The U.S. Court of Appeals for the Federal Circuit gave a high-five to settlement agreements between a patent holder and a generic manufacturer saying it doesn’t violate antitrust laws under the Hatch-Waxman Act.  In re Ciprofloxacin Hydrochloride Antitrust Litigation (08-1097).

The agreements in question involved a reverse payment from the Bayer to Barr, but did not involve the 180-day exclusivity period.  This is not small change as the payments from Bayer to Barr totaled $398.1 million, which Barr shared with HMR.

The District Court granted Bayer’s motion for summary judgment, holding that any anti-competitive effects caused by the settlement agreements between Bayer and the generic defendants were within the exclusionary zone of the patent, and thus could not be redressed by federal antitrust law.

Note that the Agreements were entered into before the 2003 amendments to the Hatch-Waxman Act, requiring a patent holder and a first Paragraph IV ANDA filer who settle their patent litigation to file their agreement with the Federal Trade Commission and Department of Justice for review, and if the agreement is found to violate the antitrust laws, the first ANDA filer loses its right to the 180-day exclusivity period.

Bayer’s patent relates to quinoline- and napthyridine-carboxylic acid compounds with antibacterial properties and methods of administering the compounds to combat bacterial illnesses.  (U.S. Pat. No. 4,670,444).  Specifically, it covers ciprofloxacin hydrochloride, the active ingredient in Cipro®.  The patent expired on December 9, 2003 but the FDA granted Bayer an additional six months of pediatric exclusivity.

Barr filed an abbreviated new drug application (ANDA) for a generic version of Cipro including a Paragraph IV certification on the grounds that the patent was invalid and unenforceable based on obviousness under 35 U.S.C. § 103 and obviousness type double patenting under 35 U.S.C. § 101, and unenforceable due to inequitable conduct.

Under the Hatch-Waxman Act, the first filer of a Paragraph IV ANDA is automatically entitled to a 180-day period of market exclusivity, which, in the version of the Act in effect at the time, begins to run either on the date that the first ANDA filer begins to market its drug or on the date of a final court decision finding the patent to be invalid or not infringed, whichever is earlier.  Thus, as the first Paragraph IV ANDA filer, Barr was entitled to the 180-day exclusivity period.

After Bayer sued Barr for patent infringement, Bayer, Barr, HMR, and Rugby entered into agreements providing that Barr, HMR, Rugby, Apotex, and Bernard Sherman would not challenge the validity or enforceability of the ’444 patent, Barr agreed to convert its Paragraph IV ANDA to a Paragraph III ANDA, thus certifying that it would not market its generic version of Cipro until after the ’444 patent expired, and Bayer agreed to make a settlement payment to Barr of $49.1 million.

Indirect purchasers of Cipro and various advocacy groups appealed a summary judgment of federal antitrust claims and dismissal of their state antitrust claims against patent holders and brand-name manufacturers, Bayer AG and Bayer Corp. and the generic manufacturers, Barr Labs, Hoechst Marion Roussel, The Rugby Group, and Watson Pharmaceuticals.

They alleged that the district court erred in its determination that the Agreements did not constitute an unreasonable restraint of trade in violation of section 1 of the Sherman Act: (1) by not finding the Agreements to be per se unlawful, or at least applying a proper rule of reason analysis; (2) by finding the Agreements to be lawful because they fell within the “exclusionary zone” of the ’444 patent; (3) by not considering the law of the regional circuits and government agencies in evaluating the Agreements; (4) by failing to appreciate the effects of the Agreements on other generic manufacturers; and (5) by not considering evidence showing that the Agreements preserved Barr’s claim to the 180-day exclusivity period.

The Sherman Act provides that “[e]very contract, combination in the form of trust or otherwise, or conspiracy, in restraint of trade or commerce among the several States, or with foreign nations, is declared to be illegal.”  15 U.S.C. § 1.  Although by its terms, the Act prohibits any “restraint of trade,” the Supreme Court “has long recognized that Congress intended to outlaw only unreasonable restraints.”  Only agreements that have a “predictable and pernicious anticompetitive effect, and . . . limited potential for procompetitive benefit” are deemed to be per se unlawful under the Sherman Act.

The Court of Appeals held that the district court correctly applied a rule of reason analysis, a three-step process: First, the plaintiff bears the initial burden of showing that the challenged action has had an actual adverse effect on competition as a whole in the relevant market.  Then, if the plaintiff succeeds, the burden shifts to the defendant to establish the pro-competitive redeeming virtues of the action.  Should the defendant carry this burden, the plaintiff must then show that the same pro-competitive effect could be achieved through an alternative means that is less restrictive of competition.  The Court agreed:

Contrary to the contentions of the appellants, the court did undertake a full rule of reason analysis.  It first determined that the relevant market is ciprofloxacin and that Bayer had market power within that market.  Cipro II, 363 F. Supp. 2d at 523.  It then determined that there was no evidence that the Agreements created a bottleneck on challenges to the ’444 patent or otherwise restrained competition outside the “exclusionary zone” of the patent.  Id. at 540.  Thus, the court concluded that the plaintiffs had failed to demonstrate that the Agreements had an anti-competitive effect on the market for ciprofloxacin beyond that permitted by the patent.

The appellants argued that Bayer is seeking not simply to enforce its patent rights, but to insulate itself from competition and avoid the risk that the patent is held invalid.
The Court of Appeals shot this down saying:

Pursuant to the Agreements, the generic defendants agreed not to market a generic version of Cipro until the ’444 patent expired and not to challenge the validity of the ’444 patent, and Bayer agreed to make payments and optionally supply Cipro for resale.  Thus, the essence of the Agreements was to exclude the defendants from profiting from the patented invention.  This is well within Bayer’s rights as the patentee.  Furthermore, there is a long-standing policy in the law in favor of settlements, and this policy extends to patent infringement litigation.

The Second Circuit, in In re Tamoxifen, similarly concluded that the validity of the patent need not be considered in the analysis of whether the settlement agreement violates the antitrust laws unless the infringement suit was objectively baseless …

We conclude that in cases such as this, wherein all anti-competitive effects of the settlement agreement are within the exclusionary power of the patent, the outcome is the same whether the court begins its analysis under antitrust law by applying a rule of reason approach to evaluate the anti-competitive effects, or under patent law by analyzing the right to exclude afforded by the patent.  The essence of the inquiry is whether the agreements restrict competition beyond the exclusionary zone of the patent.

[In] the absence of evidence of fraud before the PTO or sham litigation, the court need not consider the validity of the patent in the antitrust analysis of a settlement agreement involving a reverse payment.

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