No, this post is not about the NFL or NBA, but if I’d titled it the Probabilistics Of Reverse Payment Hatch-Waxman Settlements, then you would have stopped before reading this far.

Suits for antitrust relief based on settlements, in which pharmaceutical patent owners settled and paid makers of generics to delay entering the market, recently have been causes lost by the FTC and private plaintiffs. One recent case, FTC v. Schering, may be reviewed by the Supreme Court, since they asked the Solicitor General for a brief on the matter. The likelihood of review by the high court is greater still, due to an arguable conflict between the 11th Circuit ruling in that Schering case and the 6th Circuit in the Cardizem case, as to whether a per se rule or other analysis should apply to the alleged anticompetitive effect of “reverse payment” settlements. The 6th Circuit found it “per se illegal for a pioneer drug company to pay money to a generic manufacturer in return for a commitment to delay entry” in the Cardizem CD Antitrust Litigation, 332 F.3d 896, 908 (6th Cir. 2003). The 11th Circuit found “that neither the rule of reason not the per se analysis is appropriate in this context” in Schering-Plough Corp. v. FTC, 402 F.3d 1056, 1065 (11th Cir. 2005).

By way of background, the FTC charged that settlement payments for delaying entry of a generic were per se anticompetitive. The “essence of the complaint is that the pioneer paid the generics not to compete for a period of time, which could be per se illegal.” FTC Commission, op, pg. 12. The ALJ agreed with the FTC’s charge, based on extensive evidence from economists. The FTC Commissioners disagreed with the per se analysis, yet concluded that the settlement was anticompetitive, and then, the 11th Circuit reversed the Commissioners. I think it was Truman who said that his administration needed a one-armed economist, one who would never qualify his conclusions with the remark, “but, on the other hand.” In sum, the votes were: the FTC, the ALJ, the 6th Circuit, and many private plaintiffs claim these settlements are illegal restraints, while the FTC Commissioners, the 11th Circuit and some district courts say not, but they say no for conflicting reasons.

I put aside some of the per se tediousness of their rulings, which ask whether settlement of a pharmaceutical patent suit between a patentee and a potential generics competitor can be monopolistic, so that I can focus instead on a few simple chestnuts. Settlements are good, and our adjudicative systems favor them – right? Agreements are the product of compromise, and being sued for agreeing to a compromise would be bad – right? When patent owners settle with accused infringers, patentees pay the infringers – what?

Schering paid “$60 million to Upsher [and] $30 million to ESI.” 402 F.3d at 1062. In Cardizem, the patentee guaranteed “$ 10 million per quarter, [to] refrain from marketing its generic version of Cardizem.” 332 F.3d at 907. Payments in the Cipro case were not less than “approximately $398 million.” 363 F. Supp. 3d at 519. In each case, economists gave expert opinion as to what consumers lost by the delay in generics entering the market, the incentives to settle or litigate a patent case and the risks and costs of those choices, and the presence or absence of market power within a market of disputed scope.

Several modes of analysis are used in these court decisions. As with all antitrust cases, the defendant needs to avoid a per se legal standard. When the alternative, the rule of reason, is applied then both sides engage grandly in a battle of economists, who estimate the impacts of the challenged agreement. A scenario added in a patent antitrust case is where the Chancellor guides the mighty sword that divides the realms of evil monopolism from that of a bona fide patent monopoly.

The potentially decisive turns taken in these cases begin once it is known if the settlement is per se inimical to competition, and if not, then a rule of reason analysis will encompass the subjective intent behind the settlement terms and the objective indicia of adverse effects. (Bayer expected “to lose …between $510 million and $826 million in Cipro sales in the first two years of generic competition …[and] estimated Bayer’s losses due to a potential adverse judgment in the `444 Patent litigation at $1.679 billion net present value.”

A significant and overarching principle is that agreed restrictions in the settlement, which impair competition no more than the exclusionary scope of the patent grant, are presumptively legal. “Patent owners should not be a worse position, by virtue of the patent right, to negotiate and settle” suits, Schering, at 1072; and do “the challenged agreements restrict competition beyond the exclusionary effects” of the patent. Id., at 1068.

Generally, if the patent law allows the restrictions in the settlement agreement, such as exclusion from market entry or increased prices due to a royalty, then it should avoid antitrust liability. On the other hand (to quote Truman’s economists), when the settlement terms exceed a patentee’s rights to restrict competitive activity, then it will fact greater antitrust scrutiny.

In the Cardizem decision, the settlement kept the generic competitor Andrx from relinquishing its “first-filer” status under Hatch-Waxman, which “delayed the entry of other generic competitors, who could not enter until the expiration of Andrx’s 180-day period of marketing exclusivity …[and this] was, at its core, a horizontal agreement to eliminate competition.” Cardizem, at 907-08. This agreed restriction, which postponed the market entry of all generics, exploited the Hatch-Waxman protocols and, was outside the scope of the right granted to the patentee to exclude. The settlement in Schering had no equivalent effect.

The matter of “market power” is perhaps the factor least clarified, especially when a patent covers only claimed embodiments of a pharmaceutical, and not everything in the entire market. An example in one case was a patent only for the time-release coating, and not the active ingredient under it. In another, the molecule in the patented composition was present in non-infringing substitutes. The clarity in case law on the market power of a patentee is apparent in the Federal Circuit cases string-cited on page 12 of its recent Medimmune v. Genentech decision, “it is not presumed that” the patent confers “market power” but, “there is a presumption of market power in patent tying cases,” and consider too, that where a ”plaintiff can demonstrate an actual adverse effect on competition ..there is no need to show market power in addition.” FTC v. Ind. Fed’n of Dentists, 476 U.S. 447, 460-61 (1986). These statements suggest that “market power” is one factor that makes the patent a “probabilistic” property right in these reverse-payment antitrust cases. See, fn. 9 to FTC’s petition for certiorari in the Schering case.

Last, these reverse payment settlement cases put in doubt the “presumption” of anticompetitive effect that the FTC wished to apply when it could not obtain a per se standard of liability. That presumption would attach where the settlement sum did not represent “legitimate consideration” for the rights exchanged, and where a generic maker receives “anything of value and agrees to defer its own [R&D], production or sales activities” and where the sum paid as “litigation costs” exceeded $2 million. The Schering case applied the substantial evidence test and concluded that each offered reason was not a basis for the claimed presumption, and after that de novo review the 11th Circuit vacated the FTC’s cease and desist order.

In closing, imagine a patent challenged because, “at the time of invention,” a “hypothetical person” of skill would know to combine or not know how to enable the patent’s elements; then, based on a “hypothetical negotiation,” you believe that the “future profits” stream would be affected by a factor of X, and that your “litigation risk” assessment is that the challenger has a 39% chance of invalidating the patent, so you agree to a reverse payment settlement, pay the challenger a sum in the range of 23 to 26% of anticipated, future loss revenue; but, a later antitrust suit claims that objective, economic opinion shows that the potential impact of the settlement is harmful to the market and to consumers, who demand disgorgement of “treble” damages. To some patent professionals, that’s just another day at the office. We may see if the Supreme Court treats it that way.

Today’s post comes from Guest Barista C. Lee Thomason, a registered patent attorney and IP litigator at Frost Brown Todd’s Louisville office.

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