By Kevin E. Noonan —

Paul
Bender, former Clinton-era Principal Deputy Solicitor General, and his colleagues
Christopher A. Mohr and Michael Kippler at the University of Arizona Law
School, published a White Paper entitled "S. 214's inappropriate interference With the Fundamental Right to Settle Litigation" on Monday,
March 25, the very same day that the Supreme Court was listening to the Federal Trade Commission (FTC)
argue that it should adopt a stance regarding reverse payment settlement
agreements in ANDA litigation advocated by the FTC and
embodied in S. 214.  Mr. Bender has deep
credentials, having clerked with both Learned Hand and Felix Frankfurter as
well as having extensive experience in the very kind of agency advocacy and
legislative effects on litigation at issue before the  Supreme Court in FTC v. Actavis, Inc.

The
White Paper makes several arguments:

1.    "Recent history shows that
most of these agreements help accelerate, not delay, the public availability of inexpensive generic
equivalents of patented drugs."

2.    Settlements can "serve the public
interest" because they permit generic drugs to come on the market earlier
than if the patentee had prevailed and excluded generic competition until the
end of the patent term.

3.    Such settlements can also serve both
the public's and private interests by "avoiding expensive, complex and
time-consuming litigation."

4.    The bill raises due process concerns,
including that private parties have the
right to settle their disputes without government intervention.

5.    Adopting the presumption embodied in
S. 214 would "free the government from the substantial burden it ought to
have to justify interfering in that basic right."

6.    This presumption is also contrary to
the presumption of patent validity.

7.    The bill "turn[s] on its head"
the presumption that a plaintiff has the burden, where here the "burden"
on the innovator patent holder would often be "the impossible task of
proving the existence of a negative," i.e., that there is no
anticompetitive effect.

8.    S. 214 answers the wrong question:  the
right question is whether generic drugs will come to market before patent
expiry, i.e., sooner than they would
otherwise, which the White Paper contends is the purpose of the Hatch-Waxman
Act.

9.    Courts that have actually examined
these agreements have overwhelmingly found the answer to this question to be
that generic drugs have come to market sooner than they would have and the bill
"reject[s] those thoughtful and well-reasoned decisions" to impose
an unnecessary and unwise presumption.

S. 214
is the "Preserve Access to Favorable Generics Act," introduced by Senator
Amy Klobuchar (D-MN), and contains "findings" (from the FTC, no doubt),
that reverse payment settlements "have unduly delayed the marketing of
low-cost generic drugs," and have resulted in "consumers losing the
benefits that the 1984 [Hatch-Waxman] Act was intended to provide" (S. 214, Sec. 2(a)(6)(B) and (D)).  What the bill proposes to define as illegal
is given a broad definition:  "anything" of value transferred from an
innovator to a generic drug maker, in return for the generic "agree[ing] to
limit or forego research, development, manufacturing, marketing, or sales of
the [generic] product for any period of time" (S. 214 Sec. 2(a)(2)).

Mr.
Bender makes the point that these agreements can be, and often do "serve
the public interest because a common term in these agreements is that the
patent holder will permit the generic version of the drug to enter the market
before the expiration of the term of the underlying patent," using savings
from such an agreement involving Lipitor^®
to illustrate the point, wherein the generic form of the drug entered the
marketplace in 2011 instead of 2017.

Mr.
Bender admits that such agreements can be contrary to the public interest,
citing the In re Cardizem Antitrust Litigation, 332 F. 3d 896 (6th Cir.
2003) case.  Thus, he sets forth the
question as "permit[ting] the many good agreements that further the public
interest while prohibiting those that do not" and notes that Congress has
addressed this balance in the 2003 Medicare Modernization Act requiring that
these agreements be filed with the FTC and DOJ.  He also notes that the Act requires these agencies to "bear[] the
burden of showing the negative effects of challenged agreements on a
case-by-case basis."  S. 214, in
contrast, would permit the government to presume that these agreements are
illegal and shift the burden to the parties to establish that pro-competitive
effects outweigh any anticompetitive effects.

This
would be harmful, according to Mr. Bender, because it would inhibit settlements
in ANDA litigation, citing Blackstone for the proposition that settlement has
been recognized since the 18th Century as a "valid means of
resolving disputes."  Perhaps more
aptly, he cites Lincoln for the proposition that we should:  "Discourage
litigation.  Persuade your neighbors to compromise whenever you can.  Point out
to them how the nominal winner is often a real loser — in fees, expenses, and waste
of time."  He further cites
avoidance of the "inveterate and costly effects of litigation"
(citing Schering-Plough, Corp. v. Federal Trade Comm'n, 402 F.3d 1056,
1075 (11th Cir.
2005)), relieving crowded court dockets (citing Janneh v. GAF Corp., 887
F.2d 432, 435 (2d Cir. 1989)), and reducing uncertainty for both litigants and
the public (citing D. H. Overmyer Co. v. Loflin, 440 F.2d 1213, 1215
(5th Cir. 1971)).  For all these reasons,
Mr. Bender argues that "it is well established that courts will not
ordinarily interfere with good-faith litigation settlements," citing
several cases including D. H. Overmyer Co., Aro Corp. v. Allied Witan Co., 531 F.2d 1368, 1372 (6th Cir.
1976), and Hemstreet v. Speigel, Inc., 851 F.2d 348, 350 (Fed. Cir. 1988).  And this inclination towards settlement is
expressed in several of the Federal Rules of Civil Procedure, including Rules 16,
26 and 68, and the Federal Rules of Evidence (Rule 408), as well as
Congressional mandates to Federal agencies requiring them to "develop
policies that use alternative dispute resolution as a potential means to
resolve disputes" citing 28 U.S.C § 652(a) (The Administrative Dispute
Resolution Act of 1996).

These incentives apply with even greater force in
ANDA and patent litigation, which are characterized by "high stakes,
uncertainty, and inherent complexity," citing TM Patents, L.P. v. IBM
Corp., 72 F. Supp. 2d 370, 378 (S.D.N.Y. 1999) for the proposition that "nearly
40 percent of claims constructions are changed or overturned by the Federal Circuit."  Settlement is not something unique to patents
involved in ANDA litigation, Mr. Bender further reminds us:  95% of litigants settle patent litigation
(citing Marc G. Schildkraut, Patent-Splitting Settlements & the Reverse
Payment Fallacy, 71 Antitrust L.J. 1033, 1048 (2004)).  And this study further showed that generic
drug companies do not usually prevail (~40% of the time) when ANDA litigation
goes to judgment rather than settle, according to a survey of 370 cases between
2000 and 2010.  Indeed, the frequently
cited statistic that generic companies prevail 76% of the time is only true
when settlements are included with the number of cases either dropped or won (RBC
Capital Markets, Industry Comment: Pharmaceuticals 4 (Jan. 15, 2010)).  Further statistics the FTC apparently
disregards are that 17 of 22 generic drugs entering the marketplace in 2011
were the result of settlements, and that "early generic entry permitted by
its settlements alone 'removed 138 years of monopoly
protection' and saved consumers $128 billion," citing Teva Pharms. USA,
Press Release, Teva Pharmaceuticals Issues Statement in Response to Federal
Trade Commission Claims on Patent Settlements (June 24, 2009).

The White Paper then goes through the "key
provisions" of S. 214, setting forth the portions of the statute that would
deem all such reverse payment settlement agreements to be illegal and impose a
burden on the parties to produce "clear and convincing evidence" that
the "procompetitive benefits of the agreement outweigh the
anti-competitive effects of the agreement" (S. 214 Secs. 3(2) and 2(a)(2)(B)).  Even generic drug entry prior to
expiration of the "relevant patent term" would not suffice to
establish such a precompetitive balance under the terms of the proposed
statute (S. 214, Sec. 3(2)).  The bill would have the FTC determine whether
such agreements were on balance pro- or anticompetitive, and parties would rick
"millions in damage awards" should the Commission prevail.

Mr. Bender argues that these provisions are
harmful, inter alia, because "many" reverse payment settlement
agreements actually "accelerate the availability to consumers of
inexpensive generic drugs."  He
provides as examples Lactimal (generic entry 37 months prior to patent expiry),
tamoxifen (sold as Nolvadex, generic entry 9 years prior to patent expiry, and
under circumstances where generic challengers who did not settle did not
prevail in the litigation), as well as the Watson case before the Supreme
Court, where the generic form of the drug entered the marketplace 5 years
before patent expiry.

The Paper also asserts that the statutory
presumption that reverse payment settlement agreements are illegal contravenes
the parties' "presumptive right to settle cases" unless the
government can show that the settlement is "harmful to the public
interest," a requirement not found in the provisions of S. 214.  Moreover, Mr. Bender argues, the presumptions
set forth in the law invert the traditional requirement that plaintiffs, not
defendants, bear the burden of "proving their case," as under current
law where the FTC and DOJ are required to establish anticompetitiveness in
order to invalidate the settlement.  S. 214
also disregards, indeed nullifies, the statutory presumption of patent validity (35 U.S.C. § 282), and upsets the Hatch-Waxman scheme that encourages the parties
in an ANDA dispute to sue and
expressly recognizes patent litigation settlements as an integral part of its
statutory scheme (21 U.S.C. §
355(j)(5)(B)(iii)(I), (II)).

The Paper
then asserts that an even more basic flaw in S. 214 is that it "asks
the wrong question" by focusing on "competition"
rather than "quicker access to generic drugs," the proper focus of
the Hatch-Waxman Act.  Citing the history
of the Act, Mr. Bender argues that "competitiveness" was not the
concern, access to generic drugs was.  Focusing on competition is improper also because it ignores the fact
that "patents are themselves 'anti-competitive'"
(emphasis in original).  The FTC's focus
on competition is, Mr. Bender says, "a non sequitur" in view of the
recognized immunity patents enjoy from antitrust liability (citing, inter alia, U.S. v. General Electric
Co., 272, 490 (1926)).  The paper
gets to the heart of the matter ("S. 214 presumes the presence of
consideration in these settlements to be fundamentally corrupt")
and cites Judge Posner in Asahi Glass v. Pentech, 289 F. Supp. 2d 996,
994 (2003), for the proposition that "[a] ban on reverse-payment
settlements would reduce the incentive to challenge patents by reducing the
challenger's settlement options should he be sued for infringement, and so
might well be thought anticompetitive."

The paper concludes:

S. 214's presumptive
prohibition of consideration in patent settlements is hopelessly flawed.  It
would interfere with the basic right of litigants to decide whether to settle
their disputes, impose unusual and unfair burdens of proof on litigants, ignore
the statutory presumption of patent validity, serve to frustrate the
pro-litigation scheme created under the Hatch-Waxman Act, and preclude many
settlements that will promote the interests of consumers.  Rather than adopting
that unusual and dangerous solution, the government should utilize the tools it
has in hand under the Medicare Modernization Act of 2003 that requires the FTC
to review and prove the illegality of settlements on a case by case basis — an
approach consistent both with the benefits these settlements create for
consumers, and longstanding traditions of constitutional fairness.

The Supreme Court is expected to rule by the end of
its term in June.  Justice Alito having
recused himself, the possibility exists that the Circuit split will not be
resolved.