Administrative Law Judge Dismisses FTC Allegations of Anticompetitive Conduct by Schering-plough and Upsher-Smith

In an initial decision filed on June 27, 2002 and announced today, Administrative Law Judge (ALJ) D. Michael Chappell dismissed all allegations of anticompetitive conduct in a March 2001 Federal Trade Commission complaint against pharmaceutical manufacturers Schering-Plough Corporation (Schering) and Upsher-Smith Laboratories (Upsher-Smith). The FTC had charged that the companies had engaged in unfair methods of competition by entering into an agreement designed to delay the entry of generic drugs into the U.S. market. Through the decision announced today, the ALJ also dismissed similar charges against Schering stemming from an agreement between Schering and ESI Lederle, Inc. (ESI), a division of American Home Products Corporation (AHP). The ALJ's initial decision can be appealed to the full Commission within 30 days.

In its 2001 administrative complaint, the Commission alleged that Schering, the maker of K-Dur 20, a widely prescribed potassium chloride supplement, illegally paid Upsher and AHP millions of dollars to induce them to delay launching their generic versions of the drug. The agreements, and the subsequent delay of the generic being available to consumers, the FTC alleged, cost consumers more than $100 million. As to AHP, initially named as a respondent, the Commission had previously ordered the matter withdrawn from adjudication and, in April 2002 approved a consent order that prohibits AHP from entering into certain types of agreements with other drug makers and requires AHP to provide the FTC with notice prior to entering into other types of agreements. The consent order will expire in 10 years.

The initial decision announced today dismisses the FTC's specific charges that the Schering/Upsher-Smith agreement and the Schering/ESI agreement were unreasonable restraints of trade that constituted agreements not to compete enabling Schering to monopolize or preserve its monopoly power, in the market for potassium chloride supplements, in violation of Section 5 of the FTC Act. The opinion found that complaint counsel did not "prove or properly define" the relevant product market in this matter; and that Schering did not have monopoly power in the relevant product market as properly, and more-broadly, defined. In addition, the ALJ held that the evidence did not prove "that the payments were not to settle the infringement cases and for drugs licensed to Schering" or that the agreements served to delay the entry of generic competition. Accordingly, the decision finds that complaint counsel "failed to meet its burden of proof" in support of the violations alleged.

Case Background

K-Dur 20, a prescription potassium chloride supplement, is used to treat patients with low blood potassium levels, a condition that most commonly occurs in people taking certain drugs to treat high blood pressure. Low potassium levels in the body can lead to dangerous cardiac problems. In August 1995, Upsher-Smith sought FDA approval to manufacture and distribute a generic version of K-Dur 20, the formulation for which Schering holds a patent that will expire in 2006. The Hatch-Waxman Act allows a company to seek approval from the U.S. Food and Drug Administration (FDA) to market a generic version of a brand-name drug whose patent has not yet expired, while also protecting brand-name firms' intellectual property interests. If the generic firm seeks to bring its product to market before the patent's expiration, it must certify to the FDA that the patent in question is invalid or is not infringed by the generic product.

Following Upsher-Smith's certification to the FDA, Schering sued Upsher-Smith for patent infringement. This lawsuit served to stay FDA approval of Upsher-Smith's application. By law, if the patent holder files an infringement suit against the generic applicant within the period prescribed by the Hatch-Waxman Act, FDA approval to market the generic drug is automatically stayed for 30 months, unless, before that time, the patent expires or is judicially determined to be invalid or not infringed.

The Commission's Complaint

The FTC's administrative complaint alleged that in June 1997, Schering and Upsher-Smith agreed to settle the patent infringement lawsuit through an agreement in which Schering would pay Upsher-Smith not to enter the market. Under this agreement, the complaint alleged, Upsher-Smith would sell neither the product for which it had filed with the FDA, nor any other generic version of K-Dur 20 (without regard to whether Schering had any basis to claim infringement), until September 2001.

Although under the agreement Schering received licenses to market five of Upsher-Smith's products, the complaint charged that these products were of little value to Schering, and that the $60 million paid pursuant to the agreement had little relation to the value of those products.

According to the FTC's complaint, Schering's agreement with Upsher-Smith acted as a bottleneck that prevented other potential generic competitors from entering the market. Under the Hatch-Waxman Act, the first company to seek FDA approval obtains the exclusive right to market the generic drug for 180 days. Additionally, during this 180-day period no other generic can gain FDA approval. As the first company to seek FDA approval for a generic version of K-Dur 20, Upsher-Smith was eligible for the 180-day exclusivity right. Until Upsher-Smith marketed its product, its 180 days of exclusivity would not begin to run, so that securing an agreement to delay the launch of Upsher-Smith's product would protect Schering from any generic competition to K-Dur 20.

The FTC complaint further alleged that Schering also agreed to pay ESI to delay marketing a generic version of K-Dur 20, which ESI had planned to do once Upsher's 180-day exclusivity period had expired. ESI filed an application seeking FDA approval to manufacture and distribute a generic version of Schering's K-Dur 20 in December 1995. Schering subsequently sued ESI for patent infringement, triggering the 30-month stay on FDA approval of ESI's product. In June 1998, the FTC's complaint alleged, Schering and ESI settled the patent infringement case with an agreement by which ESI, in exchange for payments from Schering, promised not to market any generic version of K-Dur 20 until January 2004. The agreement also limited ESI to marketing only one generic version of K-Dur 20 between January 2004 and September 2006 (when Schering's patent expires), and precludes ESI from helping any other firm with studies in preparation for an FDA application for a generic version of K-Dur 20 until September 2006. In exchange, the complaint alleged that Schering agreed to pay ESI up to $15 million.

As with Schering's agreement with Upsher-Smith, ESI also agreed to grant Schering a license to two of its generic products, for which Schering agreed to pay ESI an additional $15 million. The Commission's complaint charged that payments ostensibly made for these licenses were in fact to secure ESI's agreement to delay entry, and were not based on the value of the products.

The Appeals Process

The judge's initial decision in this matter is subject to review by the full Commission on its own motion, or at the request of any party. If an appeal from the initial decision is not perfected within 30 days after it is served, or after a timely notice of appeal is filed, whichever is later, and the Commission does not take certain other actions detailed in its Rules, the initial decision will become the decision of the Commission.

Copies of the initial decision by the administrative law judge 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, D.C. 20580.