Par/Paddock Answers FTC Before Supreme Court

by McDonnell Boehnen Hulbert & Berghoff LLP

Par PharmaceuticalPar/Paddock, one of the generic drug company defendants in FTC v. Actavis Inc. et al. (the "reverse payment" ANDA settlement case now before the Supreme Court) filed its reponsive brief last week.  In it, the generic drug company not only answers the FTC's charges of non-competitive behavior but also exposes the shadings of the nuances of truth behind the Commission's position and illustrates the "change" in philosophy on competitiveness occasioned by the Obama Administration.

Paddock LaboratoriesThe brief makes several important points.  These include what may be most relevant to the question before the Court, that the "problems" caused by reverse payment settlement agreements are largely historical and were corrected by the passage of the Medicare Prescription Drug, Improvement and Modernization Act of 2003 (MMA), which included forfeiture provisions of the 180 exclusivity period for a first ANDA filer who enters into a reverse payment settlement agreement.  The predicted consequence of passage of the law has ensued, i.e., the number of reverse payment settlement agreements has declined from a high of 50% to 18% (adjusted to exclude agreements wherein an innovator drug company agreed not to market an authorized generic version of the branded drug).

TableThe brief also argues that the Court has never found an antitrust violation for exercise of a patent that was not somehow a sham.  The brief asserts that antitrust law is intended to proscribe behavior not compel it, and is not empowered to force private companies to "pursue the course that maximizes competition and consumer welfare" as asserted in the FTC's brief.  Finally, the brief contends that as to Par/Paddock, its behavior was compelled by a restraining order by the District Court and thus it is immune from antitrust liability under the Noerr-Pennington doctrine and, regardless, as the second ANDA filer under "pre-MMA rules" it could not have entered the market before the date agreed upon by the parties.

The brief begins with an explication of the provisions of the Hatch-Waxman Act and the perceived deficiencies in the law that provoked Congress (at the FTC's behest and upon its recommendations) to enact the MMA in 2003.  Resorting to traditional antitrust principles, the brief rejects the "quick look" rule of reason analysis promoted by the FTC and argues that the "default analysis" is the rule of reason which starts, in a patent case, with an assessment of whether the purported "restraint" on trade is within the scope of the patent.  The brief notes that even for patents produced by fraud, or in suits that are objectively baseless, all other provisions of Sections 1 and 2 of the Sherman Act must be established, i.e., patent shenanigans of even this egregious nature are not enough per se to amount to an antitrust violation.  The brief contrasts this with the FTC's position that "a reverse payment patent-settlement alone establishes a presumptive antitrust violation," illustrating (and not for the last time) the unreasonableness of the FTC's stance.

Moreover, the brief criticizes the primary legal basis for the FTC's argument -- Prof'l Real Estate Investors v. Columbia Pictures (PRE), 508 U.S. 49, 60-61 (1993) -- for being a case that did not involve a patent, and asserts that the FTC has ignored the legitimate exclusionary rights of the patentee in considering reverse payment settlement agreements to be "horizontal" restraints on trade.  This presumption is valid if and only if the "winning" side in ANDA litigation can be predicted, something contrary to the FTC's own Guidelines for IP licensing and that the Commission admits to being "doctrinally anomalous and likely unworkable in practice."  (And yet, of course, such a prediction, more akin to a presumption, that any reverse payment settlement agreement involves a "bad" patent is the philosophical root for the Commission's anti-reverse payment crusade.)  The brief further notes the Commission's departure from the accepted practice of looking at the nature of the restraints, rather than the amount of consideration underlying the agreements, when assessing an agreement for antitrust purposes, as well as the propensity for the FTC's position to encourage (actually, force) ANDA litigants to litigate to a final judgment and the consequences of such a requirement.

The brief notes the anomaly of using antitrust law to coerce "parties 'to pursue the course that maximizes competition and consumer welfare accords with basic antitrust norms'" in the face of copious precedent that private parties "are free to choose the parties with whom they will deal, as well as the prices, terms, and conditions of that dealing," citing Pac. Bell Tel. v. Linkline Commc'ns, 555 U.S. 438, 448 (2009) (citing United States v. Colgate, 250 U.S. 300, 307 (1919)), and noting the sentiment that "'[c]ourts are ill suited 'to act as central planners, identifying the proper price, quantity, and other terms of dealing.'"  Finally in its argument regarding antitrust law, Par/Paddock's brief discusses the three cases where the Court reviewed the "quick look" rule of reason analysis prior to rejecting it in California Dental Ass'n v. FTC, 526 U.S. 756, 781 (1999), and finding in no instance that the Court had approved of this standard.

Turning to the FTC's approach to patent law the brief finds similar deficiencies.  Most outrageous is the FTC's position that patent law does not confer a right to exclude, but rather the right to try to exclude, in a "probabilistic" manner.  The brief reminds the Court that it "recently rejected a similar challenge to the statutory presumption of patent validity" in the Microsoft v. i4i case, 131 S. Ct. 2238 (2011), where the Court expressly rejected the FTC's position that invalidity should be capable of being established by a preponderance of the evidence.  The brief also highlights the FTC's argument that the scope of the patent test is inappropriate because it "allows the patentee to purchase the same period of exclusivity that a successful infringement suit would produce, even if all would concede that the patentee had little likelihood of prevailing in the infringement litigation" (emphasis in original).  But the brief contends that the Commission provides no avenue for establishing "this Greek chorus of agreement" on the likelihood vel non of a patent being upheld successfully.

Finally, the brief speaks to the Commission's position that reverse-payment settlement agreements somehow "frustrate the purposes of the Hatch-Waxman Amendments," in the context of the Hatch-Waxman Act containing no provisions intended to "change the outcomes of pharmaceutical patent litigation."  In this regard the brief argues that the FTC ignores the very changes in Hatch-Waxman (effectuated by the MMA) that it promoted before Congress in assisting in getting the provisions of the MMA involving reverse-payment settlement agreements passed in 2003.  And the brief notes that there are bills now before Congress that "propose[] the very standard the FTC seeks here," citing S. 214.

Finally, the brief notes the change in position by the FTC with regard to the illegality (presumptive or otherwise) of reverse payment settlement agreements in ANDA litigation, something that Par/Paddock contends "warrants special mention."  In so doing, the brief reminds the Court that the government took exactly the opposite position with regard to the reverse-payment settlement agreement in Schering-Plough Corp. v. FTC, 402 F.3d 1056 (CA11 2005).  The brief contends that, in view of the positions taken in the Schering-Plough case, "[t]he United States' new position is entitled to little deference," citing colloquy from Chief Justice Roberts in the oral argument for Kiobel v. Royal Dutch  Petroleum, No.10-1491 (Oct. 1, 2012).

The brief then sets forth several propositions that it contends are not disputed:

1. This is a pre-MMA case and, therefore, is not governed by current Hatch-Waxman law.

2. Paddock copied AndroGel® unaware of any patent because under the old Patent Act, Solvay's patent application was not public.

3. Par/Paddock could not have obtained an earlier settlement-entry date even absent any alleged reverse-payment.

4. The FTC does not allege that Par/Paddock were aware that Solvay planned to introduce a new AndroGel® version in 2015.

5. Respondents settled under Eleventh Circuit precedent.

6. The District Court's Consent Judgment and Order of Permanent Injunction binds Solvay and Par/Paddock and restrains Par/Paddock's generic entry until 2015.

7. After the Eleventh Circuit affirmed dismissal, the Third Circuit decided K-Dur.

(With regard to the last point, the brief notes that the precedential basis for the 3rd Circuit panel's decision, Edward Katzinger Co. v. Chicago Metallic, 329 U.S. 394 (1947), was abrogated by Lear v. Adkins, 395 U.S. 653 (1969), which overruled in part Automatic Radio v. Hazeltine Research, 339 U.S. 827 (1950)).

Par/Paddock's brief makes several important policy arguments.  One argument is that "[o]ur founders [] viewed patent rights as essential for the innovation that would power our nation's free-market economy."  Another is that "[t]he most basic right of any patentee is the right to exclude others from using her property," citing 35 U.S.C. § 154(a)(1).  Further, the brief argues that to effectuate these rights, patentees are given the right to enter into "all manner of licenses," citing Bement v. Nat'l Harrow, 186 U.S. 70, 91 (1902).  The exclusion the FTC objects to is in reality a well-considered societal decision:  "[o]ur nation early-on made the policy choice to accept exclusion in the short-run for sake of promoting innovation and competition in the long run, and, thereby, achieve hoped-for net gains for consumer welfare," citing Scott Paper v. Marcalus Mfg., 326 U.S. 249, 255 (1945).  And this is a bargain that benefits the people:  "[e]xclusion is short-lived, while the public-benefit is enduring: 'A suppression can endure but for the life of the patent, and the disclosure he has made will enable all to enjoy the fruit of his genius,'" the brief states, citing Heaton Peninsular v. Eureka Specialty, 77 F. 288, 294-295 (CA6 1896), quoted in Bement, 186 U.S. at 90.  These effects of the patent right permit patentees to act in ways that would otherwise violate the antitrust laws, according to Par/Paddock, citing four such activities:  "(i) territorial market-allocation; (ii) field-of-use restrictions and customer-allocation; (iii) output limitation; and (iv) refusals-to-deal."  Taken together, these arguments illustrate how far afield the FTC has gone in attempting to sacrifice traditional patent rights on the altar of less expensive and more available generic drugs.

These rights include the right under "settled law" for a patentee to "reap the full reward of their time-limited monopolies" by "enter[ing] into agreement[s] that restrain the practice of the patent [] for the patent holder's financial benefit."  The brief argues that this behavior is permissible under the rubrics established by the Supreme Court in Standard Oil (Indiana) v. United States, 283 U.S. 163, 171 (1931), specifically "that (i) parties may settle patent-litigation without antitrust liability as long as there were "legitimately conflicting claims," (ii) such conflict turns on the nominal scope-of-the patent, which is not second-guessed by inquiring whether infringement would have been proven; [] and (iii) the financial terms and consideration of a settlement are irrelevant."  All of the circuit courts of appeal ruling on reverse-payment settlement agreements except the 3rd Circuit in K-Dur have relied on these principles.  And the brief distinguishes the five cases cited by the FTC in support of the proposition that "this Court has never suggested that the bundle of rights a patent provides to its holder includes the right to share the patentee's monopoly profits to induce potential competitors to abandon their efforts to compete or stay out of the market altogether," on the grounds that the Court has never adopted a rule requiring courts to appraise the financial consideration that underlie "undisputable good faith patent litigation."

Finally, in its discussion of Walker Process fraud and its effect on antitrust determinations, the brief argues that there is an "important distinction between nominal and adjudicated scope" of patent claims, so that the fact that a claim has been invalidated did not implicate antitrust concerns provided that the suit was not objectively baseless and the patent was not obtained by fraud.  And the brief ends with an explication of the effects of the Noerr-Pennington doctrine in protecting a citizen's right to petition the government for redress of grievances on the scope of Actavis' potential antitrust liability.  This section of the brief also cites the Professional Real Estate Investors case for the proposition that a party's subjective views on litigation cannot be the "sole basis for a presumptive antitrust violation."  The FTC's liability theory has two problems, according to the brief:  "it incorrectly presumes that a payment reflects the parties' shared subjective-litigation views; and, in any event, PRE bars antitrust liability based solely on parties' subjective-litigation views."  This assessment is wrong, inter alia, insofar as ANDA litigation is "a highly artificial act of infringement" that imposes an "asymmetry of risk" on the parties.  And it would also require that the parties "had a conscious commitment to a common scheme designed to achieve an unlawful objective," citing  Monsanto v. Spray-Rite, 465 U.S. 752, 758, 764 (1984) (emphasis in original).

The brief ends with a discussion of Par/Paddock's inability to enter the marketplace earlier because it is governed by a prior ANDA filer.  "The FTC's complaint against Par/Paddock thus dangles by an allegation of 'ample financial incentive' for continued-litigation when Congress enacted the MMA's remedial changes precisely because such incentives were lacking under pre-MMA law," they say, citing Mova Pharm. v. Shalala, 140 F.3d 1060, 1073 (CADC 1998).  "Our antitrust laws do not compel firms to litigate," according to the brief, and this may provide the most cogent and simple basis for the Court to disagree with the government on reverse-payment settlement agreements.

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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