generic entry. Id. at 1243. The ALJ also
found that the Schering-ESI agreement was not an attempt to
unlawfully preserve Schering’s monopoly power in the
market. Id. at 1236, 1262-63.
In December 2003, the FTC unanimously reversed the
ALJ’s ruling, finding that there was a “direct nexus between
Schering’s payment and Upsher’s agreement to delay its
competitive entry” and that this agreement “unreasonably
restrain[ed] commerce.” In re Schering-Plough Corp., Final
Order, 136 F.T.C. 956, 1052 (2003). The FTC likewise found
that the ESI settlement violated antitrust law, noting that
Schering had not attempted to rebut the natural presumption
that the payment to ESI was for delay in generic entry, except
to argue unpersuasively that the parties felt judicial pressure
to settle. Id. at 1056-57. In making these determinations, the
FTC found that it was “neither necessary nor helpful to delve
into the merits of the [underlying patent disputes].” Id. at
1055. Rather, the FTC determined that, where a name brand
pharmaceutical maker pays a generic manufacturer as part of
a settlement, “[a]bsent proof of other offsetting consideration,
it is logical to conclude that the quid pro quo for the payment
was an agreement by the generic to defer entry beyond the
date that represents an otherwise reasonable litigation
14
compromise.” Id. at 988. In applying the rule of reason, the
FTC concluded that the possible existence of a reverse
payment raises a red flag and can give rise to a prima facie
case that an agreement is anticompetitive. Id. at 991, 1000-
01. The FTC concluded that the reverse payment at issue was
illegal because the settling parties could show neither (1) that
the payment was for something other than delay of generic
entry nor (2) that the payment had pro-competitive effects.
Id. at 988-89, 1061.
Schering appealed the FTC’s ruling to the Eleventh
Circuit, which reversed in Schering-Plough Corp. v. FTC,
402 F.3d 1056 (11th Cir. 2005). The Eleventh Circuit’s
ruling in Schering-Plough is discussed in Section III(C) infra.
E. The Instant Litigation
Separate from the FTC’s challenge, various private
parties filed antitrust suits attacking the settlements. Those
suits, the matters giving rise to this appeal, were
consolidated in the District of New Jersey by the Judicial
Panel on Multidistrict Litigation. In 2006, by consent of the
parties, the District Court appointed Stephen Orlofsky as
Special Master with responsibility to handle all motions,
including motions for class certification and summary
judgment. 5
5
Because there was no objection to the appointment of a
Special Master, we have no occasion to address the use of
Special Master to prepare Reports and Recommendations on
summary judgment motions. See In re Bituminous Coal
Operators’ Ass’n, Inc., 949 F.2d 1165, 1168 (D.C. Cir. 1991)
(“Rule 53 of the Federal Rules of Civil Procedure authorizes
the appointment of special masters to assist, not to replace,
the adjudicator, whether judge or jury, constitutionally
indicated for federal court litigation.”) (emphasis in original)
(citing La Buy v. Howes Leather Co., Inc., 352 U.S. 249, 256
(1957)).
15
On April 14, 2008, the Special Master certified a class
of plaintiffs consisting of forty-four wholesalers and retailers
who purchased K-Dur directly from Schering. The District
Court adopted that decision on December 30, 2008. 6
In February 2009, the Special Master issued a Report
and Recommendation granting defendants’ motions for
summary judgment and denying plaintiffs’ motions for partial
summary judgment. In his Report and Recommendation, the
Special Master applied a presumption that Schering’s ‘743
patent was valid and that it gave Schering the right to exclude
infringing products until the end of its term, including
through reverse payment settlements. Under this analysis, the
settlements in this case would only be subject to antitrust
scrutiny if (1) they exceeded the scope of the ‘743 patent or
(2) the underlying patent infringement suits were objectively
baseless. The Special Master determined that neither of these
exceptions applied. The District Court subsequently adopted
the Report and Recommendation in its entirety.
F. Economic Background and the History
of Reverse Payment Settlements
Reverse payment settlements appear to be unique to
the Hatch-Waxman context, and the FTC has made them a
top enforcement priority in recent years. A 2010 analysis by
the FTC found that reverse payment settlements cost
consumers $3.5 billion annually. FTC, Pay-for-Delay: How
Drug Company Pay-Offs Cost Consumers Billions 2 (2010),
available at http://www.ftc.gov/os/2010/01/100112
payfordelayrpt.pdf. The FTC estimates that about one year
after market entry an average generic pharmaceutical product
takes over ninety percent of the patent holder’s unit sales and
sells for fifteen percent of the price of the name brand
product. Id. at 8. This price differential means that
consumers, rather than generic producers, are typically the
biggest beneficiaries of generic entry.
6
The class certification decision is discussed in Section
IV infra.
16
III. THE ANTITRUST ISSUE (Appeals Nos.
10-2077, 10-2078, 10-2079)
A. Jurisdiction and Standard of Review
The District Court had jurisdiction pursuant to 15
U.S.C. § 15(a) and 28 U.S.C. §§ 1331 and 1337. This court
has jurisdiction over the antitrust appeals pursuant to 28
U.S.C. § 1291.
This court exercises plenary review of the District
Court’s grant of summary judgment, applying the same
summary judgment standard that guides the District Court.
Eichenlaub v. Twp. of Indiana, 385 F.3d 274, 279 (3d Cir.
2004).
B. General Antitrust Standard
The Sherman Act provides, in part, that “[e]very
contract, combination in the form of trust or otherwise, or
conspiracy, in restraint of trade or commerce among the
several States, or with foreign nations, is declared to be
illegal.” 15 U.S.C. § 1. Under a literal reading, this provision
would make illegal every agreement in restraint of trade. See
Arizona v. Maricopa Cnty. Med. Soc’y, 457 U.S. 332, 342
(1982). However, it has not been so interpreted. Rather the
Supreme Court has long construed it to prohibit only
unreasonable restraints. See State Oil Co. v. Khan, 522 U.S.
3, 10 (1997). Whether a restraint qualifies as unreasonable
and therefore conflicts with the statute is normally evaluated
under the “rule of reason.” Id. Applying this approach, “the
finder of fact must decide whether the questioned practice
imposes an unreasonable restraint on competition, taking into
account a variety of factors, including specific information
about the relevant business, its condition before and after the
restraint was imposed, and the restraint’s history, nature, and
effect.” Id. This inquiry has been divided into three parts.
First, the plaintiff must show that the challenged conduct has
produced anti-competitive effects within the market. United
States v. Brown Univ., 5 F.3d 658, 668 (3d Cir. 1993). If the
plaintiff meets the initial burden, “the burden shifts to the
17
defendant to show that the challenged conduct promotes a
sufficiently pro-competitive objective.” Id. at 669. Finally,
the plaintiff can rebut the defendant’s purported pro-
competitive justification by showing that the restraint is not
reasonably necessary to achieve the pro-competitive
objective. Id.Courts have recognized, however, that “[s]ome types
of restraints . . . have such predictable and pernicious
anticompetitive effect, and such limited potential for
pro-competitive benefit, that they [should be] deemed
unlawful per se.” State Oil Co., 522 U.S. at 10. Examples of
agreements that have been held unlawful pursuant to the per
se rule include horizontal price fixing, output limitations,
market allocation, and group boycotts. See Copperweld
Corp. v. Independence Tube Corp., 467 U.S. 752, 768 (1984);
N. Pac. Ry. v. United States, 356 U.S. 1, 5 (1958). The per se
rule is applied where a “practice facially appears to be one
that would always or almost always tend to restrict
competition or decrease output.” Broad. Music, Inc. v. CBS,
Inc., 441 U.S. 1, 19-20 (1979).
In some situations, courts apply an antitrust analysis
that falls between the full rule of reason inquiry on the one
hand and the rigid per se approach on the other. This so-
called “quick look” or “truncated rule of reason” analysis
applies where the plaintiff has shown that the defendant has
engaged in practices similar to those subject to per se
treatment. See Brown Univ., 5 F.3d at 669. Having so
shown, plaintiff is not required to make a full showing of
anti-competitive effects within the market; rather defendant
has the burden of demonstrating pro-competitive
justifications. Id.C. Precedent from Other Circuits
Neither this court nor the Supreme Court has yet
weighed in on the legality of reverse payment settlements.
However, five other circuits have addressed the question.
Two of those courts – the first two to consider the question –
concluded that such agreements should be subject to strict
18
antitrust scrutiny, at least where the settling parties attempted
to manipulate the 180-day exclusivity period to block all
potential generic competition. The three courts to address the
question of reverse payments more recently have reached a
contrary result, ruling that such agreements are permissible so
long as they do not exceed the potential exclusionary scope of
the patent.
1. D.C. Circuit – Andrx Pharms., Inc. v.
Biovail Corp. Int’l, 256 F.3d 799(D.C. Cir. 2001)
The D.C. Circuit considered a reverse payment in
Andrx Pharmaceuticals, Inc. v. Biovail Corp. International,
256 F.3d 799 (D.C. Cir. 2001), cert. denied, 535 U.S. 931(2002). Unlike the instant case, that case did not involve a
settlement resolving patent litigation. Rather, while allowing
the patent litigation to continue, the name brand manufacturer
agreed to compensate the would-be generic producer to delay
marketing a generic product.
In September 1995, Andrx Pharmaceuticals (“Andrx”)
filed an ANDA seeking to manufacture and sell a generic
form of Cardizem CD, a heart drug for which Hoechst Marion
Russell, Inc. (“HMRI”) held the patent. Id. at 803. Andrx
filed a paragraph IV certification and was timely sued for
patent infringement by HMRI. Id. The filing of the patent
infringement suit triggered the thirty-month waiting period
during which the FDA could not give final approval to Andrx
or any subsequent ANDA applicants seeking to make a
generic version of Cardizem CD. Id. (citing 21 U.S.C.
§ 355(j)(5)(B)(iii)). In June 1997, a second generic
manufacturer, Biovail Corp. International (“Biovail”), filed an
ANDA and a paragraph IV certification to produce generic
Cardizem CD. Shortly thereafter, the FDA issued a tentative
approval of Andrx’s ANDA. Id.Soon after the tentative approval was issued, HMRI
and Andrx entered into an agreement pursuant to which
HMRI would pay Andrx $40 million per year beginning on
the date that Andrx received final approval from the FDA and
19
ending on the date that Andrx either began selling generic
Cardizem CD or was adjudged liable for patent infringement
in the pending suit. Id. The apparent purpose of this
agreement was to create a bottleneck by delaying the
triggering of Andrx’s 180-day period of exclusivity, and
thereby delaying generic entry not only by Andrx but also by
any other potential generic manufacturer. Id. at 804.
The D.C. Circuit reversed the district court’s dismissal
with prejudice of Biovail’s antitrust claims, holding that the
agreement between HMRI and Andrx could “reasonably be
viewed as an attempt to allocate market share and preserve
monopolistic conditions.” Id. at 811. The D.C. Circuit
treated the payment from HMRI to Andrx as prima facie
evidence of an illegal agreement not to compete, noting that
“Andrx’s argument that any rational actor would wait for
resolution of the patent infringement suit [before triggering
the 180-day exclusivity period] is belied by the quid of
HRMI’s quo.” Id. at 813.
2. Sixth Circuit – In re Cardizem CD
Antitrust Litig., 332 F.3d 896 (6th
Cir. 2003)
The Sixth Circuit’s decision of In re Cardizem CD
Antitrust Litigation concerned the same agreement considered
by the D.C. Circuit in Andrx. 332 F.3d 896 (6th Cir. 2003),
cert. denied, 543 U.S. 939 (2004). The Sixth Circuit case was
brought by direct and indirect purchasers of Cardizem CD
who alleged that they suffered antitrust harm as a result of
Andrx’s agreement with HRMI to delay market entry. Id. at
903-04. The Sixth Circuit held that the Andrx-HRMI
agreement was “a horizontal agreement to eliminate
competition in the market for Cardizem CD throughout the
entire United States, a classic example of a per se illegal
restraint of trade.” Id. at 908.
While both Cardizem and Andrx concerned an
agreement that caused a bottleneck by preventing other
generic manufactures from entering the market by delaying
the triggering of the first filer’s 180-day exclusivity period,
20
much of the Sixth Circuit’s reasoning in Cardizem is equally
applicable to cases, like the instant one, that do not involve
bottlenecking. Specifically, the Sixth Circuit emphasized its
concern that, even setting aside the bar to subsequent generic
applicants, HMRI had paid Andrx not to enter the market
itself, stating, “it is one thing to take advantage of a monopoly
that naturally arises from a patent, but another thing
altogether to bolster the patent’s effectiveness in inhibiting
competitors by paying the only potential competitor $40
million per year to stay out of the market.” Id. at 908.
3. Eleventh Circuit – Valley Drug Co. v.
Geneva Pharms., Inc., 344 F.3d 1294(11th Cir. 2003) and Schering-Plough
Corp. v. FTC, 402 F.3d 1056 (11th
Cir. 2005)
The Eleventh Circuit has also considered the question
of reverse payments settlements in three significant cases.
The first of these, Valley Drug Co. v. Geneva
Pharmaceuticals, Inc., 344 F.3d 1294 (11th Cir. 2003), cert.
denied, 543 U.S. 939 (2004), concerned two agreements
arising out of cases where a name brand drug manufacturer
sued generic manufacturers for patent infringement and the
generic manufacturers defended on the ground of patent
invalidity. 7 Id. at 1299-301. In the two agreements at issue,
the name brand manufacturer agreed to pay the generic
manufacturer substantial sums to refrain from entering the
market until the end of the name brand manufacturer’s patent
term. Id. at 1300. The patent at issue was subsequently
declared invalid in another case. Id. at 1306-07. The district
court granted summary judgment to antitrust plaintiffs,
holding that the settlements were per se violations of the
Sherman Act. Id. at 1301. The Eleventh Circuit reversed on
the ground that the name brand manufacturer held a patent
that gave it the right to exclude competitors. Id. at 1306. In
7
One of these agreements was a final settlement of certain
claims, the other was structured, like the agreements in Andrx
and Cardizem, to take effect even as the litigation continued.
See Valley Drug, 344 F.3d at 1300.
21
so ruling, the court emphasized the fact that the name brand
manufacturer might have prevailed in the underlying patent
litigation, id. at 1309, and highlighted policy considerations
favoring the settlement of patent litigation, id. at 1308 n.20.
The court applied neither a per se nor rule of reason analysis
to the agreements as a whole; rather, it directed the district
court to first determine whether any part of the agreement
went beyond the protections afforded by the name brand
manufacturer’s patent and, if so, to apply traditional antitrust
scrutiny only to those portions of the agreement. Id. at 1311-
1312.
A subsequent Eleventh Circuit case, Schering-Plough
Corp. v. FTC, arose out of the same settlement agreement as
the instant appeal. 8 402 F.3d 1056 (11th Cir. 2005), cert.
denied, 548 U.S. 919 (2006). After the FTC found that both
agreements violated antitrust laws, the defendants appealed to
the Eleventh Circuit. Applying the test articulated in Valley
Drug, the Eleventh Circuit set aside the ruling of the FTC. Id.
at 1065-66, 1076. The court rejected the FTC’s conclusion
that Schering’s $60 million payment to Upsher was for
something other than the licenses it obtained, finding by
“overwhelming evidence” that the payment was only for the
licenses. Id. 1069-71. As such, the court found that there
was no reverse payment from Schering to Upsher and thus
necessarily no antitrust violation in that agreement. Id. With
respect to the ESI settlement, the court acknowledged the
8
Defendants argue in passing that this court should begin
its analysis in this case with a strong presumption in favor of
following the Eleventh Circuit’s decision in Schering-Plough.
However, none of the cases cited by defendants employs such
a presumption; rather, they stand for the unsurprising
proposition that this court will follow the decisions of its
sister courts where it finds them persuasive. See, e.g.,
Ramadan v. Chase Manhattan Corp., 229 F.3d 194, 197-203
(3d Cir. 2000) (following the rulings of other courts of appeal
on similar facts but conducting an independent analysis). As
explained below, we do not find the Eleventh Circuit’s
decision in Schering-Plough persuasive, and thus decline to
follow it.
22
presence of a reverse payment but concluded that the payment
was acceptable in light of judicial policy favoring settlements
and the court’s finding that the settlement terms “‘reflect[ed]
a reasonable implementation’ of the protections afforded by
patent law.” Id. at 1072 (quoting Valley Drug, 344 F.3d at
1312). 9
Plaintiffs construe Valley Drug and Schering-Plough
as requiring courts to conduct an ex post evaluation of the
strength of the underlying patent before determining whether
the patent shields an agreement from antitrust scrutiny.
However, following oral argument in this case, the Eleventh
Circuit explicitly rejected that interpretation of its prior
holdings. In FTC v. Watson Pharmaceuticals, Inc., the
Eleventh Circuit clarified that its prior opinions did not call
for an evaluation of the strength of the patent but rather only a
determination whether, absent sham litigation or fraud in
obtaining the patent, the settlement agreement exceeded the
scope of the patent. FTC v. Watson Pharms, Inc., No. 10-
12729, 2012 WL 1427789, at *11 n.8, *12 (11th Cir. Apr. 25,
2012). Thus the standard applied by the Eleventh Circuit is
identical to the scope of the patent test applied by the Second
Circuit to which we now turn.
4. Second Circuit – In re Tamoxifen
Citrate Antitrust Litig., 466 F.3d 187(2d Cir. 2006)
The Second Circuit’s decision of In re Tamoxifen
Citrate Antitrust Litigation arose out of an agreement settling
a patent infringement suit over the drug tamoxifen, then the
most widely prescribed drug for the treatment of breast
cancer. 466 F.3d 187, 190 (2d Cir. 2006), cert. denied, 551
U.S. 1144 (2007). That settlement was reached while the
patent case was on appeal after the district court had ruled the
9
The Eleventh Circuit subsequently applied, without
further significant explication, the scope of the patent test
announced in Valley Drug and Schering-Plough in another
case, Andrx Pharmaceuticals, Inc. v. Elan Corporation, PLC,
421 F.3d 1227 (11th Cir. 2005).
23
patent invalid. Id. The settlement called for the name brand
manufacturer to grant the generic manufacturer a license to
sell an unbranded version of tamoxifen and make a reverse
payment of $21 million to the generic manufacturer. The
settlement was contingent on obtaining a vacatur of the
district court’s judgment holding the patent to be invalid,
which was subsequently obtained. Id.Affirming the district court’s dismissal of antitrust
plaintiffs’ claims, the Second Circuit applied a presumption
of patent validity and held that “there is no injury to the
market cognizable under existing antitrust law, as long as
competition is restrained only within the scope of the patent.”
Id. at 213 (internal citations and quotation marks omitted).
The only exceptions to this rule, the court held, occur where
there is evidence that the patent was procured by fraud or that
the enforcement suit was objectively baseless. Id. This test is
commonly referred to as the “scope of the patent test” or the
“Tamoxifen test.” The Second Circuit conceded that there
was a potentially troubling result of such a rule in that “[t]he
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.” Id. at 211. The court determined, however, that this
risk was counterbalanced by the judicial preference for
settlement. Id.
In reaching this conclusion, the Second Circuit
concluded that “the Hatch-Waxman Act created an
environment that encourages [reverse payments]” because,
unlike traditional infringement suits where the patent holder
can negotiate by agreeing to forego the infringement damages
it expects to recover, there usually are no infringement
damages in Hatch-Waxman suits. Id. at 206. The Second
Circuit thus reasoned that the “reverse payments” common in
Hatch-Waxman suits are less troubling because they take the
place of infringement damages that the patent holder might
have otherwise waived in order to reach a settlement. Id.
24
Judge Pooler dissented from the decision in
Tamoxifen, contending that the scope of the patent rule
applied by the majority “is not soundly grounded in Supreme
Court precedent and is insufficiently protective of the
consumer interests safeguarded by the Hatch-Waxman Act
and the antitrust laws.” Id. at 224 (Pooler, J., dissenting).
Judge Pooler argued, inter alia, that judicial reevaluation of
patent validity is a public good that reverse payment
settlements undercut, id. at 225-26, and suggested that the
proper antitrust standard is one of reasonableness considering
all the circumstances affecting a restrictive agreement
including (1) the strength of the patent as it appeared at the
time of settlement, (2) the amount of the reverse payment, (3)
the amount the generic manufacturer would have made during
its 180-day exclusivity period, and (4) any ancillary anti-
competitive effects of the agreement. Id. at 228.
In a subsequent reverse payment case, Arkansas
Carpenters Health & Welfare Fund v. Bayer AG, the Second
Circuit applied the Tamoxifen standard and rejected an
antitrust challenge to a Hatch-Waxman settlement involving a
reverse payment. 604 F.3d 98 (2d Cir. 2010), cert. denied,
131 S. Ct. 1606 (2011). However, the judges on the Arkansas
Carpenters panel made clear that they thought that Tamoxifen
was wrongly decided and invited appellants to petition for
rehearing en banc. Id. at 108-10. Among other things, the
Arkansas Carpenters court noted its concern about evidence
suggesting that the number of reverse payment settlements
had increased dramatically in the wake of the Tamoxifen
decision. Id. at 109. Rehearing en banc was subsequently
denied over a dissent from Judge Pooler. Ark. Carpenters
Health & Welfare Fund v. Bayer AG, 625 F.3d 779 (2d Cir.
2010).
5. Federal Circuit – In re Ciprofloxacin
Hydrochloride Antitrust Litig., 544
F.3d 1323 (Fed. Cir. 2008)
In In re Ciprofloxacin Hydrochloride Antitrust
Litigation the Federal Circuit considered a case related to
those confronted by the Second Circuit in Arkansas
25
Carpenters. 544 F.3d 1323 (Fed. Cir. 2008), cert. denied,
129 S. Ct. 2828 (2009). 10 The Federal Circuit applied the
scope of the patent test explicated in Tamoxifen and other
cases, stating, “[t]he essence of the inquiry is whether the
agreements restrict competition beyond the exclusionary zone
of the patent.” Id. at 1336. The court further “agree[d] with
the Second and Eleventh Circuits . . . that, in the absence of
evidence of fraud before the PTO or sham litigation, the court
need not consider the validity of the patent in the antitrust
analysis of a settlement agreement involving a reverse
payment.” Id.D. Analysis
While the first two courts of appeal to address the
issue of reverse payments subjected those agreements to
antitrust scrutiny, later courts have gravitated toward the
scope of the patent test under which 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. The scope of the patent test
was applied by the Special Master in this case and has been
applied by at least one other district court in this circuit. See
King Drug Co. of Florence, Inc. v. Cephalon, Inc., 702 F.
Supp. 2d 514, 528-29, 533 (E.D. Pa. 2010) (applying scope of
the patent test but denying defendants’ motion to dismiss
where plaintiffs pleaded facts supporting their claim that the
underlying patent suit was objectively baseless). As a
practical matter, the scope of the patent test does not subject
reverse payment agreements to any antitrust scrutiny. As the
antitrust defendants concede, no court applying the scope of
the patent test has ever permitted a reverse payment antitrust
case to go to trial.
10
That case was severed by the Second Circuit and
transferred to the Federal Circuit because it involved a claim
arising out of patent law. See Order, No. 05-2863 (2d Cir.
Nov. 7, 2007).
26
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. See
FTC, Generic Drug Entry Prior to Patent Expiration 16
(2002), available at http://www.ftc.gov/os/2002/07/
27
genericdrugstudy.pdf; Kimberly A. Moore, Judges, Juries,
and Patent Cases – An Empirical Peek Inside the Black Box,
99 Mich. L. Rev. 365, 385 (2000) (noting that between 1983
and 1999 the alleged infringer prevailed in forty-two percent
of patent cases that reached trial). 11 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
11
The Pharmaceutical Research and Manufacturers of
America points to a more recent study concluding that, in the
years from 2000 to 2009, generics prevailed in slightly less
than half of their challenges. RBC Capital Mkts.,
Pharmaceuticals: Analyzing Litigation Success Rates 4
(2010), available at http://www. amlawdaily.typepad.
com/pharmareport.pdf. Even if the industry’s own figures are
accepted, they show that a substantial fraction of Hatch-
Waxman patent challenges succeed on the merits. Moreover,
the study cited by the industry further states that “when you
take into account patent settlements and cases that were
dropped, the success rate for generics jumps to 76%,
substantially in favor of challenging patents.” Id.28
possible loss of its patent through litigation. See King Drug
Co. of Florence, Inc., 702 F. Supp. 2d at 521-22 (drug
manufacturer settled infringement suits by four generic firms,
which agreed to delay market entry “in exchange for
significant payments . . . for various licensing agreements,
supply agreements and research and development deals”).
This practical analysis is supported by a long line of
Supreme Court cases recognizing that valid patents are a
limited exception to a general rule of the free exploitation of
ideas. It follows that the public interest supports judicial
testing and elimination of weak patents. See Cardinal Chem.
Co. v. Morton Int’l, Inc., 508 U.S. 83, 100-01 (1993)
(explaining the “importance to the public at large of resolving
questions of patent validity” and noting the danger of
“grant[ing] monopoly privileges to the holders of invalid
patents”); Bonito Boats, Inc. v. Thundercraft Boats, Inc., 489
U.S. 141, 146 (1989) (noting that the patent laws embody “a
careful balance between the need to promote innovation and
the recognition that imitation and refinement through
imitation are both necessary to invention itself and the very
lifeblood of a competitive economy”); United States v.
Masonite Corp., 316 U.S. 265, 277 (1942) (a patent “affords
no immunity for a monopoly not fairly or plainly within the
grant”); id. at 280 (patents are to be “strictly construed”
because they are “privileges restrictive of a free economy”);
Pope Mfg. Co. v. Gormully, 144 U.S. 224, 234 (1892) (“It is
as important to the public that competition should not be
repressed by worthless patents, as that the patentee of a really
valuable invention should be protected in his monopoly.”).
That reasoning underlies the decision of the Supreme
Court in Edward Katzinger Co. v Chicago Metallic
Manufacturing Co., where the Court considered whether a
patent licensor could be contractually estopped from
challenging the validity of the patent under a licensing
agreement that also contained a price fixing term. 329 U.S.
394 (1947). The Court reasoned that if the patent was invalid,
the price fixing provision would violate federal antitrust law
and that, as such, the licensor could not be estopped from
challenging the patent. Id. at 399, 401-02. In reaching this
29
conclusion the Court emphasized “the broad public interest in
freeing our competitive economy from the trade restraints
which might be imposed by price-fixing agreements
stemming from narrow or invalid patents.” Id. at 400 (citing
Sola Elec. Co. v. Jefferson Elec. Co., 317 U.S. 173, 177
(1942)). The Court additionally stated: “It is the public
interest which is dominant in the patent system and . . . the
right to challenge [a patent] is not only a private right to the
individual, but it is founded on public policy which is
promoted by his making the defence, and contravened by his
refusal to make it.” Id. at 401 (internal citations and
quotation marks omitted).
This logic is persuasive with respect to the situation at
bar because reverse payments permit the sharing of monopoly
rents between would-be competitors without any assurance
that the underlying patent is valid. See also United States v.
Studiengesellschaft Kohle, m.b.H., 670 F.2d 1122, 1136 (D.C.
Cir. 1981) (suggesting an agreement might be anticompetitive
if it “give[s] potential competitors incentives to remain in
cartels rather than turning to another product, inventing
around the patent, or challenging its validity”). It appears that
these aspects of the Supreme Court’s general patent
jurisprudence had been overlooked by the Special Master and
others adopting the scope of the patent test.
We caution that our decision today is limited to reverse
payments between patent holders and would be generic
competitors in the pharmaceutical industry. As the Supreme
Court has made clear, “antitrust analysis must sensitively
recognize and reflect the distinctive economic and legal
setting of the regulated industry to which it applies.” Verizon
Commc’ns. Inc. v. Law Offices of Curtis V. Trinko, LLP, 540
U.S. 398, 411-12 (2004); see also IA Phillip E. Areeda &
Herbert Hovenkamp Antitrust Law, ¶ 240d, 289 (3d ed.
2006) (“[T]he presence of regulation in some instances limits
the antitrust role and in some instances simply changes it or
even enlarges it.”). The Supreme Court’s admonition is
particularly relevant in an industry, like the pharmaceutical
industry, that is subject to extensive regulation in which
Congress has balanced the protection of intellectual property
30
and the need for competition. Specifically, in passing the
Hatch-Waxman Act, Congress drew a careful line between
patent protection and the need to provide incentives for
competition in the pharmaceutical industry. See 130 Cong.
Rec. 24425 (Sept. 6, 1984) (statement of Rep. Waxman
underscoring the “fundamental balance of the bill”); H.R.
Rep. No. 98-857, pt. 2, at 30 (1984) (emphasizing that the bill
achieves “what the Congress has traditionally done in the area
of intellectual property law[:] balance the need to stimulate
innovation against the goal of furthering the public interest”),
reprinted in 1984 U.S.C.C.A.N. 2686, 2715. The line that
Congress drew between these competing objectives strongly
supports the application of rule of reason scrutiny of reverse
payment settlements in the pharmaceutical industry.
The goal of the Hatch-Waxman Act is to increase the
availability of low cost generic drugs. H.R. Rep. No. 98-857,
pt. 1, at 14, reprinted in 1984 U.S.C.C.A.N. 2647, 2647. One
method Congress employed was to encourage litigated
challenges by generic manufacturers against the holders of
weak or narrow patents. See 21 U.S.C. § 355(j)(5)(B)(iv)
(establishing 180-day exclusivity period as reward for
successfully challenging a patent); S. Rep. No. 107-167, at 4
(2002) (“Under Hatch-Waxman, manufacturers of generic
drugs are encouraged to challenge weak or invalid patents on
brand name drugs so consumers can enjoy lower drug
prices.”). That goal is undermined by application of the
scope of the patent test which entitles the patent holder to pay
its potential generic competitors not to compete. As one
commentator has noted, this approach nominally protects
intellectual property, not on the strength of a patent holder’s
legal rights, but on the strength of its wallet. See Hemphill,
Paying for Delay, supra at 1614 (“In the Hatch-Waxman Act
. . . the promotion and delay of litigation are central
preoccupations of the regulatory regime. An open-ended
permission for innovators to set innovation policy by self-
help [through reverse payments] is less plausible, as Congress
has taken explicit steps to fill those gaps.”) As the Second
Circuit acknowledged in its Tamoxifen decision, the principal
beneficiaries of such an approach will be name brand
manufacturers with weak or narrow patents that are unlikely
31
to prevail in court. See 466 F.3d at 211. Thus while such a
rule might be good policy from the perspective of name brand
and generic pharmaceutical producers, it is bad policy from
the perspective of the consumer, precisely the constituency
Congress was seeking to protect.
In rejecting the scope of the patent test, we are
cognizant that such a test encourages settlement, an objective
our decisions generally support. See, e.g., Ehrheart v.
Verizon Wireless, 609 F.3d 590, 595 (3d Cir. 2010)
(“Settlement agreements are to be encouraged because they
promote the amicable resolution of disputes and lighten the
increasing load of litigation faced by the federal courts.”).
However, the judicial preference for settlement, while
generally laudable, should not displace countervailing public
policy objectives or, in this case, Congress’s determination –
which is evident from the structure of the Hatch-Waxman Act
and the statements in the legislative record – that litigated
patent challenges are necessary to protect consumers from
unjustified monopolies by name brand drug manufacturers.
We also emphasize that nothing in the rule of reason test that
we adopt here limits the ability of the parties to reach
settlements based on a negotiated entry date for marketing of
the generic drug: the only settlements subject to antitrust
scrutiny are those involving a reverse payment from the name
brand manufacturer to the generic challenger. Data analyzed
by the FTC suggest that this will leave the vast majority of
pharmaceutical patent settlements unaffected. See FTC,
Bureau of Competition, Agreements Filed with the Federal
Trade Commission under the Medicare Prescription Drug,
Improvement, and Modernization Act of 2003: Overview of
Agreements Filed in FY 2010, 2 (2011) (showing that nearly
seventy-five percent of Hatch-Waxman Act infringement
suits that settled in 2010 did so without reverse payments),
available at http://www.ftc.gov/os/2011/05/1105
mmagreements.pdf.
For all of these reasons we reject the scope of the
patent test. In its place we will direct the District Court to
apply a quick look rule of reason analysis based on the
economic realities of the reverse payment settlement rather
32
than the labels applied by the settling parties. Specifically,
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.
In holding that a reverse payment is prima facie
evidence of an unreasonable restraint of trade, we follow the
approach suggested by the DC Circuit in Andrx and embrace
that court’s common sense conclusion that “[a] payment
flowing from the innovator to the challenging generic firm
may suggest strongly the anticompetitive intent of the parties
entering the agreement . . . .” 256 F.3d at 809 (internal
quotation marks and citation omitted).
We agree, moreover, with the FTC that there is no
need to consider the merits of the underlying patent suit
because “[a]bsent proof of other offsetting consideration, it is
logical to conclude that the quid pro quo for the payment was
an agreement by the generic to defer entry beyond the date
that represents an otherwise reasonable litigation
compromise.” In re Schering-Plough Corp., Final Order, 136
F.T.C. at 988. Of course, a patent holder may attempt to
rebut plaintiff’s prima facie case of an unreasonable restraint
of trade by arguing that there is in fact no reverse payment
because any money that changed hands was for something
other than a delay in market entry. Alternatively, the patent
holder may attempt to rebut the prima facie case by
demonstrating that the reverse payment offers a competitive
benefit that could not have been achieved in the absence of a
reverse payment. This second possible defense attempts to
account for the – probably rare – situations where a reverse
payment increases competition. For example, a modest cash
payment that enables a cash-starved generic manufacturer to
avoid bankruptcy and begin marketing a generic drug might
have an overall effect of increasing the amount of competition
in the market. For the reasons set forth, we will reverse the
judgment of the District Court and remand for further
proceedings in accordance with the foregoing.
33
IV. THE CLASS CERTIFICATION ISSUE
(Appeal No. 10-4571)
A. Procedural Background
The other issue before us on this appeal concerns
plaintiffs’ effort to certify a class of persons who purchased
K-Dur directly from Schering between November 20, 1998
and September 1, 2001 and subsequently purchased a generic
version of K-Dur. As identified by the parties’ experts, the
class consists of forty-four wholesalers and retailers. The
Special Master recommended granting plaintiffs’ motion to
certify the class. The District Court adopted the Special
Master’s Report and Recommendation and formally certified
the class.
Defendants sought interlocutory review of the District
Court’s order under Federal Rule of Civil Procedure 23(f).
While that petition was pending, the District Court ruled on
the cross motions for summary judgment and entered final
judgment in defendants’ favor. Plaintiffs filed a notice of
appeal, and defendants filed a cross appeal, which this court
dismissed as untimely. See Order, In re K-Dur Antitrust
Litig., No. 10-2727 (3d Cir. Nov. 24, 2010). However, this
court accepted defendants’ Rule 23(f) petition, see Order, In
re K-Dur Antitrust Litig., No. 09-8006 (3d Cir. Nov. 16,
2010), and we therefore have jurisdiction pursuant to 28
U.S.C. § 1292(e). 12
12
Plaintiffs argue that because defendants’ cross appeal
was dismissed as untimely defendants’ 23(f) petition should
have been dismissed also. An appeals court has discretion to
consider an interlocutory appeal even after the entry of final
judgment. Cf. In re Coordinated Pretrial Proceedings in
Petroleum Prods. Antitrust Litig., 788 F.2d 1571, 1573-74
(Temp. Emer. Ct. App. 1986). Moreover, in granting
defendants’ 23(f) petition, this court has already considered
the issue of the appropriateness of review, and we see no
reason to reconsider the decision to hear this appeal.
34
B. Standard of Review
This court reviews class certification orders “for abuse
of discretion, which occurs if the district court’s decision rests
upon a clearly erroneous finding of fact, an errant conclusion
of law or an improper application of law to fact.” In re
Hydrogen Peroxide Antitrust Litig., 552 F.3d 305, 312 (3d
Cir. 2008) (internal quotation marks and citation omitted).
C. Defendants’ Arguments
In order to certify a class under Rule 23(b)(3), a
plaintiff must satisfy both the general class action
prerequisites – numerosity, commonality, typicality, and
adequacy of representation – and the additional requirements
of predominance and superiority. Fed. R. Civ. P. 23(a),
(b)(3). The Special Master, in a report adopted in full by the
District Court, discussed the class requirements in detail;
defendants challenge only a few of those findings.
Defendants assert that (1) plaintiffs cannot use common
evidence to prove that the class members suffered an actual
injury from defendants’ conduct because showing actual
injury means demonstrating lost profits damages, which
defendants argue necessarily requires individualized
assessments, (2) even assuming that overcharges are an
acceptable form of injury, the District Court erred in its
conclusion that there was common evidence of injury to all
class members, and (3) the class should not have been
certified because of inherent conflicts between members.
Defendants’ first two arguments challenge the District
Court’s finding with respect to the predominance
requirement, while the third goes to the adequacy
requirement. We address these arguments in order.
1. Predominance Issues
In order for the predominance requirement to be
satisfied “[i]ssues common to the class must predominate
over individual issues.” In re Hydrogen Peroxide, 552 F.3d
at 311 (internal citations and quotation marks omitted). Class
certification calls for the district court to conduct a “rigorous
35
assessment of the available evidence,” id. at 312, and is only
appropriate in antitrust cases where plaintiffs can show, by a
preponderance of the evidence, that proof of the essential
elements of the cause of action, including antitrust injury, do
not require individual treatment. Id. at 307, 311.
It is plaintiffs’ thesis that they will prove that class
members paid more for K-Dur because of Schering’s antitrust
violations, and that this constitutes the required antitrust
impact. The Special Master accepted this based on Third
Circuit law, stating:
The Third Circuit has held that “when an
antitrust violation impacts upon a class of
persons who do have standing, there is no
reason in doctrine why proof of impact cannot
be made on a common basis, so long as the
common proof adequately demonstrates some
damage to each individual.”
App. at 7980 (quoting Bogosian v. Gulf Oil Corp., 561 F.2d
434, 454 (3d Cir. 1977)). Because all of the class members
purchased some of the generic versions of K-Dur, plaintiffs
have satisfactorily explained their theory of impact.
Plaintiffs proposed to prove antitrust injury through
common proof consisting largely of the declarations and
report of their expert, Dr. Leitzinger. Dr. Leitzinger offered
statistical and economic analyses of the overall brand-name
and generic drug market and of the specific entry of generic
potassium chloride in the market to show that, but for the
challenged reverse payment agreements, “all (or virtually all)
members of the proposed class” would have purchased at
least some less expensive generic potassium chloride earlier,
and therefore suffered an antitrust injury as a result of the
delay in generic entry. The Special Master considered Dr.
Leitzinger’s proposed methodology and the criticisms of it
made by defendants’ expert, Dr. Rubinfeld, in detail. After
slightly narrowing the class definition to accommodate a
36
criticism made by defendants’ expert, 13 the Special Master
found that plaintiffs had satisfied their burden of showing that
antitrust impact may be proven by evidence common to all
class members.
In December 2008, several months after the Special
Master’s Report and Recommendation, this court issued its
decision in In re Hydrogen Peroxide Antitrust Litigation,
which clarified the standard to be applied when certifying a
class of plaintiffs in an antitrust action. 552 F.3d 305. In that
case, we held that the preponderance requirement demands
more than a mere threshold showing by a party seeking to
certify a class and that, in considering a motion for class
certification, a district court is required to resolve any factual
or legal disputes necessary to determine whether a plaintiff
will be able to show antitrust injury for all plaintiffs with
common evidence. Id. at 316-18.
a. Whether Lost Profits Are the Relevant Antitrust
Injury
Defendants argue first that the predominance
requirement of Rule 23(b)(3) is not satisfied because, in order
to prove actual injury from delayed generic entry, plaintiffs
must produce evidence of lost profits, which necessarily
requires an individual assessment for each class member.
Defendants contend specifically that some of the wholesalers
lost substantial sales volumes after generic entry, and that, for
such wholesalers, generic entry caused a decrease in profits.
Defendants’ lost profits argument is unavailing
because it is simply a version of the so-called “passing-on
defense” that was rejected by the Supreme Court in Hanover
Shoe, Inc. v. United Shoe Machinery Corporation. 392 U.S.
481 (1968). In that case, the Supreme Court held that
demonstrating antitrust injury does not require a showing of
13
Specifically, the Special Master excluded from the class
direct purchasers who did not purchase a generic version of
K-Dur after generic entry.
37
lost profits. Id. at 494. Rather, the Supreme Court ruled that
a plaintiff suffers an antitrust injury where it is overcharged
for a product, regardless of whether it can show lost profits.
Id. at 492-95. In reaching this conclusion, the Court noted
that requiring plaintiffs to show lost profits was too
burdensome on both courts and litigants and would undercut
the effectiveness of private antitrust suits as an enforcement
mechanism. Id. at 492-94; see also Bogosian, 561 F.2d at
456 (noting that a lost-profits inquiry would be “enormously
complicated, posing a tremendous burden on the presentation
of plaintiffs’ case” and that “it is precisely for this reason that
the Supreme Court eliminated the ‘passing-on defense’ in
Hanover Shoe”).
Defendants argue that the Hanover Shoe rule should
not apply here because that case involved an overcharge for
an identical product whereas this one involves two different
products, a name brand drug with a higher price and a lower
priced generic drug. However, defendants cite no authority
distinguishing Hanover Shoe on that basis, and their own
expert conceded that the generic supplement that Schering
began manufacturing after Upsher entered the market was
made in the same plant as K-Dur and chemically identical to
K-Dur. Moreover, in In re Warfarin Sodium Antitrust
Litigation, this court affirmed class certification where
plaintiffs sought overcharges – not lost profits – stemming
from anti-competitive behavior that hindered their access to
generic pharmaceuticals. 391 F.3d 516, 532 (3d Cir. 2004).
In sum, defendants’ contention that plaintiffs are
required to show lost profits in order to demonstrate antitrust
injury is without support in law or the facts of this case. As
such, we reject it.
b. Whether There Was Common Evidence of Injury to
All Class Members
Defendants argue that because of discrepancies in the
pricing of K-Dur and variations in purchaser behavior,
plaintiffs cannot prove injury to all class members by
common evidence, even if lost profits are not required to
38
show antitrust injury. They contend further that the District
Court applied the wrong standard in evaluating plaintiffs’
evidence that antitrust injury could be proven by common
evidence.
In support of their argument that antitrust injury
requires an individualized assessment for each class member,
defendants point to two places where purportedly conflicting
evidence demonstrates the need for individualized assessment
of antitrust harm. Defendants point out that they did not sell
K-Dur to all customers at a single list price; rather, the price
paid varied considerably among class members.
Additionally, defendants argue that, for certain customers at
certain times, Schering offered rebates which caused further
price variation among customers. Defendants contend that
these pricing variations caused several class members to have
zero or negative damages under the formula applied by
plaintiffs’ expert. Finally, defendants point out that not all
class members purchased generic potassium chloride as soon
as it became available and argue that, in light of this variation
in purchase timing, plaintiffs need to make an individualized
showing that each plaintiff would have purchased a generic
product earlier if one had been available.
We do not read Hydrogen Peroxide as precluding a
class because of variations in purchasing by a very small
percentage of those who purchased K-Dur. As the Special
Master recognized, defendants conceded “that 45 of the
proposed Class members purchased some amount of generic
K-Dur.” App. at 7984 (emphasis in original). He noted that
defendants’ arguments “relate to the quantum of damages,
rather than the fact of injury.” Id. Indeed, in Hydrogen
Peroxide itself, we focused on what was really at issue – that
for certification plaintiff need not prove antitrust injury
actually occurred.
Plaintiffs’ burden at the class certification stage
is not to prove the element of antitrust impact,
although in order to prevail on the merits each
class member must do so. Instead, the task for
plaintiffs at class certification is to demonstrate
39
that the element of antitrust impact is capable of
proof at trial through evidence that is common
to the class rather than individual to its
members.
552 F.3d at 311-12. To the extent that there were minor
variations, they can be handled at trial in the context of
damages.
With regard to both the price-variation and purchase-
timing issues, the Special Master conducted an exceedingly
thorough review of plaintiffs’ proposal for demonstrating
antitrust impact through common evidence and determined
that defendants’ objections were without support. Critically,
the Special Master recognized his obligation to “probe
beyond the pleadings” and to conduct a “rigorous analysis” of
the available evidence. App. at 7960 (internal citations and
quotation marks omitted).
Our review confirms that the Special Master applied
the appropriate standard. In contrast to Hydrogen Peroxide,
where the court found that there was “no tendency for prices .
. . to move together,” 552 F.3d at 314 (internal quotation
marks omitted), plaintiffs in this case presented evidence,
credited by the Special Master, of significant, industry-wide
price drops after generic entry. Such evidence of an industry-
wide price drop after generic entry supports the Special
Master’s rejection of defendants’ arguments about limited
price variations and purchase-timing variations between
plaintiffs.
First, concerning the price-variation argument, the
Special Master carefully considered the conflicting opinions
of plaintiffs’ and defendants’ experts and credited the theories
of plaintiffs’ expert over that of defendants. The Special
Master concluded that “Plaintiffs have satisfied their burden
of adducing sufficient evidence and a plausible theory to
convince me that impact may be proven by evidence common
to all class members.” App. at 7988 (internal citations and
quotation marks omitted). Our review of the record confirms
that plaintiffs presented a comprehensive and detailed means
40
of proving impact through common means, notwithstanding
some very limited pricing variation, and that the Special
Master conducted an appropriately searching evaluation of
this evidence.
With regard to defendants’ argument about variations
in the timing of the purchase of generic K-Dur, the Special
Master explicitly rejected that argument and concluded that
“[e]vidence that all (or virtually all) class members
substituted a lower priced generic for some of their K-Dur 20
purchases gives rise to the inference that they would have
similarly done in the but-for world.” App. at 7984. This,
combined with plaintiffs’ theory of damages, means that
impact could be proven on a class-wide basis via common
evidence. Here again, the Special Master conducted a
thorough evaluation of the available evidence and resolved all
significant disputes between conflicting evidence as required
under the standard set forth in Hydrogen Peroxide.
2. Adequacy Issue – Whether the Class
Faces Inherent Conflicts
Defendants next contend that the District Court erred
in certifying a class because the class faces inherent conflicts
that preclude adequacy of representation. “The inquiry that a
court should make regarding the adequacy of representation
requisite of Rule 23(a)(4) is to determine that the putative
named plaintiff has the ability and the incentive to represent
the claims of the class vigorously, . . . and that there is no
conflict between the individual’s claims and those asserted on
behalf of the class.” In re Cmty. Bank of N. Va., 622 F.3d
275, 291 (3d Cir. 2010) (quoting Hassine v. Jeffes, 846 F.2d
169, 179 (3d Cir. 1988)). Only a fundamental conflict will
defeat adequacy of representation. See, e.g., id. at 303(adequacy defeated by “obvious and fundamental intra-class
conflict of interest”); Ward v. Dixie Nat. Life Ins. Co., 595
F.3d 164, 180 (4th Cir. 2010).
Defendants contend that three members of the class, all
national wholesalers, were net beneficiaries of the absence of
generic competition in the potassium chloride supplement
41
market because once generics came on the market those class
members saw decreased sales volumes and lower per-pill
profits. Defendants argue that, because these three class
members have financial incentives to delay generic entry,
there is an inherent conflict between them and the rest of the
class.
The case law on defendants’ argument reveals a split
in authority. A large number of district courts, including
some in this Circuit, have rejected defendants’ argument.
See, e.g., Teva Pharms USA, Inc. v. Abbott Labs., 252 F.R.D.
213, 226-27 (D. Del. 2008) (Robinson, J.); Meijer, Inc. v.
Abbott Labs., 251 F.R.D. 431, 435 (N.D. Cal. 2008); but see
Valley Drug Co. v. Geneva Pharms., Inc., 350 F.3d 1181,
1190 (11th Cir. 2003). 14
We reject the Valley Drug decision for two reasons.
First, requiring plaintiffs to show that no class member
benefitted from the challenged conduct in the form of greater
profits is contrary to the Supreme Court’s decision in
Hanover Shoe. In Hanover Shoe, the Supreme Court
permitted antitrust plaintiffs to seek overcharge damages
rather than lost profits damages precisely because proving
lost profits was too complicated and burdensome. 392 U.S. at
493; Bogosian, 561 F.2d at 456. The same logic applies
equally, if not more strongly, in the class certification setting
because under defendants’ proposed approach, plaintiffs
would not only have to assess their own lost profits but also
those of potential class members. Moreover, because
Hanover Shoe sets the amount of the overcharge as plaintiffs’
damages, all of the class members have the same financial
incentive for purposes of the litigation – i.e. proving that they
were overcharged and recovering damages based on that
overcharge. See 7A Charles Alan Wright, Arthur R. Miller &
Mary Kay Kane, Federal Practice and Procedure § 1768 (3d
ed. 2005) (“[A] potential conflict between the representatives
and some class members should not preclude the use of the
class-action device if the parties appear united in interest
14
This is a different appeal than Valley Drug, 344 F.3d
1294 (11th Cir. 2003), discussed supra.
42
against an outsider at the beginning of the case.”).
Defendants have not pointed to any plausible scenario in
which the class members might seek conflicting forms of
relief. For these reasons, we conclude that defendants’
conflict argument fails.
D. Conclusion – Class Certification Issues
In sum, with respect to the class certification issues,
we reject defendants’ arguments and will affirm the District
Court’s determination approving maintenance of the class
action.
43