Third Circuit Holds Reverse Payment Settlements Subject to "Quick-Look" Antitrust Scrutiny: Court Rejects “Scope of the Patent” Test Used In Three Other Circuits, Preparing Way for Supreme Court Review

Sullivan & Cromwell LLP - July 18, 2012

In In re: K-Dur Antitrust Litig., No. 10-2078 (3d Cir. July 16, 2012), the United States Court of Appeals for the Third Circuit considered patent litigation settlement agreements between patent owner Schering and two generic manufacturers. Those settlements involved substantial payments by Schering to the generics in exchange for, inter alia, delayed entry of generic products that would compete with Schering’s K-Dur® sustained release potassium. Such agreements, which have been associated with Hatch-Waxman patent litigation, are known as “reverse-payment” or “pay-for-delay” settlements. The Second, Eleventh and Federal Circuits have held that reverse-payment settlements are not prohibited by the antitrust laws, so long as competition is restrained only within the scope of the patent’s coverage and there is no evidence that the patent was procured by fraud or that the enforcement suit was objectively baseless. However, reverse-payment settlements continue to be a target of FTC scrutiny and enforcement efforts.

In K-Dur, the Third Circuit rejected the “scope of the patent test” as inconsistent with Supreme Court precedent and the policies underlying the Hatch-Waxman Act. It held that reverse-payment settlements should instead be subject to “quick-look” rule of reason antitrust scrutiny. Specifically, it found that a court must treat any payment from the patent holder to the generic as prima facie evidence of an unreasonable restraint of trade. The presumption that a settlement including a reverse payment is illegal can be rebutted only by showing that the payment (1) was for a purpose other than delayed entry, or (2) offers some pro-competitive benefit. The stark conflict between the Third Circuit and other courts of appeal means that the appropriate antitrust treatment of reverse-payment settlements in Hatch-Waxman patent litigation may now be considered by the Supreme Court.