US Court of Appeals for the Second Circuit invites examination of reverse settlement agreements by the Full Court of Appeals

Further to our 18 May post in relation to the FTC’s anti-trust case against Cephalon concerning the reverse settlement of a patent dispute over Provigil, a US Court of Appeals has taken the unusual step of inviting a petition to the Full Court of Appeals to consider the “difficult questions at issue and the important interests at stake” when considering reverse settlement agreements. 

The proceedings arose from a reverse settlement of patent infringement proceedings brought by Bayer, the manufacturer of the antibiotic Cipro, against would-be competitors who had sought regulatory approval to market a generic form of the antibiotic.  The settlement agreement involved payment of $49.1 million by Bayer (plus quarterly payments of between $12.5 and $17.125) to the generic companies in return for them agreeing to delay the manufacture of generic products until 6 months before expiry of the patent. A number of pharmacies and trade unions commenced proceedings in the US District Court for the Eastern District of New York, to which the Antitrust Division of the Department of Justice was later joined.  The District Court found that the plaintiffs had failed to demonstrate that the settlement had an actual adverse effect on competition, and granted Bayer’s application for summary dismissal.  Interestingly, the District Court noted that “there is no precedent for plaintiff’s argument that the parties to a settlement are required to preserve the public interest in lower prices.  Such a rule would only result in parties being less likely to reach settlements”.

The plaintiffs appealed the District Court’s decision. Importantly, while the Court of Appeals applied its own precedent (In re Tamoxifen Citrate Antitrust Litigation) in finding that as a matter of law, the plaintiffs were barred from challenging the settlement agreement under antitrust laws, it also took the extraordinary step of inviting the plaintiffs to petition for a rehearing of the matter by the Full Court of Appeals.  The Court of Appeals noted that while there was precedent for the proposition that reverse settlement agreements are only invalid where the agreement constrains competition beyond the scope of the underlying patent, the opinions of other Circuit Courts of Appeal, and that of the Department, whose position is that Tamoxifen was wrongly decided and that reverse payment arrangements are per se unlawful restraints of trade, were indicative of the need to examine such precedent in light of the competing interests at stake.

While there is widespread opinion that reverse payment settlement agreements are contrary to the purpose of the Hatch Waxman Act to “make available more low cost generic drugs”, a majority of all active judges on the Full Court is required to grant the petition to rehear the matter.  We will keep you updated of developments in these important proceedings!



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