in re k–dur antitrust litigation 197 -...

197IN RE K–DUR ANTITRUST LITIGATIONCite as 686 F.3d 197 (3rd Cir. 2012)

cause his victim in this case was white. Tosupport that claim, he pointed out that hewas not prosecuted for an earlier assaulton two black victims.

[16, 17] When analyzing selective pros-ecution claims, we review district courts’findings of facts for clear error and theapplication of legal precepts de novo.United States v. Schoolcraft, 879 F.2d 64,67 (3d Cir.1989). The district court’s deni-al of discovery on such a motion is review-able for abuse of discretion. United Statesv. Hedaithy, 392 F.3d 580, 605 (3d Cir.2004).

[18, 19] To establish selective prosecu-tion, the defendant must ‘‘provide evidencethat persons similarly situated have notbeen prosecuted’’ and that ‘‘the decision toprosecute was made on the basis of anunjustifiable standard, such as race, reli-gion, or some other arbitrary factor.’’Schoolcraft, 879 F.2d at 68. The defen-dant bears the burden of proof, id., andmust establish each of these elements with‘‘clear evidence’’ sufficient to overcome thepresumption of regularity that attaches todecisions to prosecute, United States v.Armstrong, 517 U.S. 456, 464, 116 S.Ct.1480, 134 L.Ed.2d 687 (1996). ‘‘The re-quired threshold to obtain discovery’’ onsuch a motion is ‘‘some evidence tending toshow the existence of the essential ele-ments of the defense, discriminatory effectand discriminatory intent.’’ Hedaithy, 392F.3d at 607 (internal quotation marksomitted).

Given these high standards, it is clearthat the District Court in this case did notabuse its discretion by denying Taylor dis-covery or err in denying his motion todismiss. That Taylor was prosecuted forone assault, but not for another, does not,without more, provide ‘‘clear evidence’’ of adiscriminatory effect or discriminatory in-tent. Taylor has not offered any otherexamples of defendants who assaulted both

white and black inmates, but were onlyprosecuted for assaulting the white in-mates. And Taylor-after-the-second-as-sault is not ‘‘similarly situated’’ to Taylor-after-the-first-assault for the obvious rea-son that the incident that gave rise to thecharges in this case occurred against thebackdrop of Taylor’s history of disciplinaryproblems, including the previous assault onthe black inmates. Accordingly, Taylordid not present sufficient evidence to satis-fy the threshold for obtaining discovery onhis selective prosecution claim, let alonedismissal of the indictment on thosegrounds, and this argument does not pro-vide any basis on which we could or shouldreverse the judgment of the DistrictCourt.

IV.

For the foregoing reasons, we will af-firm the judgment of the District Court.

,

In re K–DUR ANTITRUSTLITIGATION.

Louisiana Wholesale Drug Co., Inc.,on behalf of itself and all others

similarly situated, Appellants.

In re K–DUR Antitrust Litigation.

CVS Pharmacy, Inc.; Rite AidCorporation, Appellants.


198 686 FEDERAL REPORTER, 3d SERIES

Walgreen Co., Eckerd Corporation, TheKroger Co., Safeway Inc., Albertson’sInc., Hy–Vee, Inc., and Maxi Drug,Inc., Appellants.


Merck & Co., Inc.; Upsher–SmithLaboratories, Inc.,

Appellants.

Nos. 10–2077, 10–2078, 10–2079, 10–4571.

United States Court of Appeals,Third Circuit.

Argued Dec. 12, 2011.

Filed: July 16, 2012.

Background: Wholesalers and retailersthat purchased name-brand patented drugdirectly from pharmaceutical companybrought putative class actions against com-pany and its competitors, alleging that de-fendants effected an unreasonable re-straint of trade in violation of Sherman Actby settling company’s patent-infringementcases against competitors, thereby delay-ing market entry of competitors’ plannedgeneric versions of drug. Actions were con-solidated by the Judicial Panel on Multi-district Litigation. Plaintiffs moved forclass certification. The United States Dis-trict Court for the District of New Jersey,Garrett E. Brown, Jr., J., adopted theopinion of Stephen M. Orlofsky, SpecialMaster, 2008 WL 2699390, and certifiedclass. Defendants moved for summaryjudgment. The District Court, Greenaway,Jr., Chief Judge, J., 2010 WL 1172995,adopted the opinion of Orlofsky, SpecialMaster, 2009 WL 508869, and grantedsummary judgment to defendants. Plain-tiffs appealed.

Holdings: The Court of Appeals, Sloviter,Circuit Judge, held that:

(1) district court was required to apply aquick look rule of reason analysis, ab-rogating King Drug Co. of Florence,

Inc. v. Cephalon, Inc., 702 F.Supp.2d514;

(2) issues common to proposed class pre-dominated over individual issues; and

(3) proposed class did not suffer from in-herent conflict precluding adequacy ofrepresentation.

Affirmed in part, reversed in part, andremanded.

1. Federal Courts O766

Court of Appeals exercises plenary re-view of the district court’s grant of sum-mary judgment, applying the same sum-mary judgment standard that guides thedistrict court. Fed.Rules Civ.Proc.Rule56, 28 U.S.C.A.

2. Antitrust and Trade RegulationO535

Whether a restraint of trade qualifiesas unreasonable and therefore conflictswith the Sherman Act is normally evaluat-ed under the ‘‘rule of reason,’’ which re-quires the finder of fact to decide whetherthe questioned practice imposes an unrea-sonable restraint on competition, takinginto account a variety of factors, includingspecific information about the relevantbusiness, its condition before and after therestraint was imposed, and the restraint’shistory, nature, and effect. Sherman Act,§ 1, 15 U.S.C.A. § 1.

See publication Words and Phras-es for other judicial constructionsand definitions.


Under the rule of reason, inquiry intowhether a restraint of trade is unreason-able in violation of the Sherman Act isdivided into three parts: (1) the plaintiffmust first show that the challenged con-duct has produced anti-competitive effectswithin the market; (2) if the plaintiff meets


the initial burden, the burden shifts to thedefendant to show that the challenged con-duct promotes a sufficiently pro-competi-tive objective; and (3) the plaintiff canrebut the defendant’s purported pro-com-petitive justification by showing that therestraint is not reasonably necessary toachieve the pro-competitive objective.Sherman Act, § 1, 15 U.S.C.A. § 1.


Restraint of trade is per se unlawfulunder the Sherman Act where the practicefacially appears to be one that would al-ways or almost always tend to restrictcompetition or decrease output. ShermanAct, § 1, 15 U.S.C.A. § 1.


‘‘Quick look’’ or ‘‘truncated rule of rea-son’’ antitrust analysis applies where theplaintiff has shown that the defendant hasengaged in a restraint of trade similar tothose that are per se unlawful; having soshown, plaintiff is not required to make afull showing of anti-competitive effectswithin the market, rather, defendant hasthe burden of demonstrating pro-competi-tive justifications. Sherman Act, § 1, 15U.S.C.A. § 1.


6. Antitrust and Trade RegulationO587(1), 594

District court was required to applyquick look rule of reason analysis in classaction, brought by wholesalers and retail-ers that purchased name-brand patenteddrug directly from pharmaceutical compa-ny, which alleged that company and itscompetitors effected unreasonable re-straint of trade in violation of Sherman Actby settling company’s patent-infringementcases against competitors, whereby com-

petitors delayed market entry of plannedgeneric versions of drug in return for ‘‘re-verse payments’’ from company; ratherthan merely inquiring whether settlementexceeded patent’s scope, which would notsubject reverse payments to any antitrustscrutiny, district court was required totreat reverse payments as prima facie evi-dence of unreasonable restraint of tradethat defendants were required to rebut byshowing that payments were for purposeother than delayed entry or offered somepro-competitive benefit; abrogating KingDrug Co. of Florence, Inc. v. Cephalon,Inc., 702 F.Supp.2d 514. Sherman Act,§ 1, 15 U.S.C.A. § 1.

7. Patents O112.1While persons challenging the validity

of a patent in litigation bear the burden ofdefeating a presumption of validity, thispresumption is intended merely as a pro-cedural device and is not a substantiveright of the patent holder.

8. Patents O312(1.1)In infringement cases it is the patent

holder who bears the burden of showinginfringement.

9. Patents O118Valid patents are a limited exception

to a general rule of the free exploitation ofideas, and thus, the public interest sup-ports judicial testing and elimination ofweak patents.


Antitrust analysis must sensitivelyrecognize and reflect the distinctive eco-nomic and legal setting of the regulatedindustry to which it applies.


In an action under the Sherman Actchallenging as an unreasonable restraint of


trade the settlement of a patent action thatincludes a reverse payment from a name-brand-drug patent holder to an allegedinfringer that planned a generic version ofthe patented drug, the district court mustapply a quick look rule of reason analysisbased on the economic realities of the re-verse payment settlement rather than thelabels applied by the settling parties.Sherman Act, § 1, 15 U.S.C.A. § 1;Hatch–Waxman Act, 21 U.S.C.A. § 355(j).


In an action under the Sherman Actchallenging as an unreasonable restraint oftrade the settlement of a patent action thatincludes a reverse payment from a name-brand-drug patent holder to a challengerthat agrees to delay entry into the marketof a generic version of the drug, the dis-trict court must apply a quick look rule ofreason analysis that treats the paymentfrom the patent holder to the challenger asprima facie evidence of an unreasonablerestraint of trade, which may be rebuttedby showing that the payment: (1) was for apurpose other than delayed entry; or (2)offers some pro-competitive benefit. Sher-man Act, § 1, 15 U.S.C.A. § 1; Hatch–Waxman Act, 21 U.S.C.A. § 355(j).


In action under Sherman Act chal-lenging as unreasonable restraint of tradethe settlement of patent action that in-cludes a reverse payment from a name-brand-drug patent holder to a challengerthat agrees to delay entry into the marketof a generic version of the drug, there isno need to consider the merits of underly-ing patent suit because absent proof ofother offsetting consideration, it is logicalto conclude that the quid pro quo for pay-ment was an agreement by challenger todefer generic drug’s entry beyond the datethat represents an otherwise reasonable

litigation compromise. Sherman Act, § 1,15 U.S.C.A. § 1; Hatch–Waxman Act, 21U.S.C.A. § 355(j).

14. Federal Courts O723.1

An appeals court has discretion toconsider an interlocutory appeal even afterthe entry of final judgment.

15. Federal Courts O817

Court of Appeals reviews class certifi-cation orders for abuse of discretion, whichoccurs if the district court’s decision restsupon a clearly erroneous finding of fact, anerrant conclusion of law, or an improperapplication of law to fact. Fed.Rules Civ.Proc.Rule 23(f), 28 U.S.C.A.

16. Federal Civil Procedure O171

Class certification calls for the districtcourt to conduct a rigorous assessment ofthe available evidence. Fed.Rules Civ.Proc.Rule 23, 28 U.S.C.A.

17. Federal Civil Procedure O181.5

Class certification on grounds of pre-dominance and superiority is only appro-priate in antitrust cases where plaintiffscan show, by a preponderance of the evi-dence, that proof of the essential elementsof the cause of action, including antitrustinjury, do not require individual treatment.Fed.Rules Civ.Proc.Rule 23(b)(3), 28U.S.C.A.

18. Antitrust and Trade RegulationO963(1)

Plaintiffs are not required to show lostprofits in order to demonstrate antitrustinjury in action alleging unreasonable re-straint of trade in violation of ShermanAct. Sherman Act, § 1, 15 U.S.C.A. § 1.

19. Federal Civil Procedure O181.5

Issues common to proposed class ofwholesalers and retailers that purchasedname-brand patented drug directly frompharmaceutical company predominated


over individual issues, as required for classcertification on grounds of predominanceand superiority in action against companyand its competitors alleging that defen-dants effected an unreasonable restraint oftrade in violation of Sherman Act by set-tling company’s patent-infringement casesagainst competitors, thereby delaying mar-ket entry of competitors’ planned genericversions of drug; although there were lim-ited variations in prices paid by plaintiffsand timing of purchases, antitrust injury inthe form of higher price paid for name-brand drug was capable of common proofthrough evidence that there were signifi-cant, industry-wide price drops after ge-neric-drug entry and that virtually allplaintiffs substituted lower-priced genericdrug for some name-brand drug purchaseswhen generic drug was available. Sher-man Act, § 1, 15 U.S.C.A. § 1; Fed.RulesCiv.Proc.Rule 23(b)(3), 28 U.S.C.A.

20. Federal Civil Procedure O164Only a fundamental conflict of interest

between the putative named plaintiff andclass members will defeat adequacy of rep-resentation. Fed.Rules Civ.Proc.Rule23(a)(4), 28 U.S.C.A.

21. Federal Civil Procedure O181.5Proposed class of wholesalers and re-

tailers that purchased name-brand patent-ed drug directly from pharmaceuticalcompany did not suffer from inherent con-flict precluding adequacy of representa-tion required for class certification ongrounds of predominance and superiorityin action against company and its competi-tors alleging that defendants effected anunreasonable restraint of trade in viola-tion of Sherman Act by settling company’spatent-infringement cases against compet-itors, thereby delaying market entry ofcompetitors’ planned generic versions ofdrug; despite contention that certainwholesalers enjoyed higher sales volumeand per-pill profit prior to entry of gener-

ic drug, alleged antitrust injury in theform of higher price paid for name-branddrug was shared by all class members,which thus had the same financial incen-tive to prove they were overcharged andrecover damages based on that over-charge. Sherman Act, § 1, 15 U.S.C.A.§ 1; Fed.Rules Civ.Proc.Rule 23(a)(4), 28U.S.C.A.

Patents O328(2)

4,555,399, 4,863,743. Cited.

Daniel Berger, Daniel C. Simons, DavidFrancis Sorensen (Argued), Berger &Montague, Philadelphia, PA, Bruce E.Gerstein, Kimberly Hennings, Joseph Op-per, Barry S. Taus, Garwin Gerstein &Fisher, New York, NY, Peter S. Pearlman,Cohn, Lifland, Pearlman, Herrmann &Knopf, Saddle Brook, NJ, for Appellants,No. 10–2077.

Barry L. Refsin, Hangley, Aronchick,Segal, Pudlin & Schiller, Philadelphia, PA,Steve D. Shadowen (Argued), Hangley,Aronchick, Segal, Pudlin & Schiller, Har-risburg, PA, for Appellants, Nos. 10–2078,10–4571.

Deborah S. Corbishley, Scott E. Perwin,Lauren C. Ravkind, Kenny Nachwalter,Miami, FL, for Appellants, Nos. 10–4571,10–2079.

Gage Andretta, William E. Goydan,Robert L. Tchack, Wolff & Samson, WestOrange, NJ, Jennifer K. Conrad, StevenW. Copley, A. Gregory Grimsal, Gordon,Arata, McCollam, Duplantis & Eagan,New Orleans, LA, Jaime M. Crowe, Chris-topher M. Curran, White & Case, AshleyE. Bass, Thomas A. Isaacson, John W.Nields, Jr. (Argued), Alan M. Wiseman,Covington & Burling, Washington, DC,Mark A. Cunningham, David G. Radlauer,


Jones Walker, New Orleans, LA, RichardH. Gill, George W. Walker, CopelandFranco Screws & Gills, Montgomery, AL,Richard Hernandez, William J. O’Shaugh-nessy, McCarter & English, Newark, NJ,Charles A. Loughlin, Baker Botts, Wash-ington, DC, for Appellees, Nos. 10–2077,10–2078.

Ellen Meriwether, Cafferty Faucher,Philadelphia, PA, for Amicus Appellant,American Antitrust Institute, ProposedAmicus Appellants, Nos. 10–2077, 10–2078.

Adam R. Lawton, Jeffrey I. Weinberger,Munger, Tolles & Olson, Los Angeles, CA,for Amicus Appellee Pharmaceutical Re-search and Manufacturers of America, No.10–2077.

Imad D. Abyad, John F. Daly, FederalTrade Commission, Washington, DC, forAmicus Appellant Federal Trade Commis-sion, No. 10–2077.

Richard A. Samp, Washington LegalFoundation, Washington, DC, for AmicusAppellee Washington Legal Foundation,No. 10–2077.

Werner L. Margard, III, Office of Attor-ney General, Columbus, OH, Attorney forAmicus Appellants, No. 10–2077.

Catherine G. O’Sullivan, United StatesDepartment of Justice, Appellate Section,David Seidman, United States Departmentof Justice, Antitrust Division, Malcolm L.Stewart (Argued), United States Depart-ment of Justice, Office of Solicitor General,Washington, DC, for Amicus AppellantUnited States, No. 10–2077.

Donald L. Bell, II, National Associationof Chain Drug Stores, Alexandria, VA, for

Amicus Appellant Nat’l Ass’n Chain DrugStores, Inc., Nos. 10–2077, 10–2078.

Before: SLOVITER, VANASKIE,Circuit Judges and STENGEL *, DistrictJudge.

OPINION OF THE COURT

SLOVITER, Circuit Judge.

In this appeal, we consider the antitrustimplications of an agreement by a manu-facturer of a generic drug that, in returnfor a payment by the patent holder, agreesto drop its challenge to the patent andrefrain from entering the market for aspecified period of time.

A secondary issue concerns the certifica-tion by the District Court of a class ofantitrust plaintiffs. Specifically, we mustdetermine whether the antitrust injury al-legedly suffered by class members can beshown through common proof, i.e. proofapplicable to all plaintiffs, and whetherthere are insurmountable conflicts pre-venting named plaintiffs from adequatelyrepresenting the members of the class.

These appeals arise out of the settle-ment of two patent cases involving thedrug K–Dur 20 (‘‘K–Dur’’), which is manu-factured by Schering–Plough Corporation(‘‘Schering’’). Plaintiffs are LouisianaWholesale Drug Company, Inc., on behalfof a class of wholesalers and retailers whopurchased K–Dur directly from Scheringand nine individual plaintiffs, includingCVS Pharmacy, Inc., Rite Aid Corpora-tion, and other pharmacies. Defendantsare Schering and Upsher–Smith Laborato-ries (‘‘Upsher Smith’’).1

* Hon. Lawrence F. Stengel, United States Dis-trict Court for the Eastern District of Pennsyl-vania, sitting by designation.

1. In appeals numbered 10–2077, 10–2078,and 10–2079, Appellants challenge the Dis-trict Court’s grant of summary judgment on

behalf of defendants, relying on their patents.In No. 10–4571, defendants challenge the Dis-trict Court’s certification of a class of plain-tiffs.


I. STATUTORY AND REGULATO-RY FRAMEWORK

K–Dur is Schering’s brand-name sus-tained-release potassium chloride supple-ment.2 Sustained-release potassium chlo-ride is used to treat potassium deficiencies,including those that arise as a side effectof the use of diuretic products to treat highblood pressure.

Schering did not hold a patent for thepotassium chloride salt itself, as that com-pound is commonly known and not patent-able. Instead, Schering held a formulationpatent on the controlled release coating itapplied to the potassium chloride crystals.Schering identified patent number 4,863,-743 (‘‘the 8743 patent’’) as the patent thatwould be infringed by the production of ageneric version of K–Dur. Schering as-signed the 8743 patent to its subsidiaryKey Pharmaceuticals, Inc. The 8743 patentwas set to expire on September 5, 2006.

By statute, a pharmaceutical companymust obtain from the Food and Drug Ad-ministration (‘‘FDA’’) approval before itmay market a prescription drug. 21U.S.C. § 355(a). For a new drug, theapproval process requires submission of aNew Drug Application (‘‘NDA’’), which in-cludes exhaustive information about thedrug, including safety and efficacy studies,the method of producing the drug, and anypatents issued on the drug’s compositionor methods of use. Id. § 355(b)(1). TheFDA publishes the patent information sub-mitted in NDAs in the ‘‘Approved DrugProducts with Therapeutic EquivalenceEvaluations,’’ otherwise known as the‘‘Orange Book.’’ See FDA ElectronicOrange Book, http://www.fda.gov/cder/ob/.

In 1984, attempting to jumpstart genericcompetition with name brand pharmaceuti-

cals, Congress passed the Drug PriceCompetition and Patent Term RestorationAct, commonly known as the Hatch–Wax-man Act. Pub.L. No. 98–417, 98 Stat. 1585(1984). The Hatch–Waxman Act amendedthe Federal Food, Drug, and CosmeticAct, 21 U.S.C. §§ 301–399, to permit apotential manufacturer of a generic versionof a patented drug to file an abbreviatedapplication for approval with the FDA. See21 U.S.C. § 355(j). This short form appli-cation, known as an Abbreviated NewDrug Application (‘‘ANDA’’), may rely onthe FDA’s prior determinations of safetyand efficacy made in considering the appli-cation of the patented drug. Id.§ 355(j)(2)(A).

When a generic manufacturer files anANDA, it is also required to file a certifi-cation that, ‘‘in the opinion of the applicantand to the best of his knowledge,’’ theproposed generic drug does not infringeany patent listed with the FDA as coveringthe patented drug. Id. § 355(j)(2)(A)(vii).The generic manufacturer can satisfy thisrequirement by certifying one of the fol-lowing four options with respect to thepatent for the listed drug: ‘‘(I) that suchpatent information has not been filed, (II)that such patent has expired, (III) [bycertifying] the date on which such patentwill expire, or (IV) that such patent isinvalid or will not be infringed by themanufacture, use, or sale of the new drugfor which the application is submitted.’’Id. § 355(j)(2)(A)(vii). The generic manu-facturers at issue here, Upsher and ESI,used the fourth of these certification op-tions, the so-called ‘‘paragraph IV certifi-cation.’’ Id. § 355(j)(2)(A)(vii)(IV). Whena would-be generic manufacturer submitsa paragraph IV certification, it must con-sult the Orange Book and provide written

2. After the facts at issue in this case, Merck &Co. acquired Schering, the named defendantin these actions. However, in keeping with

the practice of the parties and amici, thecourt will refer to Schering.


notice to each listed patent owner impact-ed by the ANDA. Id. § 355(j)(2)(B)(iii)(I).By statute, a paragraph IV certificationconstitutes a technical act of patent in-fringement. 35 U.S.C. § 271(e)(2)(A).

Upon receiving notice of a paragraph IVcertification with respect to one of itspharmaceutical patents, the patent holdermay initiate an infringement suit based onthe filing of the paragraph IV certificationalone within forty-five days after the ge-neric applicant files its ANDA and para-graph IV certification. 21 U.S.C.§ 355(j)(5)(B)(iii). Filing suit by the pat-ent holder within that window effects anautomatic stay that prevents the FDAfrom approving the generic drug until theearlier of (1) thirty months have run or (2)the court hearing the patent challengefinds that the patent is either invalid ornot infringed. Id. § 355(j)(5)(B)(iii)(I).

Congress explained that the purpose ofthe Hatch–Waxman Act is ‘‘to make avail-able more low cost generic drugs.’’H.R.Rep. No. 98–857(I), at 14–15, reprint-ed in 1984 U.S.C.C.A.N. 2647, 2647–48. Inorder to encourage generic entry and chal-lenges to drug patents, the Hatch–Wax-man Act rewards the first generic manu-facturer who submits an ANDA and aparagraph IV certification by providing itwith a 180–day period during which theFDA will not approve subsequent ANDAapplications. 21 U.S.C. § 355(j)(5)(B)(iv).The 180–day exclusivity period is triggeredon the date on which the first ANDAapplicant begins commercial marketing ofits drug. Id. Notably, the 180–day exclu-sivity window is only available to the firstfiler of an ANDA with a paragraph IVcertification, meaning that even if the firstfiler never becomes eligible to use its 180–day exclusivity period because it settles,loses, or withdraws the litigation, that po-tential benefit will not pass to subsequentfilers. 21 U.S.C. § 355(j)(5)(D)(iii). It has

been suggested that the first filer is usual-ly the most motivated challenger to thepatent holder’s claimed intellectual proper-ty. See C. Scott Hemphill, Paying forDelay: Pharmaceutical Patent Settlementas a Regulatory Design Problem, 81N.Y.U. L.Rev. 1553, 1583 (2006) (noting ‘‘asharp difference in incentives TTT between[the first paragraph IV] filer and all othergeneric firms’’).

As explained further below, in the yearsafter the passage of Hatch–Waxman, someof the patent infringement suits occurringunder the Hatch–Waxman frameworkwere resolved through settlement agree-ments in which the patent holder paid thewould-be generic manufacturer to drop itspatent challenge and refrain from produc-ing a generic drug for a specified period.These agreements are known as ‘‘reversepayment agreements’’ or ‘‘exclusion agree-ments.’’ Concerned about the possibleanticompetitive effects of reverse paymentagreements, see S.Rep. No. 107–167, at 4(2002), Congress amended Hatch–Waxmanas part of the Medicare Prescription Drug,Improvement, and Modernization Act of2003. Those amendments require brandedand generic pharmaceutical companies whoenter into patent litigation settlements tofile those settlement agreements with theFederal Trade Commission (‘‘FTC’’) andthe Department of Justice (‘‘DOJ’’) for an-titrust review. Pub.L. No. 108–173,§§ 1111–1118, 117 Stat.2066, 2461–64 (co-dified as amended at 21 U.S.C. § 355(j)).

II. FACTUAL AND PROCEDURALBACKGROUND

A. Approval of the 8743 Patent

The patented invention claims a con-trolled-release dispersible potassiumchloride tablet. The 8743 patent wasdeveloped using a technique called ‘‘mi-croencapsulation,’’ a process in whichsmall particles of a drug are coated to


make them disperse over time. The re-search supporting the 8743 patent builton work that Schering had done for anearlier patent for a controlled-release as-pirin tablet, Patent No. 4,555,399 (‘‘the8399 patent’’). The application for whatbecame the 8743 patent was initially re-jected by the Patent and Trademark Of-fice (‘‘PTO’’) as obvious in light of the8399 patent and other prior art. In or-der to circumvent the prior art, Scher-ing amended its application for what be-came the 8743 patent to clarify that thecontrolled release coating in the inven-tion contained ethylcellulose with a vis-cosity of greater than 40 cp,3 whereasthe 8399 patent called for the use ofethylcellulose with a viscosity of 9–11cp. Schering argued that a coating con-taining ethylcellulose of greater than 40cp was not obvious under the prior art.After this amendment, the PTO grantedthe 8743 patent on September 5, 1989.

B. The Schering–Upsher Litigationand Settlement

In August 1995, Upsher filed the firstANDA seeking approval to produce a ge-neric version of K–Dur to be called Klor–Con M20. Upsher provided a paragraph IVcertification to Schering in November1995, certifying that its generic would notinfringe Schering’s 8743 patent. On De-cember 15, 1995, within the forty-five-daywindow provided by Hatch–Waxman,Schering sued Upsher in the District ofNew Jersey for patent infringement, trig-gering the 30–month automatic stay inFDA approval of Upsher’s generic.

Upsher’s defense against Schering’s pat-ent infringement suit was based on differ-ences between the chemical composition ofthe controlled release coating in its genericproduct and that of the invention claimed

in the 8743 patent. Throughout the litiga-tion, Upsher vigorously defended againstSchering’s infringement claims, at onepoint telling the court that Schering’sclaims of infringement ‘‘are baseless andcould not have been made in good faith.’’App. at 3610.

The parties began trying to settle theinfringement case at least as early as May1997. During settlement negotiations,Upsher requested both a cash paymentand an early entry date for its genericproduct. However, Schering expressedconcern about possible antitrust problemsthat might arise if it made a reverse pay-ment.

In the early morning of June 18, 1997,just hours before the District Court was torule on the pending cross motions for sum-mary judgment and begin, if necessary, apatent trial, Upsher and Schering agreedto settle the case. The settlement wasmemorialized in an eleven-page short-formagreement dated June 17, 1997 (‘‘theSchering–Upsher agreement’’). Thatagreement provided that, while Upsher didnot concede the validity, infringement, orenforceability of the 8743 patent, it wouldrefrain from marketing its generic potassi-um chloride supplement or any similarproduct until September 1, 2001, at whichpoint it would receive a non-royalty non-exclusive license under the 8743 patent tomake and sell a generic form of Klor–Con.Additionally, Upsher granted Schering li-censes to make and sell several pharma-ceutical products Upsher had developed,including Niacor–SR, a sustained-releaseniacin product used to treat high cholester-ol. In return, Schering promised to payUpsher sixty million dollars ($60,000,000)over three years, plus additional smallersums depending upon its sales of Niacor–

3. Centipoise, abbreviated ‘‘cp’’, is a measureof viscosity. McGraw–Hill Dictionary of Sci-

entific and Technical Terms 354 (6thed.2003).


SR in defined markets. While the partiesto this litigation dispute whether the pay-ment was solely for the licensing of Upsh-er products or instead formed part of theconsideration for dropping the patent ac-tion, the agreement lists Upsher’s prom-ises to dismiss the patent infringementaction and not to market any sustained-release microencapsulated potassium chlo-ride tablet until September 1, 2001, as partof the consideration for the payment.

The settlement agreement and the ac-quisition of licenses from Upsher were rat-ified by Schering’s board of directors onJune 24, 1997. Subsequent to the settle-ment, Upsher and Schering abandonedplans to make and market Niacor–SR.

In this action, the parties dispute thefacts related to the Niacor–SR license.Plaintiffs contend that the license was asham and that the $60 million paid asroyalties for Niacor–SR was actually com-pensation for Upsher’s agreement to delaythe entry of its generic extended-releasepotassium tablet. On the other hand, de-fendants contend that Schering’s boardvalued the license deal separately and that$60 million was its good faith valuation ofthe licenses at the time.

C. The Schering–ESI Litigationand Settlement

In December 1995, ESI Lederle 4

(‘‘ESI’’) filed an ANDA seeking FDA ap-proval to make and sell a generic versionof K–Dur along with a paragraph IV certi-fication stating that its proposed genericdid not infringe the 8743 patent. Withinthe forty-five-day period provided by theHatch–Waxman Act, Schering sued ESI

for patent infringement in the EasternDistrict of Pennsylvania. ESI defendedon the ground that, unlike K–Dur, its ge-neric equivalent did not employ a ‘‘coatingmaterial with two different ingredients’’ asspecified by the 8743 patent, but ratherwas made by a ‘‘different technology whichproduces a multi-layered coating with eachlayer comprised of a separate materialhaving only a single ingredient.’’ App. at1696–97.

In the fall of 1996, Schering and ESIagreed to participate in court-supervisedmediation before a magistrate judge. Thesettlement agreement the parties eventual-ly reached (‘‘the Schering–ESI agree-ment’’) called for Schering to grant ESI aroyalty-free license under the 8743 patentbeginning on January 1, 2004. In ex-change, Schering would pay ESI $5 millionup front and a varying sum depending onwhen ESI’s ANDA was approved by theFDA. Specifically, Schering agreed to payESI an amount ranging from a maximumof $10 million if ESI’s ANDA was ap-proved before July 1999 down to a mini-mum of $625,000 if the ANDA was notapproved until 2002. As part of the settle-ment, ESI also represented that it was notdeveloping and had no plans to developany other potassium chloride product.

The FDA approved ESI’s generic K–Dur product in May 1999, and Scheringpaid ESI the additional $10 million as re-quired under the settlement agreement.

D. The FTC Action

In March 2001, the FTC filed a com-plaint against Schering, Upsher, and ESIalleging that Schering’s settlements with

4. ESI is the generic division of AmericanHome Products, Inc., which changed its nameto Wyeth in 2002. Melody Peterson, Ameri-can Home Is Changing Name to Wyeth, NewYork Times, Mar. 11, 2002. Wyeth was sub-sequently acquired by Pfizer, Inc. in 2009.

Pfizer, ‘‘Wyeth Transaction,’’ http://www.pfizer.com/investors/shareholder services/wyeth transaction.jsp (last visited May 8,2012). Plaintiffs settled their claims againstESI’s corporate parent Wyeth in January2005.


Upsher and ESI unreasonably restrainedcommerce in violation of Section 5 of theFederal Trade Commission Act, 15 U.S.C.§ 45. Specifically, the FTC alleged thatthe settlement payments from Schering toUpsher and ESI constituted reverse pay-ments intended to delay generic entry andimproperly preserve Schering’s monopoly.

In June 2002, after a lengthy trial, theAdministrative Law Judge (‘‘ALJ’’) issuedan initial decision dismissing the FTC’scomplaint and finding that neither agree-ment violated Section 5 of the FTC Act. Inre Schering–Plough Corp., Initial Decision,136 F.T.C. 1092, 1263 (2002). The ALJfound that there was no reverse paymentin the Schering–Upsher agreement be-cause the licensing deal included in thatagreement was separately valued and wasnot a payment to Upsher to delay genericentry. Id. at 1243. The ALJ also foundthat the Schering–ESI agreement was notan attempt to unlawfully preserve Scher-ing’s monopoly power in the market. Id.at 1236, 1262–63.

In December 2003, the FTC unanimous-ly reversed the ALJ’s ruling, finding thatthere was a ‘‘direct nexus between Scher-ing’s payment and Upsher’s agreement todelay its competitive entry’’ and that thisagreement ‘‘unreasonably restrain[ed]commerce.’’ In re Schering–Plough Corp.,Final Order, 136 F.T.C. 956, 1052 (2003).The FTC likewise found that the ESI set-tlement violated antitrust law, noting thatSchering had not attempted to rebut thenatural presumption that the payment toESI was for delay in generic entry, exceptto argue unpersuasively that the partiesfelt judicial pressure to settle. Id. at1056–57. In making these determinations,the FTC found that it was ‘‘neither neces-sary nor helpful to delve into the merits of

the [underlying patent disputes].’’ Id. at1055. Rather, the FTC determined that,where a name brand pharmaceutical mak-er pays a generic manufacturer as part ofa settlement, ‘‘[a]bsent proof of other off-setting consideration, it is logical to con-clude that the quid pro quo for the pay-ment was an agreement by the generic todefer entry beyond the date that repre-sents an otherwise reasonable litigationcompromise.’’ Id. at 988. In applying therule of reason, the FTC concluded that thepossible existence of a reverse paymentraises a red flag and can give rise to aprima facie case that an agreement is anti-competitive. Id. at 991, 1000–01. The FTCconcluded that the reverse payment at is-sue was illegal because the settling partiescould show neither (1) that the paymentwas for something other than delay ofgeneric entry nor (2) that the payment hadpro-competitive effects. Id. at 988–89,1061.

Schering appealed the FTC’s ruling tothe Eleventh Circuit, which reversed inSchering–Plough Corp. v. FTC, 402 F.3d1056 (11th Cir.2005). The Eleventh Cir-cuit’s ruling in Schering–Plough is dis-cussed in Section III(C) infra.

E. The Instant Litigation

Separate from the FTC’s challenge, var-ious private parties filed antitrust suitsattacking the settlements. Those suits,the matters giving rise to this appeal, wereconsolidated in the District of New Jerseyby the Judicial Panel on Multidistrict Liti-gation. In 2006, by consent of the parties,the District Court appointed Stephen Or-lofsky as Special Master with responsibili-ty to handle all motions, including motionsfor class certification and summary judg-ment.5

5. Because there was no objection to the ap-pointment of a Special Master, we have no

occasion to address the use of Special Masterto prepare Reports and Recommendations on


On April 14, 2008, the Special Mastercertified a class of plaintiffs consisting offorty-four wholesalers and retailers whopurchased K–Dur directly from Schering.The District Court adopted that decisionon December 30, 2008.6

In February 2009, the Special Masterissued a Report and Recommendationgranting defendants’ motions for summaryjudgment and denying plaintiffs’ motionsfor partial summary judgment. In his Re-port and Recommendation, the SpecialMaster applied a presumption that Scher-ing’s 8743 patent was valid and that it gaveSchering the right to exclude infringingproducts until the end of its term, includ-ing through reverse payment settlements.Under this analysis, the settlements in thiscase would only be subject to antitrustscrutiny if (1) they exceeded the scope ofthe 8743 patent or (2) the underlying pat-ent infringement suits were objectivelybaseless. The Special Master determinedthat neither of these exceptions applied.The District Court subsequently adoptedthe Report and Recommendation in itsentirety.

F. Economic Background and theHistory of Reverse Payment

Settlements

Reverse payment settlements appear tobe unique to the Hatch–Waxman context,and the FTC has made them a top en-forcement priority in recent years. A 2010analysis by the FTC found that reversepayment settlements cost consumers $3.5billion annually. FTC, Pay–for–Delay:How Drug Company Pay–Offs Cost Con-

sumers Billions 2 (2010), available athttp://www.ftc.gov/os/2010/01/100112payfordelayrpt.pdf. The FTC estimates thatabout one year after market entry an aver-age generic pharmaceutical product takesover ninety percent of the patent holder’sunit sales and sells for fifteen percent ofthe price of the name brand product. Id.at 8. This price differential means thatconsumers, rather than generic producers,are typically the biggest beneficiaries ofgeneric entry.

III. THE ANTITRUST ISSUE (Ap-peals Nos. 10–2077, 10–2078, 10–2079)

A. Jurisdiction and Standardof Review

The District Court had jurisdiction pur-suant to 15 U.S.C. § 15(a) and 28 U.S.C.§§ 1331 and 1337. This court has jurisdic-tion over the antitrust appeals pursuant to28 U.S.C. § 1291.

[1] This court exercises plenary reviewof the District Court’s grant of summaryjudgment, applying the same summaryjudgment standard that guides the DistrictCourt. Eichenlaub v. Twp. of Indiana,385 F.3d 274, 279 (3d Cir.2004).

B. General Antitrust Standard

[2, 3] The Sherman Act provides, inpart, that ‘‘[e]very contract, combination inthe form of trust or otherwise, or conspira-cy, in restraint of trade or commerceamong the several States, or with foreignnations, is declared to be illegal.’’ 15U.S.C. § 1. Under a literal reading, thisprovision would make illegal every agree-

summary judgment motions. See In re Bitu-minous Coal Operators’ Ass’n, Inc., 949 F.2d1165, 1168 (D.C.Cir.1991) (‘‘Rule 53 of theFederal Rules of Civil Procedure authorizesthe appointment of special masters to assist,not to replace, the adjudicator, whether judgeor jury, constitutionally indicated for federal

court litigation.’’) (emphasis in original) (cit-ing La Buy v. Howes Leather Co., Inc., 352U.S. 249, 256, 77 S.Ct. 309, 1 L.Ed.2d 290(1957)).

6. The class certification decision is discussedin Section IV infra.


ment in restraint of trade. See Arizona v.Maricopa Cnty. Med. Soc’y, 457 U.S. 332,342, 102 S.Ct. 2466, 73 L.Ed.2d 48 (1982).However, it has not been so interpreted.Rather the Supreme Court has long con-strued it to prohibit only unreasonable re-straints. See State Oil Co. v. Khan, 522U.S. 3, 10, 118 S.Ct. 275, 139 L.Ed.2d 199(1997). Whether a restraint qualifies asunreasonable and therefore conflicts withthe statute is normally evaluated under the‘‘rule of reason.’’ Id. Applying this ap-proach, ‘‘the finder of fact must decidewhether the questioned practice imposesan unreasonable restraint on competition,taking into account a variety of factors,including specific information about therelevant business, its condition before andafter the restraint was imposed, and therestraint’s history, nature, and effect.’’ Id.This inquiry has been divided into threeparts. First, the plaintiff must show thatthe challenged conduct has produced anti-competitive effects within the market.United States v. Brown Univ., 5 F.3d 658,668 (3d Cir.1993). If the plaintiff meetsthe initial burden, ‘‘the burden shifts to thedefendant to show that the challenged con-duct promotes a sufficiently pro-competi-tive objective.’’ Id. at 669. Finally, theplaintiff can rebut the defendant’s purport-ed pro-competitive justification by showingthat the restraint is not reasonably neces-sary to achieve the pro-competitive objec-tive. Id.

[4] Courts have recognized, however,that ‘‘[s]ome types of restraints TTT havesuch predictable and pernicious anticom-petitive effect, and such limited potentialfor pro-competitive benefit, that they[should be] deemed unlawful per se.’’State Oil Co., 522 U.S. at 10, 118 S.Ct. 275.Examples of agreements that have beenheld unlawful pursuant to the per se ruleinclude horizontal price fixing, output limi-tations, market allocation, and group boy-

cotts. See Copperweld Corp. v. Indepen-dence Tube Corp., 467 U.S. 752, 768, 104S.Ct. 2731, 81 L.Ed.2d 628 (1984); N. Pac.Ry. v. United States, 356 U.S. 1, 5, 78 S.Ct.514, 2 L.Ed.2d 545 (1958). The per se ruleis applied where a ‘‘practice facially ap-pears to be one that would always or al-most always tend to restrict competition ordecrease output.’’ Broad. Music, Inc. v.CBS, Inc., 441 U.S. 1, 19–20, 99 S.Ct. 1551,60 L.Ed.2d 1 (1979).

[5] In some situations, courts apply anantitrust analysis that falls between thefull rule of reason inquiry on the one handand the rigid per se approach on the other.This so-called ‘‘quick look’’ or ‘‘truncatedrule of reason’’ analysis applies where theplaintiff has shown that the defendant hasengaged in practices similar to those sub-ject to per se treatment. See BrownUniv., 5 F.3d at 669. Having so shown,plaintiff is not required to make a fullshowing of anti-competitive effects withinthe market; rather defendant has the bur-den of demonstrating pro-competitive jus-tifications. Id.

C. Precedent from Other Circuits

Neither this court nor the SupremeCourt has yet weighed in on the legality ofreverse payment settlements. However,five other circuits have addressed thequestion. Two of those courts—the firsttwo to consider the question—concludedthat such agreements should be subject tostrict antitrust scrutiny, at least where thesettling parties attempted to manipulatethe 180–day exclusivity period to block allpotential generic competition. The threecourts to address the question of reversepayments more recently have reached acontrary result, ruling that such agree-ments are permissible so long as they donot exceed the potential exclusionary scopeof the patent.


1. D.C. Circuit—Andrx Pharms., Inc.v. Biovail Corp. Int’l, 256 F.3d

799 (D.C.Cir.2001)

The D.C. Circuit considered a reversepayment in Andrx Pharmaceuticals, Inc.v. Biovail Corp. International, 256 F.3d799 (D.C.Cir.2001), cert. denied, 535 U.S.931, 122 S.Ct. 1305, 152 L.Ed.2d 216(2002). Unlike the instant case, that casedid not involve a settlement resolving pat-ent litigation. Rather, while allowing thepatent litigation to continue, the namebrand manufacturer agreed to compensatethe would-be generic producer to delaymarketing a generic product.

In September 1995, Andrx Pharmaceuti-cals (‘‘Andrx’’) filed an ANDA seeking tomanufacture and sell a generic form ofCardizem CD, a heart drug for whichHoechst Marion Russell, Inc. (‘‘HMRI’’)held the patent. Id. at 803. Andrx filed aparagraph IV certification and was timelysued for patent infringement by HMRI.Id. The filing of the patent infringementsuit triggered the thirty-month waiting pe-riod during which the FDA could not givefinal approval to Andrx or any subsequentANDA applicants seeking to make a ge-neric version of Cardizem CD. Id. (citing21 U.S.C. § 355(j)(5)(B)(iii)). In June1997, a second generic manufacturer, Bio-vail Corp. International (‘‘Biovail’’), filed anANDA and a paragraph IV certification toproduce generic Cardizem CD. Shortlythereafter, the FDA issued a tentative ap-proval of Andrx’s ANDA. Id.

Soon after the tentative approval wasissued, HMRI and Andrx entered into anagreement pursuant to which HMRI wouldpay Andrx $40 million per year beginningon the date that Andrx received final ap-proval from the FDA and ending on thedate that Andrx either began selling ge-neric Cardizem CD or was adjudged liablefor patent infringement in the pendingsuit. Id. The apparent purpose of this

agreement was to create a bottleneck bydelaying the triggering of Andrx’s 180–dayperiod of exclusivity, and thereby delayinggeneric entry not only by Andrx but alsoby any other potential generic manufactur-er. Id. at 804.

The D.C. Circuit reversed the districtcourt’s dismissal with prejudice of Biovail’santitrust claims, holding that the agree-ment between HMRI and Andrx could‘‘reasonably be viewed as an attempt toallocate market share and preserve mo-nopolistic conditions.’’ Id. at 811. TheD.C. Circuit treated the payment fromHMRI to Andrx as prima facie evidence ofan illegal agreement not to compete, not-ing that ‘‘Andrx’s argument that any ra-tional actor would wait for resolution ofthe patent infringement suit [before trig-gering the 180–day exclusivity period] isbelied by the quid of HMRI’s quo.’’ Id. at813.

2. Sixth Circuit—In re CardizemCD Antitrust Litig., 332 F.3d

896 (6th Cir.2003)

The Sixth Circuit’s decision of In reCardizem CD Antitrust Litigation con-cerned the same agreement considered bythe D.C. Circuit in Andrx. 332 F.3d 896(6th Cir.2003), cert. denied, 543 U.S. 939,125 S.Ct. 307, 160 L.Ed.2d 248 (2004).The Sixth Circuit case was brought bydirect and indirect purchasers of CardizemCD who alleged that they suffered anti-trust harm as a result of Andrx’s agree-ment with HMRI to delay market entry.Id. at 903–04. The Sixth Circuit held thatthe Andrx–HMRI agreement was ‘‘a hori-zontal agreement to eliminate competitionin the market for Cardizem CD through-out the entire United States, a classic ex-ample of a per se illegal restraint of trade.’’Id. at 908.

While both Cardizem and Andrx con-cerned an agreement that caused a bott-


leneck by preventing other generic man-ufactures from entering the market bydelaying the triggering of the first filer’s180–day exclusivity period, much of theSixth Circuit’s reasoning in Cardizem isequally applicable to cases, like the in-stant one, that do not involve bottleneck-ing. Specifically, the Sixth Circuit em-phasized its concern that, even settingaside the bar to subsequent generic ap-plicants, HMRI had paid Andrx not toenter the market itself, stating, ‘‘it is onething to take advantage of a monopolythat naturally arises from a patent, butanother thing altogether to bolster thepatent’s effectiveness in inhibiting com-petitors by paying the only potentialcompetitor $40 million per year to stayout of the market.’’ Id. at 908.

3. Eleventh Circuit—Valley Drug Co. v.Geneva Pharms., Inc., 344 F.3d 1294(11th Cir.2003) and Schering–PloughCorp. v. FTC, 402 F.3d 1056 (11thCir.2005)

The Eleventh Circuit has also consid-ered the question of reverse payments set-tlements in three significant cases. Thefirst of these, Valley Drug Co. v. GenevaPharmaceuticals, Inc., 344 F.3d 1294 (11thCir.2003), cert. denied, 543 U.S. 939, 125S.Ct. 308, 160 L.Ed.2d 248 (2004), con-cerned two agreements arising out ofcases where a name brand drug manufac-turer sued generic manufacturers for pat-ent infringement and the generic manufac-

turers defended on the ground of patentinvalidity.7 Id. at 1299–301. In the twoagreements at issue, the name brand man-ufacturer agreed to pay the generic manu-facturer substantial sums to refrain fromentering the market until the end of thename brand manufacturer’s patent term.Id. at 1300. The patent at issue was sub-sequently declared invalid in another case.Id. at 1306–07. The district court grantedsummary judgment to antitrust plaintiffs,holding that the settlements were per seviolations of the Sherman Act. Id. at 1301.The Eleventh Circuit reversed on theground that the name brand manufacturerheld a patent that gave it the right toexclude competitors. Id. at 1306. In soruling, the court emphasized the fact thatthe name brand manufacturer might haveprevailed in the underlying patent litiga-tion, id. at 1309, and highlighted policyconsiderations favoring the settlement ofpatent litigation, id. at 1308 n. 20. Thecourt applied neither a per se nor rule ofreason analysis to the agreements as awhole; rather, it directed the district courtto first determine whether any part of theagreement went beyond the protectionsafforded by the name brand manufactur-er’s patent and, if so, to apply traditionalantitrust scrutiny only to those portions ofthe agreement. Id. at 1311–1312.

A subsequent Eleventh Circuit case,Schering–Plough Corp. v. FTC, arose outof the same settlement agreement as theinstant appeal.8 402 F.3d 1056 (11th Cir.

7. One of these agreements was a final settle-ment of certain claims, the other was struc-tured, like the agreements in Andrx and Car-dizem, to take effect even as the litigationcontinued. See Valley Drug, 344 F.3d at1300.

8. Defendants argue in passing that this courtshould begin its analysis in this case with astrong presumption in favor of following theEleventh Circuit’s decision in Schering–Plough. However, none of the cases cited by

defendants employs such a presumption;rather, they stand for the unsurprising propo-sition that this court will follow the decisionsof its sister courts where it finds them persua-sive. See, e.g., Ramadan v. Chase ManhattanCorp., 229 F.3d 194, 197–203 (3d Cir.2000)(following the rulings of other courts of ap-peal on similar facts but conducting an inde-pendent analysis). As explained below, we donot find the Eleventh Circuit’s decision inSchering–Plough persuasive, and thus declineto follow it.


2005), cert. denied, 548 U.S. 919, 126 S.Ct.2929, 165 L.Ed.2d 977 (2006). After theFTC found that both agreements violatedantitrust laws, the defendants appealed tothe Eleventh Circuit. Applying the testarticulated in Valley Drug, the EleventhCircuit set aside the ruling of the FTC. Id.at 1065–66, 1076. The court rejected theFTC’s conclusion that Schering’s $60 mil-lion payment to Upsher was for somethingother than the licenses it obtained, findingby ‘‘overwhelming evidence’’ that the pay-ment was only for the licenses. Id. 1069–71. As such, the court found that therewas no reverse payment from Schering toUpsher and thus necessarily no antitrustviolation in that agreement. Id. With re-spect to the ESI settlement, the courtacknowledged the presence of a reversepayment but concluded that the paymentwas acceptable in light of judicial policyfavoring settlements and the court’s find-ing that the settlement terms ‘‘ ‘reflect[ed]a reasonable implementation’ of the pro-tections afforded by patent law.’’ Id. at1072 (quoting Valley Drug, 344 F.3d at1312).9

Plaintiffs construe Valley Drug andSchering–Plough as requiring courts toconduct an ex post evaluation of thestrength of the underlying patent beforedetermining whether the patent shields anagreement from antitrust scrutiny. How-ever, following oral argument in this case,the Eleventh Circuit explicitly rejectedthat interpretation of its prior holdings.In FTC v. Watson Pharmaceuticals, Inc.,the Eleventh Circuit clarified that its prioropinions did not call for an evaluation ofthe strength of the patent but rather onlya determination whether, absent sham liti-gation or fraud in obtaining the patent, thesettlement agreement exceeded the scope

of the patent. FTC v. Watson Pharms.,Inc., 677 F.3d 1298, 1311–13 n. 8, 1313–14(11th Cir.2012). Thus the standard ap-plied by the Eleventh Circuit is identical tothe scope of the patent test applied by theSecond Circuit to which we now turn.

4. Second Circuit—In re TamoxifenCitrate Antitrust Litig., 466

F.3d 187 (2d Cir.2006)

The Second Circuit’s decision of In reTamoxifen Citrate Antitrust Litigationarose out of an agreement settling a patentinfringement suit over the drug tamoxifen,then the most widely prescribed drug forthe treatment of breast cancer. 466 F.3d187, 190 (2d Cir.2006), cert. denied, 551U.S. 1144, 127 S.Ct. 3001, 168 L.Ed.2d 726(2007). That settlement was reached whilethe patent case was on appeal after thedistrict court had ruled the patent invalid.Id. The settlement called for the namebrand manufacturer to grant the genericmanufacturer a license to sell an unbrand-ed version of tamoxifen and make a re-verse payment of $21 million to the genericmanufacturer. The settlement was contin-gent on obtaining a vacatur of the districtcourt’s judgment holding the patent to beinvalid, which was subsequently obtained.Id.

Affirming the district court’s dismissalof antitrust plaintiffs’ claims, the SecondCircuit applied a presumption of patentvalidity and held that ‘‘there is no injury tothe market cognizable under existing anti-trust law, as long as competition is re-strained only within the scope of the pat-ent.’’ Id. at 213 (internal citations andquotation marks omitted). The only ex-ceptions to this rule, the court held, occurwhere there is evidence that the patentwas procured by fraud or that the enforce-

9. The Eleventh Circuit subsequently applied,without further significant explication, thescope of the patent test announced in Valley

Drug and Schering–Plough in another case,Andrx Pharmaceuticals, Inc. v. Elan Corpora-tion, PLC, 421 F.3d 1227 (11th Cir.2005).


ment suit was objectively baseless. Id.This test is commonly referred to as the‘‘scope of the patent test’’ or the ‘‘Tamoxi-fen test.’’ The Second Circuit concededthat there was a potentially troubling re-sult of such a rule in that ‘‘[t]he less soundthe patent or the less clear the infringe-ment, and therefore the less justified themonopoly enjoyed by the patent holder,the more a rule permitting settlement islikely to benefit the patent holder by al-lowing it to retain the patent.’’ Id. at 211.The court determined, however, that thisrisk was counterbalanced by the judicialpreference for settlement. Id.

In reaching this conclusion, the SecondCircuit concluded that ‘‘the Hatch–Wax-man Act created an environment that en-courages [reverse payments]’’ because, un-like traditional infringement suits wherethe patent holder can negotiate by agree-ing to forego the infringement damages itexpects to recover, there usually are noinfringement damages in Hatch–Waxmansuits. Id. at 206. The Second Circuit thusreasoned that the ‘‘reverse payments’’common in Hatch–Waxman suits are lesstroubling because they take the place ofinfringement damages that the patentholder might have otherwise waived in or-der to reach a settlement. Id.

Judge Pooler dissented from the deci-sion in Tamoxifen, contending that thescope of the patent rule applied by themajority ‘‘is not soundly grounded in Su-preme Court precedent and is insufficient-ly protective of the consumer interestssafeguarded by the Hatch–Waxman Actand the antitrust laws.’’ Id. at 224 (Pool-er, J., dissenting). Judge Pooler argued,inter alia, that judicial reevaluation of pat-ent validity is a public good that reversepayment settlements undercut, id. at 225–26, and suggested that the proper antitrust

standard is one of reasonableness consid-ering all the circumstances affecting a re-strictive agreement including (1) thestrength of the patent as it appeared atthe time of settlement, (2) the amount ofthe reverse payment, (3) the amount thegeneric manufacturer would have madeduring its 180–day exclusivity period, and(4) any ancillary anticompetitive effects ofthe agreement. Id. at 228.

In a subsequent reverse payment case,Arkansas Carpenters Health & WelfareFund v. Bayer AG, the Second Circuitapplied the Tamoxifen standard and re-jected an antitrust challenge to a Hatch–Waxman settlement involving a reversepayment. 604 F.3d 98 (2d Cir.2010), cert.denied, ––– U.S. ––––, 131 S.Ct. 1606, 179L.Ed.2d 517 (2011). However, the judgeson the Arkansas Carpenters panel madeclear that they thought that Tamoxifenwas wrongly decided and invited appel-lants to petition for rehearing en banc. Id.at 108–10. Among other things, the Ar-kansas Carpenters court noted its concernabout evidence suggesting that the numberof reverse payment settlements had in-creased dramatically in the wake of theTamoxifen decision. Id. at 109. Rehear-ing en banc was subsequently denied overa dissent from Judge Pooler. Ark. Car-penters Health & Welfare Fund v. BayerAG, 625 F.3d 779 (2d Cir.2010).

5. Federal Circuit—In re CiprofloxacinHydrochloride Antitrust Litig., 544

F.3d 1323 (Fed.Cir.2008)

In In re Ciprofloxacin HydrochlorideAntitrust Litigation the Federal Circuitconsidered a case related to those con-fronted by the Second Circuit in ArkansasCarpenters. 544 F.3d 1323 (Fed.Cir.2008),cert. denied, ––– U.S. ––––, 129 S.Ct. 2828,174 L.Ed.2d 553 (2009).10 The Federal

10. That case was severed by the Second Cir- cuit and transferred to the Federal Circuit


Circuit applied the scope of the patent testexplicated in Tamoxifen and other cases,stating, ‘‘[t]he essence of the inquiry iswhether the agreements restrict competi-tion beyond the exclusionary zone of thepatent.’’ Id. at 1336. The court further‘‘agree[d] with the Second and EleventhCircuits TTT that, in the absence of evi-dence of fraud before the PTO or shamlitigation, the court need not consider thevalidity of the patent in the antitrust anal-ysis of a settlement agreement involving areverse payment.’’ Id.

D. Analysis

[6] While the first two courts of appealto address the issue of reverse paymentssubjected those agreements to antitrustscrutiny, later courts have gravitated to-ward the scope of the patent test underwhich reverse payments are permitted solong as (1) the exclusion does not exceedthe patent’s scope, (2) the patent holder’sclaim of infringement was not objectivelybaseless, and (3) the patent was not pro-cured by fraud on the PTO. The scope ofthe patent test was applied by the SpecialMaster in this case and has been appliedby at least one other district court in thiscircuit. See King Drug Co. of Florence,Inc. v. Cephalon, Inc., 702 F.Supp.2d 514,528–29, 533 (E.D.Pa.2010) (applying scopeof the patent test but denying defendants’motion to dismiss where plaintiffs pleadedfacts supporting their claim that the un-derlying patent suit was objectively base-less). As a practical matter, the scope ofthe patent test does not subject reversepayment agreements to any antitrust scru-tiny. As the antitrust defendants concede,no court applying the scope of the patenttest has ever permitted a reverse paymentantitrust case to go to trial.

After consideration of the arguments ofcounsel, the conflicting decisions in theother circuits, the Report of the SpecialMaster, and our own reading, we cannotagree with those courts that apply thescope of the patent test. In our view, thattest improperly restricts the application ofantitrust law and is contrary to the policiesunderlying the Hatch–Waxman Act and along line of Supreme Court precedent onpatent litigation and competition.

[7, 8] First, we take issue with thescope of the patent test’s almost unrebutt-able presumption of patent validity. Thispresumption assumes away the questionbeing litigated in the underlying patentsuit, enforcing a presumption that the pat-ent holder would have prevailed. We canidentify no significant support for such apolicy. While persons challenging the va-lidity of a patent in litigation bear theburden of defeating a presumption of va-lidity, this presumption is intended merelyas a procedural device and is not a sub-stantive right of the patent holder. SeeStratoflex, Inc. v. Aeroquip Corp., 713F.2d 1530, 1534 (Fed.Cir.1983) (‘‘The pre-sumption, like all legal presumptions, is aprocedural device, not substantive law.’’).Moreover, the effectively conclusive pre-sumption that a patent holder is entitled toexclude competitors is particularly mis-guided with respect to agreements—likethose here—where the underlying suitconcerned patent infringement rather thanpatent validity: In infringement cases it isthe patent holder who bears the burden ofshowing infringement. See Egyptian God-dess, Inc. v. Swisa, Inc., 543 F.3d 665, 679(Fed.Cir.2008).

Rather than adopt an unrebuttable pre-sumption of patent validity, we believe

because it involved a claim arising out ofpatent law. See Order, No. 05–2863 (2d Cir.

Nov. 7, 2007).


courts must be mindful of the fact that ‘‘[a]patent, in the last analysis, simply repre-sents a legal conclusion reached by thePatent Office.’’ Lear, Inc. v. Adkins, 395U.S. 653, 670, 89 S.Ct. 1902, 23 L.Ed.2d610 (1969). Many patents issued by thePTO are later found to be invalid or notinfringed, and a 2002 study conducted bythe FTC concluded that, in Hatch–Wax-man challenges made under paragraph IV,the generic challenger prevailed seventy-three percent of the time. See FTC, Ge-neric Drug Entry Prior to Patent Expira-tion 16 (2002), available at http://www.ftc.gov/os/2002/07/genericdrugstudy.pdf; Kim-berly A. Moore, Judges, Juries, and Pat-ent Cases—An Empirical Peek Inside theBlack Box, 99 Mich. L.Rev. 365, 385 (2000)(noting that between 1983 and 1999 thealleged infringer prevailed in forty-twopercent of patent cases that reached tri-al).11 These figures add force to the likeli-hood—conceded by the Tamoxifen majori-ty—that reverse payments enable theholder of a patent that the holder knows isweak to buy its way out of both competi-tion with the challenging competitor andpossible invalidation of the patent. 466F.3d at 211 (‘‘The less sound the patent orthe less clear the infringement, and there-fore the less justified the monopoly en-joyed by the patent holder, the more a rulepermitting settlement is likely to benefitthe patent holder by allowing it to retainthe patent.’’).

Moreover, we question the assumptionunderlying the view of the Second Circuitand other courts that subsequent chal-

lenges by other generic manufacturers willsuffice to eliminate weak patents pre-served through a reverse payment to theinitial challenger. Cf., e.g., id. at 211–12.We note that the initial generic challengeris necessarily the most motivated because,unlike all subsequent challengers, it standsto benefit from the 180–day exclusivityperiod of 21 U.S.C. § 355(j)(5)(B)(iv). Ad-ditionally, as the experience of at least onecourt in this Circuit confirms, the highprofit margins of a monopolist drug manu-facturer may enable it to pay off a wholeseries of challengers rather than suffer thepossible loss of its patent through litiga-tion. See King Drug Co. of Florence, Inc.,702 F.Supp.2d at 521–22 (drug manufac-turer settled infringement suits by fourgeneric firms, which agreed to delay mar-ket entry ‘‘in exchange for significant pay-ments TTT for various licensing agree-ments, supply agreements and researchand development deals’’).

[9] This practical analysis is supportedby a long line of Supreme Court casesrecognizing that valid patents are a limitedexception to a general rule of the freeexploitation of ideas. It follows that thepublic interest supports judicial testingand elimination of weak patents. See Car-dinal Chem. Co. v. Morton Int’l, Inc., 508U.S. 83, 100–01, 113 S.Ct. 1967, 124L.Ed.2d 1 (1993) (explaining the ‘‘impor-tance to the public at large of resolvingquestions of patent validity’’ and noting thedanger of ‘‘grant[ing] monopoly privilegesto the holders of invalid patents’’); BonitoBoats, Inc. v. Thunder Craft Boats, Inc.,

11. The Pharmaceutical Research and Manu-facturers of America points to a more recentstudy concluding that, in the years from 2000to 2009, generics prevailed in slightly lessthan half of their challenges. RBC CapitalMkts., Pharmaceuticals: Analyzing LitigationSuccess Rates 4 (2010), available at http://www.amlawdaily.typepad.com/pharmareport.pdf. Even if the industry’s own figures are

accepted, they show that a substantial frac-tion of Hatch–Waxman patent challenges suc-ceed on the merits. Moreover, the study citedby the industry further states that ‘‘when youtake into account patent settlements andcases that were dropped, the success rate forgenerics jumps to 76%, substantially in favorof challenging patents.’’ Id.


489 U.S. 141, 146, 109 S.Ct. 971, 103L.Ed.2d 118 (1989) (noting that the patentlaws embody ‘‘a careful balance betweenthe need to promote innovation and therecognition that imitation and refinementthrough imitation are both necessary toinvention itself and the very lifeblood of acompetitive economy’’); United States v.Masonite Corp., 316 U.S. 265, 277, 62 S.Ct.1070, 86 L.Ed. 1461 (1942) (a patent ‘‘af-fords no immunity for a monopoly notfairly or plainly within the grant’’); id. at280, 62 S.Ct. 1070 (patents are to be‘‘strictly construed’’ because they are‘‘privileges restrictive of a free economy’’);Pope Mfg. Co. v. Gormully, 144 U.S. 224,234, 12 S.Ct. 632, 36 L.Ed. 414 (1892) (‘‘Itis as important to the public that competi-tion should not be repressed by worthlesspatents, as that the patentee of a reallyvaluable invention should be protected inhis monopoly.’’).

That reasoning underlies the decision ofthe Supreme Court in Edward KatzingerCo. v. Chicago Metallic ManufacturingCo., where the Court considered whether apatent licensor could be contractually es-topped from challenging the validity of thepatent under a licensing agreement thatalso contained a price fixing term. 329U.S. 394, 67 S.Ct. 416, 91 L.Ed. 374 (1947).The Court reasoned that if the patent wasinvalid, the price fixing provision wouldviolate federal antitrust law and that, assuch, the licensor could not be estoppedfrom challenging the patent. Id. at 399,401–02, 67 S.Ct. 416. In reaching thisconclusion the Court emphasized ‘‘thebroad public interest in freeing our com-petitive economy from the trade restraintswhich might be imposed by price-fixingagreements stemming from narrow or in-valid patents.’’ Id. at 400, 67 S.Ct. 416(citing Sola Elec. Co. v. Jefferson Elec. Co.,317 U.S. 173, 177, 63 S.Ct. 172, 87 L.Ed.165 (1942)). The Court additionally stat-ed: ‘‘It is the public interest which is

dominant in the patent system and TTT theright to challenge [a patent] is not only aprivate right to the individual, but it isfounded on public policy which is promotedby his making the defence, and contra-vened by his refusal to make it.’’ Id. at401, 67 S.Ct. 416 (internal citations andquotation marks omitted).

This logic is persuasive with respect tothe situation at bar because reverse pay-ments permit the sharing of monopolyrents between would-be competitors with-out any assurance that the underlying pat-ent is valid. See also United States v.Studiengesellschaft Kohle, m.b.H., 670F.2d 1122, 1136 (D.C.Cir.1981) (suggestingan agreement might be anticompetitive ifit ‘‘give[s] potential competitors incentivesto remain in cartels rather than turning toanother product, inventing around the pat-ent, or challenging its validity’’). It ap-pears that these aspects of the SupremeCourt’s general patent jurisprudence hadbeen overlooked by the Special Master andothers adopting the scope of the patenttest.

[10] We caution that our decision to-day is limited to reverse payments be-tween patent holders and would be genericcompetitors in the pharmaceutical indus-try. As the Supreme Court has madeclear, ‘‘antitrust analysis must sensitivelyrecognize and reflect the distinctive eco-nomic and legal setting of the regulatedindustry to which it applies.’’ VerizonCommc’ns Inc. v. Law Offices of Curtis V.Trinko, LLP, 540 U.S. 398, 411–12, 124S.Ct. 872, 157 L.Ed.2d 823 (2004); see alsoIA Phillip E. Areeda & Herbert Hoven-kamp Antitrust Law, ¶ 240d, 289 (3d ed.2006) (‘‘[T]he presence of regulation insome instances limits the antitrust roleand in some instances simply changes it oreven enlarges it.’’). The Supreme Court’sadmonition is particularly relevant in an


industry, like the pharmaceutical industry,that is subject to extensive regulation inwhich Congress has balanced the protec-tion of intellectual property and the needfor competition. Specifically, in passingthe Hatch–Waxman Act, Congress drew acareful line between patent protection andthe need to provide incentives for competi-tion in the pharmaceutical industry. See130 Cong. Rec. 24425 (Sept. 6, 1984) (state-ment of Rep. Waxman underscoring the‘‘fundamental balance of the bill’’);H.R.Rep. No. 98–857, pt. 2, at 30 (1984),1984 U.S.C.C.A.N. 2686 at 2713 (emphasiz-ing that the bill achieves ‘‘what the Con-gress has traditionally done in the area ofintellectual property law[:] balance theneed to stimulate innovation against thegoal of furthering the public interest’’),reprinted in 1984 U.S.C.C.A.N. 2686 at2715. The line that Congress drew be-tween these competing objectives stronglysupports the application of rule of reasonscrutiny of reverse payment settlements inthe pharmaceutical industry.

The goal of the Hatch–Waxman Act is toincrease the availability of low cost genericdrugs. H.R.Rep. No. 98–857, pt. 1, at 14,reprinted in 1984 U.S.C.C.A.N. 2647 at2647. One method Congress employedwas to encourage litigated challenges bygeneric manufacturers against the holdersof weak or narrow patents. See 21 U.S.C.§ 355(j)(5)(B)(iv) (establishing 180–day ex-clusivity period as reward for successfullychallenging a patent); S.Rep. No. 107–167,at 4 (2002) (‘‘Under Hatch–Waxman, man-ufacturers of generic drugs are encour-aged to challenge weak or invalid patentson brand name drugs so consumers canenjoy lower drug prices.’’). That goal isundermined by application of the scope ofthe patent test which entitles the patentholder to pay its potential generic competi-tors not to compete. As one commentatorhas noted, this approach nominally pro-tects intellectual property, not on the

strength of a patent holder’s legal rights,but on the strength of its wallet. SeeHemphill, Paying for Delay, supra at 1614(‘‘In the Hatch–Waxman Act TTT the pro-motion and delay of litigation are centralpreoccupations of the regulatory regime.An open-ended permission for innovatorsto set innovation policy by self-help[through reverse payments] is less plausi-ble, as Congress has taken explicit steps tofill those gaps.’’) As the Second Circuitacknowledged in its Tamoxifen decision,the principal beneficiaries of such an ap-proach will be name brand manufacturerswith weak or narrow patents that are un-likely to prevail in court. See 466 F.3d at211. Thus while such a rule might be goodpolicy from the perspective of name brandand generic pharmaceutical producers, it isbad policy from the perspective of theconsumer, precisely the constituency Con-gress was seeking to protect.

In rejecting the scope of the patent test,we are cognizant that such a test encour-ages settlement, an objective our decisionsgenerally support. See, e.g., Ehrheart v.Verizon Wireless, 609 F.3d 590, 595 (3dCir.2010) (‘‘Settlement agreements are tobe encouraged because they promote theamicable resolution of disputes and lightenthe increasing load of litigation faced bythe federal courts.’’). However, the judi-cial preference for settlement, while gener-ally laudable, should not displace counter-vailing public policy objectives or, in thiscase, Congress’s determination—which isevident from the structure of the Hatch–Waxman Act and the statements in thelegislative record—that litigated patentchallenges are necessary to protect con-sumers from unjustified monopolies byname brand drug manufacturers. We alsoemphasize that nothing in the rule of rea-son test that we adopt here limits theability of the parties to reach settlementsbased on a negotiated entry date for mar-


keting of the generic drug: the only settle-ments subject to antitrust scrutiny arethose involving a reverse payment fromthe name brand manufacturer to the ge-neric challenger. Data analyzed by theFTC suggest that this will leave the vastmajority of pharmaceutical patent settle-ments unaffected. See FTC, Bureau ofCompetition, Agreements Filed with theFederal Trade Commission under theMedicare Prescription Drug, Improve-ment, and Modernization Act of 2003:Overview of Agreements Filed in FY 2010,2 (2011) (showing that nearly seventy-fivepercent of Hatch–Waxman Act infringe-ment suits that settled in 2010 did sowithout reverse payments), available athttp://www.ftc.gov/os/2011/05/1105mmagreements.pdf.

[11, 12] For all of these reasons wereject the scope of the patent test. In itsplace we will direct the District Court toapply a quick look rule of reason analysisbased on the economic realities of the re-verse payment settlement rather than thelabels applied by the settling parties. Spe-cifically, the finder of fact must treat anypayment from a patent holder to a genericpatent challenger who agrees to delay en-try into the market as prima facie evi-dence of an unreasonable restraint oftrade, which could be rebutted by showingthat the payment (1) was for a purposeother than delayed entry or (2) offers somepro-competitive benefit.

In holding that a reverse payment isprima facie evidence of an unreasonablerestraint of trade, we follow the approachsuggested by the DC Circuit in Andrx andembrace that court’s common sense con-clusion that ‘‘[a] payment flowing from theinnovator to the challenging generic firmmay suggest strongly the anticompetitiveintent of the parties entering the agree-mentTTTT’’ 256 F.3d at 809 (internal quota-tion marks and citation omitted).

[13] We agree, moreover, with theFTC that there is no need to consider themerits of the underlying patent suit be-cause ‘‘[a]bsent proof of other offsettingconsideration, it is logical to conclude thatthe quid pro quo for the payment was anagreement by the generic to defer entrybeyond the date that represents an other-wise reasonable litigation compromise.’’In re Schering–Plough Corp., Final Order,136 F.T.C. at 988. Of course, a patentholder may attempt to rebut plaintiff’s pri-ma facie case of an unreasonable restraintof trade by arguing that there is in fact noreverse payment because any money thatchanged hands was for something otherthan a delay in market entry. Alternative-ly, the patent holder may attempt to rebutthe prima facie case by demonstratingthat the reverse payment offers a competi-tive benefit that could not have beenachieved in the absence of a reverse pay-ment. This second possible defense at-tempts to account for the—probablyrare—situations where a reverse paymentincreases competition. For example, amodest cash payment that enables a cash-starved generic manufacturer to avoidbankruptcy and begin marketing a genericdrug might have an overall effect of in-creasing the amount of competition in themarket. For the reasons set forth, we willreverse the judgment of the District Courtand remand for further proceedings in ac-cordance with the foregoing.

IV. THE CLASS CERTIFICATIONISSUE (Appeal No. 10–4571)

A. Procedural Background

The other issue before us on this appealconcerns plaintiffs’ effort to certify a classof persons who purchased K–Dur directlyfrom Schering between November 20, 1998and September 1, 2001 and subsequentlypurchased a generic version of K–Dur. Asidentified by the parties’ experts, the class


consists of forty-four wholesalers and re-tailers. The Special Master recommendedgranting plaintiffs’ motion to certify theclass. The District Court adopted theSpecial Master’s Report and Recommen-dation and formally certified the class.

[14] Defendants sought interlocutoryreview of the District Court’s order underFederal Rule of Civil Procedure 23(f).While that petition was pending, the Dis-trict Court ruled on the cross motions forsummary judgment and entered final judg-ment in defendants’ favor. Plaintiffs filed anotice of appeal, and defendants filed across appeal, which this court dismissed asuntimely. See Order, In re K–Dur Anti-trust Litig., No. 10–2727 (3d Cir. Nov. 24,2010). However, this court accepted de-fendants’ Rule 23(f) petition, see Order, Inre K–Dur Antitrust Litig., No. 09–8006 (3dCir. Nov. 16, 2010), and we therefore havejurisdiction pursuant to 28 U.S.C.§ 1292(e).12

B. Standard of Review

[15] This court reviews class certifica-tion orders ‘‘for abuse of discretion, whichoccurs if the district court’s decision restsupon a clearly erroneous finding of fact, anerrant conclusion of law or an improperapplication of law to fact.’’ In re Hydro-gen Peroxide Antitrust Litig., 552 F.3d305, 312 (3d Cir.2008) (internal quotationmarks and citation omitted).

C. Defendants’ Arguments

In order to certify a class under Rule23(b)(3), a plaintiff must satisfy both thegeneral class action prerequisites—numer-

osity, commonality, typicality, and adequa-cy of representation—and the additionalrequirements of predominance and superi-ority. Fed.R.Civ.P. 23(a), (b)(3). TheSpecial Master, in a report adopted in fullby the District Court, discussed the classrequirements in detail; defendants chal-lenge only a few of those findings. Defen-dants assert that (1) plaintiffs cannot usecommon evidence to prove that the classmembers suffered an actual injury fromdefendants’ conduct because showing actu-al injury means demonstrating lost profitsdamages, which defendants argue neces-sarily requires individualized assessments,(2) even assuming that overcharges are anacceptable form of injury, the DistrictCourt erred in its conclusion that therewas common evidence of injury to all classmembers, and (3) the class should not havebeen certified because of inherent conflictsbetween members. Defendants’ first twoarguments challenge the District Court’sfinding with respect to the predominancerequirement, while the third goes to theadequacy requirement. We address thesearguments in order.

1. Predominance Issues

[16, 17] In order for the predominancerequirement to be satisfied ‘‘[i]ssues com-mon to the class must predominate overindividual issues.’’ In re Hydrogen Perox-ide, 552 F.3d at 311 (internal citations andquotation marks omitted). Class certifica-tion calls for the district court to conduct a‘‘rigorous assessment of the available evi-dence,’’ id. at 312, and is only appropriatein antitrust cases where plaintiffs canshow, by a preponderance of the evidence,

12. Plaintiffs argue that because defendants’cross appeal was dismissed as untimely defen-dants’ 23(f) petition should have been dis-missed also. An appeals court has discretionto consider an interlocutory appeal even afterthe entry of final judgment. Cf. In re Coordi-nated Pretrial Proceedings in Petroleum Prods.

Antitrust Litig., 788 F.2d 1571, 1573–74(Temp.Emer.Ct.App.1986). Moreover, ingranting defendants’ 23(f) petition, this courthas already considered the issue of the appro-priateness of review, and we see no reason toreconsider the decision to hear this appeal.


that proof of the essential elements of thecause of action, including antitrust injury,do not require individual treatment. Id. at307, 311.

It is plaintiffs’ thesis that they will provethat class members paid more for K–Durbecause of Schering’s antitrust violations,and that this constitutes the required anti-trust impact. The Special Master accept-ed this based on Third Circuit law, stating:

The Third Circuit has held that ‘‘whenan antitrust violation impacts upon aclass of persons who do have standing,there is no reason in doctrine why proofof impact cannot be made on a commonbasis, so long as the common proof ade-quately demonstrates some damage toeach individual.’’

App. at 7980 (quoting Bogosian v. Gulf OilCorp., 561 F.2d 434, 454 (3d Cir.1977)).Because all of the class members pur-chased some of the generic versions of K–Dur, plaintiffs have satisfactorily explainedtheir theory of impact.

Plaintiffs proposed to prove antitrust in-jury through common proof consistinglargely of the declarations and report oftheir expert, Dr. Leitzinger. Dr. Leitzing-er offered statistical and economic analy-ses of the overall brand-name and genericdrug market and of the specific entry ofgeneric potassium chloride in the marketto show that, but for the challenged re-verse payment agreements, ‘‘all (or virtual-ly all) members of the proposed class’’would have purchased at least some lessexpensive generic potassium chloride earli-er, and therefore suffered an antitrust in-jury as a result of the delay in genericentry. The Special Master considered Dr.Leitzinger’s proposed methodology andthe criticisms of it made by defendants’expert, Dr. Rubinfeld, in detail. Afterslightly narrowing the class definition to

accommodate a criticism made by defen-dants’ expert,13 the Special Master foundthat plaintiffs had satisfied their burden ofshowing that antitrust impact may beproven by evidence common to all classmembers.

In December 2008, several months afterthe Special Master’s Report and Recom-mendation, this court issued its decision inIn re Hydrogen Peroxide Antitrust Litiga-tion, which clarified the standard to beapplied when certifying a class of plaintiffsin an antitrust action. 552 F.3d 305. Inthat case, we held that the preponderancerequirement demands more than a merethreshold showing by a party seeking tocertify a class and that, in considering amotion for class certification, a districtcourt is required to resolve any factual orlegal disputes necessary to determinewhether a plaintiff will be able to showantitrust injury for all plaintiffs with com-mon evidence. Id. at 316–18.

a. Whether Lost Profits Are the Rele-vant Antitrust Injury

Defendants argue first that the predomi-nance requirement of Rule 23(b)(3) is notsatisfied because, in order to prove actualinjury from delayed generic entry, plain-tiffs must produce evidence of lost profits,which necessarily requires an individualassessment for each class member. De-fendants contend specifically that some ofthe wholesalers lost substantial sales vol-umes after generic entry, and that, forsuch wholesalers, generic entry caused adecrease in profits.

Defendants’ lost profits argument isunavailing because it is simply a version ofthe so-called ‘‘passing-on defense’’ that wasrejected by the Supreme Court in HanoverShoe, Inc. v. United Shoe Machinery Cor-

13. Specifically, the Special Master excludedfrom the class direct purchasers who did not

purchase a generic version of K–Dur aftergeneric entry.


poration, 392 U.S. 481, 88 S.Ct. 2224, 20L.Ed.2d 1231 (1968). In that case, theSupreme Court held that demonstratingantitrust injury does not require a showingof lost profits. Id. at 494, 88 S.Ct. 2224.Rather, the Supreme Court ruled that aplaintiff suffers an antitrust injury whereit is overcharged for a product, regardlessof whether it can show lost profits. Id. at492–95, 88 S.Ct. 2224. In reaching thisconclusion, the Court noted that requiringplaintiffs to show lost profits was too bur-densome on both courts and litigants andwould undercut the effectiveness of privateantitrust suits as an enforcement mecha-nism. Id. at 492–94, 88 S.Ct. 2224; see alsoBogosian, 561 F.2d at 456 (noting that alost-profits inquiry would be ‘‘enormouslycomplicated, posing a tremendous burdenon the presentation of plaintiffs’ case’’ andthat ‘‘it is precisely for this reason that theSupreme Court eliminated the ‘passing-ondefense’ in Hanover Shoe ’’).

Defendants argue that the HanoverShoe rule should not apply here becausethat case involved an overcharge for anidentical product whereas this one involvestwo different products, a name brand drugwith a higher price and a lower pricedgeneric drug. However, defendants citeno authority distinguishing Hanover Shoeon that basis, and their own expert con-ceded that the generic supplement thatSchering began manufacturing after Upsh-er entered the market was made in thesame plant as K–Dur and chemically iden-tical to K–Dur. Moreover, in In re Warfa-rin Sodium Antitrust Litigation, thiscourt affirmed class certification whereplaintiffs sought overcharges—not lostprofits—stemming from anti-competitivebehavior that hindered their access to ge-neric pharmaceuticals. 391 F.3d 516, 532(3d Cir.2004).

[18] In sum, defendants’ contentionthat plaintiffs are required to show lost

profits in order to demonstrate antitrustinjury is without support in law or thefacts of this case. As such, we reject it.

b. Whether There Was Common Evi-dence of Injury to All Class Mem-bers

[19] Defendants argue that because ofdiscrepancies in the pricing of K–Dur andvariations in purchaser behavior, plaintiffscannot prove injury to all class membersby common evidence, even if lost profitsare not required to show antitrust injury.They contend further that the DistrictCourt applied the wrong standard in evalu-ating plaintiffs’ evidence that antitrust in-jury could be proven by common evidence.

In support of their argument thatantitrust injury requires an individual-ized assessment for each class member,defendants point to two places wherepurportedly conflicting evidence demon-strates the need for individualized as-sessment of antitrust harm. Defendantspoint out that they did not sell K–Durto all customers at a single list price;rather, the price paid varied consider-ably among class members. Additional-ly, defendants argue that, for certaincustomers at certain times, Schering of-fered rebates which caused furtherprice variation among customers. De-fendants contend that these pricing var-iations caused several class members tohave zero or negative damages underthe formula applied by plaintiffs’ expert.Finally, defendants point out that notall class members purchased genericpotassium chloride as soon as it be-came available and argue that, in lightof this variation in purchase timing,plaintiffs need to make an individualizedshowing that each plaintiff would havepurchased a generic product earlier ifone had been available.


We do not read Hydrogen Peroxide asprecluding a class because of variations inpurchasing by a very small percentage ofthose who purchased K–Dur. As the Spe-cial Master recognized, defendants con-ceded ‘‘that 45 of the proposed Class mem-bers purchased some amount of genericK–Dur.’’ App. at 7984 (emphasis in origi-nal). He noted that defendants’ argu-ments ‘‘relate to the quantum of damages,rather than the fact of injury.’’ Id. In-deed, in Hydrogen Peroxide itself, we fo-cused on what was really at issue—that forcertification plaintiff need not prove anti-trust injury actually occurred.

Plaintiffs’ burden at the class certifica-tion stage is not to prove the element ofantitrust impact, although in order toprevail on the merits each class membermust do so. Instead, the task for plain-tiffs at class certification is to demon-strate that the element of antitrust im-pact is capable of proof at trial throughevidence that is common to the classrather than individual to its members.

552 F.3d at 311–12. To the extent thatthere were minor variations, they can behandled at trial in the context of damages.

With regard to both the price-variationand purchase-timing issues, the SpecialMaster conducted an exceedingly thoroughreview of plaintiffs’ proposal for demon-strating antitrust impact through commonevidence and determined that defendants’objections were without support. Critical-ly, the Special Master recognized his obli-gation to ‘‘probe beyond the pleadings’’and to conduct a ‘‘rigorous analysis’’ of theavailable evidence. App. at 7960 (internalcitations and quotation marks omitted).

Our review confirms that the SpecialMaster applied the appropriate standard.In contrast to Hydrogen Peroxide, wherethe court found that there was ‘‘no tenden-cy for prices TTT to move together,’’ 552F.3d at 314 (internal quotation marks

omitted), plaintiffs in this case presentedevidence, credited by the Special Master,of significant, industry-wide price dropsafter generic entry. Such evidence of anindustry-wide price drop after generic en-try supports the Special Master’s rejectionof defendants’ arguments about limitedprice variations and purchase-timing varia-tions between plaintiffs.

First, concerning the price-variation ar-gument, the Special Master carefully con-sidered the conflicting opinions of plain-tiffs’ and defendants’ experts and creditedthe theories of plaintiffs’ expert over thatof defendants. The Special Master con-cluded that ‘‘Plaintiffs have satisfied theirburden of adducing sufficient evidenceand a plausible theory to convince methat impact may be proven by evidencecommon to all class members.’’ App. at7988 (internal citations and quotationmarks omitted). Our review of the rec-ord confirms that plaintiffs presented acomprehensive and detailed means ofproving impact through common means,notwithstanding some very limited pricingvariation, and that the Special Masterconducted an appropriately searchingevaluation of this evidence.

With regard to defendants’ argumentabout variations in the timing of the pur-chase of generic K–Dur, the Special Mas-ter explicitly rejected that argument andconcluded that ‘‘[e]vidence that all (or vir-tually all) class members substituted a low-er priced generic for some of their K–Dur20 purchases gives rise to the inferencethat they would have similarly done in thebut-for world.’’ App. at 7984. This, com-bined with plaintiffs’ theory of damages,means that impact could be proven on aclass-wide basis via common evidence.Here again, the Special Master conducteda thorough evaluation of the available evi-dence and resolved all significant disputesbetween conflicting evidence as required


under the standard set forth in HydrogenPeroxide.

2. Adequacy Issue—Whether the ClassFaces Inherent Conflicts

[20, 21] Defendants next contend thatthe District Court erred in certifying aclass because the class faces inherent con-flicts that preclude adequacy of represen-tation. ‘‘The inquiry that a court shouldmake regarding the adequacy of represen-tation requisite of Rule 23(a)(4) is to deter-mine that the putative named plaintiff hasthe ability and the incentive to representthe claims of the class vigorously, TTT andthat there is no conflict between the indi-vidual’s claims and those asserted on be-half of the class.’’ In re Cmty. Bank of N.Va., 622 F.3d 275, 291 (3d Cir.2010) (quot-ing Hassine v. Jeffes, 846 F.2d 169, 179 (3dCir.1988)). Only a fundamental conflictwill defeat adequacy of representation.See, e.g., id. at 303 (adequacy defeated by‘‘obvious and fundamental intra-class con-flict of interest’’); Ward v. Dixie Nat. LifeIns. Co., 595 F.3d 164, 180 (4th Cir.2010).

Defendants contend that three membersof the class, all national wholesalers, werenet beneficiaries of the absence of genericcompetition in the potassium chloride sup-plement market because once genericscame on the market those class memberssaw decreased sales volumes and lowerper-pill profits. Defendants argue that,because these three class members havefinancial incentives to delay generic entry,there is an inherent conflict between themand the rest of the class.

The case law on defendants’ argumentreveals a split in authority. A large num-ber of district courts, including some inthis Circuit, have rejected defendants’ ar-gument. See, e.g., Teva Pharms. USA,

Inc. v. Abbott Labs., 252 F.R.D. 213, 226–27 (D.Del.2008) (Robinson, J.); Meijer,Inc. v. Abbott Labs., 251 F.R.D. 431, 435(N.D.Cal.2008); but see Valley Drug Co. v.Geneva Pharms., Inc., 350 F.3d 1181, 1190(11th Cir.2003).14

We reject the Valley Drug decision fortwo reasons. First, requiring plaintiffs toshow that no class member benefittedfrom the challenged conduct in the form ofgreater profits is contrary to the SupremeCourt’s decision in Hanover Shoe. In Han-over Shoe, the Supreme Court permittedantitrust plaintiffs to seek overchargedamages rather than lost profits damagesprecisely because proving lost profits wastoo complicated and burdensome. 392U.S. at 493, 88 S.Ct. 2224; Bogosian, 561F.2d at 456. The same logic applies equal-ly, if not more strongly, in the class certifi-cation setting because under defendants’proposed approach, plaintiffs would notonly have to assess their own lost profitsbut also those of potential class members.Moreover, because Hanover Shoe sets theamount of the overcharge as plaintiffs’damages, all of the class members havethe same financial incentive for purposesof the litigation—i.e. proving that theywere overcharged and recovering damagesbased on that overcharge. See 7A CharlesAlan Wright, Arthur R. Miller & MaryKay Kane, Federal Practice and Proce-dure § 1768 (3d ed. 2005) (‘‘[A] potentialconflict between the representatives andsome class members should not precludethe use of the class-action device if theparties appear united in interest againstan outsider at the beginning of the case.’’).Defendants have not pointed to any plausi-ble scenario in which the class membersmight seek conflicting forms of relief. For

14. This is a different appeal than Valley Drug,344 F.3d 1294 (11th Cir.2003), discussed su-

pra.


these reasons, we conclude that defen-dants’ conflict argument fails.

D. Conclusion—Class CertificationIssues

In sum, with respect to the class certifi-cation issues, we reject defendants’ argu-ments and will affirm the District Court’sdetermination approving maintenance ofthe class action.

,

Tanya Rene JOHNSON, f/k/a TanyaRene Zimmer, Debtor–

Appellant,

v.

William H. ZIMMER, Creditor–Appellee,

Robert R. Browning, Trustee–Intervenor.

No. 11–2034.

United States Court of Appeals,Fourth Circuit.

Argued: March 20, 2012.

Decided: July 11, 2012.

Background: In a bankruptcy proceeding,debtor moved for confirmation of herChapter 13 plan. The United States Bank-ruptcy Court for the Eastern District ofNorth Carolina, J. Rich Leonard, Bank-ruptcy Judge, 2011 WL 5902883, deniedthe motion, and the debtor appealed.

Holding: The Court of Appeals, Agee,Circuit Judge, held that in determining thedebtor’s ‘‘household size,’’ it was proper totake a fractional economic unit approach.

Affirmed.

Wilkinson, Circuit Judge, filed a dissentingopinion.

1. Bankruptcy O3782Court of Appeals reviews the appro-

priate statutory interpretation of theBankruptcy Code de novo.

2. Bankruptcy O3705Determination of the proper method

for calculating a debtor’s ‘‘household size’’was necessary for purposes of calculatingthe debtor’s disposable income on a motionfor confirmation of her Chapter 13 plan,even though her household size may nothave been the dispositive inquiry in deter-mining her disposable income; an interpre-tation of the term ‘‘household’’ would im-pact how other terms were understood aswell, and would impact the entire meanstest calculation. 11 U.S.C.A. §§ 707(b)(2),1325(b).

3. Bankruptcy O3705In determining a debtor’s ‘‘household

size,’’ for purposes of calculating the debt-or’s disposable income on a motion forconfirmation of her Chapter 13 plan, itwas proper to take a fractional economicunit approach, which looked to those fi-nancially supporting, or supported by, thedebtor and accounted for part-time mem-bers of the debtor’s household, ratherthan the debtor’s proffered ‘‘heads-on-beds’’ approach or an income tax depen-dent method; there was no statutorilymandated approach, and by examining thefinancial interdependence of individuals, abankruptcy court could avoid over- andunder-inclusive results caused by artificial-ly defining ‘‘household’’ according to fac-tors unrelated to which individuals withina residence impacted the debtor’s financialsituation. 11 U.S.C.A. § 1325(b).


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