Pay-to-delay: settlements can cause litigation too

PatLit is delighted to welcome Marian T. Flattery to its readers. Marian is a seasoned patent practitioner at the distinguished practice of Finnegan; she has also guest-blogged for the PharmExec weblog.  You can read all about her here.

Marian has been invited to do some guest blogging for PatLit. Her first piece is on a topic which brings together strands of patent law and the regulation of competition: pay-for delay.  Marian writes:

Pay-For-Delay Patent Settlements Back in the News 

The legality of “pay-for-delay” patent settlements between name brand drug companies and generic drug makers is making news on both sides of the Atlantic. A pay-for-delay settlement is a patent litigation settlement in which a name brand drug company pays a generic drug maker to delay market entry. The European Commission has brought two pay-for-delay cases in recent days. While in the U.S., one U.S. circuit court expressly declined to follow an earlier sister court decision on two such settlements, thereby creating a split among the circuits as to what test to apply to evaluate the legality of pay-for-delay settlements.

In In Re: K-Dur Antitrust Litigation (3rd Cir., July 16, 2012), the 3rd Circuit rejected the “scope of the patent test” for analyzing the legality of pay-for-delay patent settlements. Under a new test announced in In Re: K-Dur, any payment from a drug company patent holder to a generic patent challenger who agrees to delay market entry must be treated 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.

Over seven years ago, the same two patent settlement agreements at issue in In Re: K-Dur were held not to be an illegal restraint of trade in Schering-Plough Corp. v. FTC, 402 F. 3d 1056 (11th Cir. 2005), cert. denied, 548 U.S. 919 (2006) under the “scope of the patent” test adopted by the 2nd, 11th and Federal Circuits. The scope of the patent test permits reverse payments from a drug company patent holder to a generic patent challenger so long as (1) the exclusion does not exceed the patent’s scope, in time or subject matter; (2) the patent holder’s claim of infringement was not objectively baseless; and (3) the patent was not procured by fraud on the USPTO.

In Re: K-Dur is the first time the 3rd Circuit has weighed in on the legality of pay-for-delay patent settlements and represents a significant break from prior decisions of its sister courts. It also creates a new plaintiff-friendly forum for private parties and the FTC to challenge the legality of pay-for-delay patent settlements between name brand drug companies and generic challengers. This 3rd Circuit decision is a victory for the FTC, which has long advocated that reverse payment or pay-for-delay settlements are illegal agreements in restraint of trade, and likely sets the stage for the U.S. Supreme Court to address the legality of such settlements.