By Kevin E. Noonan —

Bayer Corp. and Bayer AG
have filed an amicus brief in support of a grant of certiorari by
the Supreme Court in the K-Dur case (In re K-Dur Antitrust Litigation).  Being a branded drug maker, it is no surprise that
Bayer argues in its brief that the Third Circuit's decision created a circuit
split that unsettled the balance created by other circuit courts of
appeal.  Two aspects of the brief stand out:  first, that Bayer was itself
involved in a Federal Trade Commission (FTC) challenge to a reverse payment
settlement agreement over the antibiotic Ciprofloxacin®, specifically Arkansas Carpenters Health & Welfare Fund v. Bayer AG, 604 F.3d 98, 106, 110 (2d
Cir. 2010) (per curiam), and In re Ciprofloxacin Hydrochloride Antitrust Litigation, 544 F.3d 1323 (Fed. Cir.
2008), cert. denied, 557 U.S. 920 (2009);
and second, by taking the position expressly that the "scope of the patent"
test used by the Second, Eleventh, and Federal Circuits was the correct test for
assessing whether a reverse payment settlement agreement is lawful.

The brief asserts that "[t]he Third Circuit's decision in In re K-Dur Antitrust Litigation, 686
F.3d 197 (3d Cir. 2012), undermines the established law governing a core legal
right of any patent holder — the right to enter into agreements no more
exclusionary than the patent itself, including agreements that settle patent
litigation."  The brief makes three
arguments in support of this conclusion:

• That the "scope of the patent" test is consistent
with Supreme Court precedent regarding a patentee's right to exclude, citing
"numerous mistakes of fact and law" in the Third Circuit opinion
rejecting this proposition;

• That the "scope of the patent" grounds for
affirming reverse payment settlement agreements "benefits consumers,"
arguing that without being able to rely on the exclusive right conferred by
patents there would be no investment in new drugs;

• That the Third Circuit opinion was based on flawed studies,
predominantly ones promulgated by the FTC.

In addition, the brief states that the Third Circuit opinion is
incorrect in reciting a rule of "presumptive [antitrust] liability" because
it presumes (as does the FTC) that reverse payment settlement agreements are
only contemplated by innovator drug companies to protect "weak" or "bad"
patents.  On the contrary, Bayer argues generic drug companies "routinely"
challenge even patents believed to be "the strongest and most secure"
so that preventing settlement will lead to more litigation and fewer new drugs
(and preclude settlements that permit generic entry earlier than would occur
otherwise).

The brief's arguments regarding the correctness of the "scope
of the patent" test are grounded in Supreme Court precedent, particularly Bement v. Nat'l Harrow Co., 186 U.S. 70,
88 (1902), for the principle that when agreements exclude no more competition
than the patent itself, they do not restrain lawful competition.  Moreover, Bayer argues that the Bement case was decided when the antitrust
laws were most expansively applied, so the import of the decision that patenting
precludes antitrust liability was even more significant.  Also, Bayer argues, Supreme Court precedent
sanctions patent infringement litigation settlements because settlements are "a
legitimate and desirable result in itself."  In this regard the brief cites
United States v. General Elec. Co.,
272 U.S. 476, 493 (1926), which found price setting under a patent license to
be lawful.

The brief then makes the case that antitrust laws are directed
to lawful competition and not unlawful, with the burden on the antitrust
plaintiff properly to require a showing that the acts prevented were lawful
ones (which patent infringement is not), citing Rubber Tire Wheel Co. v. Milwaukee Rubber Works Co., 154 F. 358,
364 (7th Cir. 1907), for the proposition that "the public [i]s not entitled
to profit by competition among infringers."  This theme is continued in a discussion of Walker Process Equipment, Inc. v. Food
Machinery & Chemical Co., 382 U.S. 172, 177 (1965), which requires
proof of actual fraud in obtaining a patent ("beyond such intentional
misconduct in obtaining the patent, the patentee's 'good faith would furnish a
complete defense' to antitrust claims").  The brief notes that the Third Circuit erred (at least) in not
considering Walker Process in its
discussion of the antitrust implications of reverse payment settlement
agreements.  The proper conclusion, according
to Bayer, is that the Second, Eleventh, and Federal Circuits, and the "scope
of the patent" test were correct, because exclusion under patent law does not
constitute an antitrust violation unless it is outside scope of patent right to exclude,
citing Mallinckrodt, Inc. v. Medipart,
Inc., 976 F.2d 700, 708 (Fed. Cir. 1992); USM Corp. v. SPS Techs., Inc., 694 F.2d 505, 513 (7th Cir. 1982);
and SCM Corp. v. Xerox Corp., 645
F.2d 1195, 1206 (2d Cir. 1981).

Turning to a discussion of the Cipro litigation, the brief
makes the point that Barr admitted
infringement, and the patent withstood reexamination and three other separate
litigations.  The brief further cites the
statements in Cipro litigation regarding reverse payment settlements as being "a natural product of the Hatch-Waxman process" due to the different
calculus of ANDA filers that do not incur any but statutory infringement
liability (a point made by the parties and other amici).  The brief finds the first enunciation of the
correct analytical framework for determining the legality of reverse payment
settlement agreements in Judge Trager's opinion in the first Cipro case:

Unless
and until the patent is shown to have been procured by fraud, or a suit for its
enforcement is shown to be objectively baseless, there is no injury to the
market cognizable under existing antitrust law, as long as competition is
restrained only within the scope of the patent.

In re
Ciprofloxacin Hydrochloride Antitrust Litig., 363 F. Supp. 2d 514, 522
(E.D.N.Y. 2005).  The Third Circuit's opinion was wrong ("remarkable"),
according to the brief, because it departs these principles, based on a
misapplication of two "policies," one based on the desire of the
public to "test" weak patents and the other based on the desire of
Congress to provide consumers with generic drugs."  But, according to the
brief, each of these "policy" questions has a countervailing
consideration.  Counter to the desire to
test patents is the interest in protecting patent holders from infringement
(citing Lear, Inc. v. Adkins, 395
U.S. 653, 663-64 (1969) (quoting Pope
Mfg. Co. v. Gormully, 144 U.S. 224, 234 (1892)).  Counter to the desire to provide cheaper
generic versions of drugs is the interest in not discouraging innovator drug
companies from developing new drugs (citing aaiPharma
Inc. v. Thompson, 296 F.3d 227, 231 (4th Cir. 2002).  The brief also notes that the Third Circuit
declared the agreements presumptively invalid and ignored the question of
whether infringement was admitted or contested (as it was in K-Dur), and criticized the third Circuit
for ignoring Bement and Walker Process while relying on cases
that were not relevant to the question of antitrust liability.  These criticisms extended to the Third
Circuit's citation of United States v.
Masonite Corp., 316 U.S. 265 (1942), which the brief argues was a patent
exhaustion case, and cases like Lear,
Pope, Edward Katzinger Co. v. Chi. Metallic Mfg. Co., 329 U.S. 394 (1947), and Sola Elec. Co. v. Jefferson Elec. Co.,
317 U.S. 173 (1942), which related to whether a licensee could challenge a
patent.  Finally, Cardinal Chemical Co. v. Morton International Inc., 508 U.S. 83
(1993), merely stated that patent invalidity was not mooted by a determination
that a patent was not infringed and similarly did not support or compel the
Third Circuit's opinion regarding the antitrust implications of reverse payment
settlement agreements.

The brief also criticizes the Third Circuit for holding that "there
is no need to consider the merits of the underlying patent suit because' . . . it
is logical to conclude that the quid pro quo for the payment was an agreement
by the generic to defer entry beyond the date that represents an otherwise reasonable
litigation compromise,'" a statement the brief calls "erroneous."  First, the value of an agreement to the
parties differ, because the branded innovator will make much more for every
month it is on the market exclusively than the generic will make sharing the
market; money can balance these considerations, and money would need to flow
from the branded to the generic.  The brief cites Marc G. Schildkraut, Patent-Splitting
Settlements and the Reverse Payment Fallacy, 71 Antitrust L.J. 1033, 1062
(2004), in support of this argument.  Further, the brief argues that courts do not get to "hypothesize a 'better'
settlement" than the ones at issue between the parties, citing Verizon Commc'ns Inc. v. Law Offices of
Curtis v. Trinko, LLP, 540 U.S. 398, 415-16 (2004) ("The Sherman Act is indeed
the Magna Carta of free enterprise, but it does not give judges carte blanche
to insist that a monopolist alter its way of doing business whenever some other
approach might yield greater competition."), and Am. Motor Inns, Inc. v. Holiday Inns, Inc., 521 F.2d 1230, 1249 (3d
Cir. 1975).  There is no precedent for
finding liability because the parties
settled, according to the brief, but that is precisely what the Third Circuit's
opinion does:  under the "presumptive liability" standard contained in
the opinion, antitrust liability arises as a direct consequence of the
settlement (albeit here the brief ignores the requirement for some sort of
payment, "anything of value").

The Third Circuit also errs, according to Bayer's brief, because it
"reads out" of the statute the presumption of validity, and because
it expressly ignores the "merits" of the case by not requiring the
antitrust plaintiff to rebut that presumption.  Effectively, this "eviscerates" the presumption of validity and
it shifts the burden to the patentee to "disprove antitrust liability."

The brief's second argument is that consumers experience a
benefit from settlements that prevent infringing entry; this is precompetitive,
Bayer argues, citing (paradoxically) the FTC's current General Counsel who is quoted as saying that "what is
neglected is that, if the settlement prevents infringing entry, such prevention
in itself is a pro-competitive effect."  Kent S. Bernard & Willard K.
Tom, Antitrust Treatment of Pharmaceutical Patent Settlements: The Need for
Context and Fidelity to First Principles, 15 Fed. Cir. B.J. 617, 622 (2006)
(original emphasis).  Indeed, Bayer
argues that the "scope of the patent" test encourages innovation:  in
view of the costs of developing a new drug for human use, the test balances the
long-term policy of encouraging innovation and the short-term consideration of
providing cheaper drugs.  Bayer also
notes that innovators need to be able to recoup their investment, and that this
need was part of the balance between innovators and generic drug companies that
formed the basis of the Hatch-Waxman Act, citing Sanofi-Synthelabo v. Apotex, Inc., 470 F.3d 1368, 1383 (Fed. Cir.
2006), and Loctite Corp. v. Ultraseal Ltd.,
781 F.2d 861, 876 (Fed. Cir. 1985).  On the other hand:

[F]ocusing
solely on lowered prices of the generic drugs "ignores the first principle
that enforcing valid patents makes a major contribution to consumer welfare by
providing the incentive for innovation. We ignore that incentive at our peril,"

citing Bernard & Tom, supra, 15 Fed. Cir. B.J. at 618.  The Third Circuit also erred in Bayer's view by
over-emphasizing those portions of the Hatch-Waxman Act regarding promoting
generic drugs ("[t]he goal of the Hatch-Waxman Act is to increase the
availability of low cost generic drugs," emphasis added)) and ignoring the
"patent protection policies Hatch-Waxman embodies":

Consequently,
the court simply discarded the scope of the patent rule, calling it a "bad
policy from the perspective of the consumer."  Pet. App. 31a.  A worse
policy is to ignore the incalculable benefits of new, life-saving drugs made
possible by the incentives for innovation.  Without those drugs being created in
the first place, there will be no prices to lower.

Finally, the brief opines that the studies the Third Circuit
relied upon are "fundamentally flawed."  Interestingly, these are FTC studies (FTC, Generic Drug Entry Prior to Patent Expiration
(2002); FTC, Pay-for-Delay: How Drug Company Pay-Offs
Cost Consumers Billions (2010); see "FTC Disapproves of 'Pay-for-Delay' Drug Deals") in large part.  Bayer argues that these opinions are "flawed" because the FTC
used statistical sleight-of-hand to arrive at the number of ANDA litigations it
maintains are won by generic challengers.  On the contrary, the brief cites other studies that expressly criticize
the FTC studies, including Adam Greene & D. Dewey Steadman,
Pharmaceuticals, Analyzing Litigation Success Rates, RBC Capital Markets 1
(2010), and Bret
Dickey et al., A Preliminary Economic
Analysis of the Budgetary Effects of Proposed Restrictions on 'Reverse Payment'
Settlements (2010),
and states that the frequency with which generic drug makers prevail in ANDA
litigation is much lower than the 78% success rate espoused by the FTC and
relied upon by the Third Circuit.  As a
consequence, "[t]hese flawed premises of the Third Circuit's rationale
only underscore the need for this Court's review."

By
Kevin E. Noonan —

The
Pharmaceutical Research and Manufacturer's of America (PhRMA) have filed an
amicus brief in support of a grant of certiorari
by the Supreme Court in the K-Dur case
(In re K-Dur Antitrust Litigation).  Not surprisingly, like the branded and
generic drug makers, PhRMA argues that the Third Circuit's decision created a
circuit split that unsettled the balance created by other circuit courts of
appeal.  While generally making the same
arguments in this regard as the briefs of the parties (and other amici), PhRMA
adds a few particular nuances to these arguments that bear consideration.

The
brief characterizes the Third Circuit's K-Dur
decision as imposing an "unwarranted presumption of illegality"
regarding reverse payment settlement agreements in ANDA litigation that will
harm consumers.  The brief asserts its
members interest in the litigation as stemming from investment in drug
discovery, stating that its members invested "an estimated $49.5 billion
in discovering and developing new medicines" in 2011, citing the list of
PhRMA members appended to the brief.  It
frames the issue the Court should consider as "whether
innovator companies can lawfully settle Hatch-Waxman patent litigation on terms
that restrict the alleged infringer's activities within the scope of the patent
and also include a payment (or other consideration) to the alleged infringer."  The practical reality, according to the brief, is that these reverse payment
settlement agreements are often the only way to settle ANDA litigation under
the Hatch-Waxman Act, and thus should not be "presumptively suspect."  And the consequences of the decision ignoring
these practical realities can be expected to be "protracted litigation
and, in some instances, delay the introduction of generic medicines."

The brief echoes reasoning from the other circuit
courts of appeal who found reverse payment settlement agreements to be free of
antitrust liability on the grounds that courts cannot "restrict[] the
ability of innovator companies to manage risk and avoid the costs and
uncertainty of litigation" without "dramatically diminish[ing]
incentives for innovation and product development."  These incentives are necessary, according to
PhRMA's brief, because pharmaceutical drug development it time-consuming
(taking from 10-15 years) and costly (averaging about $1.3 billion when the
cost of drug development failures are taken into account), and anything that
increases risk to potential return on investment (like the limitations imposed
by the Third Circuit's decision) jeopardizes innovation to the consumers'
detriment.

The brief calls this issue "tremendously
important" to the pharmaceutical industry, because it upsets the "carefully
balanced regulatory regime" under Hatch-Waxman Act.  Some of the reasons that limiting the ability
of branded drug makers to manage litigation and business risk by reverse
payment settlement agreements in ANDA litigation asserted by the brief have been
cited before in decisions from other circuit courts of appeal in upholding these
agreements.  For example, the brief cites the differences in relative risk
between branded and generics between ANDA litigation and conventional patent
infringement litigation, and that settlement permits market entry by generics
before expiry of the innovator's patents, and that there are uncertainty costs
imposed by litigation that are eliminated by the possibility of settlement.  PhRMA adds to that calculus by considering
the generic side of the equation:  because generic drug makers have no risk of
infringement liability, financial incentives for delaying product launch are necessary
because there would otherwise be no incentive for the generic drug maker to
settle (such payments "may provide the only reasonable terms on which a
settlement can be achieved").  In
this regard the brief cites 7th Circuit Judge Richard Posner, long a
proponent of the "economy and law" school of thought centered at the
University of Chicago, who has argued that a ban on reverse payment settlement
agreements could itself be anticompetitive because it would reduce the generic
challenger's incentives to bring a Paragraph IV challenge in the first
place.  Also, according to the brief a "cash-strapped
generic company" might need the reverse settlement as the only way to accommodate
the costs of delayed entry.  For both
parties, "deterring patent settlements and encouraging protracted
litigation will increase costs and consume judicial resources, prolong
uncertainty, deter innovation, delay activities to invent around patents, and,
ultimately, harm consumers" according to the brief.  All of these arguments are supported by
academic legal scholarship that is directly contradictory to the Third Circuit's
decision and the FTC's continued legal challenges to reverse payment settlement
agreements over the past decade.

PhMRA also mentions that "the FTC is now
taking the broadest possible view of the Third Circuit's opinion — disregarding
the Eleventh Circuit's opinion directly to the contrary with respect to the
very same agreements — and claims it imposes a blanket prohibition on settlements
containing any consideration whatsoever flowing from innovators to alleged
patent infringers."  As an example,
the PhRMA cites the FTC's brief in an antitrust action relating to a settlement
agreement in ANDA litigation over the drug Effexor®.  According to the brief, the FTC has taken the
position that an agreement where the innovator does not market its own
authorized generic is the equivalent of a payment and hence anticompetitive
(despite the fact, as noted in the brief, that the branded drug company will
remain in competition with the generic under the terms of the agreement).  In addition, the brief cites statements by
the FTC Chairman that if the Supreme Court refuses to grant certiorari the agency will just bring
all its actions under the Clayton Act in district courts in the Third
Circuit.  Even without this threat, the
Third Circuit's opinion warrants Supreme Court review (and reversal) because of
the concentration of ANDA litigation in that circuit; the brief cites 80 ANDA
cases having been filed in 2012 in that circuit versus five ANDA suits brought
in the other circuits combined.

The brief ends with a frank expression of the
seriousness of these issues to PhRMA's members:  "The stakes are too high
for the Third Circuit's rogue decision to go uncorrected."

Several other amici
(including Bayer, the Washington Legal Foundation and the New York Intellectual
Property Law Association) have filed briefs, which will be the subject of later
posts.