Commission Rules Schering-Plough, Upsher, and AHP Illegally Delayed Entry of Lower-Cost Generic Drug

In an administrative opinion made public today, the Federal Trade Commission ruled that Schering-Plough Corporation (Schering), Upsher-Smith Laboratories, Inc. (Upsher), and American Home Products (AHP) entered into illegal agreements in 1997 and 1998 to delay the entry of lower-cost generic competition for Schering’s prescription drug K-Dur 20, which is used to treat people with low potassium. According to the Commission’s opinion, Schering and its potential generic competitors, Upsher and AHP, had settled patent litigation with terms that included unconditional payments by Schering in return for agreements to defer introduction of the generic products. In a unanimous opinion, signed by Commissioner Thomas B. Leary and available on the FTC’s Web site, the Commission held that these provisions were unfair methods of competition, and entered an order that would bar similar conduct in the future.

This case raised significant policy issues at the intersection of patent law and antitrust law, according to the ruling. In 1984, Congress passed the Hatch-Waxman Act, a law intended to facilitate earlier entry by the manufacturers of generic drugs. Generic drugs are generally significantly less expensive than their branded counterparts. Among other things, the law made it easier for a generic manufacturer to challenge the patents of a pioneer drug manufacturer. As a result, there has been an increase in pioneer/generic patent litigation and a corresponding increase in settlements. The Commission has challenged other settlements as anticompetitive, and obtained consent orders in the past; the Schering opinion, released today, however, marks the first time the Commission has addressed the legality of settlements with the benefit of a full administrative trial and record.

The opinion released today focused on the significance of payments from Schering, the pioneer, to the generic manufacturers. “Absent proof of other offsetting considerations, 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,” according to the opinion.

The Commission found that this delayed entry caused consumer harm. “[T]here is credible evidence in the record . . . which indicates that generic entry was a uniquely significant market event and recognized as such by both parties [in the settlements],” according to the ruling. “Their predictions about the likely effects of generic entry, which were consistent with historic experience of other branded drugs, are just as compelling as predictions based on market shares. Moreover, these predictions turned out to be true.” The evidence showed that average prices dropped significantly when generic entry occurred.

The Commission’s opinion recognized the argument that the challenged agreements were ancillary to a pro-competitive objective – namely, the settlement of patent disputes. The opinion stated, “We recognize that litigation settlements can conserve public and private resources and create other efficiencies. This does not mean, however, that all settlements are procompetitive, and we find that there is insufficient evidence to support the defense in this case.”

The Commission’s Response to the Initial Decision

The complaint in this matter had been dismissed in an initial decision by an administrative law judge in June 2002. The Commission’s opinion released today holds that this initial decision was based on fundamental errors of law and of fact.

First, the initial decision had assumed it was not possible to decide whether the settlement agreements delayed generic entry without proof on the merits of the underlying patent disputes. The Commission’s opinion explained: “The issue is whether these unconditional payments [by Schering] were likely to have anticompetitive effects because they delayed generic entry beyond the dates that would have been agreed upon in the absence of the payments.” The opinion continued by saying that anticompetitive effects can be found, even if there is uncertainty about what the entry date would have been if the parties had not entered into the illegal agreements.

Second, according to the opinion, the initial decision assumed that the appropriate analysis, under the “rule of reason,” required Commission counsel to prove a “relevant market,” followed by an exploration of a variety of factors from which anticompetitive effects may be inferred. The Commission’s opinion agreed that it was correct to apply the rule of reason, but further explains, with reference to specific U.S. Supreme Court cases, that the initial decision’s methodology “is not necessary when direct evidence of anticompetitive effects can be shown,” as it was in this case.

The Commission’s opinion stated that “[w]e follow the Supreme Court’s guidance, as expressed in the [1999] California Dental case and explained at length [last July] in the Commission’s recent Polygram Holding [Three Tenors] opinion. The appropriate antitrust analysis extends over a continuum ranging from per se condemnation of particularly egregious conduct to a detailed examination of more ambiguous behavior, responsive to the facts of individual cases.” The Commission decided that the Schering case mandated “a more detailed examination of market effects than was required either in California Dental or in Polygram Holding, but the guiding principles are the same.”

In addition to these legal questions, the Commission found the agreement that settled the patent litigation between Schering and Upsher raised significant factual issues. As part of the agreement, Upsher also gave Schering licenses to market six different products for which Upsher had intellectual property rights. The factual question, according to the opinion, was whether Schering had paid $60 million to Upsher for licenses or for delay. After an exhaustive review of the facts – including the background of the settlement negotiations and the conduct of the parties after the settlement – the Commission held that “the magnitude of the payment was not based on Schering’s evaluation of the Upsher licenses. We therefore conclude that Schering did in fact pay Upsher for delayed entry, which, in the circumstances of this case, was an agreement that unreasonably restrains commerce.”

AHP initially was named as a respondent in the complaint, but agreed to a consent order during litigation. Accordingly, the Commission’s order announced today applies only to Schering and Upsher. The order broadly prohibits litigation settlements under which a generic manufacturer “receives anything of value” and agrees itself to defer its own research and development, production, or sales activities. There is, however, a specific exception for payments to the generic that are linked to litigation costs, up to $2 million, and that are notified to the Commission.

Copies of the Commission’s opinion and order are available from the FTC’s Web site at http://www.ftc.gov and also from the FTC’s Consumer Response Center, Room 130, 600 Pennsylvania Avenue, N.W., Washington, DC 20580. The FTC’s Bureau of Competition seeks to prevent business practices that restrain competition. The Bureau carries out its mission by investigating alleged law violations and, when appropriate, recommending that the Commission take formal enforcement action. To notify the Bureau concerning particular business practices, call or write the Office of Policy and Evaluation, Room 394, Bureau of Competition, Federal Trade Commission, 600 Pennsylvania Ave, N.W., Washington, DC 20580, Electronic Mail: antitrust@ftc.gov; Telephone (202) 326-3300. For more information on the laws that the Bureau enforces, the Commission has published “Promoting Competition, Protecting Consumers: A Plain English Guide to Antitrust Laws,” which can be accessed at http://www.ftc.gov/bc/compguide/index.htm.

(FTC File No.: 991-0256)