Academic White Paper Rebuts FTC and S. 214

by McDonnell Boehnen Hulbert & Berghoff LLP
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Paul Bender, former Clinton-era Principal Deputy Solicitor General, and his colleagues Christopher A. Mohr and Michael Kippler at the University of Arizona Law School, published a White Paper entitled "S. 214's inappropriate interference With the Fundamental Right to Settle Litigation" on Monday, March 25, the very same day that the Supreme Court was listening to the Federal Trade Commission (FTC) argue that it should adopt a stance regarding reverse payment settlement agreements in ANDA litigation advocated by the FTC and embodied in S. 214.  Mr. Bender has deep credentials, having clerked with both Learned Hand and Felix Frankfurter as well as having extensive experience in the very kind of agency advocacy and legislative effects on litigation at issue before the  Supreme Court in FTC v. Actavis, Inc.

The White Paper makes several arguments:

1.    "Recent history shows that most of these agreements help accelerate, not delay, the public availability of inexpensive generic equivalents of patented drugs."

2.    Settlements can "serve the public interest" because they permit generic drugs to come on the market earlier than if the patentee had prevailed and excluded generic competition until the end of the patent term.

3.    Such settlements can also serve both the public's and private interests by "avoiding expensive, complex and time-consuming litigation."

4.    The bill raises due process concerns, including that private parties have the right to settle their disputes without government intervention.

5.    Adopting the presumption embodied in S. 214 would "free the government from the substantial burden it ought to have to justify interfering in that basic right."

6.    This presumption is also contrary to the presumption of patent validity.

7.    The bill "turn[s] on its head" the presumption that a plaintiff has the burden, where here the "burden" on the innovator patent holder would often be "the impossible task of proving the existence of a negative," i.e., that there is no anticompetitive effect.

8.    S. 214 answers the wrong question:  the right question is whether generic drugs will come to market before patent expiry, i.e., sooner than they would otherwise, which the White Paper contends is the purpose of the Hatch-Waxman Act.

9.    Courts that have actually examined these agreements have overwhelmingly found the answer to this question to be that generic drugs have come to market sooner than they would have and the bill "reject[s] those thoughtful and well-reasoned decisions" to impose an unnecessary and unwise presumption.

S. 214 is the "Preserve Access to Favorable Generics Act," introduced by Senator Amy Klobuchar (D-MN), and contains "findings" (from the FTC, no doubt), that reverse payment settlements "have unduly delayed the marketing of low-cost generic drugs," and have resulted in "consumers losing the benefits that the 1984 [Hatch-Waxman] Act was intended to provide" (S. 214, Sec. 2(a)(6)(B) and (D)).  What the bill proposes to define as illegal is given a broad definition:  "anything" of value transferred from an innovator to a generic drug maker, in return for the generic "agree[ing] to limit or forego research, development, manufacturing, marketing, or sales of the [generic] product for any period of time" (S. 214 Sec. 2(a)(2)).

Mr. Bender makes the point that these agreements can be, and often do "serve the public interest because a common term in these agreements is that the patent holder will permit the generic version of the drug to enter the market before the expiration of the term of the underlying patent," using savings from such an agreement involving Lipitor® to illustrate the point, wherein the generic form of the drug entered the marketplace in 2011 instead of 2017.

Mr. Bender admits that such agreements can be contrary to the public interest, citing the In re Cardizem Antitrust Litigation, 332 F. 3d 896 (6th Cir. 2003) case.  Thus, he sets forth the question as "permit[ting] the many good agreements that further the public interest while prohibiting those that do not" and notes that Congress has addressed this balance in the 2003 Medicare Modernization Act requiring that these agreements be filed with the FTC and DOJ.  He also notes that the Act requires these agencies to "bear[] the burden of showing the negative effects of challenged agreements on a case-by-case basis."  S. 214, in contrast, would permit the government to presume that these agreements are illegal and shift the burden to the parties to establish that pro-competitive effects outweigh any anticompetitive effects.

This would be harmful, according to Mr. Bender, because it would inhibit settlements in ANDA litigation, citing Blackstone for the proposition that settlement has been recognized since the 18th Century as a "valid means of resolving disputes."  Perhaps more aptly, he cites Lincoln for the proposition that we should:  "Discourage litigation.  Persuade your neighbors to compromise whenever you can.  Point out to them how the nominal winner is often a real loser -- in fees, expenses, and waste of time."  He further cites avoidance of the "inveterate and costly effects of litigation" (citing Schering-Plough, Corp. v. Federal Trade Comm'n, 402 F.3d 1056, 1075 (11th Cir. 2005)), relieving crowded court dockets (citing Janneh v. GAF Corp., 887 F.2d 432, 435 (2d Cir. 1989)), and reducing uncertainty for both litigants and the public (citing D. H. Overmyer Co. v. Loflin, 440 F.2d 1213, 1215 (5th Cir. 1971)).  For all these reasons, Mr. Bender argues that "it is well established that courts will not ordinarily interfere with good-faith litigation settlements," citing several cases including D. H. Overmyer Co., Aro Corp. v. Allied Witan Co., 531 F.2d 1368, 1372 (6th Cir. 1976), and Hemstreet v. Speigel, Inc., 851 F.2d 348, 350 (Fed. Cir. 1988).  And this inclination towards settlement is expressed in several of the Federal Rules of Civil Procedure, including Rules 16, 26 and 68, and the Federal Rules of Evidence (Rule 408), as well as Congressional mandates to Federal agencies requiring them to "develop policies that use alternative dispute resolution as a potential means to resolve disputes" citing 28 U.S.C § 652(a) (The Administrative Dispute Resolution Act of 1996).

These incentives apply with even greater force in ANDA and patent litigation, which are characterized by "high stakes, uncertainty, and inherent complexity," citing TM Patents, L.P. v. IBM Corp., 72 F. Supp. 2d 370, 378 (S.D.N.Y. 1999) for the proposition that "nearly 40 percent of claims constructions are changed or overturned by the Federal Circuit."  Settlement is not something unique to patents involved in ANDA litigation, Mr. Bender further reminds us:  95% of litigants settle patent litigation (citing Marc G. Schildkraut, Patent-Splitting Settlements & the Reverse Payment Fallacy, 71 Antitrust L.J. 1033, 1048 (2004)).  And this study further showed that generic drug companies do not usually prevail (~40% of the time) when ANDA litigation goes to judgment rather than settle, according to a survey of 370 cases between 2000 and 2010.  Indeed, the frequently cited statistic that generic companies prevail 76% of the time is only true when settlements are included with the number of cases either dropped or won (RBC Capital Markets, Industry Comment: Pharmaceuticals 4 (Jan. 15, 2010)).  Further statistics the FTC apparently disregards are that 17 of 22 generic drugs entering the marketplace in 2011 were the result of settlements, and that "early generic entry permitted by its settlements alone 'removed 138 years of monopoly protection' and saved consumers $128 billion," citing Teva Pharms. USA, Press Release, Teva Pharmaceuticals Issues Statement in Response to Federal Trade Commission Claims on Patent Settlements (June 24, 2009).

The White Paper then goes through the "key provisions" of S. 214, setting forth the portions of the statute that would deem all such reverse payment settlement agreements to be illegal and impose a burden on the parties to produce "clear and convincing evidence" that the "procompetitive benefits of the agreement outweigh the anti-competitive effects of the agreement" (S. 214 Secs. 3(2) and 2(a)(2)(B)).  Even generic drug entry prior to expiration of the "relevant patent term" would not suffice to establish such a precompetitive balance under the terms of the proposed statute (S. 214, Sec. 3(2)).  The bill would have the FTC determine whether such agreements were on balance pro- or anticompetitive, and parties would rick "millions in damage awards" should the Commission prevail.

Mr. Bender argues that these provisions are harmful, inter alia, because "many" reverse payment settlement agreements actually "accelerate the availability to consumers of inexpensive generic drugs."  He provides as examples Lactimal (generic entry 37 months prior to patent expiry), tamoxifen (sold as Nolvadex, generic entry 9 years prior to patent expiry, and under circumstances where generic challengers who did not settle did not prevail in the litigation), as well as the Watson case before the Supreme Court, where the generic form of the drug entered the marketplace 5 years before patent expiry.

The Paper also asserts that the statutory presumption that reverse payment settlement agreements are illegal contravenes the parties' "presumptive right to settle cases" unless the government can show that the settlement is "harmful to the public interest," a requirement not found in the provisions of S. 214.  Moreover, Mr. Bender argues, the presumptions set forth in the law invert the traditional requirement that plaintiffs, not defendants, bear the burden of "proving their case," as under current law where the FTC and DOJ are required to establish anticompetitiveness in order to invalidate the settlement.  S. 214 also disregards, indeed nullifies, the statutory presumption of patent validity (35 U.S.C. § 282), and upsets the Hatch-Waxman scheme that encourages the parties in an ANDA dispute to sue and expressly recognizes patent litigation settlements as an integral part of its statutory scheme (21 U.S.C. § 355(j)(5)(B)(iii)(I), (II)).

The Paper then asserts that an even more basic flaw in S. 214 is that it "asks the wrong question" by focusing on "competition" rather than "quicker access to generic drugs," the proper focus of the Hatch-Waxman Act.  Citing the history of the Act, Mr. Bender argues that "competitiveness" was not the concern, access to generic drugs was.  Focusing on competition is improper also because it ignores the fact that "patents are themselves 'anti-competitive'" (emphasis in original).  The FTC's focus on competition is, Mr. Bender says, "a non sequitur" in view of the recognized immunity patents enjoy from antitrust liability (citing, inter alia, U.S. v. General Electric Co., 272, 490 (1926)).  The paper gets to the heart of the matter ("S. 214 presumes the presence of consideration in these settlements to be fundamentally corrupt") and cites Judge Posner in Asahi Glass v. Pentech, 289 F. Supp. 2d 996, 994 (2003), for the proposition 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 anticompetitive."

The paper concludes:

S. 214's presumptive prohibition of consideration in patent settlements is hopelessly flawed.  It would interfere with the basic right of litigants to decide whether to settle their disputes, impose unusual and unfair burdens of proof on litigants, ignore the statutory presumption of patent validity, serve to frustrate the pro-litigation scheme created under the Hatch-Waxman Act, and preclude many settlements that will promote the interests of consumers.  Rather than adopting that unusual and dangerous solution, the government should utilize the tools it has in hand under the Medicare Modernization Act of 2003 that requires the FTC to review and prove the illegality of settlements on a case by case basis -- an approach consistent both with the benefits these settlements create for consumers, and longstanding traditions of constitutional fairness.

The Supreme Court is expected to rule by the end of its term in June.  Justice Alito having recused himself, the possibility exists that the Circuit split will not be resolved.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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