Antitrust Law Daily Merck’s pay-for-delay settlement with Upsher-Smith may be anticompetitive
Friday, February 26, 2016

Merck’s pay-for-delay settlement with Upsher-Smith may be anticompetitive

By Jody Coultas, J.D.

The federal district court in Newark, New Jersey has denied Merck & Co., Inc. and Upsher-Smith Laboratories summary judgment of antitrust claims filed by direct purchasers of Merck’s potassium chloride supplement alleging that settlements between Merck’s predecessor and two generic drug manufacturers were anticompetitive (In re K-Dur Antitrust LitigationFebruary 25, 2016, Chesler, S.). Conspiracy claims regarding an agreement between Schering-Plough and ESI-Lederle were dismissed.

Pharmaceutical manufacturer Schering-Plough Corporation, which merged with Merck & Co., Inc., entered into pay-for-delay settlements with generic manufacturers Upsher-Smith Laboratories and ESI-Lederle to defer the generic company’s entering the market with a generic version of Schering’s potassium chloride supplement K-Dur.

In 2001, an Administrative Law Judge (ALJ) dismissed an FTC complaint that alleged the settlements were unlawful, finding that Schering did not pay Upsher impermissibly for delaying its entry onto the market. The ALJ also found that the Schering-ESI settlement did not maintain Schering’s monopoly unlawfully in the potassium chloride market. However, the full FTC unanimously reversed the ALJ’s decision in December 2003, and concluded that settlements with reverse payments in excess of $2 million paid for market delay, and were thus illegal.

The U. S. Court of Appeals for the Eleventh Circuit reversed the order and dismissed the complaint because the settlements fell within the protections of the patent. Rather than using a per se or a rule-of-reason approach, the Eleventh Circuit found that courts must determine “the extent to which the exclusionary effects of the agreement fall within the scope of the patent’s protection.” The $60 million payment in the Schering-Upsher settlement did not constitute an illegal reverse payment and was payment was for the license.

Purchasers of K-Dur alleged that the settlements were anticompetitive, and that Schering, Upsher, and ESI engaged in a conspiracy to restrain trade and fix the price of K-Dur. In 2010, the court granted Merck summary judgment because the settlements were lawful under the “scope of the patent” test. The Third Circuit explicitly rejected the “scope of the patent” test and reversed the decision. Merck now moves for summary judgment in light of the Supreme Court’s holding inFTC v. Watson Pharms., 133 S. Ct. 787 (2012), sub nom. FTC v. Actavis, Inc., 133 S. Ct. 2223 (2013). The Supreme Court directed lower courts to analyze reverse payments settlements using the rule-of-reason standard, and rejected both the “scope of the patent” and “quick look” tests.

Rule of reason test. In Actavis, the Supreme Court directed lower courts to analyze reverse payment settlements using the antitrust rule-of-reason test. “The true test of legality [under the rule-of-reason test] is whether the restraint imposed is such as merely regulates and perhaps thereby promotes competition or whether it is such as may suppress or even destroy competition.” To prove an agreement is an unlawful restraint of trade, a plaintiff must show the agreement contains both a limit on the generic challenger’s entry into the market and compensation from the patentee to the challenger. The defendants bear the burden of explaining the compensation; if the defendants do so, the plaintiff has the burden of demonstrating the compensation exceeds the reasonable value of these. If a prima facie case has been made out, the defendants may come forward with additional justifications to demonstrate the settlement agreement nevertheless is procompetitive.

Schering-Upsher settlement. Genuine issues of fact as to whether Schering’s payment exceeded the fair value of the licenses coupled with litigation costs precluded summary judgment, according to the court. As part of the settlement, Upsher granted Schering an overseas license to Niacor-SR© for $60 million. The parties both offered evidence to persuade a fact finder on whether Schering paid fair market value for Niacor or whether the payment compensated Upsher for delaying its market entry. Merck asserted that it paid for the Niacor license in good faith, pointing out that Schering informed Upsher several times during settlement negotiations that it would not pay money to delay Upsher’s entry onto the market. The purchasers countered with evidence that the Schering-Upsher agreement lacked terms that would typically be present in a pharmaceutical licensing agreement and that Schering did not conduct its typical diligence on the Niacor license. The purchasers also asserted that the value of the license was significantly lower than the $60 million Schering paid Upsher.

Schering-ESI settlement. However, the court granted Merck summary judgment of all claims related to the Schering-ESI settlement. The purchasers argued that Schering’s payment to ESI was inducement to convince ESI to join the conspiracy with Schering and Upsher to eliminate generic competition for K-Dur. The purchasers conceded that the Schering-ESI settlement did not cause direct competitive market harm, but disputed whether Schering, Upsher, and ESI formed a single conspiracy. In the court’s view, there was no direct evidence of a concerted action between Schering, Upsher, and ESI to prove a single conspiracy.

Further, there was insufficient circumstantial evidence that Schering, Upsher, and ESI had a common goal, sought to maintain the continuous operation of the single conspiracy, or that the parties overlap sufficiently to support an inference of a single conspiracy. The purchasers alleged that the companies shared the common goals of delaying generic competition for K-Dur, and sharing the financial benefits of such delay. A possible motivation for Schering to settle with Upsher and ESI to keep the market free of generics was not evidence of a conspiracy. Also, ESI’s awareness that Schering and Upsher had settled their patent litigation, even on potentially anticompetitive terms, did not establish a single conspiracy. There was also no evidence that Upsher and ESI interfered with the other party’s settlement with Schering. ESI’s settlement with Schering was not dependent on Upsher or the Schering-Upsher settlement. Therefore, the purchasers could not show that the Schering-Upsher and Schering-ESI agreements were interdependent, as would be required to support an inference of a single conspiracy between Schering, Upsher, and ESI, the court concluded.

The case is No. 2:01-cv-01652 (SRC)(CLW).

Attorneys: Daniel Berger (Berger & Montague, PC) and Lisa J. Rodriguez (Schnader Harrison Segal & Lewis LLP) for HIP Health Plan of Florida, Inc. Shelly L. Friedland (Trief & Olk) and Theodore M. Lieverman (Spector, Roseman & Kodroff, PC) for Indirect Purchaser Plaintiffs. Barry L. Refsin (Hangley, Aronchick, Segal & Pudlin) and Deborah S. Corbishley (Kenny, Nachwalter, Seymour, Arnold, Critchlow & Spector, PA) for Direct Purchaser Plaintiffs. William J. O'Shaughnessy (McCarter & English, LLP) for Merck & Co., Inc. Adam K. Derman (Chiesa Shahinian & Giantomasi PC) for Upsher-Smith Laboratories.

Companies: Merck & Co., Inc.; Upsher-Smith Laboratories; Schering-Plough Corporation

MainStory: TopStory Antitrust NewJerseyNews

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