Recent Court Rulings Indicate
ment, Schering agreed to pay $60 million to
Upsher (and future royalties) in exchange
for a license to market Upsher’s Niacor
That Patent Rights May Trump product outside North America. In 1998,
Schering settled with ESI, agreeing on a
January 1, 2004 entry date for ESI. In addi-
the Antitrust Laws usually seen in patent infringement settle-
tion, Schering agreed to pay ESI $5 million,
with another $10 million payment contin-
gent upon ESI receiving FDA approval by a
BY CHAD A. LANDMON certain date. Schering and ESI also entered
ments, where the infringer typically pays
into a license agreement pursuant to which
money to the patent holder. These agree-
Chad A. Landmon is an associate at Axinn, ESI granted Schering licenses to enalpril
ments have been challenged under the
,
Veltrop & Harkrider, LLP where his practice and buspirone in exchange for $15 million.
antitrust laws by both the Federal Trade
involves patent and other intellectual Commission (“FTC”) and private plaintiffs, In both settlements, the agreed generic
property litigation and counseling, includ- resulting in financial settlements and other entry dates were earlier than the expiration
ing antitrust and FDA aspects thereof. He restrictions upon the companies who of Schering’s K-Dur 20 patent.
can be reached at (860) 275-8100 or entered into these agreements.1 The FTC filed an administrative com-
cal@avhlaw.com. Recently, two different Circuit Courts of plaint against Schering, Upsher and ESI
Appeals – the Eleventh and Second parent American Home Products (“AHP”),
Circuits – considered antitrust challenges alleging that the settlements were illegal
O
ver the past decade, practitioners, pol-
to patent infringement settlements involv- agreements in restraint of trade.
icymakers and commentators have
ing reverse payments. In both of these Specifically, the FTC alleged that the
increasingly debated the issues
cases, Schering-Plough Corp. v. FTC settlement agreements unreasonably
involved when the antitrust laws intersect
(hereinafter, “Schering”)2 and Joblove restrained trade in violation of Section 1 of
with patent rights. Both the antitrust and
v. Barr Labs. Inc. (In re: Tamoxifen the Sherman Act4 and Section 5 of the
patent laws are designed to promote compe-
tition and, as a result, societal wellbeing. Citrate Antitrust Litig.) (hereinafter, Federal Trade Commission Act.5 AHP
However, the two legal regimes attempt to “Tamoxifen”),3 the courts determined that entered into a consent decree, but the
accomplish this goal through alternative the agreements at issue did not violate the legality of the ESI settlement with respect
means – the antitrust laws seek to reduce antitrust laws because the provisions of the to Schering was still at issue. An
market power and eliminate most monopo- agreements, including the reverse pay- Administrative Law Judge ruled that the
lies, while the patent laws seek to bestow ments and delay in generic entry, did not settlements did not violate the antitrust
certain exclusive rights in order to encour- exceed the “exclusionary potential” of the laws, finding that the presence of payments
age research and innovation. As such, there brand company’s patent. was not anticompetitive per se. The ALJ
can be friction between the antitrust and As discussed more fully below, the indicated that the strength of the patent and
patent laws in certain unique circumstances. Eleventh and Second Circuits recognized its exclusionary power needed to be
Perhaps nowhere is this more prevalent that the patent laws and antitrust laws are assessed in a rule of reason analysis.
than in the pharmaceutical industry. Over in conflict in these circumstances. In On December 8, 2003, the Commission
the last century, brand name drug companies resolving this conflict, both courts came out reversed the decision, first determining that
have developed a plethora of new drugs and strongly in favor of patent rights, allowing the payments were not legitimate consider-
dosage forms, improving the overall health of patent holders to engage in virtually any ation for the Schering licenses. The
society. Such innovation has been possible, activity within the exclusionary power of a Commission then stated that earlier entry
in part, because of the patent laws, which patent. Furthermore, neither court evalu- dates might have been agreed upon in the
give brand companies a period of time in ated the merits of the underlying patent absence of the payments. Although not
which they are the exclusive supplier of the infringement claim in reaching its holding. finding the reverse payments per se illegal,
new drugs they create. This exclusive market Unless the Supreme Court intervenes or the Commission found them to be “red
right has provided an incentive to brand Congress acts, the legal community and flags” and declined to consider the strength
companies to invest the substantial policymakers at the FTC may need to of the patent. Ultimately, the FTC order
resources necessary to discover and develop adjust their approaches in recognition of prohibited the parties from entering into
new drugs, often requiring tens of millions of the fact that at least the Eleventh and settlements in which a generic company: (i)
dollars over a long period of time. Second Circuits will give patent rights pri- receives anything of value (in excess of the
Although these patent rights have cer- ority over the antitrust laws. expected legal fees of the patentee, not to
tainly fueled expansive development in the exceed $2 million); and (ii) agrees to defer
pharmaceutical industry, such patents have SCHERING – CONFIRMING THE its own research, development, production
also been the basis for agreements that “EXCLUSIONARY POTENTIAL” TEST or sales activities.
potentially threaten competition. For exam- In 1995, Upsher-Smith and ESI Lederle The parties petitioned for review before
ple, brand companies have entered into sought FDA approval to market generic ver- the Eleventh Circuit. In vacating the order
agreements with potential generic entrants, sions of Schering’s K-Dur 20 potassium involving Upsher, the court applied the
typically structured as settlements of patent supplement. Schering brought suit for substantial evidence standard set forth in
infringement litigation, in which the brand infringement of its patent on the extended- California Dental Ass’n v. FTC,6 and deter-
companies have paid significant sums of release coating for the product, which will mined that the Commission’s “conclusion
money to generic companies in exchange expire in September 2006. that Niacor was not worth $60 million, and
for a delay in market entry. Such payments In 1997, Schering settled with Upsher, that settlement payment was to keep
have been called “reverse payments” agreeing to permit Upsher to launch as Upsher off the market ‘is not supported by
because the flow of funds is opposite of that early as September 1, 2001. In the settle- law or logic.’”7
30 INTELLECTUAL PROPERTY TODAY APRIL, 2006
In vacating the order involving ESI, the ests favor the settlement of patent litigation settlement agreement under the antitrust
court affirmed its holding in Valley Drug and that the FTC’s approach could under- laws. These suits were consolidated in
Co. v. Geneva Pharmaceuticals, Inc.8 mine these interests. 2001 in the Eastern District of New York.
Although the Valley Drug court conceded As summarized by the Second Circuit:
that an agreement to allocate markets is TAMOXIFEN At the heart of the lawsuit was the
“clearly anticompetitive,” the court rea- In 1985, Barr Laboratories, Inc. contention that the Settlement
soned that a patent conveys an exclusionary (“Barr”) sought FDA approval to market a Agreement enabled Zeneca and Barr
power that requires primary consideration. generic tamoxifen citrate product, which effectively to circumvent the district
The Schering court explained: was being sold under the brand name court’s invalidation of Zeneca’s
We think that neither the rule of rea- Nolvadex by AstraZeneca Pharmaceuticals tamoxifen patent . . . , which, the
son nor the per se analysis is appropri- LP (“Zeneca”). At the time, tamoxifen was plaintiffs asserted, would have been
ate in this context. We are bound by the most widely prescribed drug for the affirmed by the Federal Circuit. The
our decision in Valley Drug where we treatment of breast cancer. In 1987, Barr result of such an affirmance, accord-
held both approaches to be ill-suited amended its ANDA to include a Paragraph ing to the plaintiffs, would have been
for an antitrust analysis of patent IV certification13 to the listed patent, which that Barr would have received
cases because they seek to determine prompted a patent infringement lawsuit by approval to market a generic version
whether the challenged conduct had the then patent holder, Imperial Chemical of tamoxifen; Barr would have begun
an anticompetitive effect on the mar- Industries, PLC (Zeneca was a former sub- marketing tamoxifen, thereby trigger-
ket. . . . By their nature, patents create sidiary of Imperial Chemical and suc- ing the 180-day exclusivity period;
an environment of exclusion, and con- ceeded to the ownership rights to the patent other generic manufacturers would
sequently, cripple competition. The during the course of the lawsuit). have introduced their own versions of
anticompetitive effect is already pre- On April 20, 1992, the district court tamoxifen upon the expiration of the
sent. What is required here is an ruled that the tamoxifen patent was exclusivity period, with Zeneca col-
analysis of the extent to which “invalid based on the court’s conclusion laterally estopped from invoking its
antitrust liability might undermine the that ICI had deliberately withheld ‘crucial invalidated patent as a defense; and,
encouragement of innovation and dis- information’ from the Patent and Trademark as a result, the price for tamoxifen
closure, or the extent to which the Office regarding tests that it had conducted would have declined substantially
patent laws prevent antitrust liability on laboratory animals with respect to the below the levels at which the Zeneca-
for such exclusionary effects. . . . safety and effectiveness of the drug.”14 manufactured drug in fact sold in the
Therefore, in line with Valley Drug, During the course of the appeal to the market shared by Zeneca and Barr
we think the proper analysis of Federal Circuit in 1993, the parties entered through the Settlement Agreement.16
antitrust liability requires an exami- into a settlement agreement whereby
nation of: (1) the scope of the exclu- Zeneca paid Barr $21 million, Barr On May 15, 2003, the district court granted
sionary potential of the patent; (2) the received a license to sell tamoxifen manu- the defendants’ motion to dismiss.17
extent to which the agreements exceed factured by Zeneca and Barr agreed to A Second Circuit panel, with one dis-
that scope; and (3) the resulting anti- change its Paragraph IV certification in its sent, affirmed the dismissal. In so doing,
competitive effects.9 ANDA to a Paragraph III certification, the Second Circuit began by acknowledg-
At the same time, the Eleventh Circuit effectively agreeing not to market its own ing that both the antitrust laws and the
reaffirmed that patentees may not extend generic tamoxifen product until the expira- patent laws have the “ultimate goal of stim-
their monopoly beyond the scope of the tion of Zeneca’s patent. Barr was allowed to ulating competition and innovation.”18 The
patent. For example, a patent owner who convert its Paragraph III certification back court also recognized that “[i]t is the ten-
knows a patent is invalid may not use the to a Paragraph IV certification in the event sion between restraints on anti-competitive
patent to mask otherwise anticompetitive that the patent was subsequently declared behavior imposed by the Sherman Act and
conduct, such as market division. invalid or unenforceable in a final, unap- grants of patent monopolies under the
Following Valley Drug and Judge pealable decision. In addition, Zeneca patent laws, as complicated by the Hatch-
Posner’s decision in Asahi Glass Co., Ltd. v. agreed to pay Barr’s raw material supplier Waxman Act, that underlies this appeal.”19
Pentech Pharm., Inc. (hereinafter, “Asahi $9.5 million upfront, followed by an addi- In its opinion, the court stressed that the
Glass”),10 the Eleventh Circuit also rea- tional $35.9 million over a ten year period. settlement of litigation is to be encouraged,
soned that reverse payments should not be The settlement was contingent upon the not discouraged, and that parties’ decisions
inherently suspect because they are a “nat- vacatur of the district court judgment, to settle a lawsuit should not be second-
ural by-product” of the Hatch-Waxman reg- which was subsequently granted by the guessed based on post hoc considerations.20
ulatory regime,11 which allows for the Federal Circuit.15 Following the Eleventh Circuit’s discussion
patent issues to be litigated prior to generic Following the settlement, three other in Valley Drug, the Second Circuit stated
entry. Thus, “ESI and Upsher gained con- generic companies filed ANDAs for tamox- that “[r]ules severely restricting patent set-
siderable leverage in patent litigation: the ifen, which precipitated patent infringe- tlements might also be contrary to the goals
exposure to liability amounted to litigation ment suits by Zeneca. In contrast to the suit of the patent laws because the increased
costs, but paled in comparison to the against Barr, Zeneca’s patent was upheld in number of continuing lawsuits that would
immense volume of generic sales and prof- all three of these actions, and injunctions result would heighten the uncertainty sur-
its.”12 Under the FTC’s approach, which were issued to prohibit the generic compa- rounding patents and might delay innova-
largely ignored the exclusionary power of nies from marketing their products until tion.”21 Similar to the Eleventh Circuit in
the patent, the Eleventh Circuit expressed Zeneca’s patent expired. Schering, the Second Circuit also gratu-
concern that patent settlements would be Approximately 30 different lawsuits itously determined22 that reverse payments
highly risky and discouraged. The court were filed by consumers and consumer are not a per se violation of the antitrust
explained that strong public policy inter- groups challenging the 1993 Zeneca/Barr laws and are “particularly to be expected in
INTELLECTUAL PROPERTY TODAY APRIL, 2006 31
the drug-patent context because the Hatch- For now, however, these cases make it 3. Dkt. No. 03-7641, 2005 U.S. App. LEXIS 23653
(2d Cir. Nov. 2, 2005).
Waxman Act created an environment that clear that patent settlement terms should 4. 15 U.S.C. § 1.
encourages them.”23 not be second-guessed unless the litigation 5. 15 U.S.C. § 45(c).
Relying heavily on the Eleventh (or the settlement) is shown to be a sham. 6. 128 F.3d 720, 725 (9th Cir. 1997), rev’d on other
grounds, 526 U.S. 756 (1999).
Circuit’s Schering decision, Judge Posner’s In fact, if the words “exclusionary poten- 7. Schering, 402 F.3d at 1070.
Asahi Glass decision and the recent Eastern tial” are read to mean the life of the patent, 8. 344 F.3d 1294 (11th Cir. 2003).
9. Schering, 402 F.3d at 1065-66 (citations and
District of New York decision relating to these cases support the argument that vir- internal quotation marks omitted).
ciprofloxacin,24 the Second Circuit deter- tually any settlement of non-sham patent 10. 289 F. Supp. 2d 986 (N.D. Ill. 2003) (Posner, J.,
mined that the Zeneca/Barr settlement litigation that is not a facade for other anti- sitting by designation).
11. In 1984, Congress passed the Hatch-Waxman
agreement did not violate the antitrust laws competitive activity is permissible, even if Amendments to the Federal Food, Drug and
because the exclusionary effect of the significant monetary or other compensation Cosmetics Act (“FDCA”), aiming to increase the
number of generic drugs on the market by provid-
agreement did not exceed the scope of the flows from the patentee to the defendant. ing a streamlined process for manufacturers to
patent.25 Notably, the court reasoned that As practitioners, then, where does this obtain approval for generic drugs. 21 U.S.C. §
leave us? Under the courts’ decisions in 355. In particular, manufacturers of generic drugs
patent settlement agreements including are allowed to file an Abbreviated New Drug
even “excessive” reverse payments26 were Schering and Tamoxifen are non-sham Application (“ANDA”), relying on the safety and
not unlawful as long as the patent litigation patent settlement agreements completely efficacy data of the brand name drug and simply
immune from antitrust scrutiny? Perhaps demonstrating that the proposed generic product
was not a sham or otherwise baseless.27 is bioequivalent to the approved drug. 21 U.S.C. §
“Whatever damage is done to competition not. Even if these decisions are upheld and 355(j). In addition, the Hatch-Waxman
followed by other Circuits, antitrust plain- Amendments encourage generic companies to
by settlement is done pursuant to the challenge brand company patents and allow for
monopoly extended to the patent holder by tiffs seem to be left to argue that the likeli- the litigation of patent infringement disputes to
patent law unless the terms of the settle- hood of the patentee prevailing on both begin prior to the generic company receiving FDA
validity and infringement issues should be approval and entering the market. Id.
ment enlarge the scope of that monopoly.”28 12. Schering, 402 F.3d at 1074.
taken into account in assessing the “exclu- 13. A generic drug company seeking FDA approval
sionary potential” of the patent. For exam- for a generic version of a brand name drug must
WHAT DOES THIS MEAN FOR file, in addition to technical data, a certification
ple, it might be argued that the settlement
PRACTITIONERS? of weak (though not necessarily sham)
with respect to any patent claiming the generic
product or a method of using such product. These
The Schering and Tamoxifen courts patent claims involving extraordinary pay- certifications include: (I) that the brand company
undertook a detailed analysis of the has not filed patent information; (II) that the
ments to the defendant and significant patent has expired; (III) that the patent will expire
antitrust principles at stake. At the same entry delays remains open to scrutiny to on a particular date (and until such time the
time, however, both courts recognized the determine whether the settlement merely generic company is not seeking to market its
generic product); or (IV) that the patent is invalid
critical innovation incentives created by masks an anticompetitive agreement to stay or would not be infringed by the manufacture, use
the patent laws. In balancing these two off the market. This appears to be similar to or sale of the generic drug for which the ANDA is
legal regimes, both courts came out submitted. 21 U.S.C. § 355(j)(2)(A)(vii); 21
the approach taken by the district court fol- C.F.R. § 314.94(a)(12)(i)(A). This final certifica-
squarely in favor of the patent laws. lowing the remand of the Eleventh Circuit’s tion is commonly referred to as a “Paragraph IV
Although many commentators have been Valley Drug decision.30 certification.”
14. Tamoxifen, 2005 U.S. App. LEXIS 23653, at * 14.
hesitant to admit this, the patent and Such an argument, however, runs con- See also Imperial Chem. Indus., PLC v. Barr
antitrust laws are at odds in these cases. As trary to many aspects of Schering and Labs., Inc., 795 F. Supp. 619, 626-27 (S.D.N.Y.
recognized by the Second and Eleventh 1992).
Tamoxifen and would nonetheless 15. Imperial Chem. Indus. PLC v. Heumann Pharma
Circuits, the antitrust laws try to reduce encounter substantial problems of proof. GmbH & Co., 991 F.2d 811 (Fed. Cir. 1993)
market power while the patent laws seek to (unpublished opinion).
Moreover, the FTC would have to reverse its 16. Tamoxifen, 2005 U.S. App. LEXIS 23653, at *25-
bestow market power in order to encourage longstanding position that the merits of the 26.
innovation. Faced with these contradictory underlying patent suit are irrelevant to the 17. In re Tamoxifen Citrate Antitrust Litig., 277 F.
laws, the courts are left with little guidance Supp. 2d 121 (E.D.N.Y. 2003).
antitrust analysis. 18. Tamoxifen, 2005 U.S. App. LEXIS 23653, at *39.
from Congress on how the scales should tip. Until this issue is resolved by the 19. Id.
The Schering and Tamoxifen courts have 20. Id. at *42-50.
Supreme Court or Congress, there will cer- 21. Id. at *44 (citing Valley Drug, 344 F.3d at 1308).
left little doubt that they believe the scales 22. The plaintiffs had not asked the court to find that
tainly continue to be much uncertainty in
should tip in favor of patent rights, despite reverse payments are a per se violation.
evaluating whether a patent settlement 23. Id. at *52-57.
the resulting reduction in competition. 24. In re: Ciprofloxacin Hydrochloride Antitrust
Of course, the balancing of the patent agreement containing a reverse payment
Litig., 363 F. Supp. 2d 514 (E.D.N.Y. 2005).
and antitrust laws is far from over. The can withstand antitrust scrutiny. These 25. Tamoxifen, 2005 U.S. App. LEXIS 23653, at *58-
recent decisions indicate, however, that at 82. In this respect, the Second Circuit distin-
Supreme Court could review either the guished the Zeneca/Barr agreement from the
Schering or Tamoxifen decisions. The Sixth least certain appellate courts are willing to agreement found per se illegal by the Sixth Circuit
Circuit appears to have taken the opposite give patent holders a great deal of leeway in Louisiana Wholesale Drug Co. v. Hoechst
Marion Roussel, Inc. (In re: Cardizem CD Antitrust
approach in Cardizem, although the case is by determining that patent rights should Litig.) (hereinafter, “Cardizem”), 332 F.3d 896
factually distinct from Schering and sometimes trump the antitrust laws. IPT (6th Cir. 2003), which also prohibited the generic
company from marketing certain non-infringing
Tamoxifen. Although Judge Posner from the products. Tamoxifen, 2005 U.S. App. LEXIS
Seventh Circuit has been on record in Asahi ENDNOTES 23653, at *74-75.
Glass as supporting the patent laws over the 26. The plaintiffs had alleged that the size of the
1. See, e.g., In re: Hoechst Marion Roussel, Inc., FTC reverse payment at issue was “excessive” and a
antitrust laws,29 these issues have not been Dkt. No. 9293 (May 8, 2001) (Cardizem CD/dilti- violation of the antitrust laws because it was
addressed by the other Circuits. Thus, it is azem hydrochloride); In re: Abbott Labs., FTC greater than the profits Barr expected if it had
Dkt. No. C-3945 (May 22, 2000) (Hytrin/tera- launched its generic product.
entirely possible that some Circuits will zosin); Abbott, Geneva Pharms. to Pay in $30.7M 27. Id.
come down on the side of the antitrust laws. Settlement, DOW JONES NEWS SERVICE, March 28. Id. at *72.
31, 2005 (Hytrin/terazosin). 29. See Asahi Glass
Ultimately, Congress may be called upon to 2. 402 F.3d 1056 (11th Cir. 2005), reh’g denied, 30. In re: Terazosin Hydrochloride Antitrust Litig.,
put its finger on one side of the scale. 2005 U.S. App. LEXIS 23487 (2005). 352 F. Supp. 2d 1279 (S.D. Fla. 2005).
32 INTELLECTUAL PROPERTY TODAY APRIL, 2006