Schering/Upsher K-Dur Settlement Does Not Violate Antitrust Law, Court Says

Atlanta-based federal appeals court sets aside Federal Trade Commission’s finding that a 1997 agreement between Schering-Plough and Upsher-Smith was anticompetitive. Settlement did not exceed the potential exclusionary effects of Schering’s patent on K-Dur, court says.

A federal appeals court is setting aside the Federal Trade Commission's finding that a settlement between Schering-Plough and Upsher-Smith over generic K-Dur was anticompetitive.

In a March 8 ¹ opinion highly critical of the FTC's analysis, the Atlanta-based 11 Circuit Court of Appeals said the companies' settlement agreement fell within the potential exclusionary scope of Schering's patent for K-Dur (potassium chloride).

The opinion marks the latest round in the long-running dispute between FTC and the two companies that stems from a 1997 patent settlement.

Under the terms of the settlement, Upsher agreed to refrain from entering the market with a generic version of K-Dur until Sept. 1, 2001 at the earliest, five years ahead of the expiration of Schering's patent.

The parties also entered into a licensing deal, with Schering agreeing to pay Upsher $60 mil. in initial royalty fees, $10 mil. in milestone royalty payments, and 10% or 15% royalties on sales for six Upsher products, including Niacor SR (sustained-release niacin).

In June 2002, an administrative law judge dismissed FTC's original complaint against the companies. That dismissal was appealed to the full commission, which ruled in December 2003 that the settlement was anticompetitive.

The commission found that Schering's $60 mil. payment was not linked to an appropriate valuation of the product licenses it received from Upsher under the agreement. Rather, the payment was made to delay entry of Upsher's K-Dur generic and constituted an unfair restraint on competition, FTC ruled.

FTC prohibited the companies from entering into settlements under which the generic company receives anything of value and agrees not to enter the market for any period of time. The commission, however, did allow for payments to the generic firm (up to $2 mil.) linked to the NDA holder's expected litigation costs.

Schering and Upsher appealed the case to the 11 Circuit, whose earlier ruling on a settlement agreement over Hytrin generics offered Schering and Upsher a favorable precedent.

In the Hytrin case, the 11 Circuit ruled that "reverse payments" from Abbott to Sandoz were not per se antitrust violations. The court said the payments should be considered in conjunction with the potential exclusionary effect of Abbott's patents on Hytrin to determine whether antitrust laws were violated.

The appeals court espoused a similar analysis in the K-Dur case and chastised FTC for failing to address the exclusionary scope of Schering's patent.

The commission's conclusion that Niacor SR was not worth $60 mil. and that the payment was meant to keep Upsher off the market is "not supported by law or logic," the court said.

"There is nothing to refute that these payments are a fair price for Niacor and other Upsher products," the ruling states.

"Schering-Plough made a stand-alone determination that it was getting as much in return from these products as it was paying, and just because the agreement also includes Upsher's entry date into the potassium chloride supplement market, one cannot infer that the payments were solely for the delay rather than the licenses."

"The substantial and overwhelming evidence undercuts the commission's conclusion that Schering's agreement with Upsher was illegal," the court said.

The appeals court asserted that the commission "manufactured a rule that would make almost any settlement involving a payment illegal."

"We fear and reject a rule of law that would automatically invalidate any agreement where a patent-holding pharmaceutical manufacturer settles an infringement case by negotiating the generic's entry date and, in an ancillary transaction, pays for other products licensed by the generic," the court said.

FTC said it is reviewing the opinion before deciding on its next steps.

- Sue Sutter