In Re K-Dur Antitrust Litigation

PRECEDENTIAL

UNITED STATES COURT OF APPEALS

FOR THE THIRD CIRCUIT

_____________

No. 10-2077

_____________

In Re: K-DUR ANTITRUST LITIGATION

Louisiana Wholesale Drug Co., Inc.,

on behalf of itself and all others similarly situated,

Appellants

_____________

No. 10-2078

_____________

In Re: K-DUR ANTITRUST LITIGATION

CVS Pharmacy, Inc.; Rite Aid Corporation,

Appellants

_____________

No. 10-2079

_____________

In Re: K-DUR ANTITRUST LITIGATION

Walgreen Co., Eckerd Corporation, The Kroger Co.,

Safeway Inc., Albertson's Inc., Hy-Vee, Inc.,

and Maxi Drug, Inc.,

Appellants

_____________

No. 10-4571

_____________

In Re: K-DUR ANTITRUST LITIGATION

Merck & Co., Inc.;

Upsher-Smith Laboratories, Inc.,

Appellants

________

On Appeal from the United States District Court

for the District of New Jersey

(D.C. No. 2-01-cv-01652)

District Judge: Honorable Garrett E. Brown, Jr.

_______

Argued December 12, 2011

Before: SLOVITER, VANASKIE, Circuit Judges

and STENGEL *, District Judge

(Filed: July 16, 2012)

______

Daniel Berger

Daniel C. Simons

David Francis Sorensen (Argued)

Berger & Montague

Philadelphia, PA l9l03

Bruce E. Gerstein

Kimberly Hennings

Joseph Opper

Barry S. Taus

Garwin Gerstein & Fisher

New York, NY 10036

Peter S. Pearlman

Cohn, Lifland, Pearlman, Herrmann & Knopf

Saddle Brook, NJ 07663

*

Hon. Lawrence F. Stengel, United States District Court

for the Eastern District of Pennsylvania, sitting by

designation.

2

Attorneys for Appellants, No. 10-2077

Barry L. Refsin

Hangley, Aronchick, Segal, Pudlin & Schiller

Philadelphia, PA l9l03

Steve D. Shadowen (Argued)

Hangley, Aronchick, Segal, Pudlin & Schiller

Harrisburg, PA 17101

Attorneys for Appellants, Nos. 10-2078, 10-4571

Deborah S. Corbishley

Scott E. Perwin

Lauren C. Ravkind

Kenny Nachwalter

Miami, FL 33131

Attorneys for Appellants, Nos. 10-4571, 10-2079

Gage Andretta

William E. Goydan

Robert L. Tchack

Wolff & Samson

West Orange, NJ 07052

Jennifer K. Conrad

Steven W. Copley

A. Gregory Grimsal

Gordon, Arata, McCollam, Duplantis & Eagan

New Orleans, LA 70170

Jaime M. Crowe

Christopher M. Curran

White & Case

Washington, DC 20005

Ashley E. Bass

Thomas A. Isaacson

John W. Nields, Jr. (Argued)

Alan M. Wiseman

3

Covington & Burling

Washington, DC 20004

Mark A. Cunningham

David G. Radlauer

Jones Walker

New Orleans, LA 70170

Richard H. Gill

George W. Walker

Copeland Franco Screws & Gills

Montgomery, AL 36101

Richard Hernandez

William J. O’Shaughnessy

McCarter & English

Newark, NJ 07102

Charles A. Loughlin

Baker Botts

Washington, DC 20004

Attorneys for Appellees, Nos. 10-2077, 10-2078

Ellen Meriwether

Cafferty Faucher

Philadelphia, PA l9l03

Attorney for Amicus Appellant

American Antitrust Institute

Proposed Amicus Appellants, Nos. 10-2077, 10-2078

Adam R. Lawton

Jeffrey I. Weinberger

Munger, Tolles & Olson

Los Angeles, CA 90071

Attorneys for Amicus Appellee Pharmaceutical

Research and Manufacturers of America, No. 10-2077

Imad D. Abyad

4

John F. Daly

Federal Trade Commission

Washington, DC 20580

Attorneys for Amicus Appellant Federal Trade

Commission, No. 10-2077

Richard A. Samp

Washington Legal Foundation

Washington, DC 20036

Attorney for Amicus Appellee Washington Legal

Foundation, No. 10-2077

Werner L. Margard, III

Office of Attorney General

Columbus, OH 43266

Attorney for Amicus Appellants, No. 10-2077

Catherine G. O’Sullivan

United States Department of Justice

Appellate Section

Washington, DC 20530

David Seidman

United States Department of Justice

Antitrust Division

Washington, DC 20530

Malcolm L. Stewart (Argued)

United States Department of Justice

Office of Solicitor General

Washington, DC 20530

Attorneys for Amicus Appellant United States,

No. 10-2077

Donald L. Bell, II

National Association of Chain Drug Stores,

Alexandria, VA 22314

5

Attorney for Amicus Appellant Nat’l Ass’n Chain

Drug Stores, Inc., Nos. 10-2077, 10-2078

___________

OPINION OF THE COURT

____________

SLOVITER, Circuit Judge.

In this appeal, we consider the antitrust implications of

an agreement by a manufacturer of a generic drug that, in

return for a payment by the patent holder, agrees to drop its

challenge to the patent and refrain from entering the market

for a specified period of time.

A secondary issue concerns the certification by the

District Court of a class of antitrust plaintiffs. Specifically,

we must determine whether the antitrust injury allegedly

suffered by class members can be shown through common

proof, i.e. proof applicable to all plaintiffs, and whether there

are insurmountable conflicts preventing named plaintiffs from

adequately representing the members of the class.

These appeals arise out of the settlement of two patent

cases involving the drug K-Dur 20 (“K-Dur”), which is

manufactured by Schering-Plough Corporation (“Schering”).

Plaintiffs are Louisiana Wholesale Drug Company, Inc., on

behalf of a class of wholesalers and retailers who purchased

K-Dur directly from Schering and nine individual plaintiffs,

including CVS Pharmacy, Inc., Rite Aid Corporation, and

other pharmacies. Defendants are Schering and Upsher-

Smith Laboratories (“Upsher Smith”). 1

1

In appeals numbered 10-2077, 10-2078, and 10-2079,

Appellants challenge the District Court’s grant of summary

judgment on behalf of defendants, relying on their patents. In

No. 10-4571, defendants challenge the District Court’s

certification of a class of plaintiffs.

6

I. STATUTORY AND REGULATORY

FRAMEWORK

K-Dur is Schering’s brand-name sustained-release

potassium chloride supplement. 2 Sustained-release potassium

chloride is used to treat potassium deficiencies, including

those that arise as a side effect of the use of diuretic products

to treat high blood pressure.

Schering did not hold a patent for the potassium

chloride salt itself, as that compound is commonly known and

not patentable. Instead, Schering held a formulation patent on

the controlled release coating it applied to the potassium

chloride crystals. Schering identified patent number

4,863,743 (“the ‘743 patent”) as the patent that would be

infringed by the production of a generic version of K-Dur.

Schering assigned the ‘743 patent to its subsidiary Key

Pharmaceuticals, Inc. The ‘743 patent was set to expire on

September 5, 2006.

By statute, a pharmaceutical company must obtain

from the Food and Drug Administration (“FDA”) approval

before it may market a prescription drug. 21 U.S.C. § 355(a).

For a new drug, the approval process requires submission of a

New Drug Application (“NDA”), which includes exhaustive

information about the drug, including safety and efficacy

studies, the method of producing the drug, and any patents

issued on the drug’s composition or methods of use. Id. §

355(b)(1). The FDA publishes the patent information

submitted in NDAs in the “Approved Drug Products with

Therapeutic Equivalence Evaluations,” otherwise known as

the “Orange Book.” See FDA Electronic Orange Book,

http://www.fda.gov/cder/ob/.

In 1984, attempting to jumpstart generic competition

with name brand pharmaceuticals, Congress passed the Drug

2

After the facts at issue in this case, Merck & Co.

acquired Schering, the named defendant in these actions.

However, in keeping with the practice of the parties and

amici, the court will refer to Schering.

7

Price Competition and Patent Term Restoration Act,

commonly known as the Hatch-Waxman Act. Pub. L. No.

98-417, 98 Stat. 1585 (1984). The Hatch-Waxman Act

amended the Federal Food, Drug, and Cosmetic Act, 21

U.S.C. §§ 301-399, to permit a potential manufacturer of a

generic version of a patented drug to file an abbreviated

application for approval with the FDA. See 21 U.S.C. §

355(j). This short form application, known as an Abbreviated

New Drug Application (“ANDA”), may rely on the FDA’s

prior determinations of safety and efficacy made in

considering the application of the patented drug. Id. §

355(j)(2)(A).

When a generic manufacturer files an ANDA, it is also

required to file a certification that, “in the opinion of the

applicant and to the best of his knowledge,” the proposed

generic drug does not infringe any patent listed with the FDA

as covering the patented drug. Id. § 355(j)(2)(A)(vii). The

generic manufacturer can satisfy this requirement by

certifying one of the following four options with respect to

the patent for the listed drug: “(I) that such patent

information has not been filed, (II) that such patent has

expired, (III) [by certifying] the date on which such patent

will expire, or (IV) that such patent is invalid or will not be

infringed by the manufacture, use, or sale of the new drug for

which the application is submitted.” Id. § 355(j)(2)(A)(vii).

The generic manufacturers at issue here, Upsher and ESI,

used the fourth of these certification options, the so-called

“paragraph IV certification.” Id. § 355(j)(2)(A)(vii)(IV).

When a would-be generic manufacturer submits a paragraph

IV certification, it must consult the Orange Book and provide

written notice to each listed patent owner impacted by the

ANDA. Id. § 355(j)(2)(B)(iii)(I). By statute, a paragraph IV

certification constitutes a technical act of patent infringement.

35 U.S.C. § 271(e)(2)(A).

Upon receiving notice of a paragraph IV certification

with respect to one of its pharmaceutical patents, the patent

holder may initiate an infringement suit based on the filing of

the paragraph IV certification alone within forty-five days

after the generic applicant files its ANDA and paragraph IV

8

certification. 21 U.S.C. § 355(j)(5)(B)(iii). Filing suit by the

patent holder within that window effects an automatic stay

that prevents the FDA from approving the generic drug until

the earlier of (1) thirty months have run or (2) the court

hearing the patent challenge finds that the patent is either

invalid or not infringed. Id. § 355(j)(5)(B)(iii)(I).

Congress explained that the purpose of the Hatch-

Waxman Act is “to make available more low cost generic

drugs.” H.R. Rep. No. 98-857(I), at 14-15, reprinted in 1984

U.S.C.C.A.N. 2647, 2647-48. In order to encourage generic

entry and challenges to drug patents, the Hatch-Waxman Act

rewards the first generic manufacturer who submits an

ANDA and a paragraph IV certification by providing it with a

180-day period during which the FDA will not approve

subsequent ANDA applications. 21 U.S.C. §

355(j)(5)(B)(iv). The 180-day exclusivity period is triggered

on the date on which the first ANDA applicant begins

commercial marketing of its drug. Id. Notably, the 180-day

exclusivity window is only available to the first filer of an

ANDA with a paragraph IV certification, meaning that even

if the first filer never becomes eligible to use its 180-day

exclusivity period because it settles, loses, or withdraws the

litigation, that potential benefit will not pass to subsequent

filers. 21 U.S.C. § 355(j)(5)(D)(iii). It has been suggested

that the first filer is usually the most motivated challenger to

the patent holder’s claimed intellectual property. See C. Scott

Hemphill, Paying for Delay: Pharmaceutical Patent

Settlement as a Regulatory Design Problem, 81 N.Y.U. L.

Rev. 1553, 1583 (2006) (noting “a sharp difference in

incentives . . . between [the first paragraph IV] filer and all

other generic firms”).

As explained further below, in the years after the

passage of Hatch-Waxman, some of the patent infringement

suits occurring under the Hatch-Waxman framework were

resolved through settlement agreements in which the patent

holder paid the would-be generic manufacturer to drop its

patent challenge and refrain from producing a generic drug

for a specified period. These agreements are known as

“reverse payment agreements” or “exclusion agreements.”

9

Concerned about the possible anticompetitive effects of

reverse payment agreements, see S. Rep. No. 107-167, at 4

(2002), Congress amended Hatch-Waxman as part of the

Medicare Prescription Drug, Improvement, and

Modernization Act of 2003. Those amendments require

branded and generic pharmaceutical companies who enter

into patent litigation settlements to file those settlement

agreements with the Federal Trade Commission (“FTC”) and

the Department of Justice (“DOJ”) for antitrust review. Pub.

L. No. 108-173, §§ 1111-1118, 117 Stat. 2066, 2461-64

(codified as amended at 21 U.S.C. § 355(j)).

II. FACTUAL AND PROCEDURAL

BACKGROUND

A. Approval of the ‘743 Patent

The patented invention claims a controlled-release

dispersible potassium chloride tablet. The ‘743 patent was

developed using a technique called “microencapsulation,” a

process in which small particles of a drug are coated to make

them disperse over time. The research supporting the ‘743

patent built on work that Schering had done for an earlier

patent for a controlled-release aspirin tablet, Patent No.

4,555,399 (“the ‘399 patent”). The application for what

became the ‘743 patent was initially rejected by the Patent

and Trademark Office (“PTO”) as obvious in light of the ‘399

patent and other prior art. In order to circumvent the prior art,

Schering amended its application for what became the ‘743

patent to clarify that the controlled release coating in the

invention contained ethylcellulose with a viscosity of greater

than 40 cp, 3 whereas the ‘399 patent called for the use of

ethylcellulose with a viscosity of 9-11 cp. Schering argued

that a coating containing ethylcellulose of greater than 40 cp

was not obvious under the prior art. After this amendment,

the PTO granted the ‘743 patent on September 5, 1989.

3

Centipoise, abbreviated “cp”, is a measure of viscosity.

McGraw-Hill Dictionary of Scientific and Technical Terms

354 (6th ed. 2003).

10

B. The Schering-Upsher Litigation and

Settlement

In August 1995, Upsher filed the first ANDA seeking

approval to produce a generic version of K-Dur to be called

Klor-Con M20. Upsher provided a paragraph IV certification

to Schering in November 1995, certifying that its generic

would not infringe Schering’s ‘743 patent. On December 15,

1995, within the forty-five-day window provided by Hatch-

Waxman, Schering sued Upsher in the District of New Jersey

for patent infringement, triggering the 30-month automatic

stay in FDA approval of Upsher’s generic.

Upsher’s defense against Schering’s patent

infringement suit was based on differences between the

chemical composition of the controlled release coating in its

generic product and that of the invention claimed in the ‘743

patent. Throughout the litigation, Upsher vigorously

defended against Schering’s infringement claims, at one point

telling the court that Schering’s claims of infringement “are

baseless and could not have been made in good faith.” App.

at 3610.

The parties began trying to settle the infringement case

at least as early as May 1997. During settlement negotiations,

Upsher requested both a cash payment and an early entry date

for its generic product. However, Schering expressed

concern about possible antitrust problems that might arise if it

made a reverse payment.

In the early morning of June 18, 1997, just hours before

the District Court was to rule on the pending cross motions for

summary judgment and begin, if necessary, a patent trial,

Upsher and Schering agreed to settle the case. The settlement

was memorialized in an eleven-page short-form agreement dated

June 17, 1997 (“the Schering-Upsher agreement”). That

agreement provided that, while Upsher did not concede the

validity, infringement, or enforceability of the ‘743 patent, it

would refrain from marketing its generic potassium chloride

supplement or any similar product until September 1, 2001, at

which point it would receive a non-royalty non-exclusive license

11

under the ‘743 patent to make and sell a generic form of Klor-

Con. Additionally, Upsher granted Schering licenses to make

and sell several pharmaceutical products Upsher had developed,

including Niacor-SR, a sustained-release niacin product used to

treat high cholesterol. In return, Schering promised to pay

Upsher sixty million dollars ($60,000,000) over three years, plus

additional smaller sums depending upon its sales of Niacor-SR

in defined markets. While the parties to this litigation dispute

whether the payment was solely for the licensing of Upsher

products or instead formed part of the consideration for

dropping the patent action, the agreement lists Upsher’s

promises to dismiss the patent infringement action and not to

market any sustained-release microencapsulated potassium

chloride tablet until September 1, 2001, as part of the

consideration for the payment.

The settlement agreement and the acquisition of

licenses from Upsher were ratified by Schering’s board of

directors on June 24, 1997. Subsequent to the settlement,

Upsher and Schering abandoned plans to make and market

Niacor-SR.

In this action, the parties dispute the facts related to the

Niacor-SR license. Plaintiffs contend that the license was a

sham and that the $60 million paid as royalties for Niacor-SR

was actually compensation for Upsher’s agreement to delay

the entry of its generic extended-release potassium tablet. On

the other hand, defendants contend that Schering’s board

valued the license deal separately and that $60 million was its

good faith valuation of the licenses at the time.

C. The Schering-ESI Litigation and

Settlement

In December 1995, ESI Lederle 4 (“ESI”) filed an

ANDA seeking FDA approval to make and sell a generic

4

ESI is the generic division of American Home Products,

Inc., which changed its name to Wyeth in 2002. Melody

Peterson, American Home Is Changing Name to Wyeth, New

York Times, Mar. 11, 2002. Wyeth was subsequently

12

version of K-Dur along with a paragraph IV certification

stating that its proposed generic did not infringe the ‘743

patent. Within the forty-five-day period provided by the

Hatch-Waxman Act, Schering sued ESI for patent

infringement in the Eastern District of Pennsylvania. ESI

defended on the ground that, unlike K-Dur, its generic

equivalent did not employ a “coating material with two

different ingredients” as specified by the ‘743 patent, but

rather was made by a “different technology which produces a

multi-layered coating with each layer comprised of a separate

material having only a single ingredient.” App. at 1696-97.

In the fall of 1996, Schering and ESI agreed to

participate in court-supervised mediation before a magistrate

judge. The settlement agreement the parties eventually

reached (“the Schering-ESI agreement”) called for Schering

to grant ESI a royalty-free license under the ‘743 patent

beginning on January 1, 2004. In exchange, Schering would

pay ESI $5 million up front and a varying sum depending on

when ESI’s ANDA was approved by the FDA. Specifically,

Schering agreed to pay ESI an amount ranging from a

maximum of $10 million if ESI’s ANDA was approved

before July 1999 down to a minimum of $625,000 if the

ANDA was not approved until 2002. As part of the

settlement, ESI also represented that it was not developing

and had no plans to develop any other potassium chloride

product.

The FDA approved ESI’s generic K-Dur product in

May 1999, and Schering paid ESI the additional $10 million

as required under the settlement agreement.

D. The FTC Action

acquired by Pfizer, Inc. in 2009. Pfizer, “Wyeth

Transaction,” http://www.pfizer.com/investors/

shareholder_services/wyeth_transaction.jsp (last visited May

8, 2012). Plaintiffs settled their claims against ESI’s

corporate parent Wyeth in January 2005.

13

In March 2001, the FTC filed a complaint against

Schering, Upsher, and ESI alleging that Schering’s

settlements with Upsher and ESI unreasonably restrained

commerce in violation of Section 5 of the Federal Trade

Commission Act, 15 U.S.C. § 45. Specifically, the FTC

alleged that the settlement payments from Schering to Upsher

and ESI constituted reverse payments intended to delay

generic entry and improperly preserve Schering’s monopoly.

In June 2002, after a lengthy trial, the Administrative

Law Judge (“ALJ”) issued an initial decision dismissing the

FTC’s complaint and finding that neither agreement violated

Section 5 of the FTC Act. In re Schering-Plough Corp.,

Initial Decision, 136 F.T.C. 1092, 1263 (2002). The ALJ

found that there was no reverse payment in the Schering-

Upsher agreement because the licensing deal included in that

agreement was separately valued and was not a payment to

Upsher to delay generic entry. Id. at 1243. The ALJ also

found that the Schering-ESI agreement was not an attempt to

unlawfully preserve Schering’s monopoly power in the

market. Id. at 1236, 1262-63.

In December 2003, the FTC unanimously reversed the

ALJ’s ruling, finding that there was a “direct nexus between

Schering’s payment and Upsher’s agreement to delay its

competitive entry” and that this agreement “unreasonably

restrain[ed] commerce.” In re Schering-Plough Corp., Final

Order, 136 F.T.C. 956, 1052 (2003). The FTC likewise found

that the ESI settlement violated antitrust law, noting that

Schering had not attempted to rebut the natural presumption

that the payment to ESI was for delay in generic entry, except

to argue unpersuasively that the parties felt judicial pressure

to settle. Id. at 1056-57. In making these determinations, the

FTC found that it was “neither necessary nor helpful to delve

into the merits of the [underlying patent disputes].” Id. at

1055. Rather, the FTC determined that, where a name brand

pharmaceutical maker pays a generic manufacturer as part of

a settlement, “[a]bsent proof of other offsetting consideration,

it is logical to conclude that the quid pro quo for the payment

was an agreement by the generic to defer entry beyond the

date that represents an otherwise reasonable litigation

14

compromise.” Id. at 988. In applying the rule of reason, the

FTC concluded that the possible existence of a reverse

payment raises a red flag and can give rise to a prima facie

case that an agreement is anticompetitive. Id. at 991, 1000-

01. The FTC concluded that the reverse payment at issue was

illegal because the settling parties could show neither (1) that

the payment was for something other than delay of generic

entry nor (2) that the payment had pro-competitive effects.

Id. at 988-89, 1061.

Schering appealed the FTC’s ruling to the Eleventh

Circuit, which reversed in Schering-Plough Corp. v. FTC,

402 F.3d 1056 (11th Cir. 2005). The Eleventh Circuit’s

ruling in Schering-Plough is discussed in Section III(C) infra.

E. The Instant Litigation

Separate from the FTC’s challenge, various private

parties filed antitrust suits attacking the settlements. Those

suits, the matters giving rise to this appeal, were

consolidated in the District of New Jersey by the Judicial

Panel on Multidistrict Litigation. In 2006, by consent of the

parties, the District Court appointed Stephen Orlofsky as

Special Master with responsibility to handle all motions,

including motions for class certification and summary

judgment. 5

5

Because there was no objection to the appointment of a

Special Master, we have no occasion to address the use of

Special Master to prepare Reports and Recommendations on

summary judgment motions. See In re Bituminous Coal

Operators’ Ass’n, Inc., 949 F.2d 1165, 1168 (D.C. Cir. 1991)

(“Rule 53 of the Federal Rules of Civil Procedure authorizes

the appointment of special masters to assist, not to replace,

the adjudicator, whether judge or jury, constitutionally

indicated for federal court litigation.”) (emphasis in original)

(citing La Buy v. Howes Leather Co., Inc., 352 U.S. 249, 256

(1957)).

15

On April 14, 2008, the Special Master certified a class

of plaintiffs consisting of forty-four wholesalers and retailers

who purchased K-Dur directly from Schering. The District

Court adopted that decision on December 30, 2008. 6

In February 2009, the Special Master issued a Report

and Recommendation granting defendants’ motions for

summary judgment and denying plaintiffs’ motions for partial

summary judgment. In his Report and Recommendation, the

Special Master applied a presumption that Schering’s ‘743

patent was valid and that it gave Schering the right to exclude

infringing products until the end of its term, including

through reverse payment settlements. Under this analysis, the

settlements in this case would only be subject to antitrust

scrutiny if (1) they exceeded the scope of the ‘743 patent or

(2) the underlying patent infringement suits were objectively

baseless. The Special Master determined that neither of these

exceptions applied. The District Court subsequently adopted

the Report and Recommendation in its entirety.

F. Economic Background and the History

of Reverse Payment Settlements

Reverse payment settlements appear to be unique to

the Hatch-Waxman context, and the FTC has made them a

top enforcement priority in recent years. A 2010 analysis by

the FTC found that reverse payment settlements cost

consumers $3.5 billion annually. FTC, Pay-for-Delay: How

Drug Company Pay-Offs Cost Consumers Billions 2 (2010),

available at http://www.ftc.gov/os/2010/01/100112

payfordelayrpt.pdf. The FTC estimates that about one year

after market entry an average generic pharmaceutical product

takes over ninety percent of the patent holder’s unit sales and

sells for fifteen percent of the price of the name brand

product. Id. at 8. This price differential means that

consumers, rather than generic producers, are typically the

biggest beneficiaries of generic entry.

6

The class certification decision is discussed in Section

IV infra.

16

III. THE ANTITRUST ISSUE (Appeals Nos.

10-2077, 10-2078, 10-2079)

A. Jurisdiction and Standard of Review

The District Court had jurisdiction pursuant to 15

U.S.C. § 15(a) and 28 U.S.C. §§ 1331 and 1337. This court

has jurisdiction over the antitrust appeals pursuant to 28

U.S.C. § 1291.

This court exercises plenary review of the District

Court’s grant of summary judgment, applying the same

summary judgment standard that guides the District Court.

Eichenlaub v. Twp. of Indiana, 385 F.3d 274, 279 (3d Cir.

2004).

B. General Antitrust Standard

The Sherman Act provides, in part, that “[e]very

contract, combination in the form of trust or otherwise, or

conspiracy, in restraint of trade or commerce among the

several States, or with foreign nations, is declared to be

illegal.” 15 U.S.C. § 1. Under a literal reading, this provision

would make illegal every agreement in restraint of trade. See

Arizona v. Maricopa Cnty. Med. Soc’y, 457 U.S. 332, 342

(1982). However, it has not been so interpreted. Rather the

Supreme Court has long construed it to prohibit only

unreasonable restraints. See State Oil Co. v. Khan, 522 U.S.

3, 10 (1997). Whether a restraint qualifies as unreasonable

and therefore conflicts with the statute is normally evaluated

under the “rule of reason.” Id. Applying this approach, “the

finder of fact must decide whether the questioned practice

imposes an unreasonable restraint on competition, taking into

account a variety of factors, including specific information

about the relevant business, its condition before and after the

restraint was imposed, and the restraint’s history, nature, and

effect.” Id. This inquiry has been divided into three parts.

First, the plaintiff must show that the challenged conduct has

produced anti-competitive effects within the market. United

States v. Brown Univ., 5 F.3d 658, 668 (3d Cir. 1993). If the

plaintiff meets the initial burden, “the burden shifts to the

17

defendant to show that the challenged conduct promotes a

sufficiently pro-competitive objective.” Id. at 669. Finally,

the plaintiff can rebut the defendant’s purported pro-

competitive justification by showing that the restraint is not

reasonably necessary to achieve the pro-competitive

objective. Id.

Courts have recognized, however, that “[s]ome types

of restraints . . . have such predictable and pernicious

anticompetitive effect, and such limited potential for

pro-competitive benefit, that they [should be] deemed

unlawful per se.” State Oil Co., 522 U.S. at 10. Examples of

agreements that have been held unlawful pursuant to the per

se rule include horizontal price fixing, output limitations,

market allocation, and group boycotts. See Copperweld

Corp. v. Independence Tube Corp., 467 U.S. 752, 768 (1984);

N. Pac. Ry. v. United States, 356 U.S. 1, 5 (1958). The per se

rule is applied where a “practice facially appears to be one

that would always or almost always tend to restrict

competition or decrease output.” Broad. Music, Inc. v. CBS,

Inc., 441 U.S. 1, 19-20 (1979).

In some situations, courts apply an antitrust analysis

that falls between the full rule of reason inquiry on the one

hand and the rigid per se approach on the other. This so-

called “quick look” or “truncated rule of reason” analysis

applies where the plaintiff has shown that the defendant has

engaged in practices similar to those subject to per se

treatment. See Brown Univ., 5 F.3d at 669. Having so

shown, plaintiff is not required to make a full showing of

anti-competitive effects within the market; rather defendant

has the burden of demonstrating pro-competitive

justifications. Id.

C. Precedent from Other Circuits

Neither this court nor the Supreme Court has yet

weighed in on the legality of reverse payment settlements.

However, five other circuits have addressed the question.

Two of those courts – the first two to consider the question –

concluded that such agreements should be subject to strict

18

antitrust scrutiny, at least where the settling parties attempted

to manipulate the 180-day exclusivity period to block all

potential generic competition. The three courts to address the

question of reverse payments more recently have reached a

contrary result, ruling that such agreements are permissible so

long as they do not exceed the potential exclusionary scope of

the patent.

1. D.C. Circuit – Andrx Pharms., Inc. v.

Biovail Corp. Int’l, 256 F.3d 799

(D.C. Cir. 2001)

The D.C. Circuit considered a reverse payment in

Andrx Pharmaceuticals, Inc. v. Biovail Corp. International,

256 F.3d 799 (D.C. Cir. 2001), cert. denied, 535 U.S. 931

(2002). Unlike the instant case, that case did not involve a

settlement resolving patent litigation. Rather, while allowing

the patent litigation to continue, the name brand manufacturer

agreed to compensate the would-be generic producer to delay

marketing a generic product.

In September 1995, Andrx Pharmaceuticals (“Andrx”)

filed an ANDA seeking to manufacture and sell a generic

form of Cardizem CD, a heart drug for which Hoechst Marion

Russell, Inc. (“HMRI”) held the patent. Id. at 803. Andrx

filed a paragraph IV certification and was timely sued for

patent infringement by HMRI. Id. The filing of the patent

infringement suit triggered the thirty-month waiting period

during which the FDA could not give final approval to Andrx

or any subsequent ANDA applicants seeking to make a

generic version of Cardizem CD. Id. (citing 21 U.S.C.

§ 355(j)(5)(B)(iii)). In June 1997, a second generic

manufacturer, Biovail Corp. International (“Biovail”), filed an

ANDA and a paragraph IV certification to produce generic

Cardizem CD. Shortly thereafter, the FDA issued a tentative

approval of Andrx’s ANDA. Id.

Soon after the tentative approval was issued, HMRI

and Andrx entered into an agreement pursuant to which

HMRI would pay Andrx $40 million per year beginning on

the date that Andrx received final approval from the FDA and

19

ending on the date that Andrx either began selling generic

Cardizem CD or was adjudged liable for patent infringement

in the pending suit. Id. The apparent purpose of this

agreement was to create a bottleneck by delaying the

triggering of Andrx’s 180-day period of exclusivity, and

thereby delaying generic entry not only by Andrx but also by

any other potential generic manufacturer. Id. at 804.

The D.C. Circuit reversed the district court’s dismissal

with prejudice of Biovail’s antitrust claims, holding that the

agreement between HMRI and Andrx could “reasonably be

viewed as an attempt to allocate market share and preserve

monopolistic conditions.” Id. at 811. The D.C. Circuit

treated the payment from HMRI to Andrx as prima facie

evidence of an illegal agreement not to compete, noting that

“Andrx’s argument that any rational actor would wait for

resolution of the patent infringement suit [before triggering

the 180-day exclusivity period] is belied by the quid of

HRMI’s quo.” Id. at 813.

2. Sixth Circuit – In re Cardizem CD

Antitrust Litig., 332 F.3d 896 (6th

Cir. 2003)

The Sixth Circuit’s decision of In re Cardizem CD

Antitrust Litigation concerned the same agreement considered

by the D.C. Circuit in Andrx. 332 F.3d 896 (6th Cir. 2003),

cert. denied, 543 U.S. 939 (2004). The Sixth Circuit case was

brought by direct and indirect purchasers of Cardizem CD

who alleged that they suffered antitrust harm as a result of

Andrx’s agreement with HRMI to delay market entry. Id. at

903-04. The Sixth Circuit held that the Andrx-HRMI

agreement was “a horizontal agreement to eliminate

competition in the market for Cardizem CD throughout the

entire United States, a classic example of a per se illegal

restraint of trade.” Id. at 908.

While both Cardizem and Andrx concerned an

agreement that caused a bottleneck by preventing other

generic manufactures from entering the market by delaying

the triggering of the first filer’s 180-day exclusivity period,

20

much of the Sixth Circuit’s reasoning in Cardizem is equally

applicable to cases, like the instant one, that do not involve

bottlenecking. Specifically, the Sixth Circuit emphasized its

concern that, even setting aside the bar to subsequent generic

applicants, HMRI had paid Andrx not to enter the market

itself, stating, “it is one thing to take advantage of a monopoly

that naturally arises from a patent, but another thing

altogether to bolster the patent’s effectiveness in inhibiting

competitors by paying the only potential competitor $40

million per year to stay out of the market.” Id. at 908.

3. Eleventh Circuit – Valley Drug Co. v.

Geneva Pharms., Inc., 344 F.3d 1294

(11th Cir. 2003) and Schering-Plough

Corp. v. FTC, 402 F.3d 1056 (11th

Cir. 2005)

The Eleventh Circuit has also considered the question

of reverse payments settlements in three significant cases.

The first of these, Valley Drug Co. v. Geneva

Pharmaceuticals, Inc., 344 F.3d 1294 (11th Cir. 2003), cert.

denied, 543 U.S. 939 (2004), concerned two agreements

arising out of cases where a name brand drug manufacturer

sued generic manufacturers for patent infringement and the

generic manufacturers defended on the ground of patent

invalidity. 7 Id. at 1299-301. In the two agreements at issue,

the name brand manufacturer agreed to pay the generic

manufacturer substantial sums to refrain from entering the

market until the end of the name brand manufacturer’s patent

term. Id. at 1300. The patent at issue was subsequently

declared invalid in another case. Id. at 1306-07. The district

court granted summary judgment to antitrust plaintiffs,

holding that the settlements were per se violations of the

Sherman Act. Id. at 1301. The Eleventh Circuit reversed on

the ground that the name brand manufacturer held a patent

that gave it the right to exclude competitors. Id. at 1306. In

7

One of these agreements was a final settlement of certain

claims, the other was structured, like the agreements in Andrx

and Cardizem, to take effect even as the litigation continued.

See Valley Drug, 344 F.3d at 1300.

21

so ruling, the court emphasized the fact that the name brand

manufacturer might have prevailed in the underlying patent

litigation, id. at 1309, and highlighted policy considerations

favoring the settlement of patent litigation, id. at 1308 n.20.

The court applied neither a per se nor rule of reason analysis

to the agreements as a whole; rather, it directed the district

court to first determine whether any part of the agreement

went beyond the protections afforded by the name brand

manufacturer’s patent and, if so, to apply traditional antitrust

scrutiny only to those portions of the agreement. Id. at 1311-

1312.

A subsequent Eleventh Circuit case, Schering-Plough

Corp. v. FTC, arose out of the same settlement agreement as

the instant appeal. 8 402 F.3d 1056 (11th Cir. 2005), cert.

denied, 548 U.S. 919 (2006). After the FTC found that both

agreements violated antitrust laws, the defendants appealed to

the Eleventh Circuit. Applying the test articulated in Valley

Drug, the Eleventh Circuit set aside the ruling of the FTC. Id.

at 1065-66, 1076. The court rejected the FTC’s conclusion

that Schering’s $60 million payment to Upsher was for

something other than the licenses it obtained, finding by

“overwhelming evidence” that the payment was only for the

licenses. Id. 1069-71. As such, the court found that there

was no reverse payment from Schering to Upsher and thus

necessarily no antitrust violation in that agreement. Id. With

respect to the ESI settlement, the court acknowledged the

8

Defendants argue in passing that this court should begin

its analysis in this case with a strong presumption in favor of

following the Eleventh Circuit’s decision in Schering-Plough.

However, none of the cases cited by defendants employs such

a presumption; rather, they stand for the unsurprising

proposition that this court will follow the decisions of its

sister courts where it finds them persuasive. See, e.g.,

Ramadan v. Chase Manhattan Corp., 229 F.3d 194, 197-203

(3d Cir. 2000) (following the rulings of other courts of appeal

on similar facts but conducting an independent analysis). As

explained below, we do not find the Eleventh Circuit’s

decision in Schering-Plough persuasive, and thus decline to

follow it.

22

presence of a reverse payment but concluded that the payment

was acceptable in light of judicial policy favoring settlements

and the court’s finding that the settlement terms “‘reflect[ed]

a reasonable implementation’ of the protections afforded by

patent law.” Id. at 1072 (quoting Valley Drug, 344 F.3d at

1312). 9

Plaintiffs construe Valley Drug and Schering-Plough

as requiring courts to conduct an ex post evaluation of the

strength of the underlying patent before determining whether

the patent shields an agreement from antitrust scrutiny.

However, following oral argument in this case, the Eleventh

Circuit explicitly rejected that interpretation of its prior

holdings. In FTC v. Watson Pharmaceuticals, Inc., the

Eleventh Circuit clarified that its prior opinions did not call

for an evaluation of the strength of the patent but rather only a

determination whether, absent sham litigation or fraud in

obtaining the patent, the settlement agreement exceeded the

scope of the patent. FTC v. Watson Pharms, Inc., No. 10-

12729, 2012 WL 1427789, at *11 n.8, *12 (11th Cir. Apr. 25,

2012). Thus the standard applied by the Eleventh Circuit is

identical to the scope of the patent test applied by the Second

Circuit to which we now turn.

4. Second Circuit – In re Tamoxifen

Citrate Antitrust Litig., 466 F.3d 187

(2d Cir. 2006)

The Second Circuit’s decision of In re Tamoxifen

Citrate Antitrust Litigation arose out of an agreement settling

a patent infringement suit over the drug tamoxifen, then the

most widely prescribed drug for the treatment of breast

cancer. 466 F.3d 187, 190 (2d Cir. 2006), cert. denied, 551

U.S. 1144 (2007). That settlement was reached while the

patent case was on appeal after the district court had ruled the

9

The Eleventh Circuit subsequently applied, without

further significant explication, the scope of the patent test

announced in Valley Drug and Schering-Plough in another

case, Andrx Pharmaceuticals, Inc. v. Elan Corporation, PLC,

421 F.3d 1227 (11th Cir. 2005).

23

patent invalid. Id. The settlement called for the name brand

manufacturer to grant the generic manufacturer a license to

sell an unbranded version of tamoxifen and make a reverse

payment of $21 million to the generic manufacturer. The

settlement was contingent on obtaining a vacatur of the

district court’s judgment holding the patent to be invalid,

which was subsequently obtained. Id.

Affirming the district court’s dismissal of antitrust

plaintiffs’ claims, the Second Circuit applied a presumption

of patent validity and held that “there is no injury to the

market cognizable under existing antitrust law, as long as

competition is restrained only within the scope of the patent.”

Id. at 213 (internal citations and quotation marks omitted).

The only exceptions to this rule, the court held, occur where

there is evidence that the patent was procured by fraud or that

the enforcement suit was objectively baseless. Id. This test is

commonly referred to as the “scope of the patent test” or the

“Tamoxifen test.” The Second Circuit conceded that there

was a potentially troubling result of such a rule in that “[t]he

less sound the patent or the less clear the infringement, and

therefore the less justified the monopoly enjoyed by the

patent holder, the more a rule permitting settlement is likely

to benefit the patent holder by allowing it to retain the

patent.” Id. at 211. The court determined, however, that this

risk was counterbalanced by the judicial preference for

settlement. Id.

In reaching this conclusion, the Second Circuit

concluded that “the Hatch-Waxman Act created an

environment that encourages [reverse payments]” because,

unlike traditional infringement suits where the patent holder

can negotiate by agreeing to forego the infringement damages

it expects to recover, there usually are no infringement

damages in Hatch-Waxman suits. Id. at 206. The Second

Circuit thus reasoned that the “reverse payments” common in

Hatch-Waxman suits are less troubling because they take the

place of infringement damages that the patent holder might

have otherwise waived in order to reach a settlement. Id.

24

Judge Pooler dissented from the decision in

Tamoxifen, contending that the scope of the patent rule

applied by the majority “is not soundly grounded in Supreme

Court precedent and is insufficiently protective of the

consumer interests safeguarded by the Hatch-Waxman Act

and the antitrust laws.” Id. at 224 (Pooler, J., dissenting).

Judge Pooler argued, inter alia, that judicial reevaluation of

patent validity is a public good that reverse payment

settlements undercut, id. at 225-26, and suggested that the

proper antitrust standard is one of reasonableness considering

all the circumstances affecting a restrictive agreement

including (1) the strength of the patent as it appeared at the

time of settlement, (2) the amount of the reverse payment, (3)

the amount the generic manufacturer would have made during

its 180-day exclusivity period, and (4) any ancillary anti-

competitive effects of the agreement. Id. at 228.

In a subsequent reverse payment case, Arkansas

Carpenters Health & Welfare Fund v. Bayer AG, the Second

Circuit applied the Tamoxifen standard and rejected an

antitrust challenge to a Hatch-Waxman settlement involving a

reverse payment. 604 F.3d 98 (2d Cir. 2010), cert. denied,

131 S. Ct. 1606 (2011). However, the judges on the Arkansas

Carpenters panel made clear that they thought that Tamoxifen

was wrongly decided and invited appellants to petition for

rehearing en banc. Id. at 108-10. Among other things, the

Arkansas Carpenters court noted its concern about evidence

suggesting that the number of reverse payment settlements

had increased dramatically in the wake of the Tamoxifen

decision. Id. at 109. Rehearing en banc was subsequently

denied over a dissent from Judge Pooler. Ark. Carpenters

Health & Welfare Fund v. Bayer AG, 625 F.3d 779 (2d Cir.

2010).

5. Federal Circuit – In re Ciprofloxacin

Hydrochloride Antitrust Litig., 544

F.3d 1323 (Fed. Cir. 2008)

In In re Ciprofloxacin Hydrochloride Antitrust

Litigation the Federal Circuit considered a case related to

those confronted by the Second Circuit in Arkansas

25

Carpenters. 544 F.3d 1323 (Fed. Cir. 2008), cert. denied,

129 S. Ct. 2828 (2009). 10 The Federal Circuit applied the

scope of the patent test explicated in Tamoxifen and other

cases, stating, “[t]he essence of the inquiry is whether the

agreements restrict competition beyond the exclusionary zone

of the patent.” Id. at 1336. The court further “agree[d] with

the Second and Eleventh Circuits . . . that, in the absence of

evidence of fraud before the PTO or sham litigation, the court

need not consider the validity of the patent in the antitrust

analysis of a settlement agreement involving a reverse

payment.” Id.

D. Analysis

While the first two courts of appeal to address the

issue of reverse payments subjected those agreements to

antitrust scrutiny, later courts have gravitated toward the

scope of the patent test under which reverse payments are

permitted so long as (1) the exclusion does not exceed the

patent’s scope, (2) the patent holder’s claim of infringement

was not objectively baseless, and (3) the patent was not

procured by fraud on the PTO. The scope of the patent test

was applied by the Special Master in this case and has been

applied by at least one other district court in this circuit. See

King Drug Co. of Florence, Inc. v. Cephalon, Inc., 702 F.

Supp. 2d 514, 528-29, 533 (E.D. Pa. 2010) (applying scope of

the patent test but denying defendants’ motion to dismiss

where plaintiffs pleaded facts supporting their claim that the

underlying patent suit was objectively baseless). As a

practical matter, the scope of the patent test does not subject

reverse payment agreements to any antitrust scrutiny. As the

antitrust defendants concede, no court applying the scope of

the patent test has ever permitted a reverse payment antitrust

case to go to trial.

10

That case was severed by the Second Circuit and

transferred to the Federal Circuit because it involved a claim

arising out of patent law. See Order, No. 05-2863 (2d Cir.

Nov. 7, 2007).

26

After consideration of the arguments of counsel, the

conflicting decisions in the other circuits, the Report of the

Special Master, and our own reading, we cannot agree with

those courts that apply the scope of the patent test. In our

view, that test improperly restricts the application of antitrust

law and is contrary to the policies underlying the Hatch-

Waxman Act and a long line of Supreme Court precedent on

patent litigation and competition.

First, we take issue with the scope of the patent test’s

almost unrebuttable presumption of patent validity. This

presumption assumes away the question being litigated in the

underlying patent suit, enforcing a presumption that the patent

holder would have prevailed. We can identify no significant

support for such a policy. While persons challenging the

validity of a patent in litigation bear the burden of defeating a

presumption of validity, this presumption is intended merely

as a procedural device and is not a substantive right of the

patent holder. See Stratoflex, Inc. v. Aeroquip Corp., 713

F.2d 1530, 1534 (Fed. Cir. 1983) (“The presumption, like all

legal presumptions, is a procedural device, not substantive

law.”). Moreover, the effectively conclusive presumption

that a patent holder is entitled to exclude competitors is

particularly misguided with respect to agreements – like those

here – where the underlying suit concerned patent

infringement rather than patent validity: In infringement cases

it is the patent holder who bears the burden of showing

infringement. See Egyptian Goddess, Inc. v. Swisa, Inc., 543

F.3d 665, 679 (Fed. Cir. 2008).

Rather than adopt an unrebuttable presumption of

patent validity, we believe courts must be mindful of the fact

that “[a] patent, in the last analysis, simply represents a legal

conclusion reached by the Patent Office.” Lear, Inc. v.

Adkins, 395 U.S. 653, 670 (1969). Many patents issued by

the PTO are later found to be invalid or not infringed, and a

2002 study conducted by the FTC concluded that, in Hatch-

Waxman challenges made under paragraph IV, the generic

challenger prevailed seventy-three percent of the time. See

FTC, Generic Drug Entry Prior to Patent Expiration 16

(2002), available at http://www.ftc.gov/os/2002/07/

27

genericdrugstudy.pdf; Kimberly A. Moore, Judges, Juries,

and Patent Cases – An Empirical Peek Inside the Black Box,

99 Mich. L. Rev. 365, 385 (2000) (noting that between 1983

and 1999 the alleged infringer prevailed in forty-two percent

of patent cases that reached trial). 11 These figures add force

to the likelihood – conceded by the Tamoxifen majority – that

reverse payments enable the holder of a patent that the holder

knows is weak to buy its way out of both competition with

the challenging competitor and possible invalidation of the

patent. 466 F.3d at 211 (“The less sound the patent or the less

clear the infringement, and therefore the less justified the

monopoly enjoyed by the patent holder, the more a rule

permitting settlement is likely to benefit the patent holder by

allowing it to retain the patent.”).

Moreover, we question the assumption underlying the

view of the Second Circuit and other courts that subsequent

challenges by other generic manufacturers will suffice to

eliminate weak patents preserved through a reverse payment

to the initial challenger. Cf., e.g., id. at 211-12. We note that

the initial generic challenger is necessarily the most

motivated because, unlike all subsequent challengers, it

stands to benefit from the 180-day exclusivity period of 21

U.S.C. § 355(j)(5)(B)(iv). Additionally, as the experience of

at least one court in this Circuit confirms, the high profit

margins of a monopolist drug manufacturer may enable it to

pay off a whole series of challengers rather than suffer the

11

The Pharmaceutical Research and Manufacturers of

America points to a more recent study concluding that, in the

years from 2000 to 2009, generics prevailed in slightly less

than half of their challenges. RBC Capital Mkts.,

Pharmaceuticals: Analyzing Litigation Success Rates 4

(2010), available at http://www. amlawdaily.typepad.

com/pharmareport.pdf. Even if the industry’s own figures are

accepted, they show that a substantial fraction of Hatch-

Waxman patent challenges succeed on the merits. Moreover,

the study cited by the industry further states that “when you

take into account patent settlements and cases that were

dropped, the success rate for generics jumps to 76%,

substantially in favor of challenging patents.” Id.

28

possible loss of its patent through litigation. See King Drug

Co. of Florence, Inc., 702 F. Supp. 2d at 521-22 (drug

manufacturer settled infringement suits by four generic firms,

which agreed to delay market entry “in exchange for

significant payments . . . for various licensing agreements,

supply agreements and research and development deals”).

This practical analysis is supported by a long line of

Supreme Court cases recognizing that valid patents are a

limited exception to a general rule of the free exploitation of

ideas. It follows that the public interest supports judicial

testing and elimination of weak patents. See Cardinal Chem.

Co. v. Morton Int’l, Inc., 508 U.S. 83, 100-01 (1993)

(explaining the “importance to the public at large of resolving

questions of patent validity” and noting the danger of

“grant[ing] monopoly privileges to the holders of invalid

patents”); Bonito Boats, Inc. v. Thundercraft Boats, Inc., 489

U.S. 141, 146 (1989) (noting that the patent laws embody “a

careful balance between the need to promote innovation and

the recognition that imitation and refinement through

imitation are both necessary to invention itself and the very

lifeblood of a competitive economy”); United States v.

Masonite Corp., 316 U.S. 265, 277 (1942) (a patent “affords

no immunity for a monopoly not fairly or plainly within the

grant”); id. at 280 (patents are to be “strictly construed”

because they are “privileges restrictive of a free economy”);

Pope Mfg. Co. v. Gormully, 144 U.S. 224, 234 (1892) (“It is

as important to the public that competition should not be

repressed by worthless patents, as that the patentee of a really

valuable invention should be protected in his monopoly.”).

That reasoning underlies the decision of the Supreme

Court in Edward Katzinger Co. v Chicago Metallic

Manufacturing Co., where the Court considered whether a

patent licensor could be contractually estopped from

challenging the validity of the patent under a licensing

agreement that also contained a price fixing term. 329 U.S.

394 (1947). The Court reasoned that if the patent was invalid,

the price fixing provision would violate federal antitrust law

and that, as such, the licensor could not be estopped from

challenging the patent. Id. at 399, 401-02. In reaching this

29

conclusion the Court emphasized “the broad public interest in

freeing our competitive economy from the trade restraints

which might be imposed by price-fixing agreements

stemming from narrow or invalid patents.” Id. at 400 (citing

Sola Elec. Co. v. Jefferson Elec. Co., 317 U.S. 173, 177

(1942)). The Court additionally stated: “It is the public

interest which is dominant in the patent system and . . . the

right to challenge [a patent] is not only a private right to the

individual, but it is founded on public policy which is

promoted by his making the defence, and contravened by his

refusal to make it.” Id. at 401 (internal citations and

quotation marks omitted).

This logic is persuasive with respect to the situation at

bar because reverse payments permit the sharing of monopoly

rents between would-be competitors without any assurance

that the underlying patent is valid. See also United States v.

Studiengesellschaft Kohle, m.b.H., 670 F.2d 1122, 1136 (D.C.

Cir. 1981) (suggesting an agreement might be anticompetitive

if it “give[s] potential competitors incentives to remain in

cartels rather than turning to another product, inventing

around the patent, or challenging its validity”). It appears that

these aspects of the Supreme Court’s general patent

jurisprudence had been overlooked by the Special Master and

others adopting the scope of the patent test.

We caution that our decision today is limited to reverse

payments between patent holders and would be generic

competitors in the pharmaceutical industry. As the Supreme

Court has made clear, “antitrust analysis must sensitively

recognize and reflect the distinctive economic and legal

setting of the regulated industry to which it applies.” Verizon

Commc’ns. Inc. v. Law Offices of Curtis V. Trinko, LLP, 540

U.S. 398, 411-12 (2004); see also IA Phillip E. Areeda &

Herbert Hovenkamp Antitrust Law, ¶ 240d, 289 (3d ed.

2006) (“[T]he presence of regulation in some instances limits

the antitrust role and in some instances simply changes it or

even enlarges it.”). The Supreme Court’s admonition is

particularly relevant in an industry, like the pharmaceutical

industry, that is subject to extensive regulation in which

Congress has balanced the protection of intellectual property

30

and the need for competition. Specifically, in passing the

Hatch-Waxman Act, Congress drew a careful line between

patent protection and the need to provide incentives for

competition in the pharmaceutical industry. See 130 Cong.

Rec. 24425 (Sept. 6, 1984) (statement of Rep. Waxman

underscoring the “fundamental balance of the bill”); H.R.

Rep. No. 98-857, pt. 2, at 30 (1984) (emphasizing that the bill

achieves “what the Congress has traditionally done in the area

of intellectual property law[:] balance the need to stimulate

innovation against the goal of furthering the public interest”),

reprinted in 1984 U.S.C.C.A.N. 2686, 2715. The line that

Congress drew between these competing objectives strongly

supports the application of rule of reason scrutiny of reverse

payment settlements in the pharmaceutical industry.

The goal of the Hatch-Waxman Act is to increase the

availability of low cost generic drugs. H.R. Rep. No. 98-857,

pt. 1, at 14, reprinted in 1984 U.S.C.C.A.N. 2647, 2647. One

method Congress employed was to encourage litigated

challenges by generic manufacturers against the holders of

weak or narrow patents. See 21 U.S.C. § 355(j)(5)(B)(iv)

(establishing 180-day exclusivity period as reward for

successfully challenging a patent); S. Rep. No. 107-167, at 4

(2002) (“Under Hatch-Waxman, manufacturers of generic

drugs are encouraged to challenge weak or invalid patents on

brand name drugs so consumers can enjoy lower drug

prices.”). That goal is undermined by application of the

scope of the patent test which entitles the patent holder to pay

its potential generic competitors not to compete. As one

commentator has noted, this approach nominally protects

intellectual property, not on the strength of a patent holder’s

legal rights, but on the strength of its wallet. See Hemphill,

Paying for Delay, supra at 1614 (“In the Hatch-Waxman Act

. . . the promotion and delay of litigation are central

preoccupations of the regulatory regime. An open-ended

permission for innovators to set innovation policy by self-

help [through reverse payments] is less plausible, as Congress

has taken explicit steps to fill those gaps.”) As the Second

Circuit acknowledged in its Tamoxifen decision, the principal

beneficiaries of such an approach will be name brand

manufacturers with weak or narrow patents that are unlikely

31

to prevail in court. See 466 F.3d at 211. Thus while such a

rule might be good policy from the perspective of name brand

and generic pharmaceutical producers, it is bad policy from

the perspective of the consumer, precisely the constituency

Congress was seeking to protect.

In rejecting the scope of the patent test, we are

cognizant that such a test encourages settlement, an objective

our decisions generally support. See, e.g., Ehrheart v.

Verizon Wireless, 609 F.3d 590, 595 (3d Cir. 2010)

(“Settlement agreements are to be encouraged because they

promote the amicable resolution of disputes and lighten the

increasing load of litigation faced by the federal courts.”).

However, the judicial preference for settlement, while

generally laudable, should not displace countervailing public

policy objectives or, in this case, Congress’s determination –

which is evident from the structure of the Hatch-Waxman Act

and the statements in the legislative record – that litigated

patent challenges are necessary to protect consumers from

unjustified monopolies by name brand drug manufacturers.

We also emphasize that nothing in the rule of reason test that

we adopt here limits the ability of the parties to reach

settlements based on a negotiated entry date for marketing of

the generic drug: the only settlements subject to antitrust

scrutiny are those involving a reverse payment from the name

brand manufacturer to the generic challenger. Data analyzed

by the FTC suggest that this will leave the vast majority of

pharmaceutical patent settlements unaffected. See FTC,

Bureau of Competition, Agreements Filed with the Federal

Trade Commission under the Medicare Prescription Drug,

Improvement, and Modernization Act of 2003: Overview of

Agreements Filed in FY 2010, 2 (2011) (showing that nearly

seventy-five percent of Hatch-Waxman Act infringement

suits that settled in 2010 did so without reverse payments),

available at http://www.ftc.gov/os/2011/05/1105

mmagreements.pdf.

For all of these reasons we reject the scope of the

patent test. In its place we will direct the District Court to

apply a quick look rule of reason analysis based on the

economic realities of the reverse payment settlement rather

32

than the labels applied by the settling parties. Specifically,

the finder of fact must treat any payment from a patent holder

to a generic patent challenger who agrees to delay entry into

the market 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.

In holding that a reverse payment is prima facie

evidence of an unreasonable restraint of trade, we follow the

approach suggested by the DC Circuit in Andrx and embrace

that court’s common sense conclusion that “[a] payment

flowing from the innovator to the challenging generic firm

may suggest strongly the anticompetitive intent of the parties

entering the agreement . . . .” 256 F.3d at 809 (internal

quotation marks and citation omitted).

We agree, moreover, with the FTC that there is no

need to consider the merits of the underlying patent suit

because “[a]bsent proof of other offsetting consideration, it is

logical to conclude that the quid pro quo for the payment was

an agreement by the generic to defer entry beyond the date

that represents an otherwise reasonable litigation

compromise.” In re Schering-Plough Corp., Final Order, 136

F.T.C. at 988. Of course, a patent holder may attempt to

rebut plaintiff’s prima facie case of an unreasonable restraint

of trade by arguing that there is in fact no reverse payment

because any money that changed hands was for something

other than a delay in market entry. Alternatively, the patent

holder may attempt to rebut the prima facie case by

demonstrating that the reverse payment offers a competitive

benefit that could not have been achieved in the absence of a

reverse payment. This second possible defense attempts to

account for the – probably rare – situations where a reverse

payment increases competition. For example, a modest cash

payment that enables a cash-starved generic manufacturer to

avoid bankruptcy and begin marketing a generic drug might

have an overall effect of increasing the amount of competition

in the market. For the reasons set forth, we will reverse the

judgment of the District Court and remand for further

proceedings in accordance with the foregoing.

33

IV. THE CLASS CERTIFICATION ISSUE

(Appeal No. 10-4571)

A. Procedural Background

The other issue before us on this appeal concerns

plaintiffs’ effort to certify a class of persons who purchased

K-Dur directly from Schering between November 20, 1998

and September 1, 2001 and subsequently purchased a generic

version of K-Dur. As identified by the parties’ experts, the

class consists of forty-four wholesalers and retailers. The

Special Master recommended granting plaintiffs’ motion to

certify the class. The District Court adopted the Special

Master’s Report and Recommendation and formally certified

the class.

Defendants sought interlocutory review of the District

Court’s order under Federal Rule of Civil Procedure 23(f).

While that petition was pending, the District Court ruled on

the cross motions for summary judgment and entered final

judgment in defendants’ favor. Plaintiffs filed a notice of

appeal, and defendants filed a cross appeal, which this court

dismissed as untimely. See Order, In re K-Dur Antitrust

Litig., No. 10-2727 (3d Cir. Nov. 24, 2010). However, this

court accepted defendants’ Rule 23(f) petition, see Order, In

re K-Dur Antitrust Litig., No. 09-8006 (3d Cir. Nov. 16,

2010), and we therefore have jurisdiction pursuant to 28

U.S.C. § 1292(e). 12

12

Plaintiffs argue that because defendants’ cross appeal

was dismissed as untimely defendants’ 23(f) petition should

have been dismissed also. An appeals court has discretion to

consider an interlocutory appeal even after the entry of final

judgment. Cf. In re Coordinated Pretrial Proceedings in

Petroleum Prods. Antitrust Litig., 788 F.2d 1571, 1573-74

(Temp. Emer. Ct. App. 1986). Moreover, in granting

defendants’ 23(f) petition, this court has already considered

the issue of the appropriateness of review, and we see no

reason to reconsider the decision to hear this appeal.

34

B. Standard of Review

This court reviews class certification orders “for abuse

of discretion, which occurs if the district court’s decision rests

upon a clearly erroneous finding of fact, an errant conclusion

of law or an improper application of law to fact.” In re

Hydrogen Peroxide Antitrust Litig., 552 F.3d 305, 312 (3d

Cir. 2008) (internal quotation marks and citation omitted).

C. Defendants’ Arguments

In order to certify a class under Rule 23(b)(3), a

plaintiff must satisfy both the general class action

prerequisites – numerosity, commonality, typicality, and

adequacy of representation – and the additional requirements

of predominance and superiority. Fed. R. Civ. P. 23(a),

(b)(3). The Special Master, in a report adopted in full by the

District Court, discussed the class requirements in detail;

defendants challenge only a few of those findings.

Defendants assert that (1) plaintiffs cannot use common

evidence to prove that the class members suffered an actual

injury from defendants’ conduct because showing actual

injury means demonstrating lost profits damages, which

defendants argue necessarily requires individualized

assessments, (2) even assuming that overcharges are an

acceptable form of injury, the District Court erred in its

conclusion that there was common evidence of injury to all

class members, and (3) the class should not have been

certified because of inherent conflicts between members.

Defendants’ first two arguments challenge the District

Court’s finding with respect to the predominance

requirement, while the third goes to the adequacy

requirement. We address these arguments in order.

1. Predominance Issues

In order for the predominance requirement to be

satisfied “[i]ssues common to the class must predominate

over individual issues.” In re Hydrogen Peroxide, 552 F.3d

at 311 (internal citations and quotation marks omitted). Class

certification calls for the district court to conduct a “rigorous

35

assessment of the available evidence,” id. at 312, and is only

appropriate in antitrust cases where plaintiffs can show, by a

preponderance of the evidence, that proof of the essential

elements of the cause of action, including antitrust injury, do

not require individual treatment. Id. at 307, 311.

It is plaintiffs’ thesis that they will prove that class

members paid more for K-Dur because of Schering’s antitrust

violations, and that this constitutes the required antitrust

impact. The Special Master accepted this based on Third

Circuit law, stating:

The Third Circuit has held that “when an

antitrust violation impacts upon a class of

persons who do have standing, there is no

reason in doctrine why proof of impact cannot

be made on a common basis, so long as the

common proof adequately demonstrates some

damage to each individual.”

App. at 7980 (quoting Bogosian v. Gulf Oil Corp., 561 F.2d

434, 454 (3d Cir. 1977)). Because all of the class members

purchased some of the generic versions of K-Dur, plaintiffs

have satisfactorily explained their theory of impact.

Plaintiffs proposed to prove antitrust injury through

common proof consisting largely of the declarations and

report of their expert, Dr. Leitzinger. Dr. Leitzinger offered

statistical and economic analyses of the overall brand-name

and generic drug market and of the specific entry of generic

potassium chloride in the market to show that, but for the

challenged reverse payment agreements, “all (or virtually all)

members of the proposed class” would have purchased at

least some less expensive generic potassium chloride earlier,

and therefore suffered an antitrust injury as a result of the

delay in generic entry. The Special Master considered Dr.

Leitzinger’s proposed methodology and the criticisms of it

made by defendants’ expert, Dr. Rubinfeld, in detail. After

slightly narrowing the class definition to accommodate a

36

criticism made by defendants’ expert, 13 the Special Master

found that plaintiffs had satisfied their burden of showing that

antitrust impact may be proven by evidence common to all

class members.

In December 2008, several months after the Special

Master’s Report and Recommendation, this court issued its

decision in In re Hydrogen Peroxide Antitrust Litigation,

which clarified the standard to be applied when certifying a

class of plaintiffs in an antitrust action. 552 F.3d 305. In that

case, we held that the preponderance requirement demands

more than a mere threshold showing by a party seeking to

certify a class and that, in considering a motion for class

certification, a district court is required to resolve any factual

or legal disputes necessary to determine whether a plaintiff

will be able to show antitrust injury for all plaintiffs with

common evidence. Id. at 316-18.

a. Whether Lost Profits Are the Relevant Antitrust

Injury

Defendants argue first that the predominance

requirement of Rule 23(b)(3) is not satisfied because, in order

to prove actual injury from delayed generic entry, plaintiffs

must produce evidence of lost profits, which necessarily

requires an individual assessment for each class member.

Defendants contend specifically that some of the wholesalers

lost substantial sales volumes after generic entry, and that, for

such wholesalers, generic entry caused a decrease in profits.

Defendants’ lost profits argument is unavailing

because it is simply a version of the so-called “passing-on

defense” that was rejected by the Supreme Court in Hanover

Shoe, Inc. v. United Shoe Machinery Corporation. 392 U.S.

481 (1968). In that case, the Supreme Court held that

demonstrating antitrust injury does not require a showing of

13

Specifically, the Special Master excluded from the class

direct purchasers who did not purchase a generic version of

K-Dur after generic entry.

37

lost profits. Id. at 494. Rather, the Supreme Court ruled that

a plaintiff suffers an antitrust injury where it is overcharged

for a product, regardless of whether it can show lost profits.

Id. at 492-95. In reaching this conclusion, the Court noted

that requiring plaintiffs to show lost profits was too

burdensome on both courts and litigants and would undercut

the effectiveness of private antitrust suits as an enforcement

mechanism. Id. at 492-94; see also Bogosian, 561 F.2d at

456 (noting that a lost-profits inquiry would be “enormously

complicated, posing a tremendous burden on the presentation

of plaintiffs’ case” and that “it is precisely for this reason that

the Supreme Court eliminated the ‘passing-on defense’ in

Hanover Shoe”).

Defendants argue that the Hanover Shoe rule should

not apply here because that case involved an overcharge for

an identical product whereas this one involves two different

products, a name brand drug with a higher price and a lower

priced generic drug. However, defendants cite no authority

distinguishing Hanover Shoe on that basis, and their own

expert conceded that the generic supplement that Schering

began manufacturing after Upsher entered the market was

made in the same plant as K-Dur and chemically identical to

K-Dur. Moreover, in In re Warfarin Sodium Antitrust

Litigation, this court affirmed class certification where

plaintiffs sought overcharges – not lost profits – stemming

from anti-competitive behavior that hindered their access to

generic pharmaceuticals. 391 F.3d 516, 532 (3d Cir. 2004).

In sum, defendants’ contention that plaintiffs are

required to show lost profits in order to demonstrate antitrust

injury is without support in law or the facts of this case. As

such, we reject it.

b. Whether There Was Common Evidence of Injury to

All Class Members

Defendants argue that because of discrepancies in the

pricing of K-Dur and variations in purchaser behavior,

plaintiffs cannot prove injury to all class members by

common evidence, even if lost profits are not required to

38

show antitrust injury. They contend further that the District

Court applied the wrong standard in evaluating plaintiffs’

evidence that antitrust injury could be proven by common

evidence.

In support of their argument that antitrust injury

requires an individualized assessment for each class member,

defendants point to two places where purportedly conflicting

evidence demonstrates the need for individualized assessment

of antitrust harm. Defendants point out that they did not sell

K-Dur to all customers at a single list price; rather, the price

paid varied considerably among class members.

Additionally, defendants argue that, for certain customers at

certain times, Schering offered rebates which caused further

price variation among customers. Defendants contend that

these pricing variations caused several class members to have

zero or negative damages under the formula applied by

plaintiffs’ expert. Finally, defendants point out that not all

class members purchased generic potassium chloride as soon

as it became available and argue that, in light of this variation

in purchase timing, plaintiffs need to make an individualized

showing that each plaintiff would have purchased a generic

product earlier if one had been available.

We do not read Hydrogen Peroxide as precluding a

class because of variations in purchasing by a very small

percentage of those who purchased K-Dur. As the Special

Master recognized, defendants conceded “that 45 of the

proposed Class members purchased some amount of generic

K-Dur.” App. at 7984 (emphasis in original). He noted that

defendants’ arguments “relate to the quantum of damages,

rather than the fact of injury.” Id. Indeed, in Hydrogen

Peroxide itself, we focused on what was really at issue – that

for certification plaintiff need not prove antitrust injury

actually occurred.

Plaintiffs’ burden at the class certification stage

is not to prove the element of antitrust impact,

although in order to prevail on the merits each

class member must do so. Instead, the task for

plaintiffs at class certification is to demonstrate

39

that the element of antitrust impact is capable of

proof at trial through evidence that is common

to the class rather than individual to its

members.

552 F.3d at 311-12. To the extent that there were minor

variations, they can be handled at trial in the context of

damages.

With regard to both the price-variation and purchase-

timing issues, the Special Master conducted an exceedingly

thorough review of plaintiffs’ proposal for demonstrating

antitrust impact through common evidence and determined

that defendants’ objections were without support. Critically,

the Special Master recognized his obligation to “probe

beyond the pleadings” and to conduct a “rigorous analysis” of

the available evidence. App. at 7960 (internal citations and

quotation marks omitted).

Our review confirms that the Special Master applied

the appropriate standard. In contrast to Hydrogen Peroxide,

where the court found that there was “no tendency for prices .

. . to move together,” 552 F.3d at 314 (internal quotation

marks omitted), plaintiffs in this case presented evidence,

credited by the Special Master, of significant, industry-wide

price drops after generic entry. Such evidence of an industry-

wide price drop after generic entry supports the Special

Master’s rejection of defendants’ arguments about limited

price variations and purchase-timing variations between

plaintiffs.

First, concerning the price-variation argument, the

Special Master carefully considered the conflicting opinions

of plaintiffs’ and defendants’ experts and credited the theories

of plaintiffs’ expert over that of defendants. The Special

Master concluded that “Plaintiffs have satisfied their burden

of adducing sufficient evidence and a plausible theory to

convince me that impact may be proven by evidence common

to all class members.” App. at 7988 (internal citations and

quotation marks omitted). Our review of the record confirms

that plaintiffs presented a comprehensive and detailed means

40

of proving impact through common means, notwithstanding

some very limited pricing variation, and that the Special

Master conducted an appropriately searching evaluation of

this evidence.

With regard to defendants’ argument about variations

in the timing of the purchase of generic K-Dur, the Special

Master explicitly rejected that argument and concluded that

“[e]vidence that all (or virtually all) class members

substituted a lower priced generic for some of their K-Dur 20

purchases gives rise to the inference that they would have

similarly done in the but-for world.” App. at 7984. This,

combined with plaintiffs’ theory of damages, means that

impact could be proven on a class-wide basis via common

evidence. Here again, the Special Master conducted a

thorough evaluation of the available evidence and resolved all

significant disputes between conflicting evidence as required

under the standard set forth in Hydrogen Peroxide.

2. Adequacy Issue – Whether the Class

Faces Inherent Conflicts

Defendants next contend that the District Court erred

in certifying a class because the class faces inherent conflicts

that preclude adequacy of representation. “The inquiry that a

court should make regarding the adequacy of representation

requisite of Rule 23(a)(4) is to determine that the putative

named plaintiff has the ability and the incentive to represent

the claims of the class vigorously, . . . and that there is no

conflict between the individual’s claims and those asserted on

behalf of the class.” In re Cmty. Bank of N. Va., 622 F.3d

275, 291 (3d Cir. 2010) (quoting Hassine v. Jeffes, 846 F.2d

169, 179 (3d Cir. 1988)). Only a fundamental conflict will

defeat adequacy of representation. See, e.g., id. at 303

(adequacy defeated by “obvious and fundamental intra-class

conflict of interest”); Ward v. Dixie Nat. Life Ins. Co., 595

F.3d 164, 180 (4th Cir. 2010).

Defendants contend that three members of the class, all

national wholesalers, were net beneficiaries of the absence of

generic competition in the potassium chloride supplement

41

market because once generics came on the market those class

members saw decreased sales volumes and lower per-pill

profits. Defendants argue that, because these three class

members have financial incentives to delay generic entry,

there is an inherent conflict between them and the rest of the

class.

The case law on defendants’ argument reveals a split

in authority. A large number of district courts, including

some in this Circuit, have rejected defendants’ argument.

See, e.g., Teva Pharms USA, Inc. v. Abbott Labs., 252 F.R.D.

213, 226-27 (D. Del. 2008) (Robinson, J.); Meijer, Inc. v.

Abbott Labs., 251 F.R.D. 431, 435 (N.D. Cal. 2008); but see

Valley Drug Co. v. Geneva Pharms., Inc., 350 F.3d 1181,

1190 (11th Cir. 2003). 14

We reject the Valley Drug decision for two reasons.

First, requiring plaintiffs to show that no class member

benefitted from the challenged conduct in the form of greater

profits is contrary to the Supreme Court’s decision in

Hanover Shoe. In Hanover Shoe, the Supreme Court

permitted antitrust plaintiffs to seek overcharge damages

rather than lost profits damages precisely because proving

lost profits was too complicated and burdensome. 392 U.S. at

493; Bogosian, 561 F.2d at 456. The same logic applies

equally, if not more strongly, in the class certification setting

because under defendants’ proposed approach, plaintiffs

would not only have to assess their own lost profits but also

those of potential class members. Moreover, because

Hanover Shoe sets the amount of the overcharge as plaintiffs’

damages, all of the class members have the same financial

incentive for purposes of the litigation – i.e. proving that they

were overcharged and recovering damages based on that

overcharge. See 7A Charles Alan Wright, Arthur R. Miller &

Mary Kay Kane, Federal Practice and Procedure § 1768 (3d

ed. 2005) (“[A] potential conflict between the representatives

and some class members should not preclude the use of the

class-action device if the parties appear united in interest

14

This is a different appeal than Valley Drug, 344 F.3d

1294 (11th Cir. 2003), discussed supra.

42

against an outsider at the beginning of the case.”).

Defendants have not pointed to any plausible scenario in

which the class members might seek conflicting forms of

relief. For these reasons, we conclude that defendants’

conflict argument fails.

D. Conclusion – Class Certification Issues

In sum, with respect to the class certification issues,

we reject defendants’ arguments and will affirm the District

Court’s determination approving maintenance of the class

action.

43