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.