Are the Courts or the FTC Misapplying the
Law?

    By Kevin E. Noonan —

In its report on so-called "pay for delay"
settlements of ANDA litigation (otherwise known as "reverse payments"),
the Federal Trade Commission (FTC) is calling for an outright ban on
such
agreements.  Settlements containing
"reverse payments" involved payments from the patent- and
NDA-holding, branded drug company to a generic company that has filed an
ANDA
containing a Paragraph IV certification that an Orange Book-listed
patent is
invalid or unenforceable.

According to the FTC, these
settlements are per se violations of Section 1 of
the Sherman Antitrust
Act.  The Commission's position is
supported by the 6th Circuit Court of Appeals decision in In
re
Cardizem CD Antitrust Litigation, 332
F.3d 896 (6th Cir. 2003).  However, several
Courts of Appeals have
disagreed:  the Federal Circuit, In
re Ciprofloxacin Hydrochloride Antitrust Litigation, 544 F.3d 1323 (Fed. Cir. 2008); the
11th Circuit, Schering-Plough
Corp.
v. Fed. Trade Comm'n, 402 F.3d 1056 (11th Cir. 2005); and the
Second
Circuit, In
re Tamoxifen Citrate
Antitrust Litigation, 466 F.3d 187 (2d Cir. 2006).  These
Courts have "misapplied
the antitrust laws" by upholding this type of agreement, according to
the
Commission.  This is an opinion not
shared by the Supreme Court, which has declined petitions for certiorari
in
each case.

This pattern raises the question
of whether it may
be the FTC that is "misapplying" the law by demanding a per se
rule holding reverse payments to
be illegal.  Since the FTC's
position is completely goal-oriented (because the result of these
agreements is
a delay in generic competition), reviewing the bases of these several
Courts of Appeals decisions seems warranted.

As it turns out, the courts' views are considerably
more nuanced and thoughtful than the FTC's rhetoric.  We recently reviewed the 11th Circuit's decision
in Schering-Plough Corp. v. Fed. Trade Comm'n, 402 F.3d 1056 (11th Cir. 2005) (see Part
I of series), and
the Second Circuit's analysis of the question in In re Tamoxifen Citrate Antitrust Litigation, 466 F.3d 187 (2d Cir.
2006) (see Part II of the series).  Today, we review the
Federal Circuit's decision in In re
Ciprofloxacin Hydrochloride Antitrust Litigation, 544 F.3d 1323 (Fed. Cir.
2008).

In this case,
several union and other patient groups, as well as individual patients sued
defendants including Bayer AG & Bayer Corp., Hoechst Marion Roussel, Watson
Pharmaceuticals, and Barr Labs.  The
patent-in-suit, U.S. Patent No. 4,670,444, encompassed ciprofloxacin
hydrochloride ("Cipro"), Bayer's product, with Barr being the first
ANDA filer.  Litigation pursuant
to 35 U.S.C. § 271(e)(2) ensued.

Under the terms of the settlement agreement,
defendants agreed not to challenge the validity or enforceability of the '444
patent, and Barr would convert its Paragraph IV certification to a Paragraph
III (agreeing not to enter the market until the '444 patent expired).  The reverse payment from Bayer to Barr
totaled $398.1 million.  Bayer also
agreed to make quarterly "reverse payments" or supply Barr with Cipro
for resale until after the '444 patent expired.

Plaintiffs alleged antitrust violations under
Sections 1 and 2 of the Sherman Act, illegal contracts in restraint of trade,
as well as state antitrust and consumer protection laws; later plaintiffs added a Walker Process claim (despite the fact
that the '444 patent had been through a re-exam with a claim specific to
ciprofloxacin hydrochloride exiting unamended.

The District Court granted summary judgment against
the plaintiffs, holding that any anticompetitive effects "were within the
exclusionary zone of the patent."  This decision was based on a rule of reason analysis that
did not get past the first step:  any anti-competitive effects fell within the ambit of the patent exclusionary
right and hence were not illegal.

The Federal Circuit affirmed, in an opinion by
Judge Prost, joined by Judge Schall and Judge Ward, District Judge for
the Eastern District of Texas, sitting by designation.  The panel reviewed the judgment de novo
on all issues (the grant of summary judgment as well as defendants' motion to
dismiss and the decision that the state law claims were pre-empted by federal
patent and antitrust laws).

The plaintiffs asserted five points of error:

1.  That the agreement was per se illegal, or illegal under a
proper application of the rule of reason
2.  That the agreement improperly extended
the exclusionary zone of patent
3.  That the District Court should have considered
the law of regional circuits and government agencies (FTC)
4.  That the District Court should have considered
the effects of these kinds of agreements on other generic entrants
5.  The effects on competition of Barr's
180-day exclusivity period

As to the first asserted point of error, Judge
Prost's opinion reminded plaintiffs that the Supreme Court has not interpreted
the Sherman Act as prohibiting all agreements in restraint of trade, just
unreasonable restraints, citing State Oil Co. v. Khan, 522 U.S. 3 (1997):  "Only agreements that have a 'predictable and pernicious
anticompetitive effect, and . . . limited potential for procompetitive benefit'
are deemed to be per se unlawful under the Sherman Act."  The CAFC found no basis for finding
the agreement to be per se illegal
and instead applied a rule of reason analysis under the law of the Second
Circuit.  This is a three-step
process, according to the Federal Circuit, where plaintiffs have the initial
burden of showing an actual (not speculative) adverse affect on competition.  If the plaintiffs make such a showing,
the burden shifts to the defendant to "establish pro-competitive redeeming
virtues of the action."  Finally, the plaintiffs get the opportunity to "show that the same
pro-competitive effects could be achieved through an alternative means that is
less restrictive of competition," citing Clorox Co. v.
Sterling Winthrop, 117 F.3d 50 (2d Cir. 1997).  The panel performed this analysis by first identifying the
relevant market and deciding whether defendants possess market power in that
relevant market.  Judge Prost
opined that the District Court performed the rule of reason analysis properly
under this Second Circuit standard, including its conclusion that "there was no evidence that the
Agreements created a bottleneck on challenges to the '444 patent or otherwise
restrained competition outside the 'exclusionary zone' of the patent."

Regarding
the second allegation of error, that the settlement agreement improperly
extended the exclusionary scope of the '444 patent, the Federal Circuit set forth
plaintiffs' argument to the contrary:

The
appellants assert, however, that the district court erred in concluding that
the Agreements were within the "exclusionary zone" of the '444
patent, in essence treating them as per
se legal.  According to the appellants, the patentee's right to exclude
competition is not defined by the facial scope of the patent, but rather is
limited to the right to exclude others from profiting from the patented
invention.  Under the Agreements, the appellants argue, Bayer is seeking not
simply to enforce its patent rights, but to insulate itself from competition
and avoid the risk that the patent is held invalid.

However, the Federal Circuit noted that the District Court had cited many Supreme Court and Circuit Courts of Appeals
decisions that "any
adverse anti-competitive effects within the scope of the '444 patent could not
be redressed by antitrust law."  "This is because a patent by its very nature is
anticompetitive; it is a grant to the inventor of 'the right to exclude others
from making, using, offering for sale, or selling the invention,' according
to the District Court, citing 35 U.S.C. § 154(a)(1), and concluding "[t]hus,
'a patent is an exception to the general rule against monopolies and to the
right of access to a free and open market,'" citing Precision Instrument Mfg. Co. v. Auto. Maint. Mach. Co., 324 U.S.
806, 816 (1945).

The Federal Circuit agreed:  "[T]he essence of the Agreements was to exclude the
defendants from profiting from the patented invention.  This is well within
Bayer's rights as the patentee."  "Settlement of patent claims by agreement between the parties — including
exchange of consideration — rather than by litigation is not precluded by the
Sherman Act even though it may have some adverse effects on competition,"
citing Standard
Oil Co. v. United States, 283
U.S. 163, 171 & n.5 (1931).

The CAFC found no difference between the
anticompetitive effects of this settlement and settlements in patent cases in
general.  Of special importance to
this decision is the Court's discounting the allegation that the settlements
hinder challenges to the '444 patent, in view of the fact that four other
generic manufacturers had challenged the '444 patent after the settlement at
issue.

As to the "legal standards applied by the
regional circuits and government agencies," particularly the 6th
Circuit decision in In re Cardizem CD
Antitrust Litigation, 332 F.3d 896 (6th Cir. 2003), and the FTC's
position that reverse payments should be per se illegal, the Court declined
plaintiffs' invitation to apply the legal opinions of other regional circuits,
administrative agencies or legal commentators:

In [the District Court's rule of
reason] analysis, it considered whether there was evidence of sham litigation
or fraud before the PTO, and whether any anticompetitive effects of the Agreements
were outside the exclusionary zone of the patent.  The application of a rule of
reason analysis to a settlement agreement involving an exclusion payment in the
Hatch-Waxman context has been embraced by the Second Circuit, and advocated by
the FTC and the Solicitor General.  And, although the Sixth Circuit found a per se violation of the antitrust laws
in In re Cardizem, the facts of that
case are distinguishable from this case and from the other circuit court
decisions.  In particular, the settlement in that case included, in addition to
a reverse payment, an agreement by the generic manufacturer to not relinquish
its 180-day exclusivity period, thereby delaying the entry of other generic
manufacturers.  In re Cardizem, 332
F.3d at 907.  Furthermore, th[at] agreement provided that the generic
manufacturer would not market non-infringing versions of the generic drug.  Id. at 908 n.13.  Thus, th[at] agreement
clearly had anti-competitive effects outside the exclusion zone of the patent.  See Brief for the United States at *16 n.7, Joblove, 127 S. Ct. 3001 (No.
06-830); Brief for the United States as Amicus Curiae at *17, FTC v. Schering-Plough Corp., 548 U.S.
919 (2006) (No. 05- 273), 2006 WL 1358441.  To the extent that the Sixth Circuit
may have found a per se antitrust
violation based solely on the reverse payments, we respectfully disagree.

The Court also distinguished the 6th Circuit's decision that reverse payment agreements were per se illegal "because the court failed to consider the exclusionary power of the
patent in its antitrust analysis."

The Federal Circuit turned instead to decisions
from the 11th Circuit (Schering-Plough
v. Andrx Pharmaceuticals) and by the Second Circuit (In re Tamoxifen) that follow its approach that antitrust violations
occur in reverse settlement-containing ANDA settlement agreements when the
patent is invalid or unenforceable due to inequitable conduct or litigation is
a sham (or "objectively baseless"):

[The Second Circuit] concluded
that the presence of a reverse payment, or the size of a reverse payment, alone
is not enough to render an agreement violative of the antitrust laws unless the
anticompetitive effects of the agreement exceed the scope of the patent's
protection.

We conclude that in cases such as
this, wherein all anticompetitive effects of the settlement agreement are
within the exclusionary power of the patent, the outcome is the same whether
the court begins its analysis under antitrust law by applying a rule of reason
approach to evaluate the anti-competitive effects, or under patent law by
analyzing the right to exclude afforded by the patent.  The essence of the
inquiry is whether the agreements restrict competition beyond the exclusionary
zone of the patent.  This analysis has been adopted by the Second and the
Eleventh Circuits and by the district court below and we find it to be
completely consistent with Supreme Court precedent.  See Walker Process Equip., Inc. v. Food Mach. & Chem. Corp., 382
U.S. 172, 175-77 (1965) (holding that there may be a violation of the Sherman
Act when a patent is procured by fraud, but recognizing that a patent is an
exception to the general rule against monopolies).

The Federal Circuit also opined that, absent fraud on the PTO
or sham litigation, patent validity does not need to be considered in the
application of a rule of reason analysis — ironically, citing an
FTC position to this effect:  "it
would not be necessary, practical, or particularly useful for the Commission to
embark on an inquiry into the merits of the underlying patent dispute when
resolving antitrust issues in patent settlements" (Schering-Plough v. FTC).  It seems, however, that the FTC has changed its position on this,
because it argued that the "expected value" of the lawsuit at the time
of settlement be considered in the rule of reason antitrust analysis.  The Court
disagreed, based on the presumption of validity:  "the district court correctly concluded
that there is no legal basis for restricting the right of a patentee to choose
its preferred means of enforcement and no support for the notion that the
Hatch-Waxman Act was intended to thwart settlements."

Even Judge Posner, a leader in the "law and
economics" movement, seems to agree:

As Judge Posner remarked, if "there
is nothing suspicious about the circumstances of a patent settlement, then to
prevent a cloud from being cast over the settlement process a third party
should not be permitted to haul the parties to the settlement over the hot
coals of antitrust litigation."  Asahi Glass
Co. v. Pentech Pharms., Inc., 289 F. Supp. 2d 986, 992 (N.D. Ill. 2003).

The CAFC disregarded plaintiffs' argument that the
effects of these kinds of agreements on other generic entrants should be
considered, particularly insofar as it was based on the expense of filing an
ANDA with a Paragraph IV certification.  And the final argument, regarding Barr's
attempts to retain its 180-day exclusivity period, is mooted by the section of
the agreement in which Barr changed its Paragraph IV certification to a Paragraph
III certification.  The Court also
notes that this outcome has been changed by provisions of the 2003 Medicare
Modernization Act that strip any right to the 180-day exclusivity if reverse payment
agreement found to be anticompetitive).

As in the other appellate court cases
finding settlement agreements containing reverse payment provisions to be lawful, the
Circuit Court in this case appeared to carefully consider the agreement as a
whole, and to reject the plaintiffs' allegations based on a detailed
application of a rule of reason analysis (rejecting a substantially per se determination that reverse
payments are illegal and should be banned in all circumstances).

An analysis of the 6th Circuit's
decision finding a reverse payment to be per
se illegal under the Sherman Act will be set forth in the next post.

Are the Courts or the FTC Misapplying the Law?

    By Kevin E. Noonan —

In its report on so-called "pay for delay"
settlements of ANDA litigation (otherwise known as "reverse payments"),
the Federal Trade Commission (FTC) is calling for an outright ban on
such
agreements.  Settlements containing
"reverse payments" involved payments from the patent- and
NDA-holding, branded drug company to a generic company that has filed an
ANDA
containing a Paragraph IV certification that an Orange Book-listed
patent is
invalid or unenforceable.

According to the FTC, these
settlements are per se violations of Section 1 of
the Sherman Antitrust
Act.  The Commission's position is
supported by the 6th Circuit Court of Appeals decision in In
re
Cardizem CD Antitrust Litigation, 332
F.3d 896 (6th Cir. 2003).  However, several
Courts of Appeals have
disagreed:  the Federal Circuit, In
re Ciprofloxacin Hydrochloride Antitrust Litigation, 544 F.3d 1323 (Fed. Cir. 2008); the
11th Circuit, Schering-Plough
Corp.
v. Fed. Trade Comm'n, 402 F.3d 1056 (11th Cir. 2005); and the
Second
Circuit, In
re Tamoxifen Citrate
Antitrust Litigation, 466 F.3d 187 (2d Cir. 2006).  These
Courts have "misapplied
the antitrust laws" by upholding this type of agreement, according to
the
Commission.  This is an opinion not
shared by the Supreme Court, which has declined petitions for certiorari
in
each case.

This pattern raises the question
of whether it may
be the FTC that is "misapplying" the law by demanding a per se
rule holding reverse payments to
be illegal.  Since the FTC's
position is completely goal-oriented (because the result of these
agreements is
a delay in generic competition), reviewing the bases of these several
Courts of Appeals decisions seems warranted.

As it turns out, the courts' views are considerably
more nuanced and thoughtful than the FTC's rhetoric.  We recently reviewed the 11th Circuit's decision
in Schering-Plough Corp. v. Fed. Trade Comm'n, 402 F.3d 1056 (11th Cir. 2005) (see Part I of series), and
today turn to the Second Circuit's analysis of the question in In re Tamoxifen Citrate Antitrust Litigation,
466 F.3d 187 (2d Cir. 2006).

In this case,
the FTC (representing multiple plaintiffs) sued a number of related companies
collectively designated "Zeneca" and Barr Pharmaceuticals over a
settlement agreement of ANDA litigation regarding tamoxifen, a breast cancer
treatment.  The reverse payment
amounted to $21 million and an agreement between the companies amounting to
Barr becoming an "authorized generic," i.e., that Zeneca would act as
a supplier of tamoxifen for Barr to be resold in the U.S. at a price higher
than would typically occur when a generic version of a drug enters the
marketplace.  The District Court in
the underlying ANDA litigation found the patent invalid, and the parties'
agreement was contingent on getting a vacatur of this judgment.  The basis for the District Court's
invalidity decision was non-disclosure of material prior art and on an
inequitable conduct theory.  While
this judgment was being appealed
to the Federal Circuit, the parties settled.  (Interestingly, the District Court vacated the
invalidity judgment under circumstances where the Supreme Court declared this illegal
some time later (U.S. Bancorp Mortg. Co.
v. Bonner Mall Pshp., 513 U.S. 18 (1994)).

An additional fact relevant to the Court's decision
was that Barr, the first ANDA filer, re-asserted its 180-day data exclusivity
period that prevented other generics that were preparing to enter the market.  Prior to Barr's action, several other
generic companies filed ANDAs and Zeneca prevailed in all three of these
lawsuits.  The FDA permitted Barr
to recoup its 180-day exclusivity period, which was subsequently challenged and
overturned by the District Court.  The FTC's position was that the settlement agreement (and the District Court's vacatur of the underlying ANDA litigation) amounted to "reviving"
an invalid patent, continuing Zeneca's "monopoly" over tamoxifen, prevented other generics from entering the marketplace, maintained a high price
on tamoxifen, and amounted to the companies "sharing the profits of an
illegal monopoly."

In the District Court case brought by plaintiffs
and the FTC (and the judgment before the Second Circuit), the Court dismissed the
complaint based on the existence of a patent (specifically, U.S. Patent No.
4,536,516):  the District Court
held that only by misusing a patent can the patentee be liable for an antitrust
violation.  The District Court suggested that a reverse payment merely to keep a generic drug off the
market might have a different character than an agreement, as here, that
settles active litigation.  In
addition, Barr's petition to extend its 180-day exclusivity period was also not
illegal, being exempt from antitrust liability under the Noerr-Pennington
doctrine (no antitrust violation by petitioning the government).  Specifically, the Court held that
regulatory agency action, taken or petitioned in good faith, does not raise
antitrust injury if it is "the
result of the legal monopoly that a patent holder possesses."  Moreover, "forcing" the other
ANDA filers to "prove" that the patent was invalid was not an
antitrust injury, particularly since Zeneca prevailed in these actions
(implying that the patents were not invalid).

The Second Circuit's opinion began with an express
recognition that there is a "tension between antitrust law and patent law."  The Court expressly recognized that
there were competing legal principles between consumer protection under the
antitrust law and the exclusivity conferred to patentees under patent law.  But unlike the FTC, the Court did not
believe that a ban on reverse payments was the answer; rather, the Court substantively
considered the several allegations made by plaintiffs and the FTC.

Plaintiffs' first allegation discussed in the Second Circuit's
opinion was that the District Court should have considered the patent presumptively
invalid based on the earlier determination of invalidity.  The Second Circuit rejected this view, saying
that the established  principle is
that courts should encourage settlement in the public interest.  The Court says it is unwilling to
presume what decision would have been made at the Federal Circuit if the District Court's original invalidity opinion had been reviewed in an appeal of
the underlying ANDA litigation.  The panel was not willing to presume that the
Federal Circuit would have affirmed the invalidity determination.

Secondly, the Court found that the timing of the
settlement agreement — after an invalidity decision in the ANDA litigation —
was irrelevant, saying that both parties had reason to settle before having the
decision reviewed by the Federal Circuit (noting that "it takes no
citation to authority to conclude that appellants prevail with some frequency
in federal courts of appeal even when a high degree of deference is accorded
the district court from which the appeals are taken.")

Third, plaintiffs and the FTC contended that the
amount of the reverse payment greatly exceeded the value of the settlement even
under a "best case scenario."  (This argument differs from the FTC's position that the very existence
of a reverse payment is per se
unlawful, an opinion supported by academic commentary).  The Court expressly refused to hold
that a reverse payment is a per se
antitrust violation.  Indeed, the Court says that the Hatch-Waxman regime encourages settlements having reverse
payments, because it reverses the usual positions of the parties.  Typically, according to the Court, the
risk is with the generic (accused infringer), who must develop the competing
generic drug, obtain approval, and then enter the marketplace "at risk"
of patent infringement litigation.  The provisions of Hatch-Waxman changed this calculus, the Court opines, since
the generic does not need to expend very much of its resources in developing
its ANDA.  As a consequence, in the Court's view, the generic drug maker has relatively "little to lose"
in ANDA litigation.  The situation
of the generic drug maker is in contrast to the patentee, who has lost the
possibility of damages from the generic drug maker and can, at best, effectively
obtain an injunction (either from the court or by the refusal of the FDA to
provide regulatory approval until the patent(s) expire).  The patentee's incentive is to prevent
infringement, and a patentee may be willing to reach this result even if it needs
to incur certain costs in the short term (i.e., reverse payments).  In the Court's view, reverse payments
are expected consequences of the incentives created under the Hatch-Waxman
system.

The Second Circuit also said that "excessive"
reverse payments can be a violation as it is merely "a device for
circumventing antitrust law."  The Court recognizes that "at first blush" a reverse payment
may look per se anticompetitive, but
says that "upon reflection" suspicion abates "so long as the
patent litigation is neither a sham nor otherwise baseless."  Under the circumstances here (and
generally absent sham litigation or assertion of patent(s) known to be invalid
or unenforceable) settlements are a way to protect what the patentee is
lawfully entitled to — the patent monopoly:

"The anticipated profits of the patent holder in the absence of
generic competition are greater than the sum of its profits and the profits of
the generic entrant when the two compete."  The court says that "[i]t might therefore make economic
sense for the patent holder to pay some portion of that difference to the
generic manufacturer to maintain the patent monopoly market for itself.  And if that amount exceeds what the
generic manufacturer sees as its likely profit from victory, it seems to make
obvious economic sense for the generic manufacturer to accept such a payment if
it is offered."

To the extent that an "excessive" reverse
payment indicates a lack of confidence in the patents strength or validity, the Court opined that "we doubt the wisdom of deeming a patent effectively
invalid on the basis of a patent holder's fear of losing it.  . . .  It is not 'bad faith' to
assert patent rights that one is not certain will be upheld in a suit for
infringement pressed to judgment and to settle the suit to avoid risking the
loss of the rights.  No one can be certain that he will prevail in a patent
suit," citing Asahi Glass Co. v. Pentech Pharmaceuticals Inc.,
289 F. Supp. 2d 986 (N.D. Ill. 2003) (Posner, J.)

The Court goes on to say that a rule that would
penalize a patentee for settling a lawsuit neglects to consider that there is
always a risk that a court will invalidate a patent, and that a patentee might
legitimately decide to insure against that risk by settling.  Using this case as an illustration, the Court noted that settlement occurred after
the District Court had invalidated the patent.  Zeneca could not have counted on the Federal Circuit to
reverse the invalidity decision any more than Barr could count on the appellate
court to affirm.  Thus, both parties
had an incentive to settle.  In
addition, it was reassuring at the least that the subsequent litigation history
found Zeneca suing successfully on the patent multiple times against other ANDA
filers.

Speaking generally on the FTC's position, the Court
had this to say:

We are unsure, too, what would be
accomplished by a rule that would effectively outlaw payments by patent holders
to generic manufacturers greater than what the latter would be able to earn in
the market were they to defend successfully against an infringement claim.  A
patent holder might well prefer such a settlement limitation — it would make
such a settlement cheaper — while a generic manufacturer might nonetheless
agree to settle because it is less risky to accept in settlement all the
profits it expects to make in a competitive market rather than first to defend
and win a lawsuit, and then to enter the marketplace and earn the profits.

However:

We are not unaware of a troubling
dynamic that is at work in these cases.  The less sound the patent or the less
clear the infringement, and therefore the less justified the monopoly enjoyed
by the patent holder, the more a rule permitting settlement is likely to
benefit the patent holder by allowing it to retain the patent.  But the law
allows the settlement even of suits involving weak patents with the presumption
that the patent is valid and that settlement is merely an extension of the
valid patent monopoly.  So long as the law encourages settlement, weak patent
cases will likely be settled even though such settlements will inevitably
protect patent monopolies that are, perhaps, undeserved.

And, citing In re Ciprofloxacin
Hydrochloride Antitrust Litig., 363 F. Supp. 2d 514, 534 (E.D.N.Y. 2005):

If courts do not discount the
exclusionary power of the patent by the probability of the patent's being held
invalid, then the patents most likely to be the subject of exclusion payments
would be precisely those patents that have the most questionable validity.  This
concern, on its face, is quite powerful.  But the answer to this concern lies in
the fact that, while the strategy of paying off a generic company to drop its
patent challenge would work to exclude that particular competitor from the
market, it would have no effect on other challengers of the patent, whose
incentive to mount a challenge would also grow commensurately with the chance
that the patent would be held invalid.

There
is, of course, the possibility that the patent holder will continue to buy out
potential competition such that a settlement with one generic manufacturer
protecting the patent holder's ill-gotten patent monopoly will be followed by
other settlements with other generic manufacturers should a second, third, and
fourth rise to challenge the patent.  We doubt, however, that this scenario is
realistic.

Every settlement payment to a
generic manufacturer reduces the profitability of the patent monopoly.  The
point will come when there are simply no monopoly profits with which to pay the
new generic challengers.  "[I]t is unlikely that the holder of a weak
patent could stave off all possible challengers with exclusion payments because
the economics simply would not justify it."  Cipro III, 363 F. Supp. 2d at
535 (emphasis supplied).  We note in this regard that Zeneca settled its first tamoxifen
lawsuit against the first generic manufacturer, Barr, but did not settle, and,
as far as we know, did not attempt to settle, the litigation it brought against
the subsequent challenging generics, Novopharm, Pharmachemie, and Mylan.

The Court considers the alternative (what the FTC advocates) and says:

But such a requirement would be contrary to
well-established principles of law.  As we have rehearsed at some length above,
settlement of patent litigation is not only suffered, it is encouraged for a
variety of reasons even if it leads in some cases to the survival of monopolies
created by what would otherwise be fatally weak patents.  It is too late in the
journey for us to alter course.

The Court also considered the terms of the agreement, specifically whether the
exclusionary terms of the agreement exceed the scope of the patent protection —
i.e., to enlarge the patent right.  The answer here is that it does not, in part because the patent at issue
is to a composition rather than a formulation.  Under these circumstances, the patent scope is broader and
the exclusionary right accordingly more expansive.  In addition, the Court notes that, unlike other instances of
reverse payments, there was no generic bottleneck, since several other generic
companies filed ANDAs on Zeneca's drug.  And Barr entered the market under license from
Bayer, so there was competition in the marketplace (albeit as an "authorized
generic" that sold for about 5% less than the branded).

Finally,
while the Court was "not so sure" that Barr's later attempts to
recover its 180-day exclusivity period as the first ANDA filer was immune from
antitrust considerations under the Noerr-Pennington
doctrine, the scope of the anticompetitive aspects of the agreement was not
illegally excessive, and the Court could discern no antitrust injury.

Once
again, the Circuit Court in this case appeared to carefully consider the
agreement as a whole, and to reject the FTC's call for substantially per se
determination that reverse payments are illegal and should be banned in all
circumstances.

An analysis of the other instances where the FTC
considers appellate review contrary to its decisions to be a "misapplication
of the laws" will be set forth in later posts.

Are the Courts or the FTC Misapplying the Law?

    By Kevin E. Noonan —

In its report on so-called "pay for delay"
settlements of ANDA litigation (otherwise known as "reverse payments"),
the Federal Trade Commission (FTC) is calling for an outright ban on such
agreements.  Settlements containing
"reverse payments" involved payments from the patent- and
NDA-holding, branded drug company to a generic company that has filed an ANDA
containing a Paragraph IV certification that an Orange Book-listed patent is
invalid or unenforceable.

According to the FTC, these settlements are per se violations of Section 1 of the Sherman Antitrust
Act.  The Commission's position is
supported by the 6th Circuit Court of Appeals decision in In
re Cardizem CD Antitrust Litigation, 332 F.3d 896 (6th Cir. 2003).  However, several Courts of Appeals have
disagreed:  the Federal Circuit, In re Ciprofloxacin Hydrochloride Antitrust Litigation, 544 F.3d 1323 (Fed. Cir. 2008); the
11th Circuit, Schering-Plough
Corp. v. Fed. Trade Comm'n, 402 F.3d 1056 (11th Cir. 2005); and the Second
Circuit, In re Tamoxifen Citrate
Antitrust Litigation, 466 F.3d 187 (2d Cir. 2006).  These Courts have "misapplied
the antitrust laws" by upholding this type of agreement, according to the
Commission.  This is an opinion not
shared by the Supreme Court, which has declined petitions for certiorari in
each case.

This pattern raises the question of whether it may
be the FTC that is "misapplying" the law by demanding a per se rule holding reverse payments to
be illegal.  Since the FTC's
position is completely goal-oriented (because the result of these agreements is
a delay in generic competition), reviewing the bases of these several Courts of Appeals decisions seems warranted.

As it turns out, the Courts' views are considerably
more nuanced and thoughtful than the FTC's rhetoric.  In the 11th Circuit case, the FTC issued a "cease
and desist" order prohibiting Schering-Plough from settling any patent
infringement lawsuit with a generic drug company where Schering-Plough gives
the generic company "anything of value" and "agrees to suspend
research, development, manufacture, marketing or sales of the generic product."  The basis of the order was the
Commission's determination that the settlement agreement between Schering-Plough and Upsher Pharmaceuticals
(containing a reverse payment) was an unreasonable restraint of trade in
violation of 15 U.S.C. § 1 (Section 1 of the Sherman Antitrust Act) and Section
5 of the FTC Act (15 U.S.C. § 45(a)).  The product at issue was an extended-release formulation of a potassium
supplement claimed in U.S. Patent No. 4,863,743.  Schering-Plough filed suit in response to Upsher's ANDA
filing on a generic version of Schering-Plough's formulation product, and the
parties settled before trial.  The
agreement contained a $60 million initial licensing fee, $10 million in
milestone royalty payments and 10-15% running royalties on five drugs owned by
the generic company, including an anti-cholesterol drug having an estimated net
present value of $250 million.  In
addition, Upsher agreed to a compromise date for market entry of it generic
potassium product.  (In a related
case, Schering-Plough sued ESI-Lederle on the same patent, with a
court-mediated and approved settlement having an agreed-to delayed market entry
date for the generic product and a reverse payment from Schering-Plough to
Lederle.)

Initially, the Administrative Law Judge hearing the
case in the first instance found both these agreements legal and dismissed the
FTC complaint.  The ALJ's reasoning
was that, unless the patent was invalid or if the generic products did not
infringe, the agreements were not violations of the antitrust laws.  Significantly the FTC adduced no
evidence before the ALJ that these agreements were anything other than arm's-length
transactions between the parties.  The ALJ found that the FTC did not prove that, without the payment,
either a better settlement agreement or litigation would have resulted in
earlier generic market entry.

The case was then heard by the full Commission, who
reverse the ALJ.  The Commission
backed off its initial position that reverse payment agreements are per se illegal, but held that the quid pro quo of payment was for delayed
generic market entry, which delay "would injure competition and consumers."  The Commission based its decision on generic
market entry that "might have been" agreed upon between the parties
in the absence of payments.  Even though the Commission couldn't tie the entry dates to the monetary
compensation, it developed the rule that reverse payments were illegal, with
an exception for litigation costs to be capped at $2 million and a requirement
that the FTC must be notified of the existence and terms of the agreement (a
requirement adopted in the 2003 Medicare Prescription Drug Improvement and
Modernization Act).

The 11th Circuit reversed, in an opinion that gave
less deference to the Commission's decision that it might have otherwise,
absent the different results before the ALJ and the Commission as a whole.  The Court made its determination in
view of an earlier 11th Circuit case, Valley Drug Co. v. Geneva Pharm., Inc., 344 F.3d 1294, 1303-04 (11th Cir. 2003).  In that case, the Court reversed a
district court determination regarding an interim settlement agreement between a branded
pharmaceutical company and a generic containing a monthly payment ($4.5
million) from the branded company to the generic that kept the generic drug off
the market until the underlying patent infringement suit was concluded.  The district court found this per se
anticompetitive.  The Court of Appeals
reversed the district court's determination that this agreement was per se
illegal, based on the exclusionary nature of the patent.  Patents, according to the Court, intrinsically
distort the competitive landscape, and thus defeats a determination that the
agreement was per se illegal:  "In the context of patent litigation . . . the
anticompetitive effect may be no more broad than the patent's own exclusionary
power.  To expose those agreements to antitrust liability would 'obviously chill
such settlements.'"

The FTC did not use a per se standard against
Schering-Plough, however, but instead applied a "rule of reason"
analysis.  The rule "tests 'whether
the restraint imposed is such as merely regulates and perhaps thereby promotes
competition or whether it is such as may suppress or even destroy competition,'"
citing FTC v. Indiana
Federation of Dentists, 476 U.S. 447,
457 (1986), quoting Board of Trade of City of Chicago v. United States,
246 U.S. 231, 238 (1918).  Here,
the Commission differed from the ALJ merely be showing "a detrimental
market effect," which the Court characterized as "a low threshold"
for making a finding of antitrust liability:

Thus,
under the Commission's standard, once the FTC met the low threshold of
demonstrating the anticompetitive nature of the agreements, it found that
Schering and Upsher did not sufficiently establish that the challenged
activities were justified by procompetitive benefits.  Despite the appearance
that it openly considered Schering and Upsher's procompetitive affirmative
defense, the Commission immediately condemned the settlements because of their
absolute anti-competitive nature, and discounted the merits of the patent
litigation.  It would seem as though the Commission clearly made its decision
before it considered any contrary conclusion.

The Court stated that when patents are involved, neither per se illegality nor rule of reason analysis is appropriate in
assessing antitrust liability, due to the "legitimate effects on
competition legally available to the patentee":

By
their nature, patents create an environment of exclusion, and consequently,
cripple competition.  The anticompetitive effect is already present.  "What is required
here is an analysis of the extent to which antitrust liability might undermine
the encouragement of innovation and disclosure, or the extent to which the
patent laws prevent antitrust liability for such exclusionary effects."  Valley
Drug Co. v. Geneva Pharm., Inc..  Therefore, in line with Valley Drug,
we think the proper analysis of antitrust liability requires an examination of: 
(1) the scope of the exclusionary potential of the patent; (2) the extent to
which the agreements exceed that scope; and (3) the resulting anticompetitive
effects.

It is the legitimate
exclusionary power of the patent, that the Court said must be considered in
making an antitrust determination.  "Although the exclusionary power of a patent may seem incongruous
with the goals of antitrust law," the Court said, "a delicate balance
must be drawn between the two regulatory schemes.  Indeed, application of
antitrust law to markets affected by the exclusionary statutes set forth in
patent law cannot discount the rights of the patent holder.  Simpson v. Union
Oil Co., 377 U.S. 13, 14 (1964).  (Patent laws 'are in pari materia with the
antitrust laws and modify them pro tanto (as far as the patent laws go)).'"

Turning to the patent at issue and the agreement
between the parties, the Court noted that the FTC's characterization of the
agreements as linking the payments to the delayed market entry (which "raised
a red flag" according to the FTC) was not supported by substantial
evidence.  Indeed, in the
proceedings before the ALJ, FTC counsel "acknowledged that it could not prove that Upsher and ESI could have
entered the market on their own prior to the '743 patent's expiration on
September 5, 2006.  This reinforces the validity and strength of the patent."  Indeed, the Court found that the
evidence before the ALJ was directly contrary to the FTC's position — that
Schering-Plough's personnel evaluating the value of the license of Upsher's
products were "unaware of" the litigation, and the reverse payment
was "a bone fide fair-value payment" for rights to market these drugs
(particularly the anticholesterol drug).  The Commission credited a staff economist (purportedly an "expert"
in pharma industry licensing) who testified that the reverse payment amounts
were "grossly excessive."  The Court was unimpressed:

We
are troubled by [expert] Levy's testimony.  Interestingly, Levy arrived at his
conclusions without performing a quantitative analysis of Niacor [the
anticholesterol product] or any of the other Upsher products licensed by
Schering.  Additionally, Levy lacked expertise in the area of
cholesterol-lowering drugs and niacin supplements.  Finally, Levy's unpersuasive
appraisal of the post-settlement behavior blatantly ignored the parties'
ongoing communications and the fact that the niacin market essentially bottomed
out.

The Court found even
less evidence for the Commission's decision with regard to the Lederle
agreement — the FTC presented no factual witnesses and "little"
expert testimony (and "spent little time" in its opinion and order justifying
its conclusions).

The Court said "[t]he FTC did not rebut [Schering-Plough's] testimony,
but rather ignored it," and that "all of the evidence" supports
the ALJ's conclusion that the settlement did not contain a "naked payment"
merely intended to delay generic entry.  The 11th Circuit also noted that the Supreme Court has endorsed the practice
for litigants in a patent lawsuit
to "exchange consideration to settle their litigation" without any
antitrust liability, citing Standard Oil Co. v. United States, 283 U.S.
163, 170-71 n. 5 (1931), and the 11th Circuit notes a general policy position that encourages
settling litigation.  Affirming the
Commission's decision, the Court said, "would leave settlements, including those endorsed and facilitated
by a federal court, with little confidence."

Turning to the
allegations that the agreement violated the FTC Act, whether the agreements
represented an "unfair method of competition," the Court
said that this requires that there be an actual anticompetitive effect, not one
that is "hypothetical or presumed."  The Court based its decision in part on the limited effect
of the agreement, to the specific controlled-release potassium chloride
formulation and limited in scope to the extent of the exclusionary right stemming
from the patent.  Interestingly, the Court opined that the certainty resulting from the settlement would lead to "more
intense competition."  Citing Valley
Drug, the Court fashioned the idea that litigation can be a more costly
means to achieve the same exclusion reached by settlement, contrary to the "logic"
employed by the Commission that payment was merely a quid pro quo for delayed
generic market entry.

The Court's opinion also contained an interesting
analysis regarding the effects of the Hatch-Waxman Act:

It
is uncontested that parties settle cases based on their perceived risk of
prevailing in and losing the litigation.  Pre-Hatch-Waxman, Upsher and ESI
normally would have had to enter the market with their products, incurring the
costs of clinical trials, manufacturing and marketing.  This market entry would
have driven down Schering's profits, as it took sales away.  As a result,
Schering would have sued ESI and Upsher, seeking damages for lost profits and
willful infringement.  Assuming the patent is reasonably strong, and the parties
then settled under this scenario, the money most probably would flow from the
infringers to Schering because the generics would have put their companies at
risk by making infringing sales.

By
contrast, the Hatch-Waxman Amendments grant generic manufacturers standing to
mount a validity challenge without incurring the cost of entry or risking
enormous damages flowing from any possible infringement.  See In re
Ciprofloxacin Hydrochloride Antitrust Litigation, 261 F. Supp. 2d 188, 251
(E.D.N.Y. 2003).  Hatch-Waxman essentially redistributes the relative risk
assessments and explains the flow of settlement funds and their magnitude.  Id.  Because of the Hatch-Waxman scheme, ESI and Upsher gained considerable leverage
in patent litigation:  the exposure to liability amounted to litigation costs,
but paled in comparison to the immense volume of generic sales and profits.  This statutory scheme could then cost Schering its patent.

By entering into
the settlement agreements, Schering realized the full potential of its infringement
suit — a determination that the '743 patent was valid and that ESI and Upsher
would not infringe the patent in the future.  Furthermore, although ESI and
Upsher obtained less than what they would have received from successfully
defending the lawsuits (the ability to immediately market their generics), they
gained more than if they had lost.  A conceivable compromise, then, directs the
consideration from the patent owner to the challengers.  . . .  Ultimately,
the consideration paid to Upsher and ESI was arguably less than if Schering's
patent had been invalidated, which would have resulted in the generic entry of
potassium chloride supplements.

Following this line of reasoning, the Court posed a
"pre-Hatch-Waxman" hypothetical regarding settlement of a similar
lawsuit, wherein if the patent-holder settled for less than the damages it was
entitled to, the "windfall" garnered by the generic would be like the
reverse payment here (since presumably the settlement would effect a delay in
generic market entry).  And looking
long-term, a ban on reverse payments would remove the incentive for settlement,
and in some percentage of the cases the patentee would prevail, thus delaying
generic market entry even longer.  Accordingly, the Court says that the anticompetitive cost to consumers
of litigation needs to be considered.

Finally,
the caustic environment of patent litigation may actually decrease product
innovation by amplifying the period of uncertainty around the drug manufacturer's
ability to research, develop, and market the patented product or allegedly
infringing product.  The intensified guesswork involved with lengthy litigation
cuts against the benefits proposed by a rule that forecloses a patentee's
ability to settle its infringement claim.  See In re Tamoxifen Citrate
Antitrust Litig., 277 F. Supp. 2d 121, 133 (E.D.N.Y. 2003) (noting that the
settlement resolved the parties' complex patent litigation, and in so doing, "cleared
the field" for other ANDA filers).  Similarly, Hatch-Waxman settlements,
like the ones at issue here, which result in the patentee's purchase of a
license for some of the alleged infringer's other products may benefit the
public by introducing a new rival into the market, facilitating competitive
production, and encouraging further innovation.

The 11th Circuit's decision thus appears to be
squarely within the boundaries of appellate court review of administrative
agency decisions.  The Court found
the Commission to have ignored or discounted evidence contrary to its inclination
to find that settlement agreements containing reverse payments constitute an
antitrust violation, and rejected its legal determinations that the specific agreement at issue in this case was improperly
anticompetitive (i.e., outside the scope of the legitimate exclusionary
scope of the patent grant).

An analysis of the other instances where the FTC
considers appellate review contrary to its decisions to be a "misapplication
of the laws" will be set forth in later posts.