Schering-Plough Corp. v. F.T.C.

402 F.3d 1056

SCHERING-PLOUGH CORPORATION, Upsher-Smith Laboratories, Inc., a Minnesota corporation having its principal place of business in Minnesota, Petitioners, v. FEDERAL TRADE COMMISSION, Respondent.

No. 04-10688.

United States Court of Appeals, Eleventh Circuit.

March 8, 2005.

Laurie Webb Daniel, Holland & Knight, Atlanta, GA, J. Mark Gidley, Christopher M. Curran, Robert D. Paul, White & Case LLP, John W. Nields, Jr., Marc G. Schildkraut, Charles A. Loughlin, Howrey, Simon, Arnold & White, LLP, Washington, DC, for Petitioners.

Imad D. Abyad, John D. Graubert, F.T.C., Washington, DC, for Respondent.

Kenneth Winston Starr, Kirkland & Ellis, LLP, Washington, DC, for Generic Pharmaceutical Ass'n, Amicus Curiae.

Petitions for Review of a Decision of the Federal Trade Commission.

Before DUBINA and FAY, Circuit Judges, and GOLDBERG^*, Judge.

FAY, Circuit Judge:

Pharmaceutical companies Schering-Plough Corp. and Upsher-Smith Laboratories, Inc. petition for review of an order of the Federal Trade Commission ("FTC") that they cease and desist from being parties to any agreement settling a patent infringement lawsuit, in which a generic manufacturer either (1) receives anything of value; and (2) agrees to suspend research, development, manufacture, marketing, or sales of its product for any period of time. The issue is whether substantial evidence supports the conclusion that the Schering-Plough settlements unreasonably restrain trade in violation of Section 1 of the Sherman Antitrust Act, 15 U.S.C. § 1, and Section 5 of the Federal Trade Commission Act ("FTC Act"), 15 U.S.C. § 45(a). We have jurisdiction pursuant to 15 U.S.C. § 45(c), and, for the reasons discussed below, we grant the petition for review and set aside and vacate the FTC's order.

I. Factual Background

A. The Upsher Settlement

Schering-Plough ("Schering") is a pharmaceutical corporation that develops, markets, and sells a variety of science-based medicines, including antihistamines, corticosteroids, antibiotics, anti-infectives and antiviral products. Schering manufactures and markets an extended-release microencapsulated potassium chloride product, K-Dur 20, which is a supplement generally taken in conjunction with prescription medicines for the treatment of high blood pressure or congestive heart disease. The active ingredient in K-Dur 20, potassium chloride, is commonly used and unpatentable. Schering, however, owns a formulation patent on the extended-release coating, which surrounds the potassium chloride in K-Dur 20, patent number 4,863,743 (the "'743 patent"). The '743 patent expires on September 5, 2006.¹

In late 1995, Upsher-Smith Laboratories ("Upsher"), one of Schering's competitors, sought Food and Drug Administration ("FDA") approval to market Klor Con M20 ("Klor Con"), a generic version of K-Dur 20.² Asserting that Upsher's product was an infringing generic substitute, Schering sued for patent infringement. K-Dur 20 itself was the most frequently prescribed potassium supplement, and generic manufacturers such as Upsher could develop their own potassium-chloride supplement as long as the supplement's coating did not infringe on Schering's patent.

In 1997, prior to trial, Schering and Upsher entered settlement discussions. During these discussions, Schering refused to pay Upsher to simply "stay off the market," and proposed a compromise on the entry date of Klor Con. Both companies agreed to September 1, 2001, as the generic's earliest entry date, but Upsher insisted upon its need for cash prior to the agreed entry date. Although still opposed to paying Upsher for holding Klor Con's release date, Schering agreed to a separate deal to license other Upsher products. Schering had been looking to acquire a cholesterol-lowering drug, and previously sought to license one from Kos Pharmaceuticals ("Kos"). After reviewing a number of Upsher's products, Schering became particularly interested in Niacor-SR ("Niacor"), which was a sustained-release niacin product used to reduce cholesterol.³

Upsher offered to sell Schering an exclusive license to market Niacor worldwide, except for North America. The parties executed a confidentiality agreement in June 1997, and Schering received licenses to market five Upsher products, including Niacor. In relation to Niacor, Schering received a data package, containing the results of Niacor's clinical studies. The cardiovascular products unit of Schering's Global Marketing division, headed by James Audibert ("Audibert") evaluated Niacor's profitability and effectiveness.

According to the National Institute of Health, niacin was the only product known to have a positive effect on the four lipids related to cholesterol management. Immediate-release niacin, however, created an annoying — but innocuous — side effect of "flushing," which reduced patient compliance. On the other hand, previous versions of sustained-release niacin supplements, like Niacor, had been associated with substantial elevations in liver enzyme levels.

Schering knew of the effects associated with niacin supplements, but continued with its studies of Niacor because it had passed the FDA's medical review and determined that it would likely be approved. More important, the clinical trials studied by Audibert demonstrated that Niacor reduced the flushing effect to one-fourth of the immediate-release niacin levels and only increased liver enzymes by four percent, which was generally consistent with other cholesterol inhibitors. Based on this data, Audibert constructed a sales and profitability forecast, and concluded that Niacor's net present value at that time would be between $245-265 million.

On June 17, 1997, the day before the patent trial was scheduled to begin, Schering and Upsher concluded the settlement. The companies negotiated a three-part license deal, which called for Schering to pay (1) $60 million in initial royalty fees; (2) $10 million in milestone royalty payments; and (3) 10% or 15% royalties on sales. Schering's board approved of the licensing transaction after determining the deal was valuable to Schering. This estimation corresponds to the independent valuation that Schering completed in relation to Kos' Niaspan, a substantially similar product to Niacor. That evaluation fixed Niaspan's net present value between $225-265 million. The sales projections for both the Kos and Upsher products are substantially similar. Raymond Russo ("Russo") estimated Niaspan (Kos' supplement) sales to reach $174 million by 2005 for the U.S. market. Comparably, and more conservatively, Audibert predicted Niacor (Upsher's supplement) to reach $136 million for the global market outside the United States, Canada, and Mexico, which is either equal to or larger than U.S. market alone.⁴

After acquiring the licensing rights to Niacor, Schering began to ready its documents for overseas filings. In late 1997, however, Kos released its first-quarter sales results for Niaspan, which indicated a poor performance and lagging sales. Following this announcement, Kos' stock price dramatically dropped from $30.94 to $16.56, and eventually bottomed out at less than $6.00. In 1998, with Niaspan's disappointing decline as a precursor, Upsher and Schering decided further investment in Niacor would be unwise.

B. The ESI Settlement

In 1995, ESI Lederle, Inc. ("ESI"), another pharmaceutical manufacturer, sought FDA approval to market its own generic version of K-Dur 20 called "Micro-K 20."⁵ Schering sued ESI in United States District Court, and, as part of the pretrial process, the trial judge prompted the parties to engage a court-supervised mediation, pursuant to the Civil Justice Reform Act, 28 U.S.C. § 471 et seq. (1991). The trial court appointed U.S. Magistrate Judge Thomas Rueter ("Judge Rueter") to mediate the fifteen-month process, which resulted in nothing more than an impasse.

Finally, in December 1997, Schering offered to divide the remaining patent life with ESI and allow Micro-K 20 to enter the market on January 1, 2004 — almost three years ahead of the patent's September 2006 expiration date.⁶ ESI accepted this offer, but demanded on receiving some form of payment to settle the case. At Judge Rueter's suggestion, Schering offered to pay ESI $5 million, which was attributed to legal fees, however, ESI insisted upon another $10 million. Judge Rueter and Schering then devised an amicable settlement whereby Schering would pay ESI up to $10 million if ESI received FDA approval by a certain date. Schering doubted the likelihood of this contingency happening, and Judge Rueter intimated that if Schering's prediction proved true, it would not have to pay the $10 million.⁷ The settlement was signed in Judge Rueter's presence on January 23, 1998.⁸

C. The FTC Complaint

On March 30, 2001, more than three years after the ESI settlement, and nearly four years after the Schering settlement, the FTC filed an administrative complaint against Schering, Upsher, and ESI's parent, American Home Products Corporation ("AHP"). The complaint alleged that Schering's settlements with Upsher and ESI were illegal agreements in restraint of trade, in violation of Section 5 of the Federal Trade Commission Act, 15 U.S.C. § 45, and in violation of Section 1 of the Sherman Act, 15 U.S.C. § 1. The complaint also charged that Schering monopolized and conspired to monopolize the potassium supplement market.⁹

II. Procedural History

The Complaint was tried before an Administrative Law Judge (ALJ) from January 23, 2002 to March 28, 2002. Numerous exhibits were admitted in evidence, and the ALJ heard testimony from an array of expert witnesses presented by both sides. In his initial decision, the ALJ found that both agreements were lawful settlements of legitimate patent lawsuits, and dismissed the complaint. Specifically, the ALJ ruled that the theories advanced by the FTC, namely, that the agreements were anticompetitive, required either a presumption of (1) that...