Patent Docs

Second Circuit Denies En Banc Reconsideration in Cipro® Case

In re Ciprofloxacin Antitrust Litigation

By Kevin E. Noonan --

The Second Circuit today denied plaintiffs' petition for rehearing en banc of its decision that the "reverse payment" agreement between Bayer and Barr over ciprofloxacin hydrochloride (Cipro®) was not anticompetitive under the antitrust laws.  One judge, Rosemary S. Pooler, dissented from the decision, as she had dissented from the original panel decision.  And her dissent illustrates the point of disagreement, if not the flaw in her arguments (and that of others, including the Federal Trade Commission) that such agreements should be per se illegal.

To recap, Bayer holds U.S. Patent No. 4,670,444 claiming generically certain antibiotic drugs, and specifically ciprofloxacin hydrochloride that Bayer sells as Cipro®.  Barr filed an Abbreviated New Drug Application (ANDA) containing a Paragraph IV certification that the '444 patent was invalid and unenforceable.  Before trial, Bayer and Barr settled the litigation, entering into agreements providing that none of the defendants would challenge the validity or enforceability of the '444 patent, and that Barr would convert its Paragraph IV certification to a Paragraph III and not market its generic Cipro® until the '444 patent expired.  Importantly, the agreements contained a provision that Bayer would sell Cipro® to Barr for resale or make quarterly payments ("reverse payments") until December 31, 2003.  In return, Barr agreed not to sell a generic version of Cipro® until at least six months before the '444 patent expired.  It is undisputed that Bayer had paid Barr a total of $398 million under this agreement.  Similar agreements were also made between Bayer and other generic drug makers, including The Rugby Group and Watson Pharmaceuticals, Inc.

The Federal Circuit heard a portion of this case under a Walker Process antitrust claim, 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), finding that the "reverse payment" agreement was not per se illegal under antitrust law, a coalition of patient groups, trade unions and pharmacies brought suit in the Eastern District of New York sounding in antitrust claims.  The Court, bound by the Second Circuit's precedential Tamoxifen decision (In re Tamoxifen Citrate Antitrust Litigation), 466 F.3d 187, 208-12 (2d Cir. 2005)), that such reverse payments were not per se illegal, granted summary judgment to defendants.  The appellate court, similarly bound by the Tamoxifen precedent, affirmed, in a decision that urged the plaintiffs to petition for rehearing en banc.  That petition was denied today, setting the stage for a certiorari petition to the Supreme Court.

Judge Pooler raises the many public policy positions taken by the FTC and others, regarding the effects on consumers and drug prices occasioned by such reverse payment agreements.  Her dissent notes that, in the five years prior to the Court's Tamoxifen decision, there were no settlement agreements containing reverse payment provisions, while since that decision there had been a "dramatic surge."  She cites the FTC Report (see "FTC Disapproves of 'Pay-for-Delay' Drug Deals") for the datum that there have been 53 reverse payment-containing agreements that had cost consumers "approximately $3.5 billion per year" (by FTC estimates, which may be flawed; see Patent Docs report).

The significant statement in the dissent, that illustrates the underlying (flawed) rationale behind reverse payment agreements, is this:

Further, such settlements serve no obvious redeeming social purpose.  Put simply, what the patent holder purchases by means of an exclusion payment settlement is the continuation of a patent the patent holder must have thought had some significant probability of being declared invalid.

And in a footnote, continuing:

Nor, it should be noted, are exclusion payments a patent holder's only means of hedging against this probability.  Instead, the probability of invalidation could be reflected in a settlement by means of which the patent holder agrees to some reduction in the unexpired term of the patent.

There are several assumptions behind this statement, not the least of which is contrary to the statutory presumption of validity (the dissent quotes an amicus brief by "the United States" to the effect that "[t]he presumption of patent validity is simply a procedural device that assigns burdens in litigation challenging the validity of an issued patent.  There is no basis for treating that presumption as virtually conclusive and allowing it to serve as a substantive basis to limit the application of the Sherman Act").  What is missing is the concept of risk and reward in the current Hatch Waxman regime, by which generic drug makers are in a position to attack a patent protecting a valuable pharmaceutical franchise while taking no risk.  Indeed, the skewed nature of this relationship has been noted by courts (including the Second Circuit in this case:  "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") and by a recent study in the journal Science (Maybe Hatch-Waxman Data Exclusivity Isn't So Good For Traditional Drugs After All), questioning the utility of the litigation provisions of Hatch Waxman (see "Maybe Hatch-Waxman Data Exclusivity Isn't So Good For Traditional Drugs After All").  It should be noted that these misgivings may be shared by members of Congress, who did not include Hatch Waxman-like litigation provisions in the recently-enacted follow-on biologics bill, instead opting for complicated negotiation provisions seemingly aimed at discouraging Hatch Waxman type litigation over biologic drugs (see "A First Look at the Abbreviated Follow-on Biologic Regulatory Pathway" snippets, pages 1-4).

The dissent also notes that while the Hatch Waxman Act does not prohibit reverse payment agreements, it also "does nothing to change the general rule that market-sharing agreements violate the antitrust laws."  This notion ignores the several decisions by other courts of appeal that reverse settlement agreements are not anticompetitive, when analyzed by the rule of reason (see "Reverse Payments in Generic Drug Settlements" - Part I, Part II, Part III).  Indeed, the dissents position (and the FTC's and others) is that these agreements should be per se illegal under the Sherman Act.  The problem with this argument is that it is contrary to the legal determinations of several other courts of appeal that not only are these agreements not anticompetitive but, in many instances, result in generic versions of patented drugs being available to consumers earlier than they would have been if the patentee had prevailed at trial.

The dissent also (disturbingly) cites the several sources of "criticism" of the Court's Tamoxifen decision,  including "the majority of State Attorneys General, the Federal Trade Commission, the American Medical Association, and an impressive array of consumer groups and academic commentators."  This is legal decision by plebiscite, not law, and is possibly the worst way for this type of question to be decided.  The careful balancing of risks, rights, and responsibilities required to address this issue is not something that should be left to various groups with their various axes to grind.  This may be a question for Congress or the Supreme Court to address, but it is irresponsible for the dissent to suggest that popular opinion is the best way to come to the correct decision.

USPTO Acts Quickly to Comply with Court Order

By Kevin E. Noonan --

The U.S. Patent and Trademark Office has acted promptly to comply with Judge Claude Hilton's Order earlier this week that the Office accept The Medicines Company (MDCO) Patent Term Extension Request for U.S. Patent No. 5,196,404, by granting the patent an interim patent term extension.  In responding to the Order, Director David Kappos noted that the Office had granted two previous interim extensions to accommodate the litigation schedule, the latest lasting until ten days after the District Court rendered a decision.  Accordingly, the latest extension extends from August 13, 2010 until August 13, 2011.  It can be expected that the Office will use that time to examine MDCO's Request and make its determination, in cooperation with the FDA, regarding the length of extension to which the '404 patent is entitled.

Of course, this action has no bearing on whether the Office ultimately decides to appeal Judge Hilton's decision in this case.

For additional information regarding this topic, please see:

• "The Medicines Company Prevails in Patent Term Extension Dispute," August 4, 2010
• "House Passes Patent Term Extension Bill," June 27, 2008

Pay-For-Delay Provision Added to Senate Appropriations Bill

By Donald Zuhn --

Last week, the Senate Appropriations Committee managed to accomplish something that the Senate as a whole could not:  pass an appropriations bill containing a pay-for delay (or reverse payment) provision.  Only one week earlier, the Senate had voted in favor of the House "2010 Supplemental Appropriations Act" (H.R. 4899), but not before stripping the bill of a provision that would have allowed the Federal Trade Commission (FTC) to "initiate a proceeding . . . against the parties to any agreement resolving or settling, on a final or interim basis, a patent infringement claim, in connection with the sale of a drug product," wherein the agreement has "anticompetitive effects" (see "Senate Removes Pay-For-Delay Provision from Appropriations Bill").

While the House added its pay-for-delay provision to what was primarily a war appropriations bill ($37.12 billion of the bill's funding was earmarked for U.S. troops in Iraq and Afghanistan), the Senate Appropriations Committee placed its pay-for-delay provision (entitled "Preserving Access to Affordable Generics") in the "Financial Services and General Government Appropriations Act, 2011" (S.3677).  Following the Committee's passage of S. 3677, the bill was placed on the Senate Legislative Calendar and now awaits a vote by the full Senate.

In a press release issued shortly after the Appropriations Committee passed S. 3677, Senator Herb Kohl (D-WI) (at left), who sits on the Committee, noted that "[t]he cost of brand-name drugs rose nearly ten percent last year [and] the cost of generic drugs fell by nearly ten percent."  He contended that "[a]t this time of spiraling health care costs, we cannot turn a blind eye to these anticompetitive backroom deals that deny consumers access to affordable generic drugs."  In 2009, Senator Kohl introduced the "Preserve Access to Affordable Generics Act" (S. 369), which would have made it unlawful:

[F]or any person, in connection with the sale of a drug product, to directly or indirectly be a party to any agreement resolving or settling a patent infringement claim in which--
(1) an ANDA filer receives anything of value; and
(2) the ANDA filer agrees not to research, develop, manufacture, market, or sell the ANDA product for any period of time.

(see "Bill to Prohibit Reverse Payments Introduced in the Senate").

The pay-for-delay provision in S. 3677 would, like the House amendment to H.R. 4899, allow the FTC to "initiate a proceeding . . . against the parties to any agreement resolving or settling, on a final or interim basis, a patent infringement claim, in connection with the sale of a drug product," wherein the agreement has "anticompetitive effects."  Under S. 3677, "an agreement shall be presumed to have anticompetitive effects and be unlawful if-- (i) an ANDA filer receives anything of value; and (ii) the ANDA filer agrees to limit or forego research, development, manufacturing, marketing, or sales of the ANDA product for any period of time," unless "the parties to such agreement demonstrate by clear and convincing evidence that the procompetitive benefits of the agreement outweigh the anticompetitive effects of the agreement."  The pay-for-delay provision in S. 3677 also provides a list of competitive factors to be used in determining whether the parties have met this burden.  Finally, the bill would impose civil penalties "sufficient to deter violations of this section" that could total up to three times the value received by the NDA holder or up to three times the value given to the ANDA filer if no such value had been received by the NDA holder.

In a statement released by the Generic Pharmaceutical Association (GPhA), the trade group said that it was "extremely disappointed that [] legislation that could ultimately ban patent settlements [] passed out of the Senate Appropriations Committee," calling the addition of the pay-for-delay provision "a procedural façade with highly negative impact" and the Approproations Committee's passage of the provision "not the way the process should work."

The Medicines Company Prevails in Patent Term Extension Dispute

By Kevin E. Noonan --

Yesterday, Judge Claude M. Hilton, District Court Judge for the Eastern District of Virginia, handed The Medicines Company (MDCO) a victory in its long-standing dispute with the U.S. Patent and Trademark Office over the timeliness vel non of its Patent Term Extension Request for its patent on the blockbuster drug Angiomax® (bivalirudin).  In his opinion granting summary judgment to MDCO, it was clear that the judge was not happy with the Office's response to his earlier Order mandating reconsideration of its decision that the Request was not timely filed; judicial displeasure, if not pique, seems reasonable in view of the seemingly summary way the Office "complied" with the earlier Order.

The tale has been often told on the circumstances surrounding MDCO's PTE Request.  Pursuant to 35 U.S.C. § 156, MDCO had 60 days from the date that Angiomax® received regulatory (FDA) marketing approval to file its PTE Request (35 U.S.C. § 156(d)(1)).  The approval letter was sent by FDA to MDCO by facsimile transmission at 6:17 pm on Friday, December 15, 2000.  The FDA subsequently published the approval date for Angiomax® on its website as being December 19, 2000.  MDCO filed its PTE Request on February 14, 2001, a date that is 61 days after December 15, 2000, 58 days after December 18, 2000 (the Monday following the date of the Friday night fax) and 57 days after the approval date FDA posted on its website for Angiomax®.  These calculations were complicated by a later-issued directive by the PTO that, for purposes of calculating the time period for filing a PTE Request, the Office would consider the day FDA mailed its approval letter in the calculation (i.e., the times above are each increased by one day) (In re Patent Term Extension Application for U.S. Patent No. 5,817,338, 2008 WL 5477276 (Comm'r. Pat. Dec. December 16, 2008)).  In any case, the PTO, relying on a certification from FDA that the approval date was Friday, December 15, 2000, refused MDCO's Request, costing the company to lose 4.5 years (about 1773 days) of extension for its U.S. Patent No. 5,196,404 (which nominally expired on March 23, 2010).

MDCO filed a request for reconsideration of this decision, on the grounds that the FDA faxed its letter "after hours" on a Friday, "and that under FDA's practices, facsimiles submitted to FDA after close of business are considered received by the Agency on the next business day" (emphasis added).  Applying this standard, the approval notification date would have been Monday, December 18th, and MDCO's Request would have been timely filed even under an interpretation including the approval date in the 60-day period.  The PTO transmitted the request for reconsideration to FDA (since the dispute involved FDA procedures), which the FDA rejected without comment or support, maintaining that the approval date was Friday, December 15th.

The PTO did not issue a formal denial of MDCO's request, but instead permitted the company to file an amended request for reconsideration and an amended extension application, which were filed on March 13, 2007.  Less than six weeks later, on April 26, 2007, the PTO denied the request, again with no explanation of the inconsistency in the FDA's position on submissions to and notices from the agency.  It was at this time that the Office applied the revised calculation for determining when a PTE Request must be filed, determining in this case that MDCO had filed its Request 2 days late.

MDCO filed a petition for leave to file a second request for reconsideration on the grounds that it had not had an opportunity to address this new interpretation of the deadline date for filing its PTE Request.  In its papers MDCO argued that there was no requirement in the statute that would preclude the Office from adopting its proposed "next business day" rule, and that such an interpretation would "comport with the statute's text and purpose."  While the Office granted leave for filing the second request for reconsideration (based on the "extraordinary situation" occasioned by its change in how days were counted for calculating the filing deadline), it denied the request substantively.  The PTO's position was that the Office did not have the authority under § 156 to adopt the proposed "next business day" rule, at least because there was no basis to distinguish "during business hours" from "after business hours" in the statute, which recites the date (per the PTO, "span[ning] the course of 24 hours").

MDCO brought suit in Judge Hilton's Court, and on March 16, 2010 the judge ordered on remand that the Office reconsider its position on the grounds that "§156(d)(1) was a remedial statute and that it should be liberally construed," and that "the PTO was not bound by statute or case law to reject the business day interpretation of the work date in §156(d)(1)."  Three days later, the Office "without any additional hearings" issued another decision again rejecting the "next business day" interpretation of the statute advanced by MDCO.  The Office went further, holding that the timing provisions of the statute were not remedial in nature, and that the Office was bound by Federal Circuit authority to interpret the word "date" in the statute as the calendar day on the FDA approval letter.  In response, MDCO returned to the District Court under the Administrative Procedures Act, 5 U.S.C. §§ 551-706, arguing that the agency's action was arbitrary and capricious.

The Court began its analysis on the question of what level of deference was owed to the PTO decision, under either Skidmore v. Swift, 323 U.S. 134 (1944), or Chevron U.S.A. Inc. v. National Resource Defense Council, Inc., 467 U.S. 837 (1984), so-called "Chevron deference" being a higher level.  The Court noted that an agency is entitled to Chevron deference generally for its interpretations of law "set forth after notice-and-comment rulemaking or formal adjudication under 5 U.S.C. §§556-557."  Immediately, the Court disqualified the latter grounds for applying Chevron deference to its decision in this case, stating that "[t]he government does not deny that PTE decisions are informal adjudications."  To qualify for Chevron deference regarding the PTE determination, the Court required a "relatively formal administrative procedure," evidence that Congress intended that such decisions be given deferential judicial review, and that the Office itself gives such decisions precedential effect, citing Pesquera Mares Australes Ltda. v. U.S., 266 F.2d 1372 (Fed. Cir. 2001).

The Court found that the circumstances under which the PTO makes PTE determinations (ex parte review, the level of discretion given to the Director to require additional information from applicants, and the absence of formal hearings or administrative review other than requests for reconsideration) are inconsistent with the kinds of "relatively formal process[es] envisioned in Pesquera."  Moreover, the Court cited Federal Circuit precedent that PTO proceedings are not governed by 5 U.S.C. §§ 556-557, citing Brand v. Miller, 487 F.3d 862 (Fed. Cir. 2007).  The Court rejected the PTO's arguments to the contrary; indeed, the Court distinguished the government's citation of Glaxo Operations UK Ld. v. Quigg, 894 F.2d 392 (Fed. Cir. 1990), for the proposition that PTE determinations should be given deference by noting that the Court deferred to the agency's "scientific and technical expertise," but that the Court had "expressly rejected the PTO's claim for deference to its statutory interpretations of PTE proceedings" (expressly, that "we will give . . . little or no deference to the [PTO's] surmise of Congress' intent in framing its definition").  Nor does the Court find that the Office is entitled to Chevron deference under 35 U.S.C. § 2(b)(2), which is limited to procedural rulemaking not statutory interpretation.  The Court also rejected the government's argument that the Office's decision should be given Chevron deference due to consistent application of the calendar day interpretation of the statutory language, in the face of admissions by the Office that it had "never previously considered the choice between calendar day and business day interpretations of §156(d)(1)" (saying that "it cannot claim to give precedential effect to decisions that do not exist"), particularly since the Office is entitled to change its position at any time with no more than a "reasonable explanation" of why it has done so.

The Court then arrived at the heart of the matter:

It is well established that "[d]eviation from [a] court's remand order in . . . subsequent administrative proceedings is itself legal error, subject to reversal on further judicial review."  Sullivan v. Hudson, 490 U.S. 877, 886 (1989).  If an agency is dissatisfied with any part of a district court's order, the remedy is to appeal the case and not, under guise of a hearing, to relitigate a question already finally decided by the district court.  Hooper v. Heckler, 752 F.2d 83, 88 (4th Cir. 1985).  When a case returns to a court for a second time after the court has remanded it with explicit instructions to the agency, the court examines with care the order of the agency to ensure that its earlier decision has been followed.  Guillen-Garcia v. INS, 60 F.3d 340, 344 (7th Cir. 1995).

It is abundantly clear that the Court believed the Office did not comply with this legal standard.  The opinion reviewed its instructions to the Office from its earlier Order, that the statute, being remedial in nature should be given "liberal construction," something that the Office had done in the Synchromed case (In re Patent No. 4,146,029 (Comm'r. Pat. July 12, 1988)).  The Office declined to do so in this case, based on its interpretation that while § 156 may be remedial generally, "the specific timing provision at issue, §156(d)(1), is not."  This decision was in error, according to the Court's opinion, inter alia because "[a]ll of the provisions of a remedial statute . . . should be construed liberally."  "[E]verything is to be done in advancement of the remedy that can be done consistently with any fair construction that can be put upon [the statute]," according to the opinion, citing as an example White v. Cotzhausen, 129 U.S. 329 (1889).  The Court rejected the government's contention that because "Congress did not provide a mechanism for USPTO to prevent the loss of an applicant's patent when the applicant missed a deadline" it was compelled to reject the Court's earlier directive that § 156(d)(1) should be construed liberally.  And the Court further found that "[t]he PTO's failure to acknowledge its prior relevant practices is an independent violation of the Administrative Procedures Act," citing the Synchromed case.  Finally, the Court rejected the government's position that § 156(d)(1) and another part of the statute, § 156(g)(1))B)(ii), must be construed identically, since "[t]he relevant statutory language is different and the provisions serve distinct purposes" (§ 156(d)(1) defines the time for filing the PTE Request, while § 156(g)(1))B)(ii) defines the dates for calculating the time FDA took to review and approve the drug).  The Court discerned a clear distinction between the meaning and purpose of the two portions of the statute, and noted that "the logic that led the FDA to adopt for itself a business day construction [with regard to §156(g)(1))B)(ii)] . . . applies with equal force to the construction of §156(d)(1)."

The Court further took the Office to task for ignoring its earlier instructions:

Even if the PTO were writing on a blank slate without the benefits of the Court's prior opinion, its decision still could not stand.  In numerous respects, the decision violates the APA and advances an interpretation of §156(d)(1) that is unreasonable even under the most deferential standard of review, let alone the more exacting review that applied to the appeal of a remanded order [citing Chamber of Commerce v. SEC, 443 F.3d 890 (D.C. Cir. 2006)].

The Court then addressed the practical consequences of the PTO's asserted interpretation of the rule, to illustrate its unreasonableness.  The Court says that under the Office's interpretation, "the date stamped on the FDA approval letter starts the 60-day period for filing [a PTE Request], even if the FDA never sends the letter, sends it to the wrong address, delays in sending it or sends it by means that would take multiple days to reach the applicant."  (The Court also noted that the Federal Rules of Civil Procedure automatically add three days for a party to act within a specified time after service if service is accomplished by any means other than hand delivery.)  Since the PTO's decision failed to address this issue, "[t]hat failure, by itself, renders the PTO's decision arbitrary and capricious."  The issue is not whether such failures are likely or if there are provisions in place to prevent them, but that "over time mistakes are inevitable . . . .  An interpretation that imposes such drastic consequences when the government errs could not be what Congress intended."

The Court left little to chance in assuring that the Office will understand its Order this time:

The Court finds the proper interpretation of §156(d)(1) is a business day construction of the phrase "beginning on the date."  Of the parties' competing interpretations the business day construction is consistent with the statute's text, structure and purpose.

"[T]he courts are the final authorities on issues of statutory construction" and "must reject administrative constructions of [a] statute . . . that are inconsistent with the statutory mandate or frustrate the policy that Congress sought to implement" [citing Ethicon, Inc. v. Quigg, 849 F.2d 1442 (Fed. Cir. 1988)].

The judge's order was simple:  that the PTO accept MDCO's PTE Request as having been timely filed, and that the Office interpret the meaning of the timing provisions of § 156(d)(1) to include the next business day for notifications received after the close of business.

It remains to be seen whether the Office will challenge this ruling, and if it does not whether it will expedite review of MDCO's PTE Request (and restore the additional term to this expired patent).

Senate Removes Pay-For-Delay Provision from Appropriations Bill

By Donald Zuhn --

Earlier this month, the House of Representatives passed the "2010 Supplemental Appropriations Act" (H.R. 4899) after tacking an additional $22.8 billion onto the Senate version of the bill, which called for $45.5 billion in discretionary funding for FY 2010.  The bill would provide, inter alia, $37.12 billion for U.S. troops in Iraq and Afghanistan, $13 billion in mandatory funding for Vietnam veterans exposed to Agent Orange, $5.1 billion for FEMA disaster relief, $2.9 billion for Haiti, $162 million for the Gulf Coast oil spill, and over $600 million for other domestic needs.  The extra $22.8 billion in spending was not the only thing the House tacked onto the bill, however.  House legislators also inserted a provision that would allow the Federal Trade Commission (FTC) to "initiate a proceeding . . . against the parties to any agreement resolving or settling, on a final or interim basis, a patent infringement claim, in connection with the sale of a drug product," wherein the agreement has "anticompetitive effects" (see "House Slips Pay-For-Delay Provision into Appropriations Bill").

The bill, which was returned to the Senate last week, was cleared for White House approval yesterday, but not before the Senate stripped away the pay-for-delay provision.  Senate Majority Leader Harry Reid (D-NV) moved to adopt the House amendments to the bill, but the Senate disagreed to the House amendments by unanimous consent, after which the bill was returned to the House where that body voted 308-114 to accept the Senate's earlier version of the bill.

Before the Senate had a chance to remove the pay-for-delay provision, the Generic Pharmaceutical Association (GPhA) released a statement saying that the organization was "extremely disappointed that the U.S. House of Representatives adopted language in the War Funding Bill (H.R. 4899) that will delay consumer access to affordable medicines by severely restricting drug patent litigation settlements" (see "House Slips Pay-For-Delay Provision into Appropriations Bill").  The Pharmaceutical Research and Manufacturers of America (PhRMA) provided its own statement days before the House passed its amended version of the appropriations bill.  The trade group, which represents pharmaceutical research and biotechnology companies, said that it "continues to believe that legislation that would impose a blanket ban on certain types of patent settlements or otherwise prevent them could decrease the value of patents and reduce incentives for future innovation of new medicines," and further, that pay-for-delay (or reverse payment) legislation would "discourage pro-consumer settlements that often bring generics to market years before patent expiration."  The PhRMA release concludes by stating that "each settlement between a brand and generic should be judged on its own merit, taking all the facts into account, and the FTC, Department of Justice and the courts are well-equipped to evaluate individual settlements and determine whether they will help or hurt consumers."

The Intellectual Property Owners Association (IPO) reported on Tuesday that it sent a letter to Senate leadership last week (the day before the Senate removed the pay-for-delay provision) noting its strong opposition to the pay-for-delay provision.  In its letter, the IPO argued that "[t]he businesses and valuable patent rights owned by all IPO members, particularly members from the pharmaceutical industry, would be significantly impacted by this amendment if it becomes law."  The group also contends that "the amendment would upset the careful balance of the Hatch-Waxman Act, which provides an expedited approval pathway for generic pharmaceutical manufacturers without undermining the innovator pharmaceutical developer's incentives to continue investment and development for life-saving and life- altering medicines."  The IPO explains that:

The amendment undermines pharmaceutical patents by imposing a presumption that any settlement involving a payment to the generic applicant is to protect an undeserved patent.  This is a false rationale because it disregards the presumption of validity that accompanies a patent issued by the U.S. Patent and Trademark Office and ignores the unequal economic situation of the innovator company and the generic applicant. In typical patent litigations, a competing product is already out on the market, and damages can be more easily determined.  In such cases, when entering into a settlement, a patent holder commonly induces the competitor with something of value, either to reduce or waive damages.  In contrast, under Hatch-Waxman, the patent holder may not yet have the right to recover any damages, so the only thing of value it can offer a generic company may be cash or other assets.  In a Hatch- Waxman case, the innovator company often has significant business at risk, including manufacturing plants, sales and marketing employees, and the need to use current revenue to carry out expensive clinical trials on the next generation of innovative medicines.  By contrast, the generic company has nothing at risk other than the legal fees it pays in order to challenge the patent early.  The Hatch-Waxman Act itself contains no restrictions on settlement of the patent litigation it engenders, permitting the parties to arrive at settlements that make business sense, subject to the limits of the patent at issue in the litigation.

The group asserts that "the courts should be trusted to protect competition against the improper expansion of a patentee's lawful monopoly as a result of a settlement by applying existing antitrust case law to the specific facts relating to a challenged settlement."

It is unlikely that the Senate's removal of the pay-for-delay provision from H.R. 4899 marks the end of this debate -- particularly in view of the President's past support for such legislation (see "President's Health Care Plan Includes Pay-for-Delay Ban and Biosimilar Regulatory Pathway") and prior attempts to secure passage of standalone bills (see "Bill to Prohibit Reverse Payments Introduced in the Senate" and "Senate and House Introduce Bills Prohibiting Authorized Generics").  While the industry now awaits the next legislative attack on pay-for-delay agreements, recent statements by the GPhA, PhRMA, and IPO indicate that it will not wait silently.

House Slips Pay-For-Delay Provision into Appropriations Bill

    By Donald Zuhn --

Ordinarily, the passage of a supplemental appropriations bill would likely go unnoticed by those in the pharmaceutical industry.  Last week, however, the House of Representatives passed the "2010 Supplemental Appropriations Act" (H.R. 4899) after inserting a provision (among a host of other provisions) that would allow the Federal Trade Commission (FTC) to "initiate a proceeding . . . against the parties to any agreement resolving or settling, on a final or interim basis, a patent infringement claim, in connection with the sale of a drug product," wherein the agreement has "anticompetitive effects."  The pay-for-delay or reverse payment provision, entitled the "Preserve Access to Affordable Generics Act," also provides a number of factors to be considered when determining whether an agreement has anticompetitive effects.

The full text of the House amendment to the appropriations bill has been made available on the House Committee for Appropriations website.  According to an Intellectual Property Organization Association (IPO) report, the House pay-for-delay provision is "almost identical" to the standalone "Preserve Access to Affordable Generics Act" (S.369) introduced by Sen. Herb Kohl (D-WI) in February of 2009 (see "Bill to Prohibit Reverse Payments Introduced in the Senate").  The Senate bill states that "settlements which include a payment from a brand name manufacturer to a generic manufacturer to delay entry by generic drugs are anti-competitive and contrary to the interests of consumers," and therefore, was intended "to prohibit payments from brand name to generic drug manufacturers with the purpose to prevent or delay the entry of competition from generic drugs."

In a press release issued by the House Committee on Appropriations, the Committee noted that the House amendment would add an extra $22.8 billion to the Senate appropriations bill, which would provide a total of $45.5 billion in discretionary funding for FY 2010.  According to the Committee's release, the Senate's $45.5 billion would include $37.12 billion for U.S. troops in Iraq and Afghanistan, $5.1 billion for FEMA disaster relief, $2.9 billion for Haiti, $162 million for the Gulf Coast oil spill, $13 billion in mandatory funding for Vietnam veterans exposed to Agent Orange, and over $600 million for other domestic needs.  The $22.8 billion provided by the House amendment would provide $10 billion for an Education Jobs Fund to help save 140,000 education jobs for the next school year, funding for Pell Grants, summer youth jobs, the Pigford and Cobell settlements, border security, innovative technology energy loans, schools on military installations, additional Gulf Coast oil spill funding, emergency food assistance, a new soldier processing center at Fort Hood, and program integrity investments.  The House amendment also calls for $23.5 billion in offsets to hold spending over the next ten years to the level requested by President Obama.

The House Committee on Appropriations also provides a summary of the House amendment on its website.  Among the "Other Provisions" slipped into the bill via the House amendment is the Preserving Access to Affordable Generic Drugs provision, which the Committee contends will:

[S]trengthen the Federal Trade Commission's ability to restrict lucrative "pay for delay" payments by brand-name drug manufacturers to their generic competitors to delay the manufacture and marketing of more affordable generic drugs to consumers.  In 2009, an FTC study found that a ban on these lucrative sweetheart drug industry deals would save American consumers $35 billion over 10 years.  CBO estimates that with the provision in this bill, the federal government will save more than $2.4 billion over 10 years in lower drug costs for Medicare, Medicaid, military and veterans' health programs.

The IPO noted in its report on the House appropriations amendment that the organization opposes legislation banning pay-for-delay agreements because "existing antitrust case law is sufficient to protect competition against the improper expansion of a patent owner's right to exclude as a result of a settlement."  A recent Patent Docs series on pay-for-delay agreements reaches a similar conclusion (see "Reverse Payments in Generic Drug Settlements" - Part I, Part II, Part III, Part IV).  The IPO also notes in its report that the Senate is likely to take up the appropriations bill, with the House amendment, after returning from its July 4th recess on July 12.

On Friday, the Generic Pharmaceutical Association (GPhA) released a statement saying that the organization was "extremely disappointed that the U.S. House of Representatives adopted language in the War Funding Bill (H.R. 4899) that will delay consumer access to affordable medicines by severely restricting drug patent litigation settlements."  Noting that "[m]ore than a decade of evidence shows that patent settlements actually help bring lower-cost generic drugs to market much sooner than patent expiration dates," the GPhA declared that "add[ing] a drug patent settlement restriction to the must-pass War Funding Bill is a clear display of politics over policy."  The group warned that "[t]he unintended consequence of these restrictions on settlements will significantly harm the millions of Americans who rely on generic drugs and are awaiting the availability of new generics," and urged the Senate to remove the provision and instead give it the "serious, thoughtful consideration" it deserves.

An Uneven Debate on "Takings" in Pharmaceutical Patent Law

    By Kevin E. Noonan --

Our opinions are always (perhaps inevitably) informed by our experience.  And when our experience is limited, particularly when those limitations are coupled with passion, those limitations equally inform our opinions.

These realities come to mind when reviewing a letter from two medical students in the journal Science in response to an article by Sherry Knowles regarding patent law and the pharmaceutical industry.  In a "Policy Forum" article in Science entitled "Fixing the Legal Framework for Pharmaceutical Research," Ms. Knowles (at right) discussed two aspects of such "takings" regarding branded drugs as a consequence of changes in patent law (see "'Takings' by Congress and the Courts").  Ms. Knowles, who until recently was Chief Patent Counsel at GlaxoSmithKline, set out legal arguments why changes in patent law occasioned by several Supreme Court and Federal Circuit cases (including KSR International Co. v. Teleflex, Inc., In re Bilksi, and Ariad Pharmaceuticals, Inc. v. Eli Lilly and Co.), as well as the (perhaps unforeseen and unintended) effects of the Hatch-Waxman generic drug regime could constitute a "taking" of property that could raise constitutional liability under the Takings Clause of the Fifth Amendment to the U.S. Constitution.  Specifically, Ms. Knowles questioned the legal effects and consequences of such government action regarding the investment drug companies:

An issued patent is property just like a piece of land or a house (citing Consolidated Fruit-Jar Co. v. Wright, 84 U.S. 92, 96 (1872) and Patlex Corp. v. Mossinghoff, 758 F.2d 594, 599 (Fed. Cir. 1985)).  When a federal judicial decision dramatically changes the law, such that a valid patent becomes invalid, has the federal government taken private property in violation of the federal Constitution?  Application of the Fifth Amendment is not clearly limited to legislative and executive action; nothing in its text bars extension of the takings clause to judicial action.

Her prescription to "justly compensate" private companies for the takings effects of judicial decisions and the Hatch-Waxman Act was to increase the term of data exclusivity under Hatch-Waxman from 5 to 14 years, and to give appellate courts discretion to have a decision have prospective effect only, should it overrule prior interpretation of patent law.  She professed the belief that these changes would "substantially increase the number of drugs in the R&D pipeline, which would greatly benefit patients and ultimately benefit generic drug companies."

Two medical students, Laura M. Musselwhite and Jane Andrews take issue with these arguments.  (It should be noted that while Ms. Knowles' article was directed towards the beneficial effects of the changes she proposed, it was basically a legal argument, and there is no evidence that either medical student has any legal experience.)  In a June 11th letter to Science entitled "Protect Pharmaceutical Innovation" (access requires an AAAS subscription), the students argue that the changes Ms. Knowles proposes "would likely narrow the drug development pipeline and certainly increase drug prices."  Their argument is based on a 2001 Public Citizen report that the cost of new drug development is not $1.2 billion (in 2008) but about one seventh of that figure.  Without questioning the validity of the Public Citizen analysis, it is almost ten years out of date and contrary to every other estimate of drug development costs, across the political spectrum public and private.  They also cite a Kaiser Family Foundation study that pharmaceutical companies have "garnered three times the profits of the average Fortune 500 company," one of those statistical arguments that are of little value without context:  without knowing the range of profitability, it is hard to know whether that difference is significant.  They also repeat the naïve statement that "governments and non-profits already fund the majority of health R&D that generates [drug discovery]."  Governments and non-profits support basic research (as they should); drug discovery is overwhelmingly done by pharmaceutical and biotech companies, and these efforts depend on investment orders of magnitude greater than the monies spent by governments.  (It is perhaps not surprising that students who have spent their lives in academia would think that every innovation begins there.)

They also cite the benefits of generic drugs facilitated by the Hatch-Waxman regime since 1984, correctly citing statistics showing the percentage of prescribed drugs that are generic and the reduced prices charged for them.  However, their statement that "Hatch-Waxman has been preserving the precarious balance between public welfare and industry incentive for drug innovation by providing affordable medicine" is a sentiment (or maybe a belief) unsupported by evidence cited or otherwise (perhaps they thought it was self-evident).

They end their letter by calling for a Congressional ban on reverse payments (which they call "unethical"), which they say would "deincentivize compensatory agreements" and "refocus brand name companies on constructing novel therapies that may address presently unmet medical needs."  Lofty sentiments untethered to reality:  first, because several appellate courts have determined that reverse payment agreements can be procompetitive and permit generic drugs to enter the marketplace faster than they would otherwise (see "Reverse Payments in Generic Drug Settlements" -- Part I, Part II, Part III, and Part IV).  Second, the existence of reverse payment agreements is irrelevant to development of new drugs except in ways exactly opposite to the students' argument:  reverse payments permit pharmaceutical companies to obtain additional revenues to pay for drug development

In her response (also published in the June 11th issue of Science), Ms. Knowles, now a private consultant, cites several studies contradicting the assertions in the medical students' letter.  These include a National Academies study that recommends an increase in the exclusivity period (from 5 years to 12-14 years) under the Hatch-Waxman Act, based on more recent assessments of "the complexity and length of drug development today" and a Congressional Budget Office study showing that the number of new molecular entities by innovator drug companies "spiked in the mid- to late 1990's and have been decreasing since 2000."She points out that the Public Citizen study was not peer-reviewed and would predict outcomes not reported in any study of the pharmaceutical industry, and notes analytical deficiencies in the Kaiser Family Foundation study.  She also cites economic statistics that contradict the Kaiser study, including that "the share prices of many of the largest global pharmaceutical companies have declined dramatically" since 2000, some by as much as 60%, and attributes much of this decline to the effects of generic competition on investment in new drugs.  She rebuts the argument that governments and non-profits fund "the majority of research" on drug development with another CBO study.  Finally, with regard to reverse payment agreements, she cites the facts:  that since 2004 every settlement agreement must be filed with the Federal Trade Commission, and that of the 152 settlements only a "very small number" of these have been challenged by the FTC (and that the government has lost more of these challenges than it has won).

It is understandable why these students have the beliefs they profess in their letter:  Ms. Andrews is a member of the 2009-2010 Coordinating Committee of Universities United for Essential Medicines, has an undergraduate degree in political science, and received a Fulbright grant for research in Tanzania on barriers to rural antiretroviral access.  Ms. Musselwhite, another UUEM member, has similar views as espoused in the Winston-Salem Journal as a Guest Columnist:

Earlier this year, as a medical student at Duke University, I saw a patient with Crohn's disease, an inflammatory intestinal disease associated with substantial disability and mortality that affects more than 500,000 individuals nationwide.  This patient required hospitalization for a flare that she attributed to not being able to afford the month's Humira, a biologic medicine used to treat severe, active Crohn's disease.

The drug is priced by Abbott Laboratories at a staggering $22,000 a year.  This patient would clearly have benefited from the availability of an affordable, generic version.

This is their experience, seeing firsthand the consequences of the dysfunctional U.S. medical system that lets private insurance companies rather than doctors determine who gets care and how much they can afford.  This experience is not the same as understanding how such medicines actually get developed, the subject of Ms. Knowles' piece.  It is unfortunate that the politics of medical care provides an incentive for individuals providing care to oppose individuals providing the new drugs that improve our ability to treat and cure patients (which should be the goal for all of us).  But acting on the incentive to demonize biotech and pharmaceutical companies is self-defeating.  Generic drug companies, for all their benefits, do not invest the time and resources to produce any new drugs; without innovator biotechnology and pharmaceutical companies, generic drug makers would have nothing to copy or sell.  It would be well for the medical students and others on their side of the debate to consider where novel therapies will come from without companies with experience in obtaining (and financing) regulatory approval of such drugs, protecting them with patents, and having the business resources to bring such drugs to market.  It is certainly the case that these companies are for-profit (it's capitalism, after all), but the costs of R&D and regulatory approval, as well as scale-up, production, and distribution are realities that cannot be ignored.  That is where experience, specific experience with drug development, is invaluable.  Frankly, it is precisely this experience that the medical students lack.

Wyeth Holdings Corp. v. Sebelius (Fed. Cir. 2010)

    By Andrew Williams --

Last month, in addition to Photocure ASA v. Kappos and Ortho-McNeil Pharmaceutical, Inc. v. Lupin Pharmaceuticals, Inc., the Federal Circuit completed the hat trick of patent term extension cases with Wyeth Holdings Corp. v. Sebelius.  In this case, the Court affirmed the statutory construction decision of the U.S. District Court for the District of Columbia regarding when the testing phase ends and the approval phase begins for particular New Animal Drug Applications (NADA).

For those not completely familiar with the patent term extension scheme, despite the rash of PTE cases at the Federal Circuit, 35 U.S.C. § 156 provides that a patent holder can obtain an extension of patent term due to the potentially lengthy regulatory process that is equal to one half of the "testing phase" and the entire "approval phase."  35 U.S.C. § 156(c).  This extension is limited to five years, however.  35 U.S.C. § 156(g)(6)(A).  The present case involved an application for a new animal drug (as opposed to a drug for use in humans).  Normally, for animal drugs, the "testing phase" begins when the sponsor submits to the FDA an Investigational New Animal Drug ("INAD"), and the "approval phase" begins when a New Animal Drug Application ("NADA") is filed with the FDA.  However, the FDA introduced a "phased review" program available only for animal drugs.  In phased review, the sponsor can submit various technical sections before submitting the entire NADA.  After the FDA completes review of each of these sections, it sends a "complete letter" to the sponsor.  All of the complete letters can be combined with some additional administrative information in what is termed an "administrative NADA."  The goal of phased review is to create a stream-lined process and speed the drug development process.  Moreover, a sponsor is able to switch to the traditional NADA at any point during the process and still incorporate by reference any of the complete letters received.  And, similar to the traditional NADA application, the FDA marks the beginning of the approval phase as the date the sponsor submits the administrative NADA.

Wyeth sought FDA approval to market Cydectin for the treatment and control of internal and external parasites in beef and dairy cattle.  Wyeth opted to use the phased review procedure, and after it filed its administrative NADA, the FDA approved the Cydectin 16 days later.  Wyeth then sought patent term extension of U.S. Patent No. 4,916,154.  However, Wyeth believed that the approval phase should begin on the date that the first technical section was submitted, not the date that the administrative NADA was filed.  Wyeth asserted that this was the point at which agency review could be commenced.  The FDA maintained its position that the approval phase does not commence until the marketing application was complete, including all technical sections and the complete letters.  Because it did not receive the full term that it thought it deserved, Wyeth filed a complaint in the district court.  However, the District Court entered judgment in favor of the FDA.

This case involved statutory interpretation, and therefore Chevron U.S.A. Inc. v. Natural Res. Def. Council, Inc. provides the requisite framework.  Congress had provided for patent term extensions in 35 U.S.C. § 156, but because the FDA created a stream-lined system outside of this framework, the Federal Circuit needed to determine if it fit within the Congressionally mandated scheme.  As a review of Administrative Law, the first step in a Chevron analysis is to determine if Congress directly spoke to the precise question at issue.  The statutory provision in question is:

35 U.S.C. §156 (c) The term of a patent eligible for extension under subsection (a) shall be extended by the time equal to the regulatory review period for the approved product which period occurs after the date the patent is issued, except that-
    (1) each period of the regulatory review period shall be reduced by any period determined under subsection (d)(2)(B) during which the applicant for the patent extension did not act with due diligence during such period of the regulatory review period;
    (2) after any reduction required by paragraph (1), the period of extension shall include only one-half of the time remaining in the periods described in paragraphs (1)(B)(i), (2)(B)(i), (3)(B)(i), (4)(B)(i), and (5)(B)(i) of subsection (g);

***
        (g) For purposes of this section, the term "regulatory review period" has the following meanings:

***
    (4) (A) In the case of a product which is a new animal drug, the term means the period described in subparagraph (B) to which the limitation described in paragraph (6) applies.
    (B) The regulatory review period for a new animal drug product is the sum of -
        (i) the period beginning on the earlier of the date a major health or environmental effects test on the drug was initiated or the date an exemption under subsection (j) of section 512 became effective for the approved new animal drug product and ending on the date an application was initially submitted for such animal drug product under section 512 and ending on the date such application was approved under such section

(emphasis added).  The issue was whether Congress intended "initially submitted" to apply to the administrative NADA or the individual technical sections.  The District Court found, and the Federal Circuit agreed, that Congress did not define "application," nor did it define "initially submitted."  Therefore, for the purposes of the administrative NADA, Congress was ambiguous as to the interpretation of 35 U.S.C. § 156(g).

The second step in a Chevron analysis is to determine whether the agency's interpretation is based on a permissible construction.  In its analysis, the Federal Circuit provided an Administrative Law lesson by explaining that it does not matter whether Wyeth's construction is reasonable -- the only relevant consideration is the FDA's interpretation.  And the Court found that the FDA's interpretation was, indeed, permissible.  Section 156(g) did not define "application."  The FDA's interpretation tracked the requirements of 21 U.S.C. § 360b(b) -- the section of the statute that provides the requirements for a new animal drug application, such as information on drug safety, efficacy, and manufacturing.  As the administrative NADA is the first document to contain all of these parts, it is reasonable to interpret this date as the "initially submitted" date.  Besides, the Federal Circuit noted that this was a trade-off for a more fluid review process, and in so doing, rejected Wyeth's assertion that the new FDA process upset the balance established between the interests of the pioneer and generic drug manufacturers.

Wyeth also argued that the FDA was acting in an arbitrary and capricious manner because the implementation of the phased review program was inconsistent with the "fast track" program available for human drugs.  However, the Federal Circuit pointed out that the two programs differed in many respects.  Nevertheless, for a fast track application, the approval phase does not begin until the sponsor submits all of the required information.  As a result, the Court found no inconsistencies between these two programs.

Wyeth Holdings Corp. v. Sebelius (Fed. Cir. 2010)
Panel:  Circuit Judges Bryson and Moore and Chief District Judge Folsom
Opinion by Circuit Judge Moore

In re Ciprofloxacin Antitrust Litigation (2d Cir. 2010)

    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.

Novo Nordisk A/S v. Caraco Pharmaceutical Laboratories, Ltd. (Fed. Cir. 2010)

    By Kevin E. Noonan --

On April 14th, the Federal Circuit rendered a decision construing statutory language in a rather straightforward and unremarkable (albeit not unanimous) opinion.  But the statutory language at issue involved the 2003 Medicare Prescription Drug Improvement and Modernization Act, which amended the 1984 Drug Price Competition and Patent Term Restoration Act (colloquially known as the Hatch-Waxman Act), thus raising the opinion's significance.

The statutory provisions at issue involve the requirements for listing patents claiming drug products or their uses in the Orange Book.  The statute requires an innovator and approved New Drug Application (NDA) holder to identify these patents by patent number and expiration date.  For patents claiming uses (more properly, methods of use) of a regulated drug, the FDA proscribes "use codes" which are published in the Orange Book as well.

For a use not covered by an Orange Book listed patent, a generic drug manufacturer who files an Abbreviated New Drug Application (ANDA) must submit a proposed label for the unpatented use as well as a statement under 21 U.S.C. § 355(j)(2)(A)(viii) (a "Section viii" statement) that the use does not infringe any listed patent.  Approval of the ANDA requires that the proposed label does not overlap with any patented method (a "carve-out").

As part of the litigation provisions of the Hatch-Waxman Act, an ANDA filer can file a counterclaim in ANDA litigation that challenges the accuracy of the patent information submitted by the innovator, on two grounds -- either that the patent doesn't claim the approved drug or an approved method for using the drug (which is defined by the use codes and the innovator drug label).  This part of the law was enacted as part of the MMA amendments, in response to a Federal Circuit decision as discussed in the opinion and below, and is codified as 21 U.S.C. § 355(j)(5)(c)(ii)(I):

[The ANDA] applicant may assert a counterclaim seeking an order requiring the holder to correct or delete the patent information submitted by the holder under subsection (b) or (c) of this section on the ground that the patent does not claim either--
    (aa) the drug for which the application was approved; or
    (bb) an approved method of using the drug.

The case involves Novo Nordisk's repaglinide drug product marketed as PRANDIN®.  Novo listed two patents in the Orange Book associated with this drug:  Reissue Patent No. RE37,035, which claims repaglinide drug product itself; this patent expired March 14, 2009.  The other patent, U.S. Patent No. 6,677,358, claims the method of using repaglinide in combination with metformin; this patent expires June 12, 2018.  There are two other approved uses for PRANDIN®:  as monotherapy and in combination with thiazolidinediones (TZD's); neither of these indications is claimed in any Orange Book listed patent.  All indications are for treating Type 2 (adult-onset) diabetes.

Caraco filed an ANDA for generic repaglinide having a Paragraph III certification regarding the '035 patent and a Paragraph IV certification for the '358 patent, the latter leading to ANDA litigation pursuant to 35 U.S.C. § 271(e)(2).  During the litigation, Caraco stipulated in that action that its ANDA would infringe the '358 patent if it included a label describing the combination of repaglinide and metformin, and at the same time submitting an amended ANDA with a Paragraph IV certification and a Section viii statement that its ANDA would not seek approval for the repaglinide + metformin combination.  The "carve-out" label was acceptable to FDA.

However, at that time the FDA changed the use code associated with Novo's PRANDIN® product.  The original use code, U-546, specified the combination of repaglinide + metformin to lower blood glucose.  The FDA changed this use code to U-968, for a method for improving glycemic control in adults with Type 2 diabetes."  This use code was not limited to the specific repaglinide + metformin combination, and indeed was not expressly limited to Novo's drug (i.e., it could encompass metformin monotherapy).  (There was some dispute between the majority and the concurring opinion, the concurrence asserting that the FDA changed the use code sua sponte which was not asserted in the majority opinion.)

This change in the use code caused the FDA to reject Caraco's Section viii certification and "carve-out" label, requiring Caraco to include the rapaglinide + metformin combination on its label.  Since Caraco stipulated that this combination was an infringement, the FDA's decision essentially mandated judgment for Novo absent a finding at trial of invalidity or unenforceability.

In response to the FDA's determination, Caraco counterclaimed for an injunction to return the use code to U-546.  The District Court granted summary judgment on this issue, granting Caraco the requested injunction.  Specifically, the Court's injunction ordered Novo to request the FDA to change the use code in the Orange Book for Prandin® from U-968 to its former U-546 listing.

The Federal Circuit granted Novo an expedited appeal and briefing schedule, and stayed the injunction pending the appeal.  In its opinion, by Judge Rader joined by Judge Clevenger (with concurring opinions by Judge Clevenger and a dissenting opinion by Judge Dyk), the CAFC held that the statute contained no provisions permitting an ANDA defendant to request or a district court to grant such an injunction, reversing the decision and vacating the injunction.

The Federal Circuit characterizes the question as whether the statutory language of "an approved method" means "any approved method" (Novo) or "all approved methods" (Caraco).  Novo contended that reciting one of the patented uses was sufficient to preclude the statutory counterclaim, while Caraco contended that reciting any unpatented use permits an ANDA defendant to assert the counterclaim.

In finding for Novo, the Court found "no ambiguity" in the language of the statute:

When an indefinite article is preceded and qualified by a negative, standard grammar generally provides that "a" means "any."  See, e.g., American Heritage Dictionary of the English Language 1 (4th Ed. 2006).

The Court also says Caraco improperly focuses on its proposed uses:

[T]he statutory language "an approved method of using the drug" refers to the approved methods of using the listed drug, PRANDIN.  This language cannot refer to the methods of using Caraco's generic drug, because the FDA has not yet approved Caraco's ANDA.

Thus, the Court concluded that Caraco can assert its counterclaim only if no patent listed in the Orange Book claims "any approved methods of using the listed drug."  That was not the case here.

The opinion also references the legislative history "to make sure that it does not contain any clear intent to the contrary."  It did not:  the Court says that the counterclaim provisions of the statute addressed the Court's own interpretation of the Hatch-Waxman Act to be devoid of a "private cause of action to delist an allegedly irrelevant patent from the Orange Book."  See Mylan Pharms. Inc. v. Thompson, 268 F.3d 1323 (Fed. Cir. 2001).  This intent was ascertained by the panel due to the use in the statute of "exact language" from the Mylan decision, the Court concluding that "[t]his choice of legislative language suggests that the 2003 Amendment sought to correct the specific issue raised in Mylan, i.e., to deter pioneering manufacturers from listing patents that were not related at all to the patented product or method."  Accordingly, the opinion found this legislative history to be consistent with its interpretation that "an approved method" means "any approved method," because this interpretation "bears a direct relation to the purpose of Orange Book listings."

The opinion also asserts that, under its interpretation, the combination of a Section viii certification and ANDA litigation will "ensure that a generic drug [approved] for non-patented purposes will not be used for patented purposes via a simple section viii certification."   This is consistent , the court contends, with the Hatch-Waxman Act's purpose of striking "a balance [between] the pioneering and generic manufacturers' interests."

Finally, the Court held that the statute has no provisions permitting a generic drug maker to obtain an order from a court, like the injunction here, to compel a patent holder to change or modify its use code.  The plain language of the statute authorizes the generic drug maker to "request an order compelling the 'holder to correct or delete the patent information submitted by the holder'."  (The Court notes that "the patent information" under the statute is "the patent number and the expiration date.") (emphases in original).  Put simply, "the patent information" does not include the use code narrative according to the plain language of the statute, and thus does not grant an ANDA challenger to obtain the injunction granted by the district court below.

This analysis is complicated by an FDA requirement, promulgated before passage of the amendments in 2003, that "a pioneering manufacturer . . . submit not only the patent number and the expiration date, but also the use code narratives and other patent-related information" on specific FDA forms.  The panel refused to conclude that the regulation "change[d] the ordinary meaning of the statutory use of the term 'patent information,'" citing the Court's opinion in Wyeth v. Kappos that clear statutory meaning trumps any agency regulatory interpretation.  And the Court reminds us all that "no deference is due to agency interpretations at odds with the plain language of the statute itself," citing Pub. Employees Ret. Sys. v. Betts, 492 U.S. 158, 171 (1989).  Here, the legislative intent sheds no light on any relevance of the agency provisions to the plain meaning discerned by the panel.

Judge Clevenger concurred with the Court's judgment, but in his view Novo merely reacted to a request by the FDA, and changed its use code narrative to match the new FDA use code.  "FDA, acting independently, gummed up the works," according to the judge.

Judge Dyk (at left) dissented, believing that the construction is contrary to the "manifest purpose" of the statute, allowing "the same manipulative practices" the statute was passed to prevent, i.e., "delay[ing] the onset of competition from generic drug manufacturers."  The dissent has a thorough explication of the Hatch-Waxman act and the 2003 Amendments, particularly with regard to what Judge Dyk characterizes as efforts by NDA filers to "block generic competition by making unwarranted claims to patent coverage, for example, by listing in the Orange Book a patent for a drug or method of use when in fact the patent was clearly inapplicable."

Since the FDA "repeatedly declined to police Orange Book listings," and the Federal Circuit refused to let ANDA filers use declaratory judgment jurisdiction to do so (Mylan Pharms Inc. v. Thompson), Congress intervened by passing the 2003 amendments, including the Section viii certification provisions thereof.

Judge Dyk disagrees with majority on construing the term "patent information" to be limited to patent number and expiration date.  According to Judge Dyk, this information is not required "in the abstract"; "the statute on its face contemplates that the scope of the patent must be accurately described and that the patent must be related to the drug or method of use for which the NDA application is submitted."

In context, the statute "contemplates the description of the scope of the patent and of the relationship between the patent and the drug or the method of use; the description of that scope and relationship is itself 'patent information.'"

At least one source of the majority's error, in Judge Dyk's view, is their erroneous understanding of the Orange Book:

[T]he majority's description of the Orange Book likely bears no relationship to the actual document.  The Orange Book is not a list of patents from which a particular patent could be excised.  The Orange Book is a list of NDAs that associates particular patents with approved drugs or methods of use.  Correction of an Orange Book listing does not strike a patent from a list, it strikes (or corrects) the listing that associates the patent with a particular NDA, approved drug, or method of use.

Judge Dyk also disagreed with the majority's treatment of the FDA's regulations promulgated six months before enactment of the 2003 Amendments, stating that "Congress was well aware of this regulatory interpretation of 'patent information' when it enacted the counterclaim provision," and citing portions of the legislative history illustrating this awareness (e.g., Senator Schumer's statement that "[t]he bill provides a critical complement to the work the FDA has done in clarifying its regulations on patent listing, but it goes much further."  Legislative and Regulatory Responses to the FTC Study on Barriers to Entry in the Pharmaceutical Marketplace: Hearing Before the S. Comm. on the Judiciary, 108th Cong. 19 (2003)).  Judge Dyk believes that under circumstances where "Congress was specifically aware of the agency's interpretation of a statutory term at the time the statute was enacted, this is compelling evidence of legislative adoption of the agency's interpretation," citing Supreme Court precedent to this effect (including United States v. Bd. of Comm'rs of Sheffield, Ala., 435 U.S. 110, 131-35 (1978); Cammarano v. United States, 358 U.S. 498, 510 (1959); and Hartley v. Comm'r, 295 U.S. 216, 220 (1935)).

Judge Dyk also rejected the majority's interpretation of the term "any" in the statute, citing (ironically in view of his Merck v. Integra decision) Justice Scalia's admonition that, in construing a statute, '[u]ltimately context determines meaning,'" citing Johnson v. United States, No. 08-6925, slip op. at 5 (U.S. Mar. 2, 2010).  He illustrates this objection with the following hypothetical:

Under the majority's view, no correction of erroneous Orange Book information is permitted so long as the patent covered any approved method of use covered by the NDA.  The patent can be listed in the Orange Book as erroneously covering approved use A, despite the fact that the patent actually covers approved use B, and the counterclaim provision provides no mechanism for correction.  This cannot be what Congress intended.

Judge Dyk's dissent adds more confusion to the history of the change in use code for PRANDIN®; consistent with his view that NDA holders attempt to manipulate FDA rules to maximize the time generic drug manufacturers are kept off the market, in his description of the underlying facts Novo asked the FDA for the change in use codes, and Caraco submitted its "carve-out" labeling proposal at FDA's behest.  According to Judge Dyk:

Here, the patentee did exactly what was expressly forbidden.  For the proposed use code description submitted on the FDA Form 3542, Novo submitted the following:  "A method for improving glycemic control in adults with type 2 diabetes mellitus."  J.A. 673.  It thus utilized that portion of PRANDIN's label that refers to the use of repaglinide standing alone to treat diabetes (an unpatented use), not to the use of repaglinide together with metformin (a patented use).  There is no justification for using a portion of the label referring to an unpatented use to describe a patented use.

The manipulative nature of Novo's actions is confirmed not only by the lack of justification for the change, but also by the timing of the change (two years after the labeling change was initiated by the FDA and immediately after the FDA approved Caraco's section viii carve-out), and by its own admission that preventing approval of Caraco's ANDA was part of the motivation for changing the use code.  At oral argument, Novo conceded that the decision to change the use code was in part "a response to the section viii ruling . . . in December '08 from FDA."  Oral Arg. at 3:43-4:03.

"In summary, the majority's crabbed view of the statute sanctions an unjustified manipulation of the Orange Book," according to Judge Dyk.  Perhaps hoping to provoke Supreme Court review, in the final portion of the dissent, Judge Dyk characterizes as "notably inconsistent" the majority's view and the views of the D.C. Circuit court regarding what constituted whether the counterclaim is available under these circumstances.

Novo Nordisk A/S v. Caraco Pharmaceutical Laboratories, Ltd. (Fed. Cir. 2010)
Panel:  Circuit Judges Rader, Clevenger, and Dyk
Opinion for the court by Circuit Judge Rader; concurring opinion by Circuit Judge Clevenger; dissenting opinion by Circuit Judge Dyk

"Takings" by Congress and the Courts

    By Kevin E. Noonan --

In a recent article in the journal Science, Sherry Knowles, the Chief Patent Counsel at GlaxoSmithKline, raises several interesting questions regarding the concept of "takings" of property in the patent context.  In a "Policy Forum" article entitled "Fixing the Legal Framework for Pharmaceutical Research," Ms. Knowles (at right) tackles two aspects of such takings regarding branded drugs.  First, she reviews the provisions of the Hatch-Waxman Act that permit a generic drug maker to use an innovator company's safety and efficacy data to support an Abbreviated New Drug Application (ANDA) (calling these provisions of Hatch-Waxman the "forced data-sharing requirement").  Second, she reviews the effects of several Supreme Court and Federal Circuit cases (including KSR International Co. v. Teleflex, Inc., In re Bilksi, and Ariad Pharmaceuticals, Inc. v. Eli Lilly and Co.) on the validity of patents and the consequences of the retroactive application of these rulings on issued patents.  In each case, Ms. Knowles suggests, companies that have invested substantial sums in developing innovative drugs should be entitled to recompense from the government when their data or their patent protection is taken.

With regard to Hatch-Waxman, Ms. Knowles cites the increased costs of bringing a new drug to market today (approximately $1.2 billion) and in the early 1980's (approximately $230 million), the time when Hatch-Waxman was enacted.  She also sets forth the differences in timeframe that innovators and generic drug manufacturers are burdened with.  For the innovator, this involves "10-15 years of pre-approval R&D after a patent application is filed."  In return, an innovator can recoup up to five years of additional patent protection, capped at 14 years after drug approval.  The generic drug maker is constrained by a much shorter period:  an ANDA filer is prohibited from using an innovator's safety and efficacy data for 5 years after drug approval.  Ms. Knowles characterizes this period as a "political compromise" arrived at during negotiations over the Hatch-Waxman Act, but one that was "without substantial supporting economic analysis."  "This period is vastly inadequate today," she says, "and rarely covers the breakeven point for reimbursement of R&D costs.  Because of this, new drugs are almost never developed without patent protection, which limits the number of new drugs created (as not all useful drugs are patentable)."

In those instances where the Hatch-Waxman regime forces an innovator drug company to share its "expensive clinical research data" with a generic drug company, under circumstances where patent protection does not keep the generic drug off the market, Ms. Knowles asks whether the consequent loss of revenue is a "taking" under the Fifth Amendment?  (While the takings clause of the Fifth Amendment is restricted by its terms to takings by the government, the lines between public and private takings have been blurred by the Supreme Court's decision in Kelo v.  City of New London, where the Court held valid the taking of private property by a public entity for the benefit of another private entity.)  The extent of the taking of private data under Hatch-Waxman having "increased sixfold" over the past twenty years, Ms. Knowles asks whether an increase in the data exclusivity period (which would mitigate the deleterious effects of Hatch-Waxman on return of investment) would not be fair.

Ms. Knowles also criticizes the 14-year cap limitation of Hatch-Waxman on patent term extension.  She notes that patents on inventions such as the "Beerella" (U.S. Patent No. 6,637,447) enjoy a longer term than a patent on a metastatic breast cancer therapy (U.S. Patent No. 6,713,485).  This is hardly a societally-useful outcome.  Increasing the data exclusivity period would mitigate these deficiencies of how Hatch-Waxman has been put into practice (in view of our 26 years of experience with the Act and its consequences).

Turning to court decisions that may constitute a taking, Ms. Knowles notes that "[a] patent application filed today on a pharmaceutical innovation will not be used to defend a marker for about 15 years."  Under these circumstances, the state of the law over that time will have significant effects on the capacity of the patent to protect the innovator drug franchise.  While Congress could enact legislation changing the law, this is generally done prospectively, while court decisions apply retrospectively.  While both actions "change the rules of the game," court decisions have a much more drastic effect, since they may "disrupt well-settled expectations, which can affect the outcome of long-term business decisions."

Ms. Knowles then discusses the changes in the law occasioned by the KSR (obviousness), Bilski (patentable subject matter), and Ariad (written description) cases.  Each one of these decisions (or the prospect of these decisions, since the piece was written before the Federal Circuit decided Ariad en banc, and the Supreme Court has yet to decide Bilski) has had the effect of reducing the certainty or expectation of patent protection ex post facto.  She then summarizes the effects of retroactive application of these (and other) judicial decisions:  "[t]hey can facilitate the increase of challenges by generic producers under Hatch-Waxman, . . . stop R&D investment decisions that have already been made and could prevent a product from reaching the market because of patentability issues."  Ms. Knowles also mentions the potential to prevent R&D to take place at all.

These effects can constitute a taking, and the effects of such decisions should be analyzed according to takings law:

An issued patent is property just like a piece of land or a house (citing Consolidated Fruit-Jar Co. v. Wright, 84 U.S. 92, 96 (1872) and Patlex Corp. v. Mossinghoff, 758 F.2d 594, 599 (Fed. Cir. 1985)).  When a federal judicial decision dramatically changes the law, such that a valid patent becomes invalid, has the federal government taken private property in violation of the federal Constitution?  Application of the Fifth Amendment is not clearly limited to legislative and executive action; nothing in its text bars extension of the takings clause to judicial action.

"The time has come," Ms. Knowles contends, "to rethink the right legal framework to promote and protect investment in pharmaceutical research and development."  This rethinking involves increasing the term of data exclusivity under Hatch-Waxman from 5 to 14 years, and for Congress to give appellate courts discretion to have a decision have prospective effect only, should it overrule prior interpretation of patent law.  The benefit of these changes would be to "substantially increase the number of drugs in the R&D pipeline, which would greatly benefit patients and ultimately benefit generic drug companies."

Before wags jump to mention that these changes would also benefit pharmaceutical companies like GSK, it would be well to consider where novel therapies will come from without companies with experience in obtaining (and financing) regulatory approval of such drugs, protecting them with patents, and having the business resources to bring such drugs to market.  It is certainly the case that these companies are for-profit (it's capitalism, after all), but the costs of R&D and regulatory approval, as well as scale-up, production, and distribution are realities that cannot be ignored.  It would be well to remember that, whatever other criticisms may be raised against the pharmaceutical industry, there is no other way for consumers to get new drugs.  It is also good to remember that innovation is not what generic drug companies do (generally), and that without innovator biotechnology and pharmaceutical companies, generic drug makers would have nothing to copy or sell.

House Passes Health Care Reform Bill -- Biosimilar Regulatory Pathway Makes Cut, Pay-for-Delay Ban Does Not

    By Donald Zuhn --

On Sunday night, the House of Representatives voted by a narrow 219-212 margin to agree to the version of the Patient Protection and Affordable Care Act (H.R. 3590) that the Senate passed on December 24, 2009 (see "Follow-on Biologics News Briefs - No. 11").  Less than an hour later, the House added 135 pages of amendments to the Senate bill by a 220-211 vote.  Those amendments will now go to the Senate for approval.

As we reported in December, the Senate bill contains a section providing for an approval pathway for biosimilar biological products.  This portion of the bill would preclude a biosimilar application from being approved "until the date that is 12 years after the date on which the reference product was first licensed," as well as offer an additional 6 months of exclusivity for the use of reference products "in the pediatric population."  We also noted in January that an effort by Sen. Herb Kohl (D-WI) to add a pay-for-delay provision to the Senate health care bill had failed (see "Consumer Groups Ask Congress to Add Pay-for-Delay Provision to Health Care Bill").  The provision, which was based on a bill (S. 369) Sen. Kohl introduced in February 2009, would have prohibited payments from brand name to generic drug manufacturers with the purpose to prevent or delay the entry of competition from generic drugs.

The additional House amendments that were passed yesterday leave the biosimilars portion of the Senate bill untouched, but do not add the pay-for-delay ban that President Obama was seeking as recently as last month.  The President had included a ban of pay-for-delay settlements among 34 key improvements in his health care proposal released prior to the Bipartisan Meeting on Health Reform (see "President's Health Care Plan Includes Pay-for-Delay Ban and Biosimilar Regulatory Pathway").

Reverse Payments in Generic Drug Settlements - Part IV

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 only one recent appellate court decision, in the 6th Circuit Court of Appeals decision in In re Cardizem CD Antitrust Litigation, 332 F.3d 896 (6th Cir. 2003).  Several other courts of appeals have disagreed, including 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).  The FTC contends that these courts of appeal have "misapplied the antitrust laws" by upholding this type of agreement, which 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), we have reviewed the bases of these several courts of appeals decisions.

In this post, we turn to the 6th Circuit's decision in the Cardizem case.  This case was brought by a variety of patient groups as plaintiffs against Hoechst Marion Roussel and Andrx over a reverse payment-containing settlement agreement in ANDA litigation over U.S. Patent No. 5,470,584 for HMR's Cardizem CD product.  The active ingredient in Cardizem is diltiazem hydrochloride, used for treating angina and hypertension and as a preventative for heart attack and stroke.  Andrx filed an ANDA for Cardizem CD and HMR sued triggering the 30-month stay of FDA approval of the generic drug.  Andrx filed antitrust counterclaims and stated its intention to launch upon approval, and after expiration of the 30-month stay, the FDA approved Andrx's generic Cardizem CD.  According to the Court, "[o]n June 9, 1999, the FDA approved Andrx's reformulated product.  That same day, HMR and Andrx entered into a stipulation settling the patent infringement case and terminating the Agreement.  . . .  On June 23, 1999, Andrx began to market its product under the trademark Cartia XT, and its 180-day period of marketing exclusivity began to run."

The terms of the agreement were as follows:

• Andrx agreed not to market a generic version of Cardizem CD until Andrx received a final determination in its favor in the patent infringement lawsuit, HMR or Andrx entered into a licensing agreement, or HMR entered into a licensing agreement with a third party (the trigger date being the earliest of these).

• Andrx agreed to dismiss its counterclaims (for unfair competition and antitrust violations).

• Andrx further agreed to pursue its ANDA and not to relinquish or transfer its 180-day exclusivity period or any other right.

• HMR agreed to pay Andrx $40 million per year (paid $10 million every calendar quarter) beginning on the date when the FDA approved Andrx's ANDA, and $100 million per year (less the interim $40 million payments) once either there was a final judgment that the '584 patent was not infringed, or HMR dismissed the patent infringement lawsuit, or there was another resolution of the lawsuit between the parties that did not finally resolve issues of invalidity, unenforceability, or infringement, and HMR did not refile or pursue the lawsuit.

• HMR also agreed not to seek preliminary injunctive relief during the ANDA suit.

The FDA approved Andrx's generic Cardizem CD formulation on June 9, 1998 (one day after the end of the 30-month stay), and HMR began paying Andrx the $40 million/year payment in $10 million quarterly payments.  Andrx then filed a supplement to its ANDA specifying that it had reformulated the product and certified that its reformulated product did not infringe the claims of the '584 patent.  The FDA approved this reformulated product on June 9, 1999, and the parties settled the infringement suit and terminated the agreement that day.  HMR also paid Andrx a final sum of $50.7 million, for a total of payments equaling $89.83 million.  Two weeks later, Andrx began to market its generic product, starting the 180-day exclusivity period.  This date of market entry was almost 12 years before the expiration date of the '584 patent (February 15, 2011).

The agreement contained a number of provisions not found in other, legal agreements.  First, Andrx was the first ANDA filer, and the agreement did not require the generic company to change its Paragraph IV certification.  Since the parties settled the ANDA litigation, the 180-day exclusivity period could not begin to run until Andrx entered the marketplace -- a date delayed by the agreement.  Moreover, the agreement contained a provision where Andrx agreed neither to relinquish nor transfer its right to the exclusivity period.  In addition, plaintiffs alleged that the agreement covered generic Cardizem products that did not satisfy the dissolution limitations in the patent claims and thus did not infringe the '584 patent (specifically, that Andrx's reformulated product released not less than 55% of the drug within the first 18 hours after administration, which falls outside the scope of the limitation of the '584 patent claims that required not more than 45% release of the drug 18 hours after administration).

The lawsuit against HMR and Andrx was consolidated from a number of complaints from individuals, states, and other groups.  These complaints were brought under § 1 of the Sherman Act and § 4 of the Clayton Act (including its treble damages provisions), based on the "but for" argument that a generic Cardizem would have been on the market but for the agreement, and that the exercise of its 180-day exclusivity barred other generics from coming to market.  Plaintiffs fell into three groups: (1) the "State Law Plaintiffs," indirect purchasers, and class representatives, from various states (California, Michigan, Minnesota, New York, North Carolina, Tennessee, and Wisconsin and the District of Columbia) whose complaints, initially filed in state court and then removed to federal district court by defendants, allege violations of state antitrust and consumer protection statutes; (2) the "Sherman Act Class Plaintiffs," direct purchasers, and class representatives, whose complaint, filed in federal district court, alleges a violation of federal antitrust law; and (3) the "Individual Sherman Act Plaintiffs," two groups of purchasers, not representatives of any class, whose complaints, filed in federal district court, allege violations of federal antitrust law (filed by The Kroger Co., Albertson's, Inc., The Stop and Shop Supermarket Co., and Eckerd Corp.); JA 887-896 (filed by CVS Meridian, Inc. and Rite Aid Corp.), the plaintiffs from seven states (California, Michigan, Minnesota, New York, North Carolina, Tennessee, and Wisconsin) and the District of Columbia claim violations of state antitrust law.

The District Court held that the agreement was per se illegal, because the reverse payment provisions and actual payments from HMR to Andrx delayed generic entry and constituted a naked, horizontal restraint of trade.  The Court certified the following question for interlocutory appeal to the 6th Circuit:

In determining whether Plaintiffs' motions for partial judgment were properly granted, whether the Defendants' September 24, 1997 Agreement constitutes a restraint of trade that is illegal per se under section 1 of the Sherman Antitrust Act, 15 U.S.C. § 1, and under the corresponding state antitrust laws at issue in this litigation.

In its opinion, the appellate court noted that while the literal meaning of Section 1 of the Sherman Act would render per se illegal every agreement in restraint of trade, the Supreme Court has "long recognized" that the statute is meant only to prohibit unreasonable restraints, and that courts assess whether a restraint is unreasonable using a rule of reason, citing State Oil Co. v. Khan, 522 U.S. 3, 10 (1997).  "Under this approach, the 'finder of fact must decide whether the questioned practice imposes an unreasonable restraint on competition, taking into account a variety of factors, including specific information about the relevant business, its condition before and after the restraint was imposed, and the restraint's history, nature, and effect.'"  State Oil (citing Arizona v. Maricopa Cty. Medical Soc., 457 U.S. 332, 343 & n. 13 (1982)).

However, there are some agreements, according to the Court, that "have such predictable and pernicious anti-competitive effect[s], and such limited potential for procompetitive benefit," that they are "deemed unlawful per se."  Northern Pacific Ry. Co. v. United States, 356 U.S. 1, 5 (1958).  Courts have recognized that certain kinds of agreements cannot satisfy the rule of reason under any circumstances, and such agreements have a "conclusive presumption" of illegality, citing Arizona v. Maricopa Cty. Medical Soc. at 344.  For such agreements, "no consideration is given to the intent behind the restraint, to any claimed pro-competitive justifications, or to the restraints actual effect on competition," the Court opined, citing National College Athletic Ass'n v. Board of Regents of the UNiv. of Okalhoma, 468 U.S. 85, 100 (1984).  The Supreme Court is cited as being almost dismissive of such instances:  "a per se rule reflects the judgment that such cases are not sufficiently common or important to justify the time and expense necessary to identify them."  Continental T.V., Inc. v. GTE Sylvania Inc., 433 U.S. 36, 50 n. 6 (1977).

Citing the NCAA case, the 6th Circuit identifies naked, horizontal price restraints as being per se illegal according to this line of Supreme Court precedent.  This type of agreement is defined as "an agreement between competitors at the same level of the market structured to allocate territories in order to minimize competition," citing United States v. Topco Assocs., 405 U.S. 596, 608 (1972), stating that "[t]his Court has reiterated time and time again that horizontal territorial limitations . . . are naked restraints of trade with no purpose except stifling of competition.  Such limitations are per se violations of the Sherman Act."

With this analytical framework in mind, the 6th Circuit listed facts it termed "undisputed and dispositive."  First, under the agreement, HMR was assured that Andrx, at the time the only potential competitor in the marketplace for Cardizem, would remain off the market at a cost of $10 million per quarter even after Andrx had obtained FDA approval for its generic version of the drug.  Second, as a consequence of this agreement, not only Andrx but all other generic competitors were kept off the market in view of Andrx's 180-day exclusivity period and the provisions of the agreement that Andrx would not relinquish or transfer the right (which commenced only when Andrx first entered the marketplace; thus there was a direct nexus between the agreement's provisions keeping Andrx off the market and the delay in generic Cardizem coming to the marketplace from any source).

This was enough for the Court to characterize this as a naked horizontal restraint that is per se illegal.  In a footnote, the Court addressed the consequences of a per se determination, instead of applying a rule of reason analysis:

The risk that the application of a per se rule will lead to the condemnation of an agreement that a rule of reason analysis would permit has been recognized and tolerated as a necessary cost of this approach.  See, e.g., Maricopa Cty., 457 U.S. at 344 ("As in every rule of general application, the match between the presumed and the actual is imperfect.  For the sake of business certainty and litigation efficiency, we have tolerated the invalidation of some agreements that a full-blown inquiry might have proved to be reasonable."); United States v. Topco Associates, Inc., 405 U.S. 596, 609 (1972) ("Whether or not we would decide this case the same way under the rule of reason used by the District Court is irrelevant to the issue before us.").

The 6th Circuit was not persuaded by the arguments to the contrary.  Specifically, the Court rejected defendants' argument that the agreement was a proper exercise of the patent right.  "[T]he Agreement cannot be fairly characterized as merely an attempt to enforce patent rights or an interim settlement of the patent litigation," according to the Court.  "As the plaintiffs point out, it is one thing to take advantage of a monopoly that naturally arises from a patent, but another thing altogether to bolster the patent's effectiveness in inhibiting competitors by paying the only potential competitor $40 million per year to stay out of the market."  And arguments that there were pro-competitive effects that offset the anticompetitive effects were unavailing because of the Court's determination that the agreement was per se illegal.

The Court also determined that the plaintiffs had pleaded sufficiently to satisfy the requirement of asserting an antitrust injury ((1) "injury of the type the antitrust laws were intended to prevent" and (2) injury "that flows from that which makes defendants' acts unlawful," citing Brunswick Corp. v. Pueblo Bowl-O-Mat, Inc., 429 U.S. 477, 489 (1977)).  Part of the Court's decision was based on the standard of review, where all allegations in the complaint are taken as true and all inferences are drawn in plaintiffs' favor.  These included:

(1) Andrx had developed and was ready to market a generic version of Cardizem CD; (2) Andrx had certified to the FDA that its generic product did not infringe any of the patents associated with Cardizem CD; (3) the patent infringement litigation was a 'sham'; (4) prior to entering into the Agreement, Andrx had represented to the federal district court presiding over the patent infringement litigation that it intended to market and sell its generic version of Cardizem CD as soon as it received final FDA approval; (5) the Agreement entered into by Andrx and HMR provided, among other things, that once the FDA approved Andrx's ANDA, HMR would commence making quarterly payments of $10 million in exchange for Andrx not bringing its generic product to market; (6) Andrx did not enter the market upon receiving FDA approval on July 9, 1998; (7) pursuant to the Agreement, HMR ultimately paid Andrx $89.83 million; (8) 'but for' the Agreement and the payment, Andrx would have begun to market its generic version of Cardizem CD on or shortly after July 9, 1998; (9) the Agreement effectively eliminated generic competition in the market for Cardizem CD from July 1998 through July 1999, when the Agreement was terminated; and (10) due to the lack of a competitive market, the plaintiffs were deprived of the option of purchasing a generic lower-priced drug and paid more than they otherwise would have for Cardizem CD.

The 6th Circuit affirmed the District Court's determination that these allegations satisfy the Brunswick requirements and that plaintiffs had alleged sufficient antitrust injury that the District Court properly denied defendants' motion to dismiss.  The antitrust injury was to consumers who "were deprived of a less expensive generic product, forcing them to purchase the higher-priced brand name product, because of a per se illegal horizontal market restraint"; preventing such an outcome was "undoubtedly a raison d'etre" for passage of the Sherman Act.  In addition, the injury "'flows' from that which makes defendants' act unlawful,'" i.e., causing consumers to pay more for branded Cardizem CD than they would have paid for Andrx's generic version.  And the Court found "incredible" the argument that Andrx would not have entered the market for fear of patent infringement liability in the absence of the $89 million paid by HMR under the agreement.

There are several distinctions that can be used to explain the different outcomes in this case and the other cases that did not find a reverse payment agreement to be per se illegal.  For example, in the three cases that did not find an antitrust violation in a reverse payment agreement, the courts were careful to state that there were circumstances in which the agreement could be illegal.  These included an extension of the exclusionary right of the patent in excess of the proper scope of the claims, initiation or continuance of "sham" litigation where the patentee knew that the patent was invalid or unenforceable or that the accused product did not infringe the asserted claims, or Walker Process-type violations.  Here, the Court found that Andrx's reformulated product did not infringe the claims of the '584 patent.  From that conclusion, payment from HMR to Andrx was not a legitimate exercise of the patent's exclusionary right.  Moreover, in other instances, the first ANDA filer changed its certification from Paragraph IV to Paragraph III, and thus gave up its 180-day exclusivity period; that was not the case here.  Not only did Andrx not change its certification, but the reverse payment agreement contained an affirmative requirement that Andrx neither relinquish nor transfer the right.  The effect of this provision was in fact to keep other potential generic entrants from the marketplace.  Finally, while in other cases the change in certification permitted other generic drug companies to file their own ANDAs and to thus be able to obtain FDA approval (and in some of those cases that is precisely what occurred, although the patentee prevailed and other generic companies did not enter the market), here the reverse payment agreement had a preclusive effect on other potential generic entrants.

It is likely (although not expressly stated in the opinion) that the fact that Andrx's reformulated product did not infringe the '584 patent (and the agreement was at least in part responsible for delaying entry of the reformulated product) was an important factor precluding the 6th Circuit from crediting other considerations that were important in the decisions of the other appellate courts that the reverse payments in those cases were not illegal.  As in those cases of legal reverse payment agreements, Andrx's generic Cardizem CD product entered the marketplace significantly earlier than the expiration date of the '584 patent.  And the Court noted that Andrx's generic reformulated product, sold as Cartia XT, had "captured a substantial portion of the market" and "sold for a much lower price than Cardizem CD."  From a "big picture" approach, as has been applied by other circuit courts of appeal for other reverse payment agreements, the period of delay from the time the parties entered into the agreement (September 24, 1997) until Andrx first entered the marketplace with its Cartia XT product (July 9, 1999) (i.e., less than 22 months) is significantly shorter than the difference between the time Cartia XT was first marketed and the expiration date of the '584 patent (February 15, 2011) (i.e., 11 years, 7 months).  This "advantage" to the public evaporates under circumstances where the patentee had no right to exclude the generic entrant from the marketplace (because the generic drug product does not infringe the patent claims); that appears to have been the case here, and no doubt influenced the Court's decision.

Even in a case, as here, where the court holds a reverse payment to be per se illegal, the opinion shows the benefit of assessing these agreements as they arise rather than to create a per se rule that all reverse payment-containing agreements are per se illegal.  As the courts of appeal in In re Ciprofloxacin Hydrochloride Antitrust Litigation, Schering-Plough Corp. v. Fed. Trade Comm'n, and In re Tamoxifen Citrate Antitrust Litigation noted, there are many circumstances under which reverse payment-containing agreements are pro-competitive, consistent with the proper exercise of the exclusionary patent right and conserving judicial and societal resources.  The FTC's approach (as well as bills introduced in Congress banning reverse-payment agreements, and the purported provisions of the renewed healthcare reform proposal espoused by President Obama removes these advantages when they exist, and substitute by legislation what courts (like the 6th Circuit) can deliver in those instances when reverse payment-containing agreements cross the line into illegal restraints of trade.  While there are certainly political advantages in opposing these agreements in all instances, the experience of several courts of appeals strongly suggest that making the determination per se may restrict rather than advance expeditious generic drug entry.  Which isn't what the FTC, the administration, the generic drug companies, or the public want.

Reverse Payments in Generic Drug Settlements - Part III

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.

President's Health Care Plan Includes Pay-for-Delay Ban and Biosimilar Regulatory Pathway

    By Donald Zuhn --

President Obama's new proposal for health care reform was unveiled on the White House website earlier this week.  According to the White House, the President's plan "builds off of the legislation that passed the Senate and improves on it by bridging key differences between the House and the Senate as well as by incorporating Republican provisions that strengthen the proposal."  The President's new proposal is being offered in anticipation of Thursday's "open, bipartisan" meeting to discuss ideas for reforming and improving the U.S. health care system.

Among 34 "key improvements" in the President's plan is a proposal to prevent delays in the public's access to generic drugs by banning pay-for-delay settlements, wherein a brand-name pharmaceutical company can delay generic competition through an agreement to pay a generic company to keep its drug off the market for a period of time.  According to the President, support for a pay-for-delay ban comes from a Federal Trade Commission (FTC) report that estimates that such agreements could cost consumers $35 billion over the next 10 years.  The President's plan adopts a provision from current health care reform legislation wherein "any agreement in which a generic drug manufacturer receives anything of value from a brand-name drug manufacturer that contains a provision in which the generic drug manufacturer agrees to limit or forego research, development, marketing, manufacturing or sales of the generic drug" would be presumed to be "anti-competitive and unlawful."  This presumption could "be overcome if the parties to such an agreement demonstrate by clear and convincing evidence that the pro-competitive benefits of the agreement outweigh the anti-competitive effects of the agreement."  The President's proposal would also give the FTC enforcement authority to address pay-for-delay agreements.

According to the President's proposal, the plan also "promotes innovation [and] creates a pathway for the creation of generic versions of biological drugs so that doctors and patients have access to effective and lower cost alternatives."  However, as presently described, the plan provides no further details regarding how it would promote innovation and lacks specifics regarding the follow-on biologics (or biosimilar) regulatory pathway it would establish.  Earlier this year, the President created some controversy when he informed Congressional Democratic leaders, including Rep. Anna Eshoo (D-CA), of his continued opposition to a 12-year data exclusivity period in a meeting at the White House (see "Snatching Defeat from the Jaws of Victory?").  The President's position was not too surprising, given the Administration's assertion in a letter to House Energy and Commerce Chairman Henry Waxman (D-CA) last June that a 7-year data exclusivity period would "strike[] the appropriate balance between innovation and competition" (see "White House Recommends 7-Year Data Exclusivity Period for Follow-on Biologics").

The President's Bipartisan Meeting on Health Reform will take place on Thursday, February 25, beginning at 10:00 am (EST).  The meeting, which will be held in the Blair House, will be open to the public and made available online at www.whitehouse.gov/live.  The meeting webpage on the White House website includes links to health care ideas being currently presented by Senate Democrats, Senate Republicans, House Democrats, and House Republicans.

Reverse Payments in Generic Drug Settlements - Part II

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.

Reverse Payments in Generic Drug Settlements

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.

FTC Disapproves of "Pay-for-Delay" Drug Deals

    By Kevin E. Noonan --

Last month, the Federal Trade Commission released a report about so-called "pay for delay" arrangements, agreements between branded pharmaceutical companies and generic drug companies that delay entry of generic versions of branded drugs.  The FTC's position is clear from the title of the Report:  "Pay-for-Delay: How Drug Company Pay-Offs Cost Consumers Billions."

The Report, by FTC staffers from the Bureau of Competition, Bureau of Economics, and Office of Policy Planning, describes these agreements as "win-win" for the companies, by permitting brand-name drug prices to stay high while giving generic companies a share of the high profits generated by an extension of the time during which the brand-name drug has no competition.  In the marketplace, the Report notes that generic prices can be as much as 90% lower than brand-name drug prices, designating delay in generic entry as a loss for consumers.  The Report notes that the FTC had "deterred" the use of such agreements between April 1999 and 2004, buttressed by a decision by a regional Court of Appeals that these agreements were per se illegal.  In re Cardizem CD Antitrust Litigation, 332 F.3d 896 (6th Cir. 2003).  However, a decision by the Federal Circuit, In re Ciprofloxacin Hydrochloride Antitrust Litigation, 544 F.3d 1323 (Fed. Cir. 2008), and other Courts of Appeal, Schering-Plough Corp. v. Fed. Trade Comm'n, 402 F.3d 1056 (11th Cir. 2005); see also In re Tamoxifen Citrate Antitrust Litigation, 466 F.3d 187 (2d Cir. 2006), have "misapplied the antitrust laws" by upholding this type of agreement.  As a consequence, "pay-for-delay" agreements between branded and generic drug companies have "re-emerged."

As a result, generic drug entry is delayed for on average 17 months and pay-for-delay agreements "protect at least $20 billion in sales of brand-name pharmaceuticals from generic competition."  The Report estimates that the "cost to American consumers [is] $3.5 billion per year."  The nature of these agreements is public information under the terms of the Medicare Prescription Drug, Improvement, and Modernization Act of 2003, 42 U.S.C. § 1395w-101 (2009) note (section 110), 21 U.S.C. § 355 (2009) note (sections 1111-1118), 21 U.S.C. § 355(j)(5) (2009) (section 1102)), which require all such agreements to be filed with the FTC.

A previous FTC study showed that generic drug companies prevailed in ANDA litigation against brand-name drug companies 73% of the time between 1992 and 2002.  Generic Drug Entry Prior to Patent Expiration: An FTC Study, Exec. Summary at viii (July 2002).  This statistic provides the incentives for brand-name companies to pursue these types of agreements.

Turning to statistics, the Report notes that there have been 66 agreements that "involved some sort of compensation" for delayed entry between FY 2004-2009, and that in the same time period, ANDA litigation was settled in 152 instances without pay-for-delay agreements.  Of the 66 agreements involving delayed generic entry, 51 of them (77%) were between the brand-name pharmaceutical company and the first ANDA filer.  These data were significant, because (as the Report notes) "[s]ettlements with first-filer generics can prevent all generic entry" (emphasis in original), since the generic company to first file an ANDA has a 180–day exclusivity period to which it is entitled under the Hatch-Waxman Act.  Thus, delaying market entry for the first ANDA filer prevents any subsequent ANDA filer from entering the market until the first filer has utilized the 180-day exclusivity period.

These agreements do not all involve direct cash payments to the generics companies, however.  Other arrangements described in the Report include an agreement from the brand-name pharmaceutical company not to introduce an "authorized generic," i.e., a generic version of the drug made by the brand-name company, which are not excluded by the 180-day exclusivity period awarded to the first to file an ANDA.  These types of agreements were included in about 25% of the "pay-for-delay" agreements discussed in the Report.

The Report also presents details regarding how the various estimates were determined (including average length of no competition against brand-name drugs, the annual costs to consumers (with an embedded estimate on the average savings to consumers from generic drug entry), the likelihood of settlements containing such pay-for-delay provisions, and the sales volume for drugs where settlements containing such provisions (the latter two categories admittedly being highly speculative).  Indeed, the Report contains alternative estimates with higher ($7.5 billion) and lower ($0.6 billion) amounts of consumer costs, depending on initial assumptions.

The Report recommends that, in the absence of consistent treatment by the Courts of Appeal or a decision by the Supreme Court, Congress needs to effect a legislative remedy.  In the interim, the FTC is pursuing additional remedies in two lawsuits, Fed. Trade Comm'n v. Cephalon, No. 08-cv-2141-RBS (E.D. Pa.), and Fed. Trade Comm'n v. Watson, No. 09-cv-00598 (N.D. GA).  Possible legislative measures recommended by the Commission (but not contained in the Report) include forfeiture of the 180-day exclusivity period for any first ANDA filer that enters into a "pay-for-delay" agreement with a branded drug company or outright bans as proposed in bills introduced in both Houses of Congress (H.R. 1706 and S. 369 or S. 1135).  None of these bills have been voted on in either chamber, however, and their fate is (at present) bound up with the stalled healthcare reform bill.

Consumer Groups Ask Congress to Add Pay-for-Delay Provision to Health Care Bill

    By Donald Zuhn --

On Monday, the American Antitrust Institute (AAI) sent a letter to Speaker of the House Nancy Pelosi (D-CA) and Senate Majority Leader Harry Reid (D-NV), urging the House and Senate to include provisions in their health care reform bills that would prohibit exclusion payments in pharmaceutical patent settlements.  These payments, also known as pay-for delay settlements or reverse payments, are made by brand name drug companies to generic drug companies in order to delay the entry of a generic drug into the market.  Co-signatories on the letter included Families USA, U.S. PIRG, the Consumer Federation of America, Consumers Union, Community Catalyst, and the National Legislative Association on Prescription Drug Prices.

In a press release issued on Monday, the AAI noted that a group of Senators, led by Sen. Herb Kohl (D-WI) (at left), had tried unsuccessfully to add a pay-for-delay provision to the Senate health care bill last month.  The proposed amendment was based on a bill (S. 369) Sen. Kohl introduced in February 2009, which would "prohibit payments from brand name to generic drug manufacturers with the purpose to prevent or delay the entry of competition from generic drugs" (see "Bill to Prohibit Reverse Payments Introduced in the Senate").  Last fall, the bill was passed out of Senate Judiciary Committee by a 12-7 vote (see "Anti-Reverse Payment Legislation Introduced in the House").

In its letter to the Speaker and Senate Majority Leader, the consumer advocacy groups seek support for the pay-for-delay legislation being proposed by Rep. Bobby Rush (D-IL) (at right).  The anti-reverse payment provision being proposed by Rep. Rush is presumably similar to the bill (H.R. 1706) he introduced in April 2009, which would prohibit brand name drug companies from compensating generic drug companies for delaying the entry of generic drugs into the market (see "Senate Judiciary Committee Acts on Reverse Payments").

The groups also seek support for a bill (S. 1315) introduced by Sen. Bill Nelson (D-FL) (at left), which would provide an incentive for multiple generic manufacturers to challenge patents.  The bill, which was introduced in June and then referred to the Senate Committee on Health, Education, Labor, and Pensions (HELP), would amend the Federal Food, Drug, and Cosmetic Act to expand the definition of "first applicant" under the Act to allow a generic drug manufacturer that is currently considered an applicant subsequent to a brand-name manufacturer's 180-day exclusivity period to qualify as a first applicant for purposes of filing an abbreviated application for a new drug.  Currently, Sen. Nelson's bill has only one co-sponsor:  Sen. Kohl.

The AAI letter states that Rep. Rush's and Sen. Nelson's provisions "will help open up the market for affordable prescription drugs."  The letter notes that "[w]hen patents are weak or illegitimate, drug manufacturers have the opportunity to challenge those patents and, if successful, to introduce affordable generics to the market in a shorter timeframe than they otherwise would."  However, when a first-to-challenge generic manufacturer is "paid off by the branded drug manufacturer to stay out of the market," the generic manufacturer gets to keep its 180-day exclusivity period, thereby preventing other manufacturers from bringing the same generic drug to market.  According to the letter, this results in consumer harm.  As a result, the letter contends that reverse payments "should be considered per se illegal:  they prevent any generic manufacturer with a legitimate challenge to a patent from potentially entering the market."

With regard Sen. Nelson's modification of the 180-day exclusivity period, the letter argues that "[e]xpanding the exclusivity period is vitally important, since it removes the barrier to entry that has protected collusive settlements between brands and first-filing generics."  The letter contends that including Sen. Nelson's provision in the final health reform legislation "would provide a strong complement to Representative Rush's per se ban on these payments."

Senate Judiciary Committee Acts on Reverse Payments

    By Kevin E. Noonan --

With fresh life being breathed into its patent "reform" bill by the new Commerce Secretary and PTO management, the Senate Judiciary Committee on Thursday acted on another "reform" measure, voting in favor of sending to the floor of the Senate a bill prohibiting "reverse payments."  These are payments by branded drug makers to generic drug companies that forestall generic drug entry into the marketplace, which many, including the Federal Trade Commission, contend are (or should be) presumptively illegal.  The FTC maintains that these arrangements cost consumers about $3.5 billion annually in additional prescription drug costs.  The new administration's Justice Department has also changed the opinion espoused by the Bush administration, and now embraces the FTC's "presumptively unlawful" stance; President Obama is reported by Reuters to support the ban.

However, the FTC and others have not been able to convince the Federal Circuit that there is anything illegal in these arrangements (as in In re Ciprofloxacin Hydrochloride Antitrust Litigation), and as a result these agencies have turned to Congress to mandate the illegality of such payments.

The bill (S. 369) was co-sponsored by Senators Kohl (D-WI), Grassley (R-IA), Feingold (D-WI), Durbin (D-IL), Brown (D-OH), Collins (R-ME), Klobuchar (D-MN), Nelson (D-NE) and Franken (D-MN).  As reported by the Committee, it provides, inter alia, that:

(1) In 1984, the Drug Price Competition and Patent Term Restoration Act (Public Law 98-417) (referred to in this Act as the '1984 Act'), was enacted with the intent of facilitating the early entry of generic drugs while preserving incentives for innovation.

(2) Prescription drugs make up 10 percent of the national health care spending but for the past decade have been one of the fastest growing segments of health care expenditures.

(3) Until recently, the 1984 Act was successful in facilitating generic competition to the benefit of consumers and health care payers - although 67 percent of all prescriptions dispensed in the United States are generic drugs, they account for only 20 percent of all expenditures.

(4) Generic drugs cost substantially less than brand name drugs, with discounts off the brand price sometimes exceeding 90 percent.

(5) Federal dollars currently account for an estimated 30 percent of the $235,000,000,000 spent on prescription drugs in 2008, and this share is expected to rise to 40 percent by 2018.

(6)(A) In recent years, the intent of the 1984 Act has been subverted by certain settlement agreements between brand companies and their potential generic competitors that make 'reverse payments' which are payments by the brand company to the generic company.

(B) These settlement agreements have unduly delayed the marketing of low-cost generic drugs contrary to free competition, the interests of consumers, and the principles underlying antitrust law.

(C) Because of the price disparity between brand name and generic drugs, such agreements are more profitable for both the brand and generic manufacturers than competition, and will become increasingly common unless prohibited.

(D) These agreements result in consumers losing the benefits that the 1984 Act was intended to provide.

The Act is intended:

(1) to enhance competition in the pharmaceutical market by stopping anticompetitive agreements between brand name and generic drug manufacturers that limit, delay, or otherwise prevent competition from generic drugs; and

(2) to support the purpose and intent of antitrust law by prohibiting anticompetitive practices in the pharmaceutical industry that harm consumers.

And the prohibitions of the Clayton Act (15 U.S.C. § 12 et seq.) are amended as follows:

SEC. 28. PRESERVING ACCESS TO AFFORDABLE GENERICS

(a) In General-

(1) ENFORCEMENT PROCEEDING- The Federal Trade Commission may initiate a proceeding to enforce the provisions of this section against the parties to any agreement resolving or settling, on a final or interim basis, a patent infringement claim, in connection with the sale of a drug product.

(2) PRESUMPTION-

    (A) IN GENERAL- Subject to subparagraph (B), in such a proceeding, an agreement shall be presumed to have anticompetitive effects and be unlawful if--

        (i) an ANDA filer receives anything of value; and

        (ii) the ANDA filer agrees to limit or forego research, development, manufacturing, marketing, or sales of the ANDA product for any period of time.

    (B) EXCEPTION- The presumption in subparagraph (A) shall not apply if the parties to such agreement demonstrate by clear and convincing evidence that the procompetitive benefits of the agreement outweigh the anticompetitive effects of the agreement.

(b) Competitive Factors- In determining whether the settling parties have met their burden under subsection (a)(2)(B), the fact finder shall consider--

(1) the length of time remaining until the end of the life of the relevant patent, compared with the agreed upon entry date for the ANDA product;

(2) the value to consumers of the competition from the ANDA product allowed under the agreement;

(3) the form and amount of consideration received by the ANDA filer in the agreement resolving or settling the patent infringement claim;

(4) the revenue the ANDA filer would have received by winning the patent litigation;

(5) the reduction in the NDA holder's revenues if it had lost the patent litigation;

(6) the time period between the date of the agreement conveying value to the ANDA filer and the date of the settlement of the patent infringement claim; and

(7) any other factor that the fact finder, in its discretion, deems relevant to its determination of competitive effects under this subsection.

(c) Limitations- In determining whether the settling parties have met their burden under subsection (a)(2)(B), the fact finder shall not presume--

(1) that entry would not have occurred until the expiration of the relevant patent or statutory exclusivity; or

(2) that the agreement's provision for entry of the ANDA product prior to the expiration of the relevant patent or statutory exclusivity means that the agreement is pro-competitive, although such evidence may be relevant to the fact finder's determination under this section.

(d) Exclusions- Nothing in this section shall prohibit a resolution or settlement of a patent infringement claim in which the consideration granted by the NDA holder to the ANDA filer as part of the resolution or settlement includes only one or more of the following:

(1) The right to market the ANDA product in the United States prior to the expiration of--

    (A) any patent that is the basis for the patent infringement claim; or

    (B) any patent right or other statutory exclusivity that would prevent the marketing of such drug.

(2) A payment for reasonable litigation expenses not to exceed $7,500,000.

(3) A covenant not to sue on any claim that the ANDA product infringes a United States patent.

(emphasis added)

The bill permits the FTC to "exempt certain agreements" if the Commission finds that they are "in furtherance of market competition and for the benefit of consumers."  The legislation omits a requirement in draft versions of the bill that all agreements between generic and branded drug manufacturers were to be submitted under oath to the FTC and the DOJ under the Medicare Prescription Drug, Improvement, and Modernization Act of 2003, and also omits provisions wherein the 180-day exclusivity period granted under the Hatch-Waxman Act to the first ANDA filer would be forfeited if it enters into a "reverse payment" agreement with the branded drug manufacturer.

The Committee vote was 12-7.  The bill is as yet unscheduled for a floor vote, and a companion bill in the House (H.R. 1706, introduced by Congressman Rush (D-IL) and co-sponsored by Congressmen Waxman, Dingell, Doyle, Markey, Stupak, Schakowsky and DeGette) has been forwarded by the Subcommittee on Commerce, Trade and Consumer Protection to the House Energy and Commerce Committee and to the Judiciary Committee for action.