[author: Kevin E. Noonan]
Bayer Corp. and Bayer AG have filed an amicus brief in support of a grant of certiorari by the Supreme Court in the K-Dur case (In re K-Dur Antitrust Litigation). Being a branded drug maker, it is no surprise that Bayer argues in its brief that the Third Circuit's decision created a circuit split that unsettled the balance created by other circuit courts of appeal. Two aspects of the brief stand out: first, that Bayer was itself involved in a Federal Trade Commission (FTC) challenge to a reverse payment settlement agreement over the antibiotic Ciprofloxacin®, specifically Arkansas Carpenters Health & Welfare Fund v. Bayer AG, 604 F.3d 98, 106, 110 (2d Cir. 2010) (per curiam), and In re Ciprofloxacin Hydrochloride Antitrust Litigation, 544 F.3d 1323 (Fed. Cir. 2008), cert. denied, 557 U.S. 920 (2009); and second, by taking the position expressly that the "scope of the patent" test used by the Second, Eleventh, and Federal Circuits was the correct test for assessing whether a reverse payment settlement agreement is lawful.
The brief asserts that "[t]he Third Circuit's decision in In re K-Dur Antitrust Litigation, 686 F.3d 197 (3d Cir. 2012), undermines the established law governing a core legal right of any patent holder -- the right to enter into agreements no more exclusionary than the patent itself, including agreements that settle patent litigation." The brief makes three arguments in support of this conclusion:
• That the "scope of the patent" test is consistent with Supreme Court precedent regarding a patentee's right to exclude, citing "numerous mistakes of fact and law" in the Third Circuit opinion rejecting this proposition;
• That the "scope of the patent" grounds for affirming reverse payment settlement agreements "benefits consumers," arguing that without being able to rely on the exclusive right conferred by patents there would be no investment in new drugs;
• That the Third Circuit opinion was based on flawed studies, predominantly ones promulgated by the FTC.
In addition, the brief states that the Third Circuit opinion is incorrect in reciting a rule of "presumptive [antitrust] liability" because it presumes (as does the FTC) that reverse payment settlement agreements are only contemplated by innovator drug companies to protect "weak" or "bad" patents. On the contrary, Bayer argues generic drug companies "routinely" challenge even patents believed to be "the strongest and most secure" so that preventing settlement will lead to more litigation and fewer new drugs (and preclude settlements that permit generic entry earlier than would occur otherwise).
The brief's arguments regarding the correctness of the "scope of the patent" test are grounded in Supreme Court precedent, particularly Bement v. Nat'l Harrow Co., 186 U.S. 70, 88 (1902), for the principle that when agreements exclude no more competition than the patent itself, they do not restrain lawful competition. Moreover, Bayer argues that the Bement case was decided when the antitrust laws were most expansively applied, so the import of the decision that patenting precludes antitrust liability was even more significant. Also, Bayer argues, Supreme Court precedent sanctions patent infringement litigation settlements because settlements are "a legitimate and desirable result in itself." In this regard the brief cites United States v. General Elec. Co., 272 U.S. 476, 493 (1926), which found price setting under a patent license to be lawful.
The brief then makes the case that antitrust laws are directed to lawful competition and not unlawful, with the burden on the antitrust plaintiff properly to require a showing that the acts prevented were lawful ones (which patent infringement is not), citing Rubber Tire Wheel Co. v. Milwaukee Rubber Works Co., 154 F. 358, 364 (7th Cir. 1907), for the proposition that "the public [i]s not entitled to profit by competition among infringers." This theme is continued in a discussion of Walker Process Equipment, Inc. v. Food Machinery & Chemical Co., 382 U.S. 172, 177 (1965), which requires proof of actual fraud in obtaining a patent ("beyond such intentional misconduct in obtaining the patent, the patentee's 'good faith would furnish a complete defense' to antitrust claims"). The brief notes that the Third Circuit erred (at least) in not considering Walker Process in its discussion of the antitrust implications of reverse payment settlement agreements. The proper conclusion, according to Bayer, is that the Second, Eleventh, and Federal Circuits, and the "scope of the patent" test were correct, because exclusion under patent law does not constitute an antitrust violation unless it is outside scope of patent right to exclude, citing Mallinckrodt, Inc. v. Medipart, Inc., 976 F.2d 700, 708 (Fed. Cir. 1992); USM Corp. v. SPS Techs., Inc., 694 F.2d 505, 513 (7th Cir. 1982); and SCM Corp. v. Xerox Corp., 645 F.2d 1195, 1206 (2d Cir. 1981).
Turning to a discussion of the Cipro litigation, the brief makes the point that Barr admitted infringement, and the patent withstood reexamination and three other separate litigations. The brief further cites the statements in Cipro litigation regarding reverse payment settlements as being "a natural product of the Hatch-Waxman process" due to the different calculus of ANDA filers that do not incur any but statutory infringement liability (a point made by the parties and other amici). The brief finds the first enunciation of the correct analytical framework for determining the legality of reverse payment settlement agreements in Judge Trager's opinion in the first Cipro case:
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.
In re Ciprofloxacin Hydrochloride Antitrust Litig., 363 F. Supp. 2d 514, 522 (E.D.N.Y. 2005). The Third Circuit's opinion was wrong ("remarkable"), according to the brief, because it departs these principles, based on a misapplication of two "policies," one based on the desire of the public to "test" weak patents and the other based on the desire of Congress to provide consumers with generic drugs." But, according to the brief, each of these "policy" questions has a countervailing consideration. Counter to the desire to test patents is the interest in protecting patent holders from infringement (citing Lear, Inc. v. Adkins, 395 U.S. 653, 663-64 (1969) (quoting Pope Mfg. Co. v. Gormully, 144 U.S. 224, 234 (1892)). Counter to the desire to provide cheaper generic versions of drugs is the interest in not discouraging innovator drug companies from developing new drugs (citing aaiPharma Inc. v. Thompson, 296 F.3d 227, 231 (4th Cir. 2002). The brief also notes that the Third Circuit declared the agreements presumptively invalid and ignored the question of whether infringement was admitted or contested (as it was in K-Dur), and criticized the third Circuit for ignoring Bement and Walker Process while relying on cases that were not relevant to the question of antitrust liability. These criticisms extended to the Third Circuit's citation of United States v. Masonite Corp., 316 U.S. 265 (1942), which the brief argues was a patent exhaustion case, and cases like Lear, Pope, Edward Katzinger Co. v. Chi. Metallic Mfg. Co., 329 U.S. 394 (1947), and Sola Elec. Co. v. Jefferson Elec. Co., 317 U.S. 173 (1942), which related to whether a licensee could challenge a patent. Finally, Cardinal Chemical Co. v. Morton International Inc., 508 U.S. 83 (1993), merely stated that patent invalidity was not mooted by a determination that a patent was not infringed and similarly did not support or compel the Third Circuit's opinion regarding the antitrust implications of reverse payment settlement agreements.
The brief also criticizes the Third Circuit for holding that "there is no need to consider the merits of the underlying patent suit because' . . . it is logical to conclude that the quid pro quo for the payment was an agreement by the generic to defer entry beyond the date that represents an otherwise reasonable litigation compromise,'" a statement the brief calls "erroneous." First, the value of an agreement to the parties differ, because the branded innovator will make much more for every month it is on the market exclusively than the generic will make sharing the market; money can balance these considerations, and money would need to flow from the branded to the generic. The brief cites Marc G. Schildkraut, Patent-Splitting Settlements and the Reverse Payment Fallacy, 71 Antitrust L.J. 1033, 1062 (2004), in support of this argument. Further, the brief argues that courts do not get to "hypothesize a 'better' settlement" than the ones at issue between the parties, citing Verizon Commc'ns Inc. v. Law Offices of Curtis v. Trinko, LLP, 540 U.S. 398, 415-16 (2004) ("The Sherman Act is indeed the Magna Carta of free enterprise, but it does not give judges carte blanche to insist that a monopolist alter its way of doing business whenever some other approach might yield greater competition."), and Am. Motor Inns, Inc. v. Holiday Inns, Inc., 521 F.2d 1230, 1249 (3d Cir. 1975). There is no precedent for finding liability because the parties settled, according to the brief, but that is precisely what the Third Circuit's opinion does: under the "presumptive liability" standard contained in the opinion, antitrust liability arises as a direct consequence of the settlement (albeit here the brief ignores the requirement for some sort of payment, "anything of value").
The Third Circuit also errs, according to Bayer's brief, because it "reads out" of the statute the presumption of validity, and because it expressly ignores the "merits" of the case by not requiring the antitrust plaintiff to rebut that presumption. Effectively, this "eviscerates" the presumption of validity and it shifts the burden to the patentee to "disprove antitrust liability."
The brief's second argument is that consumers experience a benefit from settlements that prevent infringing entry; this is precompetitive, Bayer argues, citing (paradoxically) the FTC's current General Counsel who is quoted as saying that "what is neglected is that, if the settlement prevents infringing entry, such prevention in itself is a pro-competitive effect." Kent S. Bernard & Willard K. Tom, Antitrust Treatment of Pharmaceutical Patent Settlements: The Need for Context and Fidelity to First Principles, 15 Fed. Cir. B.J. 617, 622 (2006) (original emphasis). Indeed, Bayer argues that the "scope of the patent" test encourages innovation: in view of the costs of developing a new drug for human use, the test balances the long-term policy of encouraging innovation and the short-term consideration of providing cheaper drugs. Bayer also notes that innovators need to be able to recoup their investment, and that this need was part of the balance between innovators and generic drug companies that formed the basis of the Hatch-Waxman Act, citing Sanofi-Synthelabo v. Apotex, Inc., 470 F.3d 1368, 1383 (Fed. Cir. 2006), and Loctite Corp. v. Ultraseal Ltd., 781 F.2d 861, 876 (Fed. Cir. 1985). On the other hand:
[F]ocusing solely on lowered prices of the generic drugs "ignores the first principle that enforcing valid patents makes a major contribution to consumer welfare by providing the incentive for innovation. We ignore that incentive at our peril,"
citing Bernard & Tom, supra, 15 Fed. Cir. B.J. at 618. The Third Circuit also erred in Bayer's view by over-emphasizing those portions of the Hatch-Waxman Act regarding promoting generic drugs ("[t]he goal of the Hatch-Waxman Act is to increase the availability of low cost generic drugs," emphasis added)) and ignoring the "patent protection policies Hatch-Waxman embodies":
Consequently, the court simply discarded the scope of the patent rule, calling it a "bad policy from the perspective of the consumer." Pet. App. 31a. A worse policy is to ignore the incalculable benefits of new, life-saving drugs made possible by the incentives for innovation. Without those drugs being created in the first place, there will be no prices to lower.
Finally, the brief opines that the studies the Third Circuit relied upon are "fundamentally flawed." Interestingly, these are FTC studies (FTC, Generic Drug Entry Prior to Patent Expiration (2002); FTC, Pay-for-Delay: How Drug Company Pay-Offs Cost Consumers Billions (2010); see "FTC Disapproves of 'Pay-for-Delay' Drug Deals") in large part. Bayer argues that these opinions are "flawed" because the FTC used statistical sleight-of-hand to arrive at the number of ANDA litigations it maintains are won by generic challengers. On the contrary, the brief cites other studies that expressly criticize the FTC studies, including Adam Greene & D. Dewey Steadman, Pharmaceuticals, Analyzing Litigation Success Rates, RBC Capital Markets 1 (2010), and Bret Dickey et al., A Preliminary Economic Analysis of the Budgetary Effects of Proposed Restrictions on 'Reverse Payment' Settlements (2010), and states that the frequency with which generic drug makers prevail in ANDA litigation is much lower than the 78% success rate espoused by the FTC and relied upon by the Third Circuit. As a consequence, "[t]hese flawed premises of the Third Circuit's rationale only underscore the need for this Court's review."
