A Problem At the Patent-Regulatory-Antitrust Interface: Settling Hatch-Waxman Patent

Infringement Cases by Reverse Payments

Fordham Intellectual Property Law Institute

19th Annual Conference

Fordham University School of Law

April, 2011

Gerald Sobel

Kaye Scholer LLP

© Copyright Gerald Sobel 2011.All Rights Reserved.

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Recent Reverse Payment EnforcementActivities by Government

• A top FTC priority. Jon Leibowitz, Chairman, FTC, Prepared Statement of FTC before the U.S. Senate Comm. on the

Judiciary Subcommittee on Antitrust, Competition Policy and Consumer Rights at 3 (July 27, 2010 )(“One of the Commission’s top competition priorities is stopping ‘pay-for-delay agreements’”). See also Interview with R.A. Feinstein, Director, FTC Bureau of Competition, Antitrust Source at 3 (April, 2010) (“desire to get this issue to the Supreme Court”; legislative solution “will almost certainly be faster”).

• King Drug Co. of Florence v. Cephalon, Inc., 702 F. Supp. 2d 514 (E.D. Pa. 2010) (motion to dismiss denied on other grounds).

• In re Androgel Antitrust Litigation, 687 F. Supp. 2d 1371 (N.D. Ga. 2010) (motion to dismiss reverse payment claim granted).

• Amicus briefs argued settlements were presumptively illegal, but rebuttable if delayed generic entry date reflected the parties’ contemporaneous evaluations of the likelihood of success in the patent litigation. Brief for the United States in Response to the Court’s Invitation at 11, Ark. Carpenters

Health & Welfare Fund v. Bayer, 604 F.3d 98 (2d Cir. 2010) (Ark. Carpenters).

• See proposed “Preserve Access to Affordable Generics Act” which establishes rebuttable presumption of illegality if ANDA filer “receives anything of value” to “limit …sales”, s.27

(January 25, 2011).

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The Economic and Regulatory Setting:Pioneer Firm

• Pioneer pharmaceutical company must:

• Invent the drug (active ingredient, formulation, delivery system, and the like), including trying blind alleys.

• Develop it.

• Conduct safety and efficacy studies. 21 U.S.C. § 355(b) (2006).

• Satisfy FDA that the drug is both safe and effective. Id.

• The process is lengthy, expensive and presents a substantial risk of failure. See Release, Tufts Center for the Study of Drug Development, Tufts Center for the Study of Drug Development Pegs Cost of a New Prescription Medicine at $802 Million (Nov. 30, 2001), http://70.42.48.93/NewsEvents/NewsArticle.asp?newsid=6.

• A patent by statute awards to the pioneer company the right to exclude others from making, using or selling the drug. 35 U.S.C. § § 154(a)(1),

271(a).

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The Economic and Regulatory Setting:Generic Firm

• The Hatch-Waxman Act permits the generic to obtain approval to sell a copy by a low-cost abbreviated application to FDA (“ANDA”).21 U.S.C. § 355(j).

• No need for safety and efficacy studies.

• Must demonstrate bioequivalence to a pioneer company’s approved drug (close to the same rate and extent of absorption).21 U.S.C. § 355(j)(8)(B).

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The Regulatory Setting

• In order to obtain approval before expiration of listed patents, the generic may challenge listed patents. 21 U.S.C. § 355(j)(2)(A)(vii)(IV).

• Pioneer company may bring infringement suit under listed patents within 45 days of notice from the generic. 35 U.S.C. § 271(e)(4).

• FDA is then barred from approving the ANDA for thirty months in the ordinary case. 21 U.S.C. § 355(j)(5)(B)(iii).

• A 180-day exclusivity period against other generics is awarded to first ANDA filer when it markets the ANDA product (subject to forfeiture). 21 U.S.C. § 355(j)(5)(B)(iv).

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Settlement Parameters• Generic has no costs for market entry or sales because the litigation

ordinarily occurs in the period prior to marketing by the generic. No risk of damages.

• Pioneer company risks loss of patent/drug franchise, investment and profits on sales of the drug.

• After generic exclusivity period, with additional generic competition, the generic price has been reported by FTC to fall to a level of 20% of pioneer’s price.See U.S. Food & Drug Administration, Generic Competition and Drug Prices (2006), available at http://www.fda.gov/AboutFDA/CentersOffices/CDER/ucm129385.htm (“For products that attract a large number of generic manufacturers, the average generic price falls to 20% of the branded price and lower.”).

• Compromise of a damages claim is typically not available in Hatch -Waxman cases.

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Representative Settlement Terms inHatch-Waxman Patent Cases

• Agreement by generic not to market for part or all of patent term.

• Delayed license for remaining term of patent.

• Reverse payment to generic.

• No challenge to validity of patent.

• Consent Judgment that patent is valid and infringed.

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FTC View of Reverse Payments• “As illustrated below, by eliminating the potential for competition, the

parties can share the consumer savings that would result if they were to compete”: Graphic , FTC Opp’n Br. to Cephalon’s Mot. to Dismiss at 5, FTC v. Cephalon, Inc., No. 08-cv-2141-RBS

(E.D. Pa. June 2, 2008).

Brand’sProfits

Brand’sProfits

Paymentsto

GenericBrand’sProfits

Generic’sProfits

ConsumerSavings

Incentives to Pay for Delay

Pre-Generic Filing

Exclusion PaymentCompetition

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“Probabilistic Property Right” Theory• “A real patent does not give the patentee ‘the right to exclude’ but

rather the more limited ‘right to try to exclude’ by asserting its patent in court.”

• “[A] patent settlement [should not] lead to lower expected surplus than would have arisen from the ongoing litigation.”

• “The patentholder’s rights [in a settlement] are calibrated according to the likelihood that the patentholder would win the patent litigation, and the extent of exclusion that such a victory would permit.” Carl Shapiro, Antitrust Limits to Patent Settlements, RAND JOURNAL OF ECONOMICS, Vol. 34, No. 2 (Summer 2003) at pp. 395, 396.

• Compare FTC: “[T]he likelihood that a patent holder will prevail in infringement litigation is relevant.” Appellant FTC’s Reply Br. in FTC v. Watson, No. 10-12729-DD, at 3 (11th Cir. Dec. 15, 2010).

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Three Circuits Have Approved Reverse Payments

• Three circuits have decided antitrust cases involving final reverse payment settlements and upheld them as within the scope of the patent in view briefly, of:

• Redistribution of risks by the Hatch-Waxman Act;

• The statutory presumption of patent validity;

• Policy favoring final settlements of litigation;

• Absence of a fraudulently obtained patent or baseless patent suit (which would invoke exception to constitutional right to petition immunity for suits).Ark. Carpenters Health & Welfare Fund v. Bayer AG, 604 F.3d 98, reh’g en banc denied, 625 F.3d 779 (2d Cir. 2010); In re Ciprofloxacin Hydrochloride Antitrust Litig., 544 F.3d 1323 (Fed. Cir. 2008); In re Tamoxifen Citrate Antitrust Litig., 466 F.3d 187 (2d Cir. 2006) ; Schering-Plough Corp. v. F.T.C., 402 F.3d 1056 (11th Cir. 2005).

• The Supreme Court has denied certiorari in reverse payment cases six times.Louisiana Wholesale Drug Co., Inc. v. Bayer AG, 131 S. Ct. 1606 (2011); Ark. Carpenters Health & Welfare Fund v. Bayer AG, 129 S. Ct. 2828 (2009); Joblove v. Barr Labs, Inc., 551 U.S. 1144 (2007); F.T.C. v. Schering-Plough Corp., 548 U.S. 919 (2006); Valley Drug Co. v. Geneva Pharma., Inc., 543 U.S. 939 (2004); and Andrx Pharm., Inc. v. Kroger Co., 543 U.S. 939 (2003).

• See J. Thomas Rosch, Comm’r, F.T.C.: “given our [FTC’s] somewhat abysmal track record in the courts . . . .” Remarks Before World Generic Medicine Congress, p. 9 (Nov. 17, 2010))

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Compare Cardizem (6th Cir.)

• Held: Reverse money payment was a significant factor (“bolster[ing] the patent’s effectiveness”) in finding settlement agreement pending appeal per se illegal. In re Cardizem CD Antitrust Litig., 332 F.3d 896, 908 (6th Cir. 2003) (Cardizem), cert. denied,

Andrx Pharm., Inc. v. Kroger Co., 543 U.S. 939 (2003).

• Cardizem was distinguished by Second, Eleventh, and Federal Circuits as involving:

• An interim, not final, settlement;

• Delay of entry extending to non-infringing products; and

• Delay of entry of other generics by barring relinquishment by settling generic of the 180-day generic exclusivity.

In re Ciprofloxacin Hydrochloride Antitrust Litig., 544 F.3d 1323, 1335 (Fed. Cir. 2008) (Cipro)In re Tamoxifen Antitrust Litig., 466 F.3d 187, 213-14 (2d Cir. 2006) (Tamoxifen)Valley Drug Co. v. Geneva Pharms., Inc., 344 F.3d 1294,1311 n.26. (11th Cir. 2003) (Valley Drug)

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Recent Settlements

• The Medicare Prescription Drug, Improvement, And Modernization Act of 2003 requires filing of settlements of Hatch-Waxman patent infringement cases with the antitrust agencies.Pub. L. No. 108-173, 117 Stat 2066 (2003).

• FTC:

“According to newly released agency data, branded and generic drug companies entered into 21 suspect patent litigation settlements involving compensation in the first nine months of FY 2010 alone. This is more than the total for the entire previous fiscal year.” FTC Release, Stopping “Pay-for-Delay” Drug Settlement Agreements is a Top Competition Priority (July 27, 2010).

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Cipro Is Illustrative

• In re Ciprofloxacin Hydrochloride Antitrust Litig. (“Cipro”) involved an agreement pursuant to which the

– generic defendant agreed not to market a generic version of the Cipro® drug until the patent on the drug expired (paragraph iii certification to FDA)

– Patentee agreed to make payments (which totaled $398 million) and optionally supply Cipro® for resale to the generic. Cipro, 544 F.3d at 1323, 1331-33 (Fed. Cir. 2008).

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Cipro (Fed. Cir.)

• Affirmed grant of summary judgment for defendant, finding “no anti-competitive effects outside the exclusionary zone of the patent” and, consequently, no violation of the Sherman Act. Id.

• Factors:

• Redistribution of risk: “[A]s explained by the Eleventh Circuit, the Hatch-Waxman Act redistributes the relative risks between the patent holder and generic manufacturers, allowing generic manufacturers to challenge the validity of the patent without incurring the costs of market entry or the risks of damages from infringement.” Id. at 1338 (citing Schering, 402 F.3d at 1074.).

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Cipro (Fed. Cir.)

• Factors (cont’d):• Statutory Presumption: “[A] patent is presumed valid.”

Cipro at 1337 (citing 35 U.S.C. § 282).

• The court agreed with the Second and Eleventh Circuits in Tamoxifen and Schering that “in the absence of evidence of fraud before the PTO or sham litigation, the court need not consider the validity of the patent in the antitrust analysis of a settlement agreement involving a reverse payment.”Id. at 1336; accord Schering, 402 F.3d at 1068; Tamoxifen, 466 F.3d at 213.

• The court disagreed with the amicus views of the Solicitor General that the antitrust court should “conduct a limited evaluation of the merits of the patent claims.”Cipro at 1337.

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Cipro (Fed. Cir.)

• Factors (cont’d):

• No Bottlenecks: “[T]here was no evidence that the Agreements created a bottleneck preventing generic challenges to the ’444 patent.” Cipro at 1338.

• Indeed, the patent was subsequently challenged by four other generic manufacturers and was upheld as valid.” Id.

• “[T]he agreement did not create a bottleneck against other generic entry because Barr had no right to the 180-day exclusivity period.” Id. at 1339-40.

• Policy Favoring Settlement: The “long-standing policy . . . in favor of settlements [which] . . . extends to patent infringement litigation.” Id.

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Cipro (2d Cir.)

• The Second Circuit, finding itself “bound” by its Tamoxifen decision, upheld the same Cipro settlement agreement in another private antitrust action. Ark. Carpenters Health & Welfare Fund v. Bayer AG, 604 F.3d 98 (2d Cir. 2010).

• The court invited a petition for rehearing en banc, but rehearing was denied. Ark. Carpenters Health & Welfare Fund v. Bayer AG, 604 F.3d 98, reh’g en banc denied, 625 F.3d 779 (2d Cir. 2010).

• Petition for certiorari was denied. Louisiana Wholesale Drug Co., Inc. v. Bayer AG, 131 S. Ct. 1606

(2011).

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Compare Supreme Court Review ofStandard of Proof of Invalidity

The question presented on certiorari to the Supreme Court:

“Whether the court of appeals erred in holding that Microsoft’s [patent] invalidity defense must be proved by clear and convincing evidence.” Brief for Petitioner Microsoft Corp., Microsoft Corp. v. i4i Ltd. P’ship, No. 10-290, 2011 WL 288890, at *i (U.S. Jan. 26, 2011).

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Additional Precedent Re: Government Argument That Patent Validity Should Be Weighed in Antitrust

Case• The patent right to exclude has been repeatedly upheld in antitrust challenges

as a defense for restrictive conduct within the scope of the patent, without weighing validity. See, e.g., Walker Process, 382 U.S. 172, 177 (1965); Gen’l Talking Pictures, 304 U.S. 175, 181 (1938).

• Antitrust violations have been limited to restrictions beyond the scope of the patent, such as horizontal concerted action by competitors against third-party competitors or to fix prices, and tie-ins of unpatented goods. See, e.g., U.S. v. Krasnov, 143

F. Supp. 184, 199 (E.D. Pa. 1956), aff’d , 355 U.S. 5 (1957); U.S. v. Nat’l Lead, 63 F. Supp. 513, 522-24 (S.D.N.Y. 1945), aff’d, 32 U.S. 319 (1947); International Salt Co. v. U.S., 332 U.S. 392 (1947). See review of cases in SCM Corp. v. Xerox Corp., 463 F. Supp. 983, 997-98 (D. Conn. 1978).

• Mere settlement of a patent case has not been held to violate the antitrust laws, notwithstanding a challenge to validity in the patent case.

• No antitrust case has made its outcome dependent on the likelihood that a patent would prevail in litigation.See generally Sobel, Consideration of Patent Validity in Antitrust Cases Challenging Hatch-Waxman Act Settlements, 20 Fed. Cir. B.J. 47 (2010) (Vol. 20.1 and errata in Vol. 20.2).

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Additional Precedent Re: Government Argument That Patent Validity Should Be Weighed in Antitrust

Case• Speculation is not admissible in evidence and that rule has been applied to

speculation about the future outcome of litigation. Whitemore v. Arkansas, 495 U.S. 149, 157 (1990);

Boehm v. Comm’l, 146 F.2d 553 (2d Cir.), aff’d, 326 U.S. 287 (1945).

• The policy favoring challenges to patents has been tested against the policy favoring settlement of litigation, with the result that the latter has prevailed. Compare Lear, Inc. v. Adkins, 395 U.S. 653 (1969) (licensee not estopped to challenge licensed patents) to Hemstreet v. Spiegel, 851 F.2d 348 (Fed. Cir. 1988) (upholding agreement not to challenge patents in license settlement) ; Flex-Foot v. CRP, 238 F.3d 1362 (Fed. Cir. 2001).

• The opinions of counsel for the parties to patent litigation about its outcome are likely to be subject to the attorney-client privilege. In order to mount a defense, the parties would be required by the government’s proposed rule to waive the privilege.

• However, in order to preserve a viable privilege, it has been held that liability cannot depend on waiver. Knorr-Bremse v. Dang, 383 F.3d 1337 (Fed. Cir. 2004) (en banc).

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Are Reverse Payments Different Than Other Concededly Lawful Consideration?

• Judge Posner: “any settlement agreement ‘can be characterized as involving ‘compensation’ to the defendant, who would not settle unless he had something to show for the settlement,’”Asahi Glass v. Pentech Pharms., 289 F. Supp. 2d 986, 994 (N.D. Ill. 2003), dismissed by, 104 Fed. App’x 178 (Fed. Cir. 2004) (emphasis in original).

• Compare FTC’s endorsement of other consideration:• “right to sell the generic drug product before patent expiration”• “waiver of the brand’s market exclusivity based on testing of a drug

for pediatric use”• “waiver of patent infringement damages”

Jon Leibowitz, Comm’r, FTC, Prepared Statement of the FTC Before the Senate Judiciary Comm. on Anticompetitive Patent Settlements in the Pharmaceutical Industry: The Benefits of a Legislative Solution at 22-23 (Jan. 17, 2007).

• See also FTC’s Schering Decree: allowing license prior to expiration; lesser of future litigation costs and $2 million.In re Schering-Plough Corp., 136 F.T.C. 956, 966-67 (F.T.C. 2003) , rev’d by, Schering, 402 F.3d at 1075 (11th Cir. 2005)$2 million limit “rather naïve”.).