By Kevin E. Noonan —

On April 29th, the U.S. Court of Appeals for the Second Circuit ruled that the "pay-for-delay" agreement between
defendants Bayer AG and several generic drugmakers (including The Rugby Group,
Watson Pharmaceuticals Inc., and Barr Laboratories Inc.) were not illegal under
U.S. antitrust law and prevailing precedent.  However, in a significant indication of the panel's
sentiments on its opinion, it urged plaintiffs, including several trade unions
and pharmacies, to request en banc
review (apparently so the en banc
court could do what a panel cannot, i.e.,
overturn prior precedent).  While
this suggestion was cloaked in the language of procedure (that the earlier,
precedential Tamoxifen decision was
based on a motion to dismiss, while here the more developed record on summary
judgment would provide the opportunity to "analyze the competing interests"
of the parties), it is clear from the opinion that the panel was dissatisfied
with having to affirm based on precedent rather than consider the legal and
policy issues raised by plaintiffs below and again on appeal.

The
opinion arose from plaintiffs' appeal of summary judgment for defendants by the
U.S. District Court for the Eastern District of New York, that defendants were not
guilty of violating Section 1 of the Sherman Act by agreeing to a "reverse
exclusionary payment" settlement of patent infringement litigation.  The panel's opinion cited the earlier
determination that such "reverse payments" were not illegal in Joblove
v. Barr Labs., Inc., (In re Tamoxifen Citrate Antitrust Litigation), 466 F.3d 187, 208-12 (2d Cir. 2005).

As
the consolidated case name indicates, the drug at issue is ciprofloxacin (or "Cipro"),
a patented (U.S. Patent No. 4,670,444) antibiotic owned by Bayer.  The other defendants are generic
drugmakers capable of making generic versions of Cipro who had filed ANDAs with
the FDA to obtain regulatory approval for selling generic Cipro.  Under the provisions of the
Hatch-Waxman Act (the Drug Price Stabilization and Patent term Restoration Act
of 1984, Pub. L. No. 98-417, 98 Stat. 1585), Bayer sued each of these generic
drugmakers to block FDA approval until the conclusion of the patent litigation.  35 U.S.C. § 271(e)(2)(A).  (The Court recognized that "the Hatch-Waxman Act redistributes the
relative risks between the patent holder and the generic manufacturer, allowing
generic manufacturers to challenge the validity of the patent without incurring
the costs of market entry or the risks of damages from infringement.")

The terms of the "pay-for-delay"
agreement between Bayer and Barr (the first ANDA filer) had Bayer paying Barr
$49.1 million in a lump sum and then quarterly payments of from $12.5 million
to $17.125 million until 6 months prior to patent expiry (for a total payment
of $398.1 million), and a guarantee that the generic manufacturers could sell "brand
name" Cipro for 6 months prior to the expiration date of the '444
patent.  Bayer received Barr's
promise (and the promise of the other generic manufacturers) not to enter the
marketplace with a generic version of Cipro and concessions regarding the
validity and enforceability of the '444 patent, thereby ending the ANDA
lawsuit.  Barr "reserved its
right to reinstate its ANDA-IV [lawsuit] if Bayer's ['444] patent were later
held to be invalid."  There
were four later challenges (by Ranbaxy, Schein, Carlsbad, and Mylan) to the '444
patent, none of which were successful in invalidating it.

Plaintiffs responded with "over thirty
antitrust lawsuits," which were consolidated in the Eastern District of
New York for trial, granting defendants' summary judgment motion.  The panel quotes from the District Court opinion:

The ultimate question — and this is the crux of the matter —
is not whether Bayer and Barr had the power to adversely affect competition for
ciprofloxacin as a whole, but whether any adverse effects on competition
stemming from the Agreements were outside the exclusionary zone of the '444
Patent.  It goes without saying that patents have adverse effects on
competition.  However, any adverse effects within the scope of a patent cannot
be redressed by antitrust law.

Specifically, the Court rejected what it called a "post
hoc determination of potential validity" vel non of the '444 patent, which would be contrary to the statutory
presumption of validity and "would work a revolution in patent law."  Further from the District Court's
reasoning:

[I]n the absence of any evidence that the Agreements created
a bottleneck on challenges to the '444 Patent, or that they otherwise restrained
competition beyond the scope of the claims of the '444 Patent, the Agreements
have not had any anti-competitive effects on the market for ciprofloxacin
beyond that which are permitted under the '444 Patent.  The fact that Bayer paid
what in absolute numbers is a handsome sum to Barr to settle its lawsuit does
not necessarily reflect a lack of confidence in the '444 Patent, but rather the
economic realities of what was at risk.  There is simply no precedent for
plaintiffs' argument that the parties to a settlement are required to preserve the public's
interest in lower prices.  Such a rule would only result in parties being less
likely to reach settlements, aside from undermining well-settled principles of
patent law.  Finally, to even attempt to quantify the public's interest in a
patent settlement between private parties would require devaluing patents
across the board, a result that would contravene the presumption of validity
afforded by Congress and impact the very way patent licenses are handled in countless
daily transactions.

In
an interesting footnote, the Second Circuit explained that the "indirect
purchaser plaintiffs" had included "Walker Process" antitrust claims, based on the willful
assertion of an unenforceable patent, pursuant to Walker Process Equip., Inc.
v. Food Mach. & Chem. Corp.,
382 U.S. 172, 177 (1965).  Transfer
was necessary because Walker Process claims "arise under" U.S. patent
law and are thus within the exclusive province of the Federal Circuit.  That Court affirmed the District Court's
grant of summary judgment for defendants.

In the instant case, the Second Circuit panel
analyzed defendants' behavior in the context of the prohibitions of the Sherman
Act.  15 U.S.C. § 1 et
seq.  Its consideration of the
question was informed by the opinions of other Circuit Courts of Appeal as well
as the arguments put forward by the Federal Trade Commission, whose position is
that reverse payment arrangements are per
se illegal restraints of trade (see "FTC Disapproves of 'Pay-for-Delay' Drug Deals").  Putting it mildly, the Court notes that "[a]uthorities are divided
on this question."  Notably,
while academic commentators and FTC economists take the per se illegal view,
most courts have applied the "rule of reason" and held that such
agreements are not sufficiently anticompetitive (if at all) to raise antitrust
liability (see "Reverse Payments in Generic Drug Settlements" – Part I, Part II, Part III).  The most relevant of these judicial
determinations finding no antitrust liability is Joblove v. Barr Labs. Inc. (In
re Tamoxifen Citrate Antitrust Litigation), 466 F.3d 187, 216 (2d Cir. 2005),
being binding precedent on this Court.  In that case, the Second Circuit panel determined as a matter of law that the
reverse-payment agreement was not anticompetitive to a degree that raised
antitrust liability.  Here, the
panel noted the similarities between the Tamoxifen Court's reasoning and the
analysis supplied by the District Court here; in Tamoxifen the Court said:

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.

Under the Tamoxifen precedent, there is a
three-prong test for determining that a reverse payment agreement is legal:  "where (1) there was no
restriction on marketing noninfringing products; (2) a generic version of the
branded drug would necessarily infringe the branded firm's patent; and (3) the
agreement did not bar other generic manufacturers from challenging the patent."

The opinion notes the binding nature of this
precedent, and thus applies this test to the facts here.  The Court notes that there was no
allegation that Bayer's assertion of the '444 patent was a sham or that Bayer
procured the '444 patent by fraud.  Thus the Court says that "the only reasonable basis for
distinguishing Tamoxifen would be if plaintiffs demonstrated that the
settlement agreement here, unlike in Tamoxifen, exceeded the scope of
the Cipro patent."  Which
plaintiffs cannot do, of course, since a generic version of Cipro would "necessarily
infringe" the '444 patent, so the exercise of the patent to exclude
generic Cipro is precisely within the scope of the patent's exclusionary
right.  In this regard the Court
distinguished so-called "formulation patents," which are limited to
certain formulations of an active pharmaceutical ingredient, with "compound
patents" (such as the '444 patent), which encompass all formulations of a
drug.  And while plaintiffs argued
on appeal that the settlement agreement involved (or at least permitted) "manipulation"
of the 180-day exclusivity period and precluded subsequent ANDA-IV challenges,
there was no evidence to support these allegations (indeed, here there were four "subsequent"
ANDA-IV challenges to the '444 patent).  And the Court noted that Barr forfeited its 180-day exclusivity period
under the law in effect at that time (which required the ANDA filer to prevail
in litigation invalidating an Orange Book-listed patent).

Perhaps
as a hedge against the likelihood that legal arguments would prove unavailing,
plaintiffs also argued on policy grounds that reverse payment settlements are
contrary to the "purpose" of the Hatch-Waxman Act, i.e., "to make
available more low cost generic drugs," citing H.R. Rep. No. 98-857, pt. 1, at 14 (1984),
reprinted in 1984 U.S.C.C.A.N. 2647, 2647.  Market entry of generic drugs "arising from successful
Hatch-Waxman challenges can result in significant savings to consumers,"
the plaintiffs contended, citing data contained in an amicus brief filed by AARP.  However, the panel held
that such policy arguments could not be addressed by a panel, in view of the
precedential Tamoxifen opinion.  And this situation prompted the panel
to suggest "several reasons why this case might be appropriate for
reexamination by our full Court."  These were enumerated as first, that the U.S. in an amicus brief "urged
us to repudiate Tamoxifen."  The U.S. argued that "[t]his Court's Tamoxifen standard
inappropriately permits patent holders to contract their way out of the
statutorily imposed risk that patent litigation could lead to invalidation of
the patent while claiming antitrust immunity for that private contract.  . . .  [T]his standard effectively bars considering whether the agreement might
violate the antitrust laws, and so offers no protection to the public interest
in eliminating undeserved patents."  The government would have such settlements be presumptively illegal
unless a patentee could show that their cost does "not greatly exceed anticipated
litigation costs."

The Court also noted that the "practice
of entering into reverse exclusionary payment settlements has increased"
since the Tamoxifen decision (14
settlements prior to the Tamoxifen
decision, none of which contained reverse payment provisions, compared with 27
settlements after the decision, in which 20 contained reverse payment
provisions.)  (It should be noted that these data were gleaned from amicus briefs
arguing against the legality of reverse-payment provisions in settlement agreements.)  Also significant for the panel were
remarks from Senator Orrin Hatch to the effect that he found reverse payment
provisions "appalling."  Finally, and perhaps most significantly, the Court considered the
Tamoxifen decision to have been based on "an unambiguous
mischaracterization" of the law, specifically that the 180-day exclusivity
period would be ceded by the first ANDA filer upon entering into a reverse
payment-containing settlement of ANDA litigation.

The panel's sentiments, noted above, were
patent in its conclusion:

In sum, as long as Tamoxifen is controlling law,
plaintiffs' claims cannot survive.  Accordingly, we AFFIRM the judgment of the district court.  However, we
believe there are compelling reasons to revisit Tamoxifen with the
benefit of the full Court's consideration of the difficult questions at issue
and the important interests at stake.  We therefore invite the
plaintiffs-appellants to petition for rehearing in banc.

Although some groups have gone so far as to prepare
(and make available online)
amicus briefs in support of any request for rehearing plaintiffs may file, to
date plaintiffs have not filed such a request.