In Schering-Plough Corp. v. Federal Trade Commission, 2005 U.S. App. LEXIS 3811, (11th. Cir. 2005), the Eleventh Circuit addressed the antitrust implications of settlements of patent suits in the context of the Hatch-Waxman regulatory regime that involve payments from the patent holder to the alleged infringer. Under the Hatch-Waxman Act, a generic drug manufacturer may be approved to market its generic drug without expensive and time-consuming safety studies if its drug is the bioequivalent of a pioneer drug that is already approved for marketing. In order to receive this approval, the generic manufacturer must certify that the relevant patents on the brand name drug are either invalid or will not be infringed by the generic drug. The pioneer manufacturer is then notified of the generic’s desire to enter the market; if the pioneer manufacturer sues for patent infringement within forty-five days of receiving notice, Hatch-Waxman imposes a thirty month stay on FDA approval of the generic.

In this case, Schering-Plough (“Schering”), manufactured and marketed a pioneer drug on which it had a patent (the “‘743 patent”). Upsher and ESI manufactured generic versions of the drug and each certified that either Schering’s patent was invalid or that its drug did not infringe it. Schering promptly filed patent infringement suits against both companies. Prior to trial in either suit, Schering reached a separate settlement with each company. Neither settlement fit the conventional mold of “reverse” payments by the patent holder to the generics to stay off the market. Rather, in each case Schering agreed that the generics could enter the market well in advance of the expiration of the ‘743 patent – nearly six years ahead in the case of Usher and three years in the case of ESI – and then paid them for exclusive licenses on other products and, in ESI’s case, for its attorney fees. Specifically, based on internal and independent valuations of its profitability, Schering paid Upsher $60 million for a license for Niacor, a cholesterol-reducing drug. In negotiating with Upsher, Schering expressly and adamantly proclaimed that it would not pay Upsher for the purpose of keeping them off the market. In the case of ESI, at the suggestion and with the approval of the judge in the case, Schering paid ESI $5 million for attorney fees, $15 million to license other products from ESI, and agreed to pay ESI $10 million if its generic version was approved by a certain date. In both cases, the settlement agreements terminated the patent infringement litigation between the parties.

The FTC filed a complaint alleging that these agreements violated the FTC Act and the Sherman Act. An FTC Administrative Law Judge found the agreements to be lawful settlements of patent infringement suits. On appeal the full Commission held the agreements violated the FTC Act and the Sherman Act. Applying a rule of reason analysis, the Commission concluded that Schering’s payments to generics were not “legitimate consideration” for licenses, that they were in fact part of a quid pro quo to delay entry dates, and that the agreements harmed competition and consumers as a result. According to the Eleventh Circuit’s interpretation of the Commission decision, the Commission essentially “prohibited settlements under which the generic receives anything of value and agrees to defer its own research, development, production or sales activities.”

In his opinion for the Eleventh Circuit, Judge Peter Fay, reviewing the Commission decision under a substantial evidence standard, first noted the Eleventh Circuit’s recent holding in Valley Drug Co. v. Geneva Pharm., Inc., 344 F.3d 1294 (11th Cir. 2003), that while payments made to an alleged infringer as part of a patent litigation settlement are anticompetitive in the context of patent litigation, the anticompetitive effect may be no broader than the patent’s power to exclude. As such, Valley Drug dictates that the proper analysis of antitrust liability requires an examination of: (1) the scope of the exclusionary potential of the patent; (2) the extent to which the agreements exceed that scope; and (3) the resulting anticompetitive effects. By contrast, both the Commission and the ALJ approached the agreement under a more traditional rule of reason analysis. Judge Fay thus concluded that the Commission’s approach was inconsistent with the binding precedent of Valley Drug and ill-suited to analysis of Schering’s agreements because of the inherent exclusionary nature of patents. According to Judge Fay, the Commission “clearly made its decision before it considered any contrary conclusion.”

Judge Fay proceeded to apply the Valley Drug approach to Schering’s agreements. He first noted that patents are presumed valid, that patents are the power to exclude others, that there was no dispute that the ‘743 patent enabled Schering to exclude infringing products from the market, and that the FTC acknowledged that it could not prove that the generic manufacturers could have entered the market prior to the expiration of Schering’s ‘743 patent. Thus, Judge Fay concluded that Schering was in possession of valid patent that had the potential to keep infringing drugs off the market until its expiration on September 5, 2006.

The opinion next considered the scope of the agreements at issue. With respect to the Upsher agreement, Judge Fay concluded that there was not substantial evidence to support the Commission’s conclusion that the license agreement was a sham. Rather, the evidence, which included independent expert testimony, showed that $60 million was “fair value” for the license, even though a product similar to Niacor, contrary to the predictions of market analysts, ultimately performed poorly when marketed by another company. The Eleventh Circuit thus found that the Commission’s conclusion that Schering’s license agreement with Upsher was a sham was “not supported by law or logic.” With respect to the ESI settlement, Judge Fay remarked that the Commission’s opinion ignored the strength of the underlying patent suit, that the agreed upon date of entry for ESI reasonably reflected the strength of Schering’s case, and that the Commission’s ruling is inconsistent with the general policy of encouraging settlements.

The Eleventh Circuit next considered the overall anticompetitive effects of Schering’s agreements. Citing California Dental Ass’n v. FTC, 526 U.S. 756 (1999), the Eleventh Circuit noted that an antitrust plaintiff must show that a restraint of trade has actual anticompetitive effects. Patent settlement agreements are recognized as generally efficiency-enhancing agreements. They avert a number of private and public costs and decrease the uncertainty that may surround a drug manufacturer’s ability to develop and market drugs in the “caustic environment” of patent litigation, thereby increasing the incentive to innovate. The Commission failed to consider the exclusionary power of the ‘743 patent. As Fay noted, as long as the settlement and entry date are within the scope of the patent and represent a reasonable compromise based on the strength of the patent, then the actual anticompetitive effects do not amount to an illegal restraint of trade. Given the exclusionary power of patents, settlement payments to delay generic entry may be a reasonable, efficiency-enhancing method of resolving patent infringement litigation.

As Judge Fay further explained, payments from a patent holder to an alleged infringer are a natural consequence of the Hatch-Waxman regime. Since Hatch-Waxman grants generic manufacturers standing to challenge the validity of a patent without incurring the cost of entry or risking damages from possible infringement, potential infringers have considerably more leverage than they would in the usual case. In the present case, the Eleventh Circuit concluded that the agreements, which allowed generic entry prior to the expiration of the ‘743 patent, fell well within the protections of the ‘743 patent and were therefore not illegal.

In sum, the Eleventh Circuit found the license payments from Schering to Upsher and ESI to be legitimate and bona fide and not simply shams to delay generic entry. There was no indication that Upsher and ESI’s products could have entered the market prior to the expiration date of the patent, and the settlement agreements stipulated to entry prior to the expiration of the patent. Finally, settlements of litigation are favored generally and patent settlements within the scope of the patent at issue are favored particularly since they may enhance efficiency and spur innovation.

Authored by:
Carlton A. Varner


Anik Banerjee