[Ip-health] FTC press release on antitrust ruling against 3 drug firms

[Mike Palmedo]

http://www.ftc.gov/opa/2003/12/schering.htm

* *For release: December 18, 2003*
*

*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=92s prescription drug
K-Dur 20, which is used to treat people with low potassium. According to
the Commission=92s 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=92s 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. =93Absent 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,=94 according to the opinion.

The Commission found that this delayed entry caused consumer harm.
=93[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],=94 according to the ruling.
=93Their 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.=94 The evidence showed that average
prices dropped significantly when generic entry occurred.

The Commission=92s opinion recognized the argument that the challenged
agreements were ancillary to a pro-competitive objective =96 namely, the
settlement of patent disputes. The opinion stated, =93We 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.=94

*The Commission=92s 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=92s 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=92s opinion
explained: =93The 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.=94 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 =93rule of reason,=94 required Commission
counsel to prove a =93relevant market,=94 followed by an exploration of a
variety of factors from which anticompetitive effects may be inferred.
The Commission=92s 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=92s methodology =93is not necessary
when direct evidence of anticompetitive effects can be shown,=94 as it was
in this case.

The Commission=92s opinion stated that =93[w]e follow the Supreme Court=92s
guidance, as expressed in the [1999] California Dental case and
explained at length [last July] in the Commission=92s 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.=94 The
Commission decided that the Schering case mandated =93a more detailed
examination of market effects than was required either in California
Dental or in Polygram Holding, but the guiding principles are the same.=94

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 =96
including the background of the settlement negotiations and the conduct
of the parties after the settlement =96 the Commission held that =93the
magnitude of the payment was not based on Schering=92s 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.=94

AHP initially was named as a respondent in the complaint, but agreed to
a consent order during litigation. Accordingly, the Commission=92s order
announced today applies only to Schering and Upsher. The order broadly
prohibits litigation settlements under which a generic manufacturer
=93receives anything of value=94 and agrees itself to defer its own researc=
h
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=92s opinion and order are available from the
FTC=92s Web site at http://www.ftc.gov and also from the FTC=92s Consumer
Response Center, Room 130, 600 Pennsylvania Avenue, N.W., Washington, DC
20580. The FTC=92s 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 =93Promoting Competition,
Protecting Consumers: A Plain English Guide to Antitrust Laws,=94 which
can be accessed at http://www.ftc.gov/bc/compguide/index.htm.

*MEDIA CONTACT:*

    Cathy MacFarlane
    / Office of Public Affairs/
    202-326-2180

(FTC File No.: 991-0256)