Ebook Antitrust law and intellectual property rights: Part 2

(BQ) Part 2 book Antitrust law and intellectual property rights has contents: The antitrust implications of horizontal agreements involving intellectual property, the antitrust implications of vertical agreements involving intellectual property, injury, remedies, jurisdiction and procedural issues.

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CHAPTER 11

Pharmaceutical Settlements and Reverse Payments

In re Cardizem CD Antitrust Litigation,

332 F.3d 896 (6th Cir 2003)

OBERDORFER, District Judge

This antitrust case arises out of an agreement entered into by the defendants, Hoescht Marion Roussel, Inc (“HMR”), the manufacturer of the prescription drug Cardizem CD, and Andrx Pharmaceuticals, Inc (“Andrx”), then a potential manufacturer of a generic version of that drug The agreement provided, in essence, that Andrx, in exchange for quarterly payments of $10 million, would refrain from marketing its generic version of Cardizem CD even after it had received FDA approval (the “Agreement”) The plaintiffs are direct and indirect purchasers of Cardizem CD who ﬁ led complaints challenging the Agreement as a violation of federal and state antitrust laws After denying the defendants’ motions to dismiss,

see In re Cardizem CD Antitrust Litigation, 105 F.Supp.2d 618 (E.D.Mich.2000)

(“Dist.Ct.Op I”) and granting the plaintiffs’ motions for partial summary

judg-ment, id., 105 F.Supp.2d 682 (E.D.Mich.2000) (“Dist.Ct.Op II”), the district court

certiﬁ ed two questions for interlocutory appeal: * * *

(2) 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 * * *

Answer to Second Certiﬁ ed Question : Yes The Agreement whereby HMR paid

Andrx $40 million per year not to enter the United States market for Cardizem

CD and its generic equivalents is a horizontal market allocation agreement and,

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as such, is per se illegal under the Sherman Act and under the corresponding state antitrust laws Accordingly, the district court properly granted summary judgment for the plaintiffs on the issue of whether the Agreement was per se illegal

to the patent-holder, id § 355(j)(2)(B); the patent-holder then has forty-ﬁ ve days

to ﬁ le a patent infringement action against the applicant Id § 355(j)(5)(B)(iii)

If the patent-holder ﬁ les suit, a thirty-month stay goes into effect, meaning that unless before that time the court hearing the patent infringement case ﬁ nds that the patent is invalid or not infringed, the FDA cannot approve the generic drug before the expiration of that thirty-month period Id § 355(j)(5)(B)(iii)(I) In order

to encourage generic entry, and to compensate for the thirty-month protective period accorded the patent holder, the fi rst generic manufacturer to submit an ANDA with a paragraph IV certifi cation receives a 180-day period of exclusive marketing rights, during which time the FDA will not approve subsequent ANDA applications Id § 355(j)(5)(B)(iv) The 180-day period of exclusivity begins either (1) when the fi rst ANDA applicant begins commercial marketing of its generic drug (the marketing trigger) or (2) when there is a court decision ruling that the patent is invalid or not infringed (the court decision trigger), whichever is earlier Id

1 A “generic” drug contains the same active ingredients but not necessarily the same inactive ingredients as a “pioneer” drug sold under a brand name

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Pharmaceutical Settlements and Reverse Payments 389

B Facts

Unless otherwise noted, the following facts are undisputed HMR manufactures and markets Cardizem CD, a brand-name prescription drug which is used for the treatment of angina and hypertension and for the prevention of heart attacks and strokes The active ingredient in Cardizem CD is diltiazem hydrochloride, which is delivered to the user through a controlled-release system that requires only one dose per day HMR’s patent for diltiazem hydrochloride expired in November 1992

On September 22, 1995, Andrx ﬁ led an ANDA with the FDA seeking approval

to manufacture and sell a generic form of Cardizem CD On December 30, 1995, Andrx fi led a paragraph IV certifi cation stating that its generic product did not infringe any of the patents listed with the FDA as covering Cardizem CD Andrx was the fi rst potential generic manufacturer of Cardizem CD to fi le an ANDA with

a paragraph IV certiﬁ cation, entitling it to the 180-day exclusivity period once it received FDA approval

In November 1995, the United States patent ofﬁ ce issued Carderm Capital, L.P (“Carderm”) U.S Patent No 5, 470, 584 (“ ′ 584 patent”), for Cardizem CD’s

“dissolution proﬁ le,” which Carderm licensed to HMR [citation omitted] The solution proﬁ le claimed by the ′ 584 patent was for 0–45 % of the total diltiazem to

dis-be released within 18 hours (“45 % –18 patent”)

In January 1996, HMR and Carderm fi led a patent infringement suit against Andrx in the United States District Court for the Southern District of Florida, asserting that the generic version of Cardizem CD that Andrx proposed would infringe the ′ 584 patent [citation omitted] The complaint sought neither damages nor a preliminary injunction Id However, fi ling that complaint automatically trig-gered the thirty-month waiting period during which the FDA could not approve Andrx’s ANDA and Andrx could not market its generic product In February 1996, Andrx brought antitrust and unfair competition counterclaims against HMR [citation omitted] In April 1996, Andrx amended its ANDA to specify that the dissolution profi le for its generic product was not less than 55 % of total diltiazem released within 18 hours (“55 %– 18 generic”) HMR nonetheless continued to pursue its patent infringement litigation against Andrx in defense of its 45 % –18 patent On June 2, 1997, Andrx represented to the patent court that it intended to market its generic product as soon as it received FDA approval [citation omitted]

On September 15, 1997, the FDA tentatively approved Andrx’s ANDA, ing that it would be ﬁ nally approved as soon as it was eligible, either upon expiration

indicat-of the thirty-month waiting period in early July 1998, or earlier if the court in the patent infringement action ruled that the ′ 584 patent was not infringed

Nine days later, on September 24, 1997, HMR and Andrx entered into the Agreement [citation omitted] It provided that Andrx would not market a bioequiv-alent or generic version of Cardizem CD in the United States until the earliest of: (1) Andrx obtaining a favorable, ﬁ nal and unappealable determination in the patent infringement case; (2) HMR and Andrx entering into a license agreement; or (3) HMR entering into a license agreement with a third party Andrx also agreed to dismiss its antitrust and unfair competition counterclaims, to diligently prosecute

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its ANDA, and to not “relinquish or otherwise compromise any right accruing thereunder or pertaining thereto,” including its 180-day period of exclusivity

In exchange, HMR agreed to make interim payments to Andrx in the amount of

$40 million per year, payable quarterly, beginning on the date Andrx received fi nal FDA approval 3 2 HMR further agreed to pay Andrx $100 million per year, 4 3 less whatever interim payments had been made, once: (1) there was a fi nal and unap-pealable determination that the patent was not infringed; (2) HMR dismissed the patent infringement case; or (3) there was a fi nal and unappealable determination that did not determine the issues of the patent’s validity, enforcement, or infringe-ment, and HMR failed to refi le its patent infringement action 5 4HMR also agreed that

it would not seek preliminary injunctive relief in the ongoing patent infringement litigation 6 5

On July 8, 1998, the statutory thirty-month waiting period expired On July 9,

1998, the FDA issued its ﬁ nal approval of Andrx’s ANDA Pursuant to the ment, HMR began making quarterly payments of $10 million to Andrx, and Andrx did not bring its generic product to market

On September 11, 1998, Andrx, in a supplement to its previously ﬁ led ANDA, sought approval for a reformulated generic version of Cardizem CD Andrx informed HMR that it had reformulated its product; it also urged HMR to recon-sider its infringement claims On February 3, 1999, Andrx certiﬁ ed to HMR that its reformulated product did not infringe the ′ 584 patent

On 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 At the time of settlement, HMR paid Andrx

a ﬁ nal sum of $50.7 million, bringing its total payments to $89.83 million 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 Since its release, Cartia XT has sold for a much lower price than Cardizem CD and has captured a substantial portion of the market

3 The payments were scheduled to end on the earliest of: (1) a ﬁ nal and unappealable order or judgment in the patent infringement case; (2) if HMR notiﬁ ed Andrx that it intended to enter into

a license agreement with a third party, the earlier of: (a) the expiration date of the required notice period or (b) the date Andrx effected its ﬁ rst commercial sale of the Andrx product; or (3) if Andrx exercised its option to acquire a license from HMR, the date the license agreement became effective

4 HMR and Andrx stipulated that, for the purposes of the Agreement, Andrx would have realized

$100 million per year in proﬁ ts from the sale of its generic product after receiving FDA approval

5 HMR had to notify Andrx within thirty days of such a determination that it continued to believe that Andrx’s generic version of the drug infringed its patent and that it intended to reﬁ le its patent infringement action

6 HMR also agreed that it would give Andrx copies of changes it proposed to the FDA regarding Cardizem CD’s package insert and immediate container label, that it would notify Andrx of any labeling changes pending before or approved by the FDA, and that it would grant Andrx an irrevocable option to acquire a nonexclusive license to all intellectual property HMR owned or controlled that Andrx might need to market its product in the United States

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II Discussion

* * * [W]e address ﬁ rst whether the Agreement was a per se illegal restraint of trade before considering whether the plaintiffs adequately alleged antitrust injury

A Per Se Illegal Restraint of Trade * * *

1 Relevant Antitrust Law

Section 1 of the Sherman Act provides that “Every contract, combination in the form of trust or otherwise, or conspiracy, in restraint of trade or commerce among the several States, or with foreign nations, is declared to be illegal .” 15 U.S.C

§ 1 Read “literally,” section 1 “prohibits every agreement in restraint of trade.”

Arizona v Maricopa Cty Medical Soc., 457 U.S 332, 342 (1982) However, the

Supreme Court has long recognized that Congress intended to outlaw only

“unrea-sonable” restraints State Oil Co v Khan, 522 U.S 3, 10 (1997) [citation omitted] Most restraints are evaluated using a “rule of reason.” State Oil, 522 U.S at 10

Under this approach, the “ﬁ nder of fact must decide whether the questioned practice imposes an unreasonable restraint on competition, taking into account a variety of factors, including speciﬁ c information about the relevant business, its condition before and after the restraint was imposed, and the restraint’s history,

nature, and effect.” Id [citation omitted]

Other restraints, however, “are deemed unlawful per se” because they “have such predictable and pernicious anticompetitive effect, and such limited poten-

tial for procompetitive beneﬁ t.” Id [citation omitted] “Per se treatment is

appro-priate ‘[o]nce experience with a particular kind of restraint enables the Court to

predict with conﬁ dence that the rule of reason will condemn it.’ “ Id [citation

omitted] The per se approach thus applies a “conclusive presumption” of

ille-gality to certain types of agreements, Maricopa Cty., 457 U.S at 344; where it

applies, no consideration is given to the intent behind the restraint, to any claimed pro-competitive justiﬁ cations, or to the restraint’s actual effect on competition 11 6

11 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 efﬁ ciency, 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)

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National College Athletic Ass’n (“NCAA”) v Board of Regents, 468 U.S 85, 100

(1984) As explained by the Supreme Court, “[t]he probability that itive consequences will result from a practice and the severity of those conse-quences must be balanced against its procompetitive consequences Cases that

anticompet-do not fi t the generalization may arise, but a per se rule refl ects the judgment that such cases are not suffi ciently 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)

The Supreme Court has identiﬁ ed certain types of restraints as subject to the per se rule The classic examples are naked, horizontal restraints pertaining to prices or territories [citation omitted]

2 Application

In answering the question whether the Agreement here was per se illegal, the following facts are undisputed and dispositive The Agreement guaranteed to HMR that its only potential competitor at that time, Andrx, would, for the price of

$10 million per quarter, refrain from marketing its generic version of Cardizem

CD even after it had obtained FDA approval, protecting HMR’s exclusive access

to the market for Cardizem CD throughout the United States until the rence of one of the end dates contemplated by the Agreement (In fact, Andrx and HMR terminated the Agreement and the payments in June 1999, before any of the speciﬁ ed end dates occurred.) In the interim, however, from July 1998 through June 1999, Andrx kept its generic product off the market and HMR paid Andrx

occur-$89.83 million By delaying Andrx’s entry into the market, the Agreement also delayed the entry of other generic competitors, who could not enter until the expiration of Andrx’s 180-day period of marketing exclusivity, which Andrx had agreed not to relinquish or transfer There is simply no escaping the conclusion that the Agreement, all of its other conditions and provisions notwithstanding, was, at its core, a horizontal agreement to eliminate competition in the market for Cardizem CD throughout the entire United States, a classic example of a per se illegal restraint of trade

None of the defendants’ attempts to avoid per se treatment is persuasive As explained in greater detail in the district court’s opinion, [citation omitted] the Agreement cannot be fairly characterized as merely an attempt to enforce patent rights or an interim settlement of the patent litigation As the plaintiffs point out,

it is one thing to take advantage of a monopoly that naturally arises from a ent, 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 Nor does the fact that this is a “novel” area of law preclude per

pat-se treatment, pat-see Maricopa Cty., 457 U.S at 349 To the contrary, the Supreme

Court has held that “‘[w]hatever may be its peculiar problems and characteristics, the Sherman Act, so far as price-ﬁ xing agreements are concerned, establishes (“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.”)

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one uniform rule applicable to all industries alike.’” Id at 349 [citation omitted] We

see no reason not to apply that rule here, especially when the record does not support the defendants’ claim that the district court made “errors” in its analysis Finally, the defendants’ claims that the Agreement lacked anticompetitive effects and had pro-

competitive beneﬁ ts are simply irrelevant See, e.g., Maricopa Cty., 457 U.S at 351

To reiterate, the virtue/vice of the per se rule is that it allows courts to presume that certain behaviors as a class are anticompetitive without expending judicial resources

to evaluate the actual anticompetitive effects or procompetitive justiﬁ cations in a particular case As the Supreme Court explained in Maricopa County:

The respondents’ principal argument is that the per se rule is inapplicable because their agreements are alleged to have procompetitive justifi cations The argument indicates a misunderstanding of the per se concept The anticompetitive potential inherent in all price-fi xing agreements justifi es their facial invalidation even

if procompetitive justifi cations are offered for some Those claims of enhanced competition are so unlikely to prove signifi cant in any particular case that we adhere to the rule of law that is justifi ed in its general application

457 U.S at 351 Thus, the law is clear that once it is decided that a restraint is subject to per se analysis, the claimed lack of any actual anticompetitive effects or presence of procompetitive effects is irrelevant Of course, our holding here does not resolve the issues of causation and damages, both of which will have to be proved before the plaintiffs can succeed on their claim for treble damages under the Clayton Act

III Conclusion

For the foregoing reasons, we answer [] the district court’s certiﬁ ed question[] as follows: it properly grant[ed] the plaintiffs’ motions for summary judgment that the defendants had committed a per se violation of the antitrust laws

Comments and Questions

1 Does the court hold that all reverse payment settlements are per se illegal? If not all reverse payment settlements warrant per se condemnation, which features

of this settlement tipped the balance in favor of per se treatment?

2 Would making reverse payment settlements per se illegal be good policy? If reverse payments were per se illegal, how might parties try to craft settlements in order to circumvent the per se rule? Could those settlements be more anticompeti-tive than reverse payments?

3 Sitting by designation as a district court judge, Judge Richard Posner asserted:

“A ban on reverse-payment settlements would reduce the incentive to challenge patents by reducing the challenger’s settlement options should he be sued for

infringement, and so might well be thought anticompetitive.” Asahi Glass Co v

Pentech Pharm., Inc., 289 F.Supp.2d 986, 992 (N.D Ill 2003) (Posner., J.) What

do you think of Judge Posner’s argument? Would a per se rule against payment settlements reduce competition and innovation?

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4 It appears unusual that a plaintiff would pay a defendant to settle a lawsuit After all, if the plaintiff wants the litigation to end, it can seek to voluntarily dismiss its lawsuit See Fed R Civ Proc 41(a) Are there legitimate — not anticompetitive — reasons why a patentholder would pay an accused infringer to settle?

5 Some have advanced the argument that reverse-payment settlements are

a legitimate mechanism for patentholders to any uncertainty associated with infringement litigation, including the risk that their patents could be invalidated See ABA Section of Antitrust Law, Intellectual Property and Antitrust Handbook 10 (2007) Does this justify removing such settlements from the per

se illegal category? If so, does it mean that such agreements should be per se legal? Why or why not?

Schering-Plough Corp v F.T.C.

402 F.3d 1056 (11th Cir 2005)

FAY, Circuit Judge:

Pharmaceutical companies Schering-Plough Corp and Upsher-Smith tories, Inc petition for review of an order of the Federal Trade Commission (“FTC”) that they cease and desist from being parties to any agreement settling a patent infringement lawsuit, in which a generic manufacturer either (1) receives anything

Labora-of value; and (2) agrees to suspend research, development, manufacture, marketing,

or sales of its product for any period of time The issue is whether substantial dence supports the conclusion that the Schering-Plough settlements unreasonably restrain trade in violation of Section 1 of the Sherman Antitrust Act, 15 U.S.C § 1, and Section 5 of the Federal Trade Commission Act (“FTC Act”), 15 U.S.C § 45(a)

evi-We have jurisdiction pursuant to 15 U.S.C § 45(c), and, for the reasons discussed below, we grant the petition for review and set aside and vacate the FTC’s order

I Factual Background

A The Upsher Settlement

Schering-Plough (“Schering”) is a pharmaceutical corporation that develops, markets, and sells a variety of science-based medicines, including antihistamines, corticosteroids, antibiotics, anti-infectives and antiviral products Schering manufactures and markets an extended-release microencapsulated potassium chloride product, K-Dur 20,which is a supplement generally taken in conjunc-tion with prescription medicines for the treatment of high blood pressure or congestive heart disease The active ingredient in K-Dur 20, potassium chloride,

is commonly used and unpatentable Schering, however, owns a formulation patent on the extended-release coating, which surrounds the potassium chlo-ride in K-Dur 20, patent number 4,863,743 (the “ ‘743 patent”) The ‘743 patent expires on September 5, 2006

The ‘743 patent claims a pharmaceutical dosage unit in tablet form for oral administration of potassium chloride The tablet contains potassium chloride

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crystals coated with a cellulose-type material The novel feature in the ‘743 patent

is the viscous coating, which is applied to potassium chloride crystals The coating provides a sustained-release delivery of the potassium chloride

In late 1995, Upsher-Smith Laboratories (“Upsher”), one of Schering’s itors, sought Food and Drug Administration (“FDA”) approval to market Klor Con M20 (“Klor Con”), a generic version of K-Dur 20 Asserting that Upsher’s product was an infringing generic substitute, Schering sued for patent infringement K-Dur

compet-20 itself was the most frequently prescribed potassium supplement, and generic manufacturers such as Upsher could develop their own potassium-chloride supple-ment as long as the supplement’s coating did not infringe on Schering’s patent

In 1997, prior to trial, Schering and Upsher entered settlement discussions During these discussions, Schering refused to pay Upsher to simply “stay off the market,” and proposed a compromise on the entry date of Klor Con Both com-panies agreed to September 1, 2001, as the generic’s earliest entry date, but Upsher insisted upon its need for cash prior to the agreed entry date Although still opposed

to paying Upsher for holding Klor Con’s release date, Schering agreed to a rate deal to license other Upsher products Schering had been looking to acquire a cholesterol-lowering drug, and previously sought to license one from Kos Pharma-ceuticals (“Kos”) After reviewing a number of Upsher’s products, Schering became particularly interested in Niacor-SR (“Niacor”), which was a sustained-release niacin product used to reduce cholesterol

Upsher offered to sell Schering an exclusive license to market Niacor worldwide, except for North America The parties executed a conﬁ dentiality agreement in June

1997, and Schering received licenses to market ﬁ ve Upsher products, including Niacor In relation to Niacor, Schering received a data package, containing the results of Niacor’s clinical studies The cardiovascular products unit of Schering’s Global Marketing division, headed by James Audibert (“Audibert”) evaluated Niacor’s proﬁ tability and effectiveness

According to the National Institute of Health, niacin was the only product known to have a positive effect on the four lipids related to cholesterol manage-ment Immediate-release niacin, however, created an annoying-but innocuous-side effect of “ﬂ ushing,” which reduced patient compliance On the other hand, previous versions of sustained-release niacin supplements, like Niacor, had been associated with substantial elevations in liver enzyme levels

Schering knew of the effects associated with niacin supplements, but continued with its studies of Niacor because it had passed the FDA’s medical review and deter-mined that it would likely be approved More important, the clinical trials studied

by Audibert demonstrated that Niacor reduced the ﬂ ushing effect to one-fourth

of the immediate-release niacin levels and only increased liver enzymes by four percent, which was generally consistent with other cholesterol inhibitors Based

on this data, Audibert constructed a sales and proﬁ tability forecast, and concluded that Niacor’s net present value at that time would be between $245–265 million

On June 17, 1997, the day before the patent trial was scheduled to begin, Schering and Upsher concluded the settlement The companies negotiated a three-part license deal, which called for Schering to pay (1) $60 million in initial royalty fees;

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(2) $10 million in milestone royalty payments; and (3) 10 % or 15 % royalties on sales Schering’s board approved of the licensing transaction after determining the deal was valuable to Schering This estimation corresponds to the independent valuation that Schering completed in relation to Kos’ Niaspan, a substantially simi-lar product to Niacor That evaluation ﬁ xed Niaspan’s net present value between

$225–265 million The sales projections for both the Kos and Upsher products are substantially similar Raymond Russo (“Russo”) estimated Niaspan (Kos’ supple-ment) sales to reach $174 million by 2005 for the U.S market Comparably, and more conservatively, Audibert predicted Niacor (Upsher’s supplement) to reach

$136 million for the global market outside the United States, Canada, and Mexico, which is either equal to or larger than U.S market alone

After acquiring the licensing rights to Niacor, Schering began to ready its uments for overseas ﬁ lings In late 1997, however, Kos released its ﬁ rst-quarter sales results for Niaspan, which indicated a poor performance and lagging sales Following this announcement, Kos’ stock price dramatically dropped from $30.94

doc-to $16.56, and eventually botdoc-tomed out at less than $6.00 In 1998, with Niaspan’s disappointing decline as a precursor, Upsher and Schering decided further invest-ment in Niacor would be unwise

B The ESI Settlement

In 1995, ESI Lederle, Inc (“ESI”), another pharmaceutical manufacturer, sought FDA approval to market its own generic version of K-Dur 20 called “Micro-K 20.” Schering sued ESI in United States District Court * * * The trial court appointed U.S Magistrate Judge Thomas Rueter (“Judge Rueter”) to mediate the ﬁ fteen-month process, which resulted in nothing more than an impasse

Finally, in December 1997, Schering offered to divide the remaining patent life with ESI and allow Micro-K 20 to enter the market on January 1, 2004-almost three years ahead of the patent’s September 2006 expiration date 6 7ESI accepted this offer, but demanded on receiving some form of payment to settle the case At Judge Rueter’s suggestion, Schering offered to pay ESI $5 million, which was attributed

to legal fees, however, ESI insisted upon another $10 million Judge Rueter and Schering then devised an amicable settlement whereby Schering would pay ESI up to

$10 million if ESI received FDA approval by a certain date Schering doubted the likelihood of this contingency happening, and Judge Rueter intimated that if Schering’s prediction proved true, it would not have to pay the $10 million The settlement was signed in Judge Rueter’s presence on January 23, 1998

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against Schering, Upsher, and ESI’s parent, American Home Products tion (“AHP”) The complaint alleged that Schering’s settlements with Upsher and ESI were illegal agreements in restraint of trade, in violation of Section 5 of the Federal Trade Commission Act, 15 U.S.C § 45, and in violation of Section 1 of the Sherman Act, 15 U.S.C § 1 The complaint also charged that Schering monop-olized and conspired to monopolize the potassium supplement market

II Procedural History

The Complaint was tried before an Administrative Law Judge (ALJ) from January

23, 2002 to March 28, 2002 Numerous exhibits were admitted in evidence, and the ALJ heard testimony from an array of expert witnesses presented by both sides

In his initial decision, the ALJ found that both agreements were lawful settlements

of legitimate patent lawsuits, and dismissed the complaint Speciﬁ cally, the ALJ ruled that the theories advanced by the FTC, namely, that the agreements were anticompetitive, required either a presumption of (1) that Schering’s ‘743 patent was invalid; or (2) that Upsher’s or ESI’s generic products did not infringe the ‘743 patent The ALJ concluded that such presumptions had no basis in law or fact Moreover, the ALJ noted that Schering’s witnesses went unrebutted by FTC com-plaint counsel, and credibly established that the licensing agreement with Upsher was a “bona-ﬁ de arm’s length transaction.”

The ALJ further found that the presence of payments did not make the ment anticompetitive, per se Rather, the strength of the patent itself and its exclu-sionary power needed to be assessed The initial decision highlighted the FTC’s failure to prove that, absent a payment, either better settlement agreements or litigation results would have effected an earlier entry date for the generics Finally, the ALJ found no proof that Schering maintained an illegal monopoly within the relevant potassium chloride supplement market

The FTC’s complaint counsel appealed this decision to the full Commission

On December 8, 2003, the Commission issued its opinion, reversing the ALJ’s initial decision, and agreeing with complaint counsel that Schering’s settlements with ESI and Upsher had violated the FTC Act and the Sherman Act Although it refrained from ruling that Schering’s payments to Upsher and ESI made the settle-ments per se illegal, the Commission concluded that the quid pro quo for the pay-ment was an agreement to defer the entry dates, and that such delay would injure competition and consumers

In contrast to the ALJ’s inquiry into the merits of the ‘743 patent litigation, the Commission turned instead to the entry dates that “might have been” agreed upon

in the absence of payments as the determinative factor Despite the Commission’s assumption that the parties could have achieved earlier entry dates via litigation

or non-monetary compromises, it also acknowledged that the settled entry dates were non-negotiable Upon review of the settlement payments, the Commission determined that neither the $60 million to Upsher nor the $30 million to ESI rep-resented legitimate consideration for the licenses granted by Upsher or ESI’s ability

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to secure FDA approval of its generic 10 8 Consequently, the Commission ited settlements under which the generic receives anything of value and agrees to defer its own research, development, production or sales activities Nevertheless, the Commission carved out one arbitrary exception for payments to the generic: beyond a “simple compromise” to the entry date, if payments can be linked to litigation costs (not to exceed $2 million), and the Commission is notiﬁ ed of the settlement, then the parties need not worry about a later antitrust attack Neither

prohib-of the Schering agreements ﬁ t this caveat, and Schering and Upsher timely petition for review * * *

IV Discussion

The question remains whether the Commission’s conclusions are legally sufﬁ cient to establish a violation of the Sherman Act and the FTC Act-that is, whether Schering’s agreements with Upsher and ESI amount to an “unreasonable” restraint

-of trade In Valley Drug, this Court stated that the “ultimate purpose -of the

anti-trust inquiry is to form a judgment with respect to the competitive signiﬁ cance

of the restraint at issue.” Valley Drug Co v Geneva Pharm., Inc , 344 F.3d 1294,

1303-04 (11th Cir.2003) [citation omitted] We wrote that the focus of antitrust analysis should be on “what conclusions regarding the competitive impact of a challenged restraint can conﬁ dently be drawn from the facts demonstrated by the

parties.” Valley Drug, 344 F.3d at 1304

Valley Drug involved an interim settlement agreement between a holding pharmaceutical company and its potential generic competitor Under the agreement, the patent holder paid the generic manufacturer $4.5 million per month to keep its product off the market until resolution of the underlying patent infringement suit The lower court determined that the payments amounted

patent-to a per se violation of antitrust laws See In re Terazosin Hydrochloride Antitrust

Litig., 164 F.Supp.2d 1340 (S.D.Fla.2000) We reversed that decision, and

con-cluded that monetary payments made to an alleged infringer as part of a patent

litigation settlement did not constitute a per se violation of antitrust law Valley

Drug, 344 F.3d at 1309

Although we acknowledged in Valley Drug that an agreement to allocate markets is “clearly anticompetitive,” resulting in reduced competition, increased prices, and a diminished output, we nonetheless reversed for a rather simple reason:

one of the parties owned a patent Id at 1304 We recognized the effect of

agree-ments that employ extortion-type tactics to keep competitors from entering the market In the context of patent litigation, however, the anticompetitive effect may

be no more broad than the patent’s own exclusionary power To expose those

agree-ments to antitrust liability would “obviously chill such settleagree-ments.” Id at 1309

10 The contradictory nature of the Commission’s opinion is exempliﬁ ed by its assessment of the ESI settlement Although the Commission found the payment to be unjustiﬁ ed and in violation of the law, it simultaneously explained that “[a]s a matter of prosecutorial discretion, we might not have brought a stand-alone case based on such relatively limited evidence.”

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Both the ALJ and the Commission analyzed the Schering agreements ing to the rule of reason analysis, albeit under two different methodologies To

accord-the contrary, accord-the district court in Valley Drug approached accord-the agreements in that

case from the perspective of whether they were a per se violation of antitrust laws Under the Supreme Court’s guidance, an alleged restraint may be found unreason-able either because it ﬁ ts within a category of restraints that has been held to be “per se” unreasonable, or because it violates the so-called “Rule of Reason.” The rule of reason tests “ ‘whether the restraint imposed is such as merely regulates and per-haps thereby promotes competition or whether it is such as may suppress or even

destroy competition.’ “ FTC v Indiana Federation of Dentists, 476 U.S 447, 457, 106 S.Ct 2009, 2017, 90 L.Ed.2d 445 (1986) (quoting Board of Trade of City of Chicago

v United States, 246 U.S 231, 238, 38 S.Ct 242, 244, 62 L.Ed 683, (1918))

Both the ALJ’s initial decision and the Commission’s opinion rejected the per se approach, and instead employed the rule of reason The traditional rule of reason analysis requires the factﬁ nder to “weigh all of the circumstances of a case in deciding whether a restrictive practice should be prohibited as imposing an unrea-

sonable restraint on competition.” Continental T.V., Inc v GTE Sylvania Inc., 433

U.S 36, 49 (1977) The plaintiff bears an initial burden of demonstrating that the alleged agreement produced adverse, anti-competitive effects within the relevant product and geographic markets, i.e., market power [citation omitted]

Once the plaintiff meets the burden of producing suffi cient evidence of market power, the burden then shifts to the defendant to show that the challenged con-duct promotes a suffi ciently pro-competitive objective A restraint on competition cannot be justifi ed solely on the basis of social welfare concerns [citation omitted]

In rebuttal then, the plaintiff must demonstrate that the restraint is not reasonably necessary to achieve the stated objective [citation omitted]

In the present case, the Commission emphasized that its rule of reason standard required a methodology different from that set out by the ALJ’s ini-tial decision The Commission chided the ALJ’s approach-which evaluated the strength of the patent, deﬁ ned the relevant geographic and product markets, calcu-lated market shares, and then drew inferences from the shares and other industry characteristics-as an inappropriate manner of analyzing the competitive effects of the parties’ activities Instead, the Commission’s rule of reason dictated application

of the Indiana Federation exception, in that complaint counsel need not prove the

relevant market See 476 U.S at 460-61, 106 S.Ct 2009 Rather, the FTC was only

required to show a detrimental market effect Thus, under the Commission’s dard, once the FTC met the low threshold of demonstrating the anticompetitive nature of the agreements, it found that Schering and Upsher did not suffi ciently establish that the challenged activities were justifi ed by procompetitive benefi ts Despite the appearance that it openly considered Schering and Upsher’s procom-petitive affi rmative defense, the Commission immediately condemned the settle-ments because of their absolute anti-competitive nature, and discounted the merits

stan-of the patent litigation It would seem as though the Commission clearly made its decision before it considered any contrary conclusion

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We think that neither the rule of reason nor the per se analysis is appropriate

in this context We are bound by our decision in Valley Drug where we held both

approaches to be ill-suited for an antitrust analysis of patent cases because they seek

to determine whether the challenged conduct had an anticompetitive effect on the market 344 F.3d 1294, 1311 n 27 14 9 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 anti-trust liability might undermine the encouragement of innovation and disclosure,

or the extent to which the patent laws prevent antitrust liability for such

exclusion-ary effects.” Id 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 Valley Drug, 344 F.3d at 1312 15 10

A The ‘743 Patent

“A patent shall be presumed valid.” 35 U.S.C § 282 [citation omitted] Engrafted into patent law is the notion that a patent grant bestows “the right to exclude

others from proﬁ ting by the patented invention.” Dawson Chem Co v Rohm &

Haas Co., 448 U.S 176, 215, 100 S.Ct 2601, 65 L.Ed.2d 696 (1980); see Valley Drug,

344 F.3d at 1304 (“A patent grants its owner the lawful right to exclude others.”) Thus, the Patent Act essentially provides the patent owner “with what amounts to

a permissible monopoly over the patented work.” Telecom Technical Services Inc v

Rolm Co., 388 F.3d 820, 828 (11th Cir.2004) [citation omitted] The Patent Act also

explicitly allows for the assignability of a patent; providing the owner with a right

to “grant or convey an exclusive right under his application for patent to the whole or any speciﬁ ed part of the United States.” 35 U.S.C § 261

14 On remand, the district court in Valley Drug still applied a per se analysis, and found those agreements to be illegal See In re Terazosin Hydrochloride Antitrust Litigation, 352 F.Supp.2d

1279 (S.D.Fla.2005) We note that the case at bar is wholly different from Valley Drug The critical

difference is that the agreements at issue in Valley Drug did not involve ﬁ nal settlements of patent

litigation, and, moreover, the Valley Drug agreements did not permit the generic company to

market its product before patent expiration On remand, the district court emphasized that the

“[a]greement did not resolve or even simplify Abbott’s patent infringement action to the contrary, the Agreement tended to prolong that dispute to Abbott’s advantage, delaying generic entry for a longer period of time than the patent or any reasonable interpretation of the patent’s protections

would have provided.” In re Terazosin Hydrochloride Antitrust Litigation, 352 F.Supp.2d 1279

(S.D.Fla.2005) Given these material distinctions, the same analysis cannot apply

15 The Commission wrote that it would neither address the exclusionary power of Schering’s patent nor compare the patent’s scope to the exclusionary effect of the settlements Rather, the Commission grounds its decision in the untenable supposition that without a payment there would have been different settlements with both ESI and Schering, resulting in earlier entry dates: “we cannot assume that Schering had a right to exclude Upsher’s generic competition for the life of the patent any more than we can assume that Upsher had the right to enter earlier In fact we make neither assumption, but focus on the effect that Schering’s payment to Upsher was likely to have on the generic entry date which the parties would otherwise have agreed to in a settlement.”

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By virtue of its ‘743 patent, Schering obtained the legal right to exclude Upsher and ESI from the market until they proved either that the ‘743 patent was invalid

or that their products, Klor-Con and Micro-K 20, respectively, did not infringe Schering’s patent Although the exclusionary power of a patent may seem incon-gruous with the goals of antitrust law, 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 [citation omitted] Therefore, a patent holder does not incur anti-trust liability when it chooses to exclude others from producing its patented work [citation omitted]

A patent gives its owner the right to grant licenses, if it so chooses, or it may ride its wave alone until the patent expires [citation omitted] What patent law does not do, however, is extend the patentee’s monopoly beyond its statutory right

to exclude Mallinckrodt, Inc v Medipart, Inc., 976 F.2d 700, 708 (Fed.Cir.1992); see also, United States v Singer Mfg Co., 374 U.S 174, 196–197 (1963) (“[B]eyond

the limited monopoly which is granted, the arrangements by which the patent

is utilized are subject to the general law [T]he possession of a valid patent

or patents does not give the patentee any exemption from the provisions of the Sherman Act beyond the limits of the patent monopoly.”) If the challenged activ-ity simply serves as a device to circumvent antitrust law, then that activity is sus-

ceptible to an antitrust suit Asahi Glass Co., Ltd v Pentech Pharmaceuticals, Inc.,

289 F.Supp.2d 986, 991 (N.D.Ill.2003), In Asahi, Judge Posner gave an illustrative example of when certain conduct transcends the conﬁ nes of the patent:

Suppose a seller obtains a patent that it knows is almost certainly invalid (that is, almost certain not to survive a judicial challenge), sues its competitors, and settles the suit by licensing them to use its patent in exchange for their agreeing not to sell the patented product for less than the price speciﬁ ed in the license In such a case, the patent, the suit, and the settlement would be devices-masks-for ﬁ xing prices,

in violation of antitrust law

Id

It is uncontested that potassium chloride is the unpatentable active ingredient

in Schering’s brand-name drug K-Dur 20 Schering won FDA approval in 1986 to sell its K-Dur 20 tablets Under the Hatch-Waxman scheme, in order for Upsher and ESI to obtain FDA approval to market their generic versions of an approved drug product like K-Dur 20, they simply needed to demonstrate that the drugs were bioequivalent [sic], i.e., that the “active ingredient of the new drug is the same as that of the listed drug.” 21 U.S.C § 355(j)(2)(A)(ii)(I) K-Dur 20’s unique-ness, and hence the reason for a patent, is the time-release capsule that surrounds the potassium chloride Because the patent only covers the individualized delivery method (the sustained-release formula), and not the active ingredient itself, it is termed a “formulation” patent

No one disputes that the ‘743 patent gave Schering the lawful right to exclude infringing products from the market until September 5, 2006 Nor is there any

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dispute that Schering’s agreement with Upsher gave it a license under the ‘743 ent to sell a microencapsulated form of potassium chloride more than ﬁ ve years before the expiration of the ‘743 patent 17 11 Likewise, ESI gained a license under the

pat-‘743 patent to sell its microencapsulated version more than two years before the

‘743 patent expired Perhaps most important, and which the ALJ duly noted, is that FTC complaint 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

Although the FTC alleges that Schering’s settlement agreements are veiled attempts to disguise a quid pro quo arrangement aimed at preserving Schering’s monopoly in the potassium chloride supplement market, there has been no alle-gation that the ‘743 patent itself is invalid or that the resulting infringement suits against Upsher and ESI were “shams.” Additionally, without any evidence to the contrary, there is a presumption that the ‘743 patent is a valid one, which gives Schering the ability to exclude those who infringe on its product Therefore, the proper analysis now turns to whether there is substantial evidence to support the Commission’s conclusion that the challenged agreements restrict competition

beyond the exclusionary effects of the ‘743 patent Valley Drug, 344 F.3d at 1306; see also In re Ciproﬂ oxacin Hydrochloride Antitrust Litig., 261 F.Supp.2d 188, 196

(E.D.N.Y.2003) 18 12

B The Scope of Schering’s Agreements

1 The Upsher Settlement

The FTC’s complaint characterized the agreements at the center of this contest

as “horizontal market allocation agreements,” whereby Schering reserved its sales

of K-Dur 20 for several years, while Upsher and ESI refrained from selling their generic versions of K-Dur 20 during that same time period Adding to the FTC’s ire is the presence of “reverse payments,” represented by settlement payments from the patent owner to the alleged infringer The Commission ruled that the coupling of reverse payments with an agreement by the generics not to enter the market before a particular date, “raise[d] a red ﬂ ag that distinguishes this par-ticular litigation settlement from most other patent settlements, and mandates a further inquiry.” [citation omitted]

In the context of Schering’s settlement with Upsher, the FTC argues that the

$60 million payment from Schering to Upsher was not a bona ﬁ de royalty payment under the licenses Schering obtained for Niacor and ﬁ ve other Upsher products Instead, according to the FTC, the royalty payments constituted payoffs to delay

17 Upsher began selling Klor Con M20 on September 1, 2001

18 It is patently obvious that the Commission’s opinion did not employ this analysis; preferring, instead, to proceed through its laborious rule of reason framework, eventually branding the challenged restraints to be illegal horizontal market allocation agreements The Commission was ostensibly silent with regard to the ‘743 patent, yet it cavalierly dismissed our holding in Valley Drug, stating that a determination on the merits of the underlying patent disputes was “not supported by law or logic.”

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the introduction of Upsher’s generic The FTC concedes that its position fails if it cannot prove a direct causal link between the payments and the delay

The trial before the ALJ covered 8,629 pages of transcript, involved forty-one witnesses, and included thousands of exhibits The trial revealed that Schering personnel evaluated Niacor, and forecast its proﬁ t stream with a net present value

of $225–265 million Upsher itself had invested signiﬁ cant time and ﬁ nancial resources in Niacor Moreover, Schering had a long-documented and ongoing interest in licensing an extended-release niacin product, as evidenced by its efforts

to acquire Niaspan from Kos Pharmaceuticals

Evidence at trial also demonstrated that the personnel who evaluated Niaspan’s potential were unaware of the ongoing litigation between Upsher and Schering, and had little, if any, incentive to inﬂ ate Niacor’s value Indeed, many of the esti-mates in conjunction with the Niacor evaluation traced the independent conclu-sions of the team that evaluated Niaspan Schering’s witnesses corroborated the documentary evidence, and the ALJ found the $60 million payment to Upsher to

be a bona ﬁ de fair-value payment

The Commission chose to align its opinion with the two witnesses presented

by the FTC One witness, Dr Nelson Levy (“Levy”) was proffered as an expert

in pharmaceutical licensing and valuation He concluded that the $60 million payment was “grossly excessive,” and that Schering’s due diligence in evaluat-ing Niacor fell astonishingly short of industry standards Levy cited Upsher and Schering’s post-settlement behavior, as proof of the agreement’s artiﬁ cial nature

We are troubled by Levy’s testimony Interestingly, Levy arrived at his conclusions without performing a quantitative analysis of Niacor 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 Although the Commission’s opinion does not state that it in relying on Levy’s testimony, it curiously mirrors each of Levy’s conclusions

The FTC also offered Professor Timothy Bresnahan (“Bresnahan”) to prove that Schering’s payment was not for the Niacor license While Bresnahan neither challenged Niacor’s sales projections nor discounted its economic value, Bresnahan nonetheless opined that the payment was for Upsher’s delayed entry, and not Niacor Bresnahan based his conclusions on his interpretation of the parties’ sub-jective incentives to trade a payment for delay Bresnahan speciﬁ cally pointed to Schering’s failed transactions with Kos and the lack of other competitors vying for Niacor as evidence that the payment was not connected to the license

Like the Levy testimony, the Commission did not expressly adopt Bresnahan’s theories, but his rationale and the Commission’s conclusions became one and the same The Commission is quite comfortable with assenting to Bresnahan’s rather amorphous “incentive” theory despite its lack of empirical foundation Unfortu-nately, Bresnahan’s so-called incentives do not rise to the level of legal conclusions

We understand that certain incentives may rank high in these transactions, but it

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also true that the possibility of an outside impetus often lays dormant The simple presence of economic motive weighs little on the scale of probative value [citation omitted]

The ALJ rejected the FTC’s experts, concluding that testimony from Schering’s witnesses “provides direct evidence that the parties did not exchange money for delay.” The Commission disagreed, and determined that Niacor was not worth

$60 million To prove its point, the Commission relied on somewhat forced dence: (1) the unconvincing fact that doctors gave Kos’ niacin product mixed reviews, causing Schering to value those proﬁ ts at an apparently contemptible

evi-$254 million; (2) the meretricious argument that Schering’s personnel did not adequately assess Niacor’s safety; (3) the Commission’s questionable non-expert opinion that Schering should have done more due diligence; (4) the Commission’s belief that the European market-where Schering held the Niacor license-for a niacin product was less desirable than the U.S market; and (5) Schering’s post-settlement decision to discontinue its Niacor efforts in light of the poor sales effected by Kos’ Niaspan 23 13

To borrow from the Commission’s own words, we think its conclusion that Niacor was not worth $60 million, and that settlement payment was to keep Upsher off the market is “not supported by law or logic.” Substantial evidence requires

a review of the entire record at trial, and that most certainly includes the ALJ’s credibility determinations and the overwhelming evidence that contradicts the Commission’s conclusion [citation omitted]

The ALJ made credibility fi ndings based upon his observations of the witnesses’ demeanor and the testimony given at trial The Commission rejected these fi nd-ings, and instead relied on information that was not even in the record The Supreme Court has noted the importance of an examiner’s determination of credibility, and explained that evidence which supports an administrative agency’s fact-fi nding “may be less substantial when an impartial, experienced examiner who has observed the witnesses and lived with the case has drawn conclusions different

from the [agency’s] ” Id Additionally, the Court instructs that “[t]he ﬁ ndings of

the examiner are to be considered along with the consistency and inherent

prob-ability of testimony.” Id

We think that this record consistently demonstrates the factors that Schering considered, and there is nothing to undermine the clear ﬁ ndings of the ALJ that this evidence was reliable The Commission’s ﬁ nding that the “Upsher licenses were worth nothing to Schering” overlooks the very nature of the pharmaceu-tical industry where licenses are very often granted on drugs that never see the market 25 14 Likewise, the essence of research and development is the need to encourage

23 Niaspan’s sales were in fact disappointing Market analysts predicted its 1999 sales to reach

$169.3 million, and Schering’s more conservative estimate calculated $101 million for the same year

In actuality, the sales were only $37.9 million

25 At trial, the FTC selected eight products that Schering had licensed from companies other than Upsher for comparative analysis Five of those eight products were never marketed

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and foster new innovations, which necessarily involves exploring licensing options and selecting which products to pursue

Finally, we note that the terms of the Schering-Upsher agreement expressly describes three payments totaling $60 million as “up-front royalty payments.” The surrounding negotiations, trial testimony, and the record all evidence that both parties intended “royalty” to denote its traditional meaning: that Schering would pay Upsher for the licenses and production rights of Upsher’s products [citation omitted] There is nothing to refute that these payments are a fair price for Niacor and the other Upsher products Schering-Plough made a stand-alone determina-tion that it was getting as much in return from these products as it was paying, and just because the agreement also includes Upsher’s entry date into the potas-sium chloride supplement market, one cannot infer that the payments were solely for the delay rather than the licenses [citation omitted] Thus, the substantial and overwhelming evidence undercuts the Commission’s conclusion that Schering’s agreement with Upsher was illegal

2 The ESI Settlement

The Commission separately addressed Schering’s settlement with ESI Although it purported to analyze this agreement under the same scheme as it did the Upsher settlement, there is far less development of the factual record to support the Commission’s conclusion that the settlement was unreasonable At trial, the FTC called no fact witnesses to testify about the ESI settlement, and its economic expert offered only brief testimony The Commission’s opinion itself spends little time

on the ESI settlement, and begins with the recognition that the case is based on

“relatively limited evidence.” On the other hand, Schering produced experts who posited that Schering would have won the patent case, and that the ESI’s January 1,

2004, entry date reasonably reﬂ ected the strength of Schering’s case The FTC did not rebut this testimony, but rather ignored it

It seems the sole indiscretion committed in the context of the ESI settlement is the inclusion of monetary payments The Commission ignored the lengthy media-tion process, and insisted that the parties could have reached an alternative settle-ment with an earlier entry date We do not pretend to understand the Commission’s profound concern with this settlement, but it takes particular exception to the $10 million payment, which was contingent on FDA approval of the generic product The Commission also subtly questions the validity of the $5 million for legal costs

We might only guess that if the legal fee tallied $2 million-the arbitrary cap the mission would allow for such settlements-it would not garner the same scrutiny The Commission, however, refused to consider the underlying patent litigation, and its certainty to be a bitter and prolonged process All of the evidence of record supports the conclusion of the ALJ that this is not the case of a “naked payment” aimed to delay the entry of product that is “legally ready and able to compete with Schering.” The litigation that unfolded between Schering and ESI was ﬁ erce and impassioned Fifteen months of mediation demonstrates the doubt of a peaceful conclusion (or a simple compromise, as the Commission would characterize it)

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That the parties to a patent dispute may exchange consideration to settle

their litigation has been endorsed by the Supreme Court See Standard Oil Co v

United States, 283 U.S 163, 170-71 n 5 (1931) (noting that the interchange of

rights and royalties in a settlement agreement “may promote rather than restrain competition”) Veritably, the Commission’s opinion would leave settlements, including those endorsed and facilitated by a federal court, with little confi dence The general policy of the law is to favor the settlement of litigation, and the policy extends to the settlement of patent infringement suits [citation omitted] Patent owners should not be in a worse position, by virtue of the patent right, to negotiate and settle surrounding lawsuits We fi nd the terms of the settlement to be within the patent’s exclusionary power, and “refl ect a reasonable implementation” of the

protections afforded by patent law Valley Drug, 344 F.3d at 1312

C The Anticompetitive Effects

Our ﬁ nal line of inquiry turns to whether these agreements were indeed an “unfair method of competition.” The FTC Act’s prohibition on such agreements encom-passes violations of other antitrust laws, including the Sherman Act, which pro-

hibits agreements in restraint of trade 15 U.S.C § 45(a); California Dental Ass’n.,

526 U.S at 763 n 3 In California Dental, the Supreme Court required that the anticompetitive effect cannot be hypothetical or presumed Rather, the probe must

turn to “whether the effects actually are anticompetitive.” Id at 775 n 12

The restraints at issue here covered any “sustained release lated potassium chloride tablet.” Such a speciﬁ c clause-an “ancillary restraint”-is routine to deﬁ ne the parameters of the agreement and to prevent future litigation

microencapsu-over what may or may not infringe upon the patent See Rothery Storage & Van Co

v Atlas Van Lines, Inc., 792 F.2d 210, 224 (D.C.Cir.1986) (“The ancillary restraint

is subordinate and collateral in the sense that it serves to make the main transaction more effective in accomplishing its purpose.”) Ancillary restraints are generally permitted if they are “reasonably necessary” toward the contract’s objective of util-ity and efﬁ ciency [citation omitted]

The efﬁ ciency-enhancing objectives of a patent settlement are clear, and

“[p]ublic policy strongly favors settlement of disputes without litigation.” Aro Corp

v Allied Witan Co., 531 F.2d 1368, 1372 (6th Cir.1976) See also Schlegal Mfg Co

v U.S.M Corp., 525 F.2d 775, 783 (6th Cir.1975) (“The importance of encouraging

settlement of patent-infringement litigation cannot be overstated.”) In order for a condition to be ancillary, an agreement limiting competition must be second-

ary and collateral to an independent and legitimate transaction Rothery Storage,

792 F.2d at 224 Naturally, the restraint imposed must relate to the ultimate tive, and cannot be so broad that some of the restraint extinguishes competition without creating efﬁ ciency Even restraints ancillary in form can in substance be illegal if they are part of a general plan to gain monopoly control of a market

United States v Addyston Pipe & Steel Co., 85 F 271, 282–83 (6th Cir.1898) Such a

restraint, then, is not ancillary

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Under the Schering-Upsher agreement, the scope of the products subject to the September 1, 2001 entry date demonstrate an efﬁ cient narrowness No other products were delayed by the ancillary restraints contained in the agreements The

‘743 patent claims a “controlled release [microencapsulated] potassium chloride tablet.” The language in the Schering-Upsher agreement covers the identical reach

of the ‘743 patent There is no broad provision that detracts from the efﬁ ciency of settling the underlying patent litigation Nevertheless, the Commission rejected the notion that the narrow restraints were legitimate and reasonable means of accom-plishing the settlement, and refused to consider that this settlement preserved public and private resources, and that the resultant certainty ultimately led to more intense competition

The Commission’s opinion requires the conclusion that but for the payments, the parties would have fashioned different settlements with different entry dates Although it claimed to apply a rule of reason analysis, which we disagree with on its own, the Commission pointedly states that it logically concluded that “quid pro quo for the payment was an agreement by the generic to defer entry date beyond the date that represents an otherwise reasonable litigation compromise.”

We are not sure where this “logic” derives from, particularly given our holding in

Valley Drug “It is not obvious that competition was limited more than that lawful

degree by paying potential competitors for their exit litigation is a much more costly mechanism to achieve exclusion, both to the parties and to the public, than

is settlement.” Id at 1309

The Commission rationalizes its decision not to consider the exclusionary power of the patent by asserting that the parties could have attained an earlier entry without the role of payments There is simply no evidence in the record, however, that supports this conclusion The Commission even recognized that the January 1,

2004 entry date in the ESI settlement was “non-negotiable.” For its part, Schering presented experts who testiﬁ ed to the litigation truism that settlements are not always possible Indeed, Schering’s experts agreed that ancillary agreements may

be the only avenue to settlement

The proposition that the parties could have “simply compromised” on earlier entry dates is somewhat myopic, given the nature of patent litigation and the role that reverse payments play in settlements 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 profi ts, as it took sales away As a result, Schering would have sued ESI and Upsher, seeking damages for lost profi ts and willful infringement Assuming the patent is reasonably strong, and the parties then settled under this scenario, the money most probably would fl ow 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

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enormous damages ﬂ owing from any possible infringement See In re Ciproﬂ oxacin

Hatch-Waxman essentially redistributes the relative risk assessments and explains

the ﬂ ow 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 proﬁ ts 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 success-fully 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 Id Ultimately, the

consid-eration 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

In fact, even in the pre-Hatch-Waxman context, “implicit consideration ﬂ ows

from the patent holder to the alleged infringer.” Id If Schering had been able to

prove damages from infringing sales, and settled before trial for a sum less than the damages, the result is a windfall to the generic manufacturers who essentially keep a portion of the proﬁ ts If this were true, then under the Commission’s analy-sis, such a settlement would be a violation of antitrust law because the infringer reaped the beneﬁ t of the patent holder’s partial surrender of damages Like the reverse payments at issue here, “such a rule would discourage any rational party from settling a patent case because it would be an invitation to antitrust

litigation.” Id

The Commission’s inﬂ exible compromise-without-payment theory neglects

to understand that “[r]everse payments are a natural by-product of the

Hatch-Waxman process.” Id Pure compromise ignores that patents, payments, and

settlement are, in a sense, all symbiotic components that must work together in order for the larger abstract to succeed As Judge Posner emphasized in Asahi,

“[i]f 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 If any settlement agreement is thus classiﬁ ed as involving a forbidden

‘reverse payment,’ we shall have no more patent settlements.” Asahi Glass Co., 289

F.Supp.2d at 994 We agree If settlement negotiations fail and the patentee vails in its suit, competition would be prevented to the same or an even greater extent because the generic could not enter the market prior to the expiration of

pre-the patent See In re Ciproﬂ oxacin Hydrochloride Antitrust Litigation, 261 F.Supp.2d

188, 250–52 (E.D.N.Y.2003) A prohibition on reverse-payment settlements would

“reduce the incentive to challenge patents by reducing the challenger’s settlement options should he be sued for infringement, and so might well be thought anti-

competitive.” Asahi Glass Co., 289 F.Supp.2d at 994

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There is no question that settlements provide a number of private and social beneﬁ ts as opposed to the inveterate and costly effects of litigation See generally

D Crane, “Exit Payments in Settlement of Patent Infringement Lawsuits: Antitrust Rules and Economic Implications,” 54 Fla L.Rev 747, 760 (2002) Patent litiga-tion breeds a litany of direct and indirect costs, ranging from attorney and expert fees to the expenses associated with discovery compliance Other costs accrue for

a variety of reasons, be it the result of uncompromising legal positions, differing strategic objectives, heightened emotions, lawyer incompetence, or sheer moxie Id.; see also, S Carlson, Patent Pools and the Antitrust Dilemma, 16 Yale J Reg

359, 380 (1999) (U.S patent litigation costs $1 billion annually)

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 intensiﬁ ed guesswork involved with lengthy litigation cuts against the beneﬁ ts 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 fi eld” for other ANDA fi lers) Similarly, Hatch-Waxman settlements, likes 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 benefi t the public by introducing a new rival into the market, facilitating competitive production, and encouraging further innovation See

H Hovenkamp, et al., Anticompetitive Settlement of Intellectual Property putes 87 Minn L.Rev at 1719, 1750–51 (2003); see also H Hovenkamp Antitrust Law: An Analysis of Antitrust Principles and Their Application, ¶ 1780a (1999) Despite the associated beneﬁ ts of settlements-which include the avoidance of the burdensome costs and the resolution of uncertainty regarding the respective rights and obligations of party litigants-the Commission manufactured a rule that would make almost any settlement involving a payment illegal Furthermore, the Commission’s minimal allowance for $ 2 million in litigation costs is rather naive While we agree that a settlement cannot be more anticompetitive than litigation,

see Valley Drug, 344 F.3d at 1312, we must recognize “[a] suitable

accommoda-tion between antitrust law’s free competiaccommoda-tion requirement and the patent regime’s incentive system.” 344 F.3d at 1307

We have said before, and we say it again, that the size of the payment, or the mere presence of a payment, should not dictate the availability of a settlement rem-edy Due to the “asymmetrics of risk and large proﬁ ts at stake, even a patentee conﬁ dent in the validity of its patent might pay a potential infringer a substan-

tial sum in settlement.” Id at 1310 An exception cannot lie, as the Commission might think, when the issue turns on validity ( Valley Drug ) as opposed to infringe-

ment (the Schering agreements) 27 15 The effect is the same: a generic’s entry into the

27 The Schering agreements would necessarily be stronger than those in Valley Drug, where the facts demonstrated the likelihood of an invalid patent, because a valid patent could operate to exclude all infringing products for the life of the patent

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market is delayed What we must focus on is the extent to which the exclusionary effects of the agreement fall within the scope of the patent’s protection Id Here,

we ﬁ nd that the agreements fell well within the protections of the ‘743 patent, and were therefore not illegal

Comments and Questions

1 Why does the court examine the $60 million dollar royalty for the Niacor license? What is the legal signifi cance if the royalty signifi cantly exceeds the true value of the license? How can the court determine whether the payment is exces-sive? What factors should the court consider in making this determination? Should the court grant any deference to the FTC’s fi nding that the payment was excessive?

If so, why?

2 What test does the court employ to evaluate the settlement in Schering ? Rule

of Reason? Per se? Quick look? Traditional rule of reason analysis asks courts to balance pro and anti-competitive aspects of an agreement — is this test appropriate for this case? Professors Hovenkamp, Janis, and Lemley’s oft-cited article argued,

in part, against a traditional rule of reason analysis:

This middle set of cases — where the agreement itself looks like an antitrust violation but the presence of IP rights might absolve it — is much more problematic and requires special treatment The traditional “rule of reason” analysis is not a good ﬁ t for practices that would be unlawful per se but for the presence of an IP claim The rule of reason is designed to assess whether a practice tends to diminish market-wide output By contrast, the disputed issue in these middle cases concerns the likely validity and scope of the claimed IP rights, and the reasonableness of the settlement as one among many outcomes of the IP dispute That is, these cases should be decided on IP grounds because the agreements in this middle category are pro-competitive if, but only if, the patent in question is valid and infringed Antitrust’s rule of reason cannot help with that IP inquiry All antitrust can do is narrow the class of cases for which inquiry into the IP merits is required

Settlement of Intellectual Property Disputes, 87 Minn L Rev 1719, 1724–25 (2003)

(internal citations omitted)

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3 Does Schering-Plough hold that it is per se legal for parties to settle sham litigation as long as the settlement does not go beyond the scope of the

non-patent? See Ronald W Davis, Reverse Payment Patent Settlements: A View into the

Abyss, And a Modest Proposal, 21-Fall Antitrust 26, 28 (2006) (suggesting such

an interpretation)

4 The FTC appealed the Schering decision to the Supreme Court, but cert was

denied Professor Holman summarized the FTC’s argument:

The FTC’s position relies heavily on a body of scholarly literature that stresses the uncertainty of patent litigation and the “probabilistic” nature of patent rights These theories characterize the patent right as inherently “probabilistic” because of the general uncertainty with respect to validity and scope of a patent prior to court decision As expressed by Hovenkamp et al., a patent is best viewed not as a right to exclude competition, but more correctly as “a right to try to exclude competition.” The FTC has essentially taken the position that in every Paragraph IV litigation, consumers have an expectation interest in the ﬁ nite probability that the patent challenge will succeed In effect, the FTC would treat this consumer expectation

as a probabilistic property right The FTC argues that any settlement between the parties that deprives consumers of the value of this expectation interest is a presumptive violation of the antitrust laws

The FTC would allow parties to settle by compromising on an entry date prior to the patent’s expiration, without cash payments, because “the resulting settlement presumably would refl ect the parties’ own assessment of the strength of the patent.” The FTC views these agreements as neutral, or even pro-competitive, since they resolve the uncertainty of the litigation early and provide some guaranteed benefi t to consumers in proportion to the probability that the patent challenge would succeed The FTC would generally fi nd any reverse payment settlement anticompetitive, because it fails to provide as much consumer benefi t as what it considers to be the “benchmark” agreement with a negotiated early entry date and

no payments to the patent challenger The FTC would infer that any payment is

a quid pro quo for delayed generic entry, and that were it not for the payment the parties would have either settled on an earlier entry date, or not settled and litigated the case to completion — either scenario beneﬁ ting consumers relative to the reverse payment settlement Note that under the FTC’s approach, essentially any reverse payment settlement will be found illegal, regardless of the strength

or weakness of the patent case This is consistent with the FTC’s position that an inquiry into the merits of the underlying patent case is inappropriate, except in cases of an objectively baseless or sham patent suit

Christopher M Holman, Do Reverse Payment Settlements Violate Antitrust Laws?,

23 Santa Clara Computer & High Tech L.J 489, 533–34 (2007) Should the government protect consumers’ “probabilistic” property rights? More speciﬁ cally, should it be an antitrust violation for settlements to bargain away consumers’ probabilistic property rights?

5 After the FTC petitioned the Supreme Court to take the case, the Antitrust Division of the Department of Justice ﬁ led an amicus brief, advising the Court

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to deny the FTC’s petition for certiorari It is relatively rare for the two federal antitrust agencies to disagree so publicly In its brief, the DOJ argued that the

Schering-Plough case was not an appropriate vehicle for the Court to consider the

appropriate antitrust treatment for patent settlements involving reverse payments and, also, that there was no split between the circuits The Court did, in fact, deny the FTC’s cert petition Do you agree with the DOJ that no circuit split existed?

C Scott Hemphill, An Aggregate Approach to Antitrust: Using New Data

and Rulemaking to Preserve Drug Competition , 109 COLUMBIA L AW R EVIEW

629 (2009)

The intensity of antitrust enforcement affects not only the fact, but also the form,

of monetary settlements The fi rst monetary settlements * * * blocked entry until patent expiration, and the brand-name fi rm paid cash Starting in 1997, and with increasing frequency after 2000, settling fi rms changed the standard form of set-tlements in two ways, both likely responses to increased pressure from antitrust enforcers First, settlements began to include some pre-expiration entry That shift provides drug makers with the rhetorical opportunity to argue that the settlement guarantees some competition Some entry looks better than no entry From this perspective, the law has shifted in the drug makers’ favor even further than they may have anticipated, given the prevailing view of appellate courts that it is fi ne to pay for settlements with no pre-expiration entry

Second, starting in 1997, settlements frequently included not only payment and delay, but also additional contractual terms that tend to obscure whether pay-ment has occurred * * *

In the wake of increased antitrust scrutiny, naked payments have given way to more complex arrangements Today, side deals take two complementary forms: overpayment by the brand-name fi rm for value contributed by the generic fi rm, and underpayment by the generic fi rm for value provided by the brand-name fi rm

1 Overpayment by the Brand-Name Firm — In the most common type of side deal, the generic ﬁ rm contributes — in addition to delayed entry — some further value, such as an unrelated product license The additional term provides an opportunity to overstate the value contributed by the generic ﬁ rm and claim that the cash is consid-eration for the contributed value, rather than for delayed entry In reviewing K-Dur, the earliest settlement with this type of side deal, the Eleventh Circuit accepted such

a factual assertion, which provided a basis for rejecting antitrust liability

Side deals are now a regular feature of entry-delaying settlements The uted value can include a wide range of product development, manufacturing, and promotional services In some deals, the generic fi rm offers a product or patent license, or agrees to develop a new product In one variant, the generic fi rm devel-ops a new formulation of the brand-name drug In other deals, it agrees to furnish manufacturing services to the brand-name producer, or to provide inventory, or even to provide “backup” manufacturing services In some cases, the generic fi rm provides promotional services as to the product at issue, related drugs, or unrelated

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contrib-Pharmaceutical Settlements and Reverse Payments 413

products For some drugs, the brand-name ﬁ rm reaches entry-delaying settlements with multiple generic ﬁ rms, each with side deals

Some of these arrangements are suspect on their face It may seem clear that the brand-name ﬁ rm does not need a patent license that does not clearly cover its product, new drug development that is unrelated to its current core business,

a new source of raw material supply, backup manufacturing, or additional motion However, not all such settlements are facially absurd In some cases, the generic ﬁ rm has plausible expertise in the subject of the side deal It is very difﬁ cult

pro-to be certain that a deal is collusive without a deep and complex inquiry inpro-to the business judgment of the two drug makers

2 Underpayment by the Generic Firm — The brand-name fi rm, rather than ing too much, can charge too little One mechanism involves “authorized generic” sales These are sales made by a generic fi rm under the brand-name fi rm’s FDA approval The brand-name fi rm supplies the product to the generic fi rm at a dis-count, which the generic fi rm then resells under its own label at a profi table price The compensation is buried in the discounted price offered by the brand-name fi rm

In several early settlements, the authorized generic product was launched at the time of settlement This practice fell out of favor after a court concluded that the authorized generic sales triggered the 180-day period Some modern settle-ments avoid the trigger problem by providing for authorized generic sales only after another generic ﬁ rm enters, or of a drug other than the subject of the generic

ﬁ rm’s ANDA ﬁ ling, or in another country

In a related form of discounted sale, which avoids the trigger issue, the name fi rm sells an entire product line to the generic fi rm One settlement involv-ing an extended-release version of a drug, for example, transferred (for a possibly discounted price) the immediate-release version to the generic fi rm In a more complicated set of deals, a brand-name fi rm may have sold a generic fi rm rights to one product, and the generic fi rm delayed entry in two other products * * * Once again, it is very diffi cult as a practical matter for a decisionmaker to know whether the transfer price provides compensation from the brand-name fi rm to the generic

brand-ﬁ rm, and if so, how much * * *

Outside of settlement, brand-name fi rms seldom contract with generic fi rms for help with the activities that form the basis of side deals Indeed, as a general matter, brand-name and generic fi rms seldom execute major deals outside the settlement context, with the exception of authorized generic arrangements, which necessarily are reached between a brand-name fi rm and a generic fi rm

In re Tamoxifen Citrate Antitrust Litigation

466 F.3d 187 (2nd Cir 2006)

SACK, Circuit Judge

This appeal, arising out of circumstances surrounding a lawsuit in which a drug manufacturer alleged that its patent for the drug tamoxifen citrate (“tamoxifen”)

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was about to be infringed, and the suit’s subsequent settlement, requires us to address issues at the intersection of intellectual property law and antitrust law Although the particular factual circumstances of this case are unlikely to recur, the issues presented have been much litigated and appear to retain their vitality The plaintiffs appeal from a judgment of the United States District Court for the Eastern District of New York (I Leo Glasser, Judge) dismissing their complaint pursuant to Federal Rule of Civil Procedure 12(b)(6) The plaintiffs claim that the defendants conspired, under an agreement settling a patent infringement lawsuit among the defendants in 1993 while an appeal in that lawsuit was pending, to monopolize the market for tamoxifen — the most widely prescribed drug for the treatment of breast cancer — by suppressing competition from generic versions

of the drug The settlement agreement included, among other things, a so-called

“reverse payment” of $21 million from the defendant patent-holders Zeneca, Inc., AstraZeneca Pharmaceuticals LP, and AstraZeneca PLC (collectively “Zeneca”)

to the defendant generic manufacturer Barr Laboratories, Inc (“Barr”), and a license from Zeneca to Barr allowing Barr to sell an unbranded version of Zeneca-manufactured tamoxifen The settlement agreement was contingent on obtaining

a vacatur of the judgment of the district court that had heard the infringement action holding the patent to be invalid

The district court in the instant case concluded that the settlement did not restrain trade in violation of the antitrust laws, and that the plaintiffs suffered no antitrust injury from that settlement Because we conclude that we have jurisdiction

to hear the appeal and that the behavior of the defendants alleged in the complaint would not violate antitrust law, we afﬁ rm the judgment of the district court

Regulatory Background

[ This has been removed because it was covered in the previous cases Editor ] * * *

Factual and Procedural Background

Tamoxifen, the patent for which was obtained by Imperial Chemical Industries, PLC, (“ICI”) on August 20, 1985, is sold by Zeneca (a former subsidiary of ICI which succeeded to the ownership rights of the tamoxifen patent) under the trade name Nolvadex ® 6 16Tamoxifen is the most widely prescribed drug for the treat-ment of breast cancer Indeed, it is the most prescribed cancer drug in the world

In December 1985, four months after ICI was awarded the patent, Barr ﬁ led an ANDA with the FDA requesting the agency’s approval for Barr to market a generic version of tamoxifen that it had developed Barr amended its ANDA in September

1987 to include a paragraph IV certiﬁ cation

In response, on November 2, 1987-within the required forty-fi ve days of Barr’s amendment of its ANDA to include a paragraph IV certifi cation — ICI fi led a patent

6 In 2001, Zeneca’s domestic sales of tamoxifen amounted to $442 million

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infringement lawsuit against Barr and Barr’s raw material supplier, Heumann Pharma GmbH & Co (“Heumann”), in the United States District Court for the

Southern District of New York See Imperial Chem Indus., PLC v Barr Labs., Inc.,

126 F.R.D 467, 469 (S.D.N.Y.1989) On April 20, 1992, the district court (Vincent

L Broderick, Judge) declared ICI’s tamoxifen patent invalid based on the court’s conclusion that ICI had deliberately withheld “crucial information” from the Patent and Trademark Ofﬁ ce regarding tests that it had conducted on laboratory

animals with respect to the safety and effectiveness of the drug See Imperial Chem

Indus., PLC v Barr Labs., Inc., 795 F.Supp 619, 626–27 (S.D.N.Y.1992)

(“Tamox-ifen I”) Those tests had revealed hormonal effects “opposite to those sought

in humans,” which, the court found, could have “unpredictable and at times

disastrous consequences.” Id at 622

ICI appealed the district court’s judgment to the United States Court of Appeals for the Federal Circuit In 1993, while the appeal was pending, the parties entered into a conﬁ dential settlement agreement (the “Settlement Agreement”) which is the principal subject of this appeal In the Settlement Agreement, Zeneca (which had succeeded to the ownership rights of the patent) and Barr agreed that in return for $21 million and a non-exclusive license to sell Zeneca-manufactured tamoxifen

in the United States under Barr’s label, rather than Zeneca’s trademark Nolvadex ® , Barr would change its ANDA paragraph IV certiﬁ cation to a paragraph III cer-tiﬁ cation, thereby agreeing that it would not market its own generic version of

tamoxifen until Zeneca’s patent expired in 2002 See In re Tamoxifen Citrate

Anti-trust Litig., 277 F.Supp.2d 121, 125–26 (E.D.N.Y.2003) (“Tamoxifen II”) Zeneca

also agreed to pay Heumann $9.5 million immediately, and an additional $35.9 lion over the following ten years The parties further agreed that if the tamoxifen patent were to be subsequently declared invalid or unenforceable in a ﬁ nal and (in contrast to the district court judgment in Tamoxifen I) unappealable judgment by

mil-a court of competent jurisdiction, Bmil-arr would be mil-allowed to revert to mil-a pmil-armil-agrmil-aph

IV ANDA certiﬁ cation Thus if, in another lawsuit, a generic marketer prevailed as Barr had prevailed in Tamoxifen I, and that judgment was either not appealed or was afﬁ rmed on appeal, Barr would have been allowed to place itself in the same position (but for the 180-day head start, if it was available) that it would have been

in had it prevailed on appeal in Tamoxifen I, rather than settling while its appeal

was pending in the Federal Circuit

The plaintiffs allege that as a part of the Settlement Agreement, Barr stood” that if another generic manufacturer attempted to market a version

“under-of tamoxifen, Barr would seek to prevent the manufacturer from doing so by attempting to invoke the 180-day exclusivity right possessed by the fi rst “para-graph IV” fi ler Compl ¶ 58 According to the plaintiffs, this understanding among the defendants effectively forestalled the introduction of any generic version of tamoxifen, because, fi ve years later — only a few weeks before other generic manu-facturers were to be able to begin marketing their own versions of tamoxifen — Barr did in fact successfully claim entitlement to the exclusivity period It thereby prevented those manufacturers from entering the tamoxifen market until 180 days

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after Barr triggered the period by commercially marketing its own generic version

of the drug In fact, Barr had not yet begun marketing its own generic version and had little incentive to do so because, pursuant to the Settlement Agreement, it was already able to market Zeneca’s version of tamoxifen

Meanwhile, pursuant to the Settlement Agreement which was contingent on the vacatur of the district court judgment in Tamoxifen I, Barr and Zeneca ﬁ led a

“Joint Motion to Dismiss the Appeal as Moot and to Vacate the Judgment Below.” See Tamoxifen II, 277 F.Supp.2d at 125 The Federal Circuit granted the motion, thereby vacating the district court’s judgment that the patent was invalid [citation omitted] Such a vacatur, while generally considered valid as a matter of appellate

procedure by courts at the time of the Settlement Agreement, see U.S Philips Corp

v Windmere Corp., 971 F.2d 728, 731 (Fed.Cir.1992), was shortly thereafter held

to be invalid in nearly all circumstances by the Supreme Court, see U.S Bancorp

Mortgage Co v Bonner Mall P’ship, 513 U.S 18, 27–29 (1994) 8 17

In the years after the parties entered into the Settlement Agreement and the Federal Circuit vacated the district court’s judgment, 9 18 three other generic manu-facturers fi led ANDAs with paragraph IV certifi cations to secure approval of their respective generic versions of tamoxifen: Novopharm Ltd., in June 1994, Mylan Pharmaceuticals, Inc., in January 1996, and Pharmachemie, B.V., in February 1996 See Tamoxifen II, 277 F.Supp.2d at 126–27 Zeneca responded to each of these cer-tifi cations in the same manner that it had responded to Barr’s: by fi ling a patent infringement lawsuit within the forty-fi ve day time limit provided by 21 U.S.C § 355(j)(5)(B)(iii) See id In each case, the court rejected the generic manufacturer’s attempt to rely on the vacated Tamoxifen I decision, and-contrary to the Tamoxifen

I judgment-upheld the validity of Zeneca’s tamoxifen patent [citation omitted] * * *

Proceedings in the District Court

While these generic manufacturers were litigating the validity of Zeneca’s patent on tamoxifen, consumers and consumer groups in various parts of the United States ﬁ led some thirty lawsuits challenging the legality of the 1993 Settle-

ment Agreement between Zeneca and Barr See Tamoxifen II, 277 F.Supp.2d at 127

Those lawsuits were subsequently transferred by the Judicial Panel on Multidistrict Litigation to the United States District Court for the Eastern District of New York Subsequently, a consolidated class action complaint embodying the claims was ﬁ led

In re Tamoxifen Citrate Antitrust Litig., 196 F.Supp.2d 1371 (2001); Tamoxifen II,

277 F.Supp.2d at 127 In the consolidated lawsuit, the plaintiffs alleged that the Settlement Agreement unlawfully (1) enabled Zeneca and Barr to resuscitate a patent that the district court had already held to be invalid and unenforceable;

8 The rule in U.S Bancorp does not apply retroactively [c.o.]

9 After the Settlement Agreement was entered into and the vacatur ordered, Barr began to market its licensed version of Zeneca’s tamoxifen, selling its product to distributors and wholesalers at a

15 percent discount to the brand-name price, which translated into a price to consumers about ﬁ ve percent below Zeneca’s otherwise identical Nolvadex ® brand-name version Barr soon captured about 80 percent of the tamoxifen market

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(2) facilitated Zeneca’s continuing monopolization of the market for tamoxifen; (3) provided for the sharing of unlawful monopoly proﬁ ts between Zeneca and Barr; (4) maintained an artiﬁ cially high price for tamoxifen; and (5) prevented

competition from other generic manufacturers of tamoxifen See Tamoxifen II, 277

F.Supp.2d at 127-28 At the heart of the lawsuit was the contention that the ment Agreement enabled Zeneca and Barr effectively to circumvent the district

Settle-court’s invalidation of Zeneca’s tamoxifen patent in Tamoxifen I, which, the

plain-tiffs asserted, would have been afﬁ rmed by the Federal Circuit The result of such

an afﬁ rmance, according to the plaintiffs, would have been that Barr would have received approval to market a generic version of tamoxifen; Barr would have begun marketing tamoxifen, thereby triggering the 180-day exclusivity period; other generic manufacturers would have introduced their own versions of tamoxifen upon the expiration of the exclusivity period, with Zeneca collaterally estopped from invoking its invalidated patent as a defense; and, as a result, the price for tamoxifen would have declined substantially below the levels at which the Zeneca-manufactured drug in fact sold in the market shared by Zeneca and Barr through

the Settlement Agreement Id at 128 The defendants moved to dismiss the class

action complaint pursuant to Federal Rule of Civil Procedure 12(b)(6) for failure

to state a claim upon which relief can be granted

On May 15, 2003, in a thorough and thoughtful opinion, the district court granted the defendants’ motion to dismiss [citation omitted] The court noted that although market-division agreements between a monopolist and a potential competitor ordinarily violate the Sherman Act, they are not necessarily unlawful when the monopolist is a patent holder [citation omitted] Pursuant to a patent grant, the court reasoned, a patent holder may settle patent litigation by entering into a licensing agreement with the alleged infringer without running afoul of the Sherman Act [citation omitted] Yet, the court continued, a patent holder is pro-hibited from acting in bad faith “beyond the limits of the patent monopoly” to restrain or monopolize trade [citation omitted]

Analyzing the terms and impact of the Settlement Agreement, the district court concluded that the agreement permissibly terminated the litigation between the defendants, which “cleared the ﬁ eld for other generic manufacturers to challenge

the patent.” Id at 133 “Instead of leaving in place an additional barrier to

subse-quent ANDA ﬁ lers, the Settlement Agreement in fact removed one possible barrier

to ﬁ nal FDA approval-namely, the existence of ongoing litigation between an

exist-ing ANDA ﬁ ler and a subsequent ﬁ ler.” Id To the court, this factor distexist-inguished

the case from similar cases in which other circuits had held settlement agreements

to be unlawful, where the agreement in question did not conclude the underlying litigation and instead prolonged the period during which other generic manufac-turers could not enter the market [citation omitted]

The district court was also of the view that the defendants could not be held liable for Barr’s FDA petition to preserve its 180-day exclusivity period even if this was a term of the defendants’ negotiated Settlement Agreement [citation omitted]

It reasoned that at the time of settlement, Barr could not have successfully pursued its FDA application because the FDA continued to apply the “successful defense”

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rule until 1997 [citation omitted] It was only after 1997 that Barr petitioned the FDA to preserve its exclusivity period The court concluded that Barr’s petition was

an attempt to petition a governmental body in order to protect an arguable interest

in a statutory right based on recent developments in the court and at the FDA As such, the FDA Petition was protected activity under the First Amendment, and long-settled law established that the Sherman Act, with limited exceptions, does not apply to petitioning administrative agencies

Id at 135 The court concluded that the plaintiffs’ complaint therefore did not

sufﬁ ciently allege a bad-faith settlement in violation of the Sherman Act [citation omitted]

The district court also concluded that even if the plaintiffs had stated an trust violation, they did not suffer antitrust injury from either Barr’s exclusivity period or the Settlement Agreement and the resulting vacatur of the district court’s

anti-judgment in Tamoxifen I invalidating the tamoxifen patent [citation omitted] The

court noted that “[a]ntitrust injury must be caused by something other than

the regulatory action limiting entry to the market.” Id at 137 The court attributed

“the lack of competition in the market” not to “the deployment of Barr’s exclusivity period, but rather [to] the inability of the generic companies to invalidate or design around” the tamoxifen patent, and their consequent loss of the patent litigation

against Zeneca Id This was so, the district court concluded, even if Barr’s petition

to the FDA had delayed the approval of Mylan’s ANDA Id at 137 Any “injury”

suffered by the plaintiffs, said the court, “is thus not antitrust injury, but rather the

result of the legal monopoly that a patent holder possesses.” Id at 138

The district court also rejected the plaintiffs’ contention that “the settlement and vacatur deprived other generic manufacturers of the ability to make the legal argu-

ment that the [ Tamoxifen I ] judgment (if afﬁ rmed) would collaterally estop Zeneca

from claiming the [tamoxifen] patent was valid in future patent litigation with other

ANDA ﬁ lers.” Id It reasoned that there is no basis for the assertion that “forcing

other generic manufacturers to litigate the validity of the [tamoxifen] patent[] is an

injury to competition.” Id The court also referred to the other generic

manufactur-ers’ subsequent litigation against Zeneca over the validity of the tamoxifen patent,

in which Zeneca prevailed, as additional reason to reject the plaintiffs’ assertion that the Federal Circuit would have afﬁ rmed Judge Broderick’s judgment invalidating

the tamoxifen patent Id

The district court therefore dismissed the plaintiffs’ Sherman Act claims * * * The plaintiffs appeal the dismissal of their claims * * *

Discussion * * * III The Plaintiffs’ Antitrust Claims

A The Tension between Antitrust Law and Patent Law

With the ultimate goal of stimulating competition and innovation, the Sherman Act prohibits “[e]very contract, combination in the form of trust or otherwise, or con-spiracy, in restraint of trade or commerce among the several States,” 15 U.S.C § 1,

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and “monopoliz[ation], or attempt[s] to monopolize, or combin[ations] or conspir[acies] to monopolize any part of the trade or commerce among the several States,” id § 2 By contrast, also with the ultimate goal of stimulating competition and innovation, patent law grants an innovator “the right to exclude others from making, using, offering for sale, or selling the invention throughout the United States or importing the invention into the United States” for a limited

term of years 35 U.S.C § 154(a)(1)-(2); see also Dawson Chem Co v Rohm &

Haas Co., 448 U.S 176, 215 (1980) (“[T]he essence of a patent grant is the right

to exclude others from proﬁ ting by the patented invention.”) It is the tension between restraints on anti-competitive behavior imposed by the Sherman Act and grants of patent monopolies under the patent laws, as complicated by the Hatch-Waxman Act, that underlies this appeal [citation omitted]

In most cases, however, conduct will be evaluated under a “rule of reason” analysis, “according to which the ﬁ nder of fact must decide whether the questioned practice imposes an unreasonable restraint on competition, taking into account a variety of factors, including speciﬁ c information about the relevant business, its condition before and after the restraint was imposed, and the restraint’s history, nature, and effect.” [citation omitted]

The rule-of-reason analysis has been divided into three steps First, a plaintiff must demonstrate “that the challenged action has had an actual adverse effect on competition as a whole in the relevant market.” [citation omitted] If the plaintiff succeeds in doing so, “the burden shifts to the defendant to establish the ‘pro-competitive “redeeming virtues” ‘of the action.” [citation omitted] If the defendant succeeds in meeting its burden, the plaintiff then has the burden of “show[ing] that the same pro-competitive effect could be achieved through an alternative means that is less restrictive of competition.” [citation omitted]

B The Plaintiffs’ Allegations

1 Settlement of a Patent Validity Lawsuit The plaintiffs contend that several

factors — including that Tamoxifen I was settled after the tamoxifen patent had

been held invalid by the district court, making the patent unenforceable at the time

of settlement–indicate that if their allegations are proved, the defendants violated the antitrust laws They argue that the district court in the case before us erred by treating the tamoxifen patent as valid and enforceable Instead, they say, in accor-dance with the never-reviewed judgment in Tamoxifen I, the district court in this case should have treated the patent as presumptively invalid for purposes of assay-ing the sufﬁ ciency of the plaintiffs’ complaint

We begin our analysis against the backdrop of our longstanding adherence to the principle that “courts are bound to encourage” the settlement of litigation [citation omitted] It is well settled that “[w]here there are legitimately conﬂ icting [patent] claims , a settlement by agreement, rather than litigation, is not pre-cluded by the [Sherman] Act,” although such a settlement may ultimately have an adverse effect on competition Standard Oil Co v United States, 283 U.S 163, 171 (1931) [citation omitted]

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Rules severely restricting patent settlements might also be contrary to the goals

of the patent laws because the increased number of continuing lawsuits that would result would heighten the uncertainty surrounding patents and might delay inno-

vation See Valley Drug, 344 F.3d at 1308; Daniel A Crane, Exit Payments in

Settle-ment of Patent InfringeSettle-ment Lawsuits: Antitrust Rules and Economic Implications, 54

Fla L.Rev 747, 749 (2002) Although forcing patent litigation to continue might beneﬁ t consumers in some instances, “patent settlements can promote efﬁ -ciencies, resolving disputes that might otherwise block or delay the market entry

of valuable inventions.” Joseph F Brodley & Maureen A O’Rourke, Preliminary

Views: Patent Settlement Agreements, Antitrust , Summer 2002, at 53 As the

Fourth Circuit has observed, “It is only when settlement agreements are entered into in bad faith and are utilized as part of a scheme to restrain or monopolize trade

that antitrust violations may occur.” Duplan Corp., 540 F.2d at 1220

We cannot judge this post-trial, pre-appeal settlement on the basis of the hood vel non of Zeneca’s success had it not settled but rather pursued its appeal * * *

As the plaintiffs correctly point out, the Federal Circuit would have reviewed Judge Broderick’s factual ﬁ ndings underlying his conclusion of invalidity with con-siderable deference, rather than engaging in a presumption of validity [citation omitted] But it takes no citation to authority to conclude that appellants prevail with some frequency in federal courts of appeals even when a high degree of defer-ence is accorded the district courts from which the appeals are taken Accordingly,

it does not follow from the deference that was due by the Federal Circuit to the

district court in Tamoxifen I that Zeneca would have been unsuccessful on appeal

[citation omitted] * * *

The fact that the settlement here occurred after the district court ruled against Zeneca seems to us to be of little moment There is a risk of loss in all appeals that may give rise to a desire on the part of both the appellant and the appellee to settle before the appeal is decided Settlements of legitimate disputes, even antitrust and patent disputes of which an appeal is pending, in order to eliminate that risk, are not prohibited That Zeneca had sufﬁ cient conﬁ dence in its patent to proceed

to trial rather than ﬁ nd some means to settle the case ﬁ rst should hardly weigh against it

We conclude, then, that without alleging something more than the fact that Zeneca settled after it lost to Barr in the district court that would tend to establish that the Settlement Agreement was unlawful, the assertion that there was a bar-antitrust or otherwise-to the defendants’ settling the litigation at the time that they did is unpersuasive

2 Reverse Payments Payments pursuant to the settlement of a patent suit such

as those required under the Settlement Agreement are referred to as “reverse” ments because, by contrast, “[t]ypically, in patent infringement cases the payment

pay-ﬂ ows from the alleged infringer to the patent holder.” David A Balto,

Pharmaceu-tical Patent Settlements: The Antitrust Risks, 55 Food & Drug L.J 321, 335 (2000)

Here, the patent holder, which, if its patent is valid, has the right to prevent the

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alleged infringer from making commercial use of it, nonetheless pays that party not to do so Seeking to supply the “something more” than the fact of settlement that would render the Settlement Agreement unlawful, the plaintiffs allege that the value of the reverse payments from Zeneca to Barr thereunder “greatly exceeded the value of Barr’s ‘best case scenario’ in winning the appeal and entering the market with its own generic product.” Appellants’ Br at 27

It is the size, not the mere existence, of Zeneca’s reverse payment that the plaintiffs point to in asserting that they have successfully pleaded a Sherman Act cause of action In explaining our analysis, though, it is worth exploring the notion advanced by others that the very existence of reverse payments establishes unlaw-fulness See Balto, supra, at 335 (“A payment ﬂ owing from the innovator to the challenging generic ﬁ rm may suggest strongly the anticompetitive intent of the par-ties in entering the agreement and the rent-preserving effect of that agreement.”); Herbert Hovenkamp et al., Anticompetitive Settlement of Intellectual Property Disputes, 87 Minn L.Rev 1719, 1751 (2003) (“[T]he problem of exclusion pay-ments can arise whenever the patentee has an incentive to postpone determination

of the validity of its patent.”)

Heeding the advice of several courts and commentators, we decline to conclude (and repeat that the plaintiffs do not ask us to conclude) that reverse payments are per se violations of the Sherman Act such that an allegation of an agreement to make reverse payments sufﬁ ces to assert an antitrust violation We do not think that the fact that the patent holder is paying to protect its patent monopoly, with-

out more, establishes a Sherman Act violation See Valley Drug, 344 F.3d at 1309

(concluding that the presence of a reverse payment, by itself, does not transform

an otherwise lawful settlement into an unlawful one); Asahi Glass, 289 F.Supp.2d

at 994 (asserting that “[a] ban on reverse-payment settlements would reduce the incentive to challenge patents by reducing the challenger’s settlement options should he be sued for infringement, and so might well be thought anticompeti-tive,” and observing that if the parties decided not to settle, and the patent holder ultimately prevailed in the infringement lawsuit, there would be the same level of competition as in the reverse payment case); Thomas F Cotter, Reﬁ ning the “Pre-sumptive Illegality” Approach to Settlements of Patent Disputes Involving Reverse Payments: A Commentary on Hovenkamp, Janis & Lemley, 87 Minn L.Rev 1789,

1807 (2003) (noting that “the plaintiff often will have an incentive to pay the dant not to enter the market, regardless of whether the former expects to win at trial,” which “suggests that reverse payments should not be per se illegal, since they are just as consistent with a high probability of validity and infringement as they are with a low probability It also suggests that reverse payments should not

defen-be per se legal for the same reason.”) But see Cardizem, 332 F.3d at 911 (calling a

forty-million-dollar reverse payment to a generic manufacturer “a naked, tal restraint of trade that is per se illegal because it is presumed to have the effect of reducing competition in the market for Cardizem CD and its generic equivalents

horizon-to the detriment of consumers”)

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* * * [M]oreover, reverse payments are particularly to be expected in the patent context because the Hatch-Waxman Act created an environment that encourages them [citation omitted]

In the typical patent infringement case, the alleged infringer enters the market with its drug after the investment of substantial sums of money for manufacturing, marketing, legal fees, and the like The patent holder then brings suit against the alleged infringer seeking damages for, inter alia, its lost proﬁ ts If the patent holder wins, it receives protection for the patent and money damages for the infringe-ment And in that event, the infringer loses not only the opportunity to continue in the business of making and selling the infringing product, but also the investment

it made to enter the market for that product in the ﬁ rst place And it must pay ages to boot It makes sense in such a circumstance for the alleged infringer to enter into a settlement in which it pays a signiﬁ cant amount to the patent holder to rid itself of the risk of losing the litigation

By contrast, under the Hatch-Waxman Act, the patent holder ordinarily brings suit shortly after the paragraph IV ANDA has been fi led — before the fi ler has spent substantial sums on the manufacturing, marketing, or distribution of the potentially infringing generic drug The prospective generic manufacturer there-fore has relatively little to lose in litigation precipitated by a paragraph IV certifi -cation beyond litigation costs and the opportunity for future profi ts from selling the generic drug Conversely, there are no infringement damages for the patent holder to recover, and there is therefore little reason for it to pursue the litigation beyond the point at which it can assure itself that no infringement will occur in the

“Hatch-Waxman essentially redistributes the relative risk assessments and explains the ﬂ ow of settlement funds and their magnitude Because of the Hatch-Waxman scheme, [the generic challengers] gain[] considerable leverage in patent litigation: the exposure to liability amount[s] to litigation costs, but pale[s] in com-

parison to the immense volume of generic sales and proﬁ ts.” Schering-Plough, 402

F.3d at 1074 (citation omitted)

Under these circumstances, we see no sound basis for categorically ing reverse payments employed to lift the uncertainty surrounding the validity and scope of the holder’s patent

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condemn-Pharmaceutical Settlements and Reverse Payments 423

3 “Excessive” Reverse Payments As we have noted, although there are those who contend that reverse payments are in and of themselves necessarily unlawful, the plaintiffs are not among them They allege instead that “[t]he value of the con-sideration provided to keep Barr’s product off the market greatly exceeded the value Barr could have realized by successfully defending its trial victory on appeal and entering the market with its own competitive generic product.” Appellants’

Br at 15 The plaintiffs assert that it is that excessiveness that renders the ment Agreement unlawful We agree that even if “reverse payments are a natural

Settle-by-product of the Hatch-Waxman process,” Cipro II, 261 F.Supp.2d at 252, it does

not follow that they are necessarily lawful [citation omitted] But

[o]nly if a patent settlement is a device for circumventing antitrust law is it vulnerable to an antitrust suit Suppose a seller obtains a patent that it knows is almost certainly invalid (that is, almost certain not to survive a judicial challenge), sues its competitors, and settles the suit by licensing them to use its patent in exchange for their agreeing not to sell the patented product for less than the price speciﬁ ed in the license In such a case, the patent, the suit, and the settlement would be devices — masks — for ﬁ xing prices, in violation of antitrust law

Asahi Glass, 289 F.Supp.2d at 991 “If, however, 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.” Id at 992

There is something on the face of it that does seem “suspicious” about a patent holder settling patent litigation against a potential generic manufacturer by paying that manufacturer more than either party anticipates the manufacturer would earn

by winning the lawsuit and entering the newly competitive market in competition with the patent holder Why, after all-viewing the settlement through an antitrust lens-should the potential competitor be permitted to receive such a windfall at the ultimate expense of drug purchasers? We think, however, that the suspicion abates upon reﬂ ection In such a case, so long as the patent litigation is neither a sham nor otherwise baseless, the patent holder is seeking to arrive at a settlement in order

to protect that to which it is presumably entitled: a lawful monopoly over the manufacture and distribution of the patented product

If the patent holder loses its patent monopoly as a result of defeat in patent gation against the generic manufacturer, it will likely lose some substantial portion

liti-of the market for the drug to that generic manufacturer and perhaps others The patent holder might also (but will not necessarily) lower its price in response to the competition The result will be, unsurprisingly, that (assuming that lower prices do not attract signiﬁ cant new purchasers for the drug) the total proﬁ ts of the patent holder and the generic manufacturer on the drug in the competitive market will

be lower than the total proﬁ ts of the patent holder alone under a patent-conferred monopoly In the words of the Federal Trade Commission: “The anticipated prof-its of the patent holder in the absence of generic competition are greater than the

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sum of its proﬁ ts and the proﬁ ts of the generic entrant when the two compete.” In

re Schering-Plough Corp., slip op at 27, 2003 WL 22989651 (Fed Trade Comm’n

Dec 8, 2003), 2003 FTC LEXIS 187, vacated, 402 F.3d 1056 (11th Cir.2005) It 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 profi t from victory, it seems to make obvious economic sense for the generic manufacturer to accept such a payment if it is offered We think we can safely assume that the patent holder will seek to pay less if it can, but under the circumstances of a paragraph IV Hatch-Waxman fi ling, as we have discussed, the ANDA fi ler might well have the whip hand [citation omitted]

Of course, the law could provide that the willingness of the patent holder to settle at a price above the generic manufacturer’s projected proﬁ t betrays a fatal disbelief in the validity of the patent or the likelihood of infringement, and that the patent holder therefore ought not to be allowed to maintain its monopoly posi-tion Perhaps it is unwise to protect patent monopolies that rest on such dubious patents But even if large reverse payments indicate a patent holder’s lack of conﬁ -dence in its patent’s strength or breadth, we doubt the wisdom of deeming a patent effectively invalid on the basis of a patent holder’s fear of losing it

[T]he private thoughts of a patentee, or of the alleged infringer who settles with him, about whether the patent is valid or whether it has been infringed is not the issue in an antitrust case A ﬁ rm that has received a patent from the patent ofﬁ ce (and not by fraud ), and thus enjoys the presumption of validity that attaches to

an issued patent, 35 U.S.C § 282, is entitled to defend the patent’s validity in court,

to sue alleged infringers, and to settle with them, whatever its private doubts, unless

a neutral observer would reasonably think either that the patent was almost certain

to be declared invalid, or the defendants were almost certain to be found not to have infringed it, if the suit went to judgment 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

Asahi Glass, 289 F.Supp.2d at 992-93 (citation omitted) (emphasis in original)

Such a rule would also fail to give sufﬁ cient consideration to the patent holder’s incentive to settle the lawsuit without reference to the amount the generic manu-facturer might earn in a competitive market, even when it is relatively conﬁ dent

of the validity of its patent-to insure against the possibility that its conﬁ dence is misplaced, or, put another way, that a reviewing court might (in its view) render an

erroneous decision Cf Schering-Plough, 402 F.3d at 1075–76 Whatever the degree

of the patent holder’s certainty, there is always some risk of loss that the patent holder might wish to insure against by settling

This case is illustrative It is understandable that however sure Zeneca was at the outset that its patent was valid, settlement might have seemed attractive once

it lost in the district court, especially in light of the deferential standard the Federal

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Circuit was expected to apply on review But its desire to settle does not ily belie Zeneca’s confi dence in the patent’s validity Indeed, Zeneca’s pursuit of subsequent litigation seeking to establish the tamoxifen patent’s validity, and the success of that litigation, strongly suggest that such confi dence persisted and was not misplaced Neither do we think that the settlement’s entry after the district court rendered a judgment against Zeneca should counsel against the settlement’s propriety It would be odd to handicap the ability of Zeneca to settle after it had displayed suffi cient confi dence in its patent to risk a fi nding of invalidity by taking the case to trial

We are unsure, too, what would be accomplished by a rule that would tively 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 manufac-turer might nonetheless agree to settle because it is less risky to accept in settlement all the profi ts it expects to make in a competitive market rather than fi rst to defend and win a lawsuit, and then to enter the marketplace and earn the profi ts If such a limitation had been in place here, Zeneca might have saved money by paying Barr the maximum such a rule might allow-what Barr was likely to earn if it entered the market—and Barr would have received less than it could have if it were free

effec-to negotiate the best deal available-as it did here But the resulting level of petition, and its beneﬁ t to consumers, would have been the same The monopoly would have nonetheless endured — but, to no apparent purpose, at less expense to Zeneca and less reward for Barr

It strikes us, in other words, as pointless to permit parties to enter into an ment settling the litigation between them, thereby protecting the patent holder’s monopoly even though it may be based on a relatively weak patent, but to limit the amount of the settlement to the amount of the generic manufacturer’s projected proﬁ ts had it won the litigation

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 justiﬁ ed the monopoly enjoyed by the patent holder, the more a rule permitting settlement is likely to beneﬁ t 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 pat-ent monopolies that are, perhaps, undeserved

* * * An alternative rule is, of course, possible As suggested above, the trust laws could be read to outlaw all, or nearly all, settlements of Hatch-Waxman infringement actions Patent holders would be required to litigate each threatened patent to ﬁ nal, unappealable judgment Only patents that the courts held were valid would be entitled to confer monopoly power on their proprietors But such

anti-a requirement would be contranti-ary to well-estanti-ablished principles of lanti-aw As we hanti-ave

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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

We generally agree, then, with the Eleventh Circuit insofar as it held in Valley

Drug that “‘simply because a brand-name pharmaceutical company holding a

pat-ent paid its generic competitor money cannot be the sole basis for a violation of antitrust law,’ unless the ‘exclusionary effects of the agreement’ exceed the ‘scope of

the patent’s protection.’” Cipro III, 363 F.Supp.2d at 538 ( quoting Schering-Plough,

402 F.3d at 1076 (alteration omitted)) Whatever damage is done to competition

by settlement is done pursuant to the monopoly extended to the patent holder by patent law unless the terms of the settlement enlarge the scope of that monopoly

“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.” Cipro III, 363 F.Supp.2d at 535

We further agree with the Cipro III court that absent an extension of the

monopoly beyond the patent’s scope, an issue that we address in the next section

of this opinion, and absent fraud, which is not alleged here, the question is whether the underlying infringement lawsuit was “objectively baseless in the sense that

no reasonable litigant could realistically expect success on the merits.” Prof’l Real

Estate Investors, Inc v Columbia Pictures Indus., Inc., 508 U.S 49, 60 (1993) In this

case, the plaintiffs do not contend that they can — and we conclude that in all hood they cannot — establish that Zeneca’s patent litigation was baseless, particu-larly in light of the subsequent series of decisions upholding the validity of the same

likeli-patent Cf id at 60 n 5 (“A winning lawsuit is by deﬁ nition a reasonable effort at

petitioning for redress and therefore not a sham.”) Payments, even “excessive” payments, to settle the dispute were therefore not necessarily unlawful

4 The Terms of the Settlement Agreement Inasmuch as we conclude that neither the fact of settlement nor the amount of payments made pursuant thereto

as alleged by the plaintiffs would render the Settlement Agreement unlawful, we must assess its other terms to determine whether they do As we have explained

in the previous section of this opinion, we think that the question is whether the

“exclusionary effects of the agreement” exceed the “scope of the patent’s

pro-tection.” Schering-Plough, 402 F.3d at 1076 Looking to other courts that have

addressed similar cases for guidance, and accepting the plaintiffs’ allegations as true, we conclude that the Settlement Agreement did not unlawfully extend the reach of Zeneca’s tamoxifen patent

First, the Settlement Agreement did not extend the patent monopoly by restraining the introduction or marketing of unrelated or non-infringing products

It is thus unlike the agreement the Sixth Circuit held per se illegal in Cardizem,

332 F.3d at 908, which included not only a substantial reverse payment but also

an agreement that the generic manufacturer would not market non-infringing products [citation omitted] * * *

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