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.

Comments

[EG]

Kevin,

May be you will convince me that the FTC's view is the problem here (I wouldn't mind that being the case as the FTC, along with the Antitrust Division of the DOJ are two of my least favorite federal entities). I guess my "logical mind" rebels at the quirkiness of the Hatch-Waxman act that appears to shield this ploy from being considered a "horizontal conspiracy" amongst competitors. (I used to find the intersection between patent law and antitrust law disturbing as the antitrust law normally prevailed, including those awful 9 licensing "no-nos" articulated by the Antitrust Division).

I do have the 6th Cir. Cardizem case (the 6th is my local circuit) so I'm pretty sure I read it, although probably long ago. I'll be interested in your analysis of it which is apparently the only appellate court to nix this Hatch-Waxman ploy.

[Kevin E. Noonan]

Dear EG:

I know there are lots of ways such agreements can have anticompetitive effects that overweigh the procompetitive effects, but the FTC takes a per se approach - a lot like the anti-gene patenting crowd. "It's just wrong" is rarely a coherent answer. I am doing these comparisons to tease out why the different Circuit Courts of Appeal (not just the CAFC) have assessed these individual agreements and come to the conclusion that they are not illegal.

The next post, on the Cardiozem case, is different, as the CAFC noted - different scope, different effects, etc. But that's the point - per se isn't an answer, it's a policy and a very blunt tool at that. Added to the deficiencies of the approach is the study we posted on a few months ago, that on the basis of economic efficiency the Hatch-Waxman provisions of Sec. 271(e)(2) are not as beneficial as advertised.

I don't blame the FTC - they are economists (a severe burden) and they are outcome-oriented. Bad combination, especially since they have not evinced an understanding (or desire to understand) patent law. If we ran the experiment without reverse payments, we would have a mixture of consequences - some branded pharma patents would be invalidated, some would not, some generics would come on the market faster, some would not. Whether this was a good or bad outcome would depend on the drugs that became generics and perhaps whether the decision maker used those drugs. But for the system as a whole, the question is resources - legal, investment, etc. Would there be more or less litigation? Would it drain more or less resources (both for branded and generic drugs) from other uses of capital? Would it inhibit investment because of increased risk? Economists can model this, but I'm not sure the FTC has - I think all their modeling has been on the back end, on the
"how much less will it cost consumers" end, looking only at the end of the telescope that relates to each reverse payment settlement. I am suggesting the bigger picture may give a different answer; remember, for all these agreements the generic entered the market earlier than it would have if the branded drugmaker won the ANDA lawsuit.

Finally, even Judge Posner thinks reverse payment agreements are not per se illegal. Who at the FTC has more credibility on the interface between economics and the law than Judge Posner?

Thanks for the comment

[EG]

Kevin,

You're comment on the per se approach of the FTC is definitely on point. That's one of the great flaws of how the antitrust laws are applied-it's too hard to do the economics/math, so we need per se rules of illegality. In other words, you've convinced me that we need a "rule of reason" approach to these "reverse payment" situations under Hatch-Waxman (but I remain convinced that Hatch-Waxman is a mess).