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.