Earlier, Sen. Arlen Specter (R-Pa.), criticized Varney for what he called “incomplete answers” to his written questions; in many of her answers, she declined to give specifics and instead promised to work with other administration officials, learn more about an issue, or “vigorously enforce” the antitrust laws.

Answers to Questions for the Record Confirmation Hearing of Christine A. Varney Before the Senate Judiciary Committee.
March 10, 2009
Questions from Senator Specter

11. Despite numerous decisions to the contrary in the courts, the FTC continues to vigorously prosecute generic and brand drug makers for entering into agreements settling patent infringement litigation in which the generic firm agrees to delay entry. During your testimony before the Committee, you suggested that you might be opposed to any drug patent settlement that included a so-called reverse payment.  To clarify, does that mean that you believe any settlement in which a generic firm receives something of value, or receives a reverse payment—no matter the amount— violates the antitrust laws?

Answer: Every case must be examined on its own merits, and certainly there are some disputes where settlements can be procompetitive.

a. If a patent is valid and applicable, then a settlement allowing a generic to enter the market before the expiration of the patent-no matter what the generic manufacturer receives¬would actually increase competition. Why should such settlements be unlawful? Why should patent holders not enjoy the presumption that their patent is valid until there is some evidence that it is not?

Answer: Lawful patents should be enforced and upheld until their expiration. A patent holder who enters into a commercial arrangement to allow a competitor to enter the market prior to the patent’s expiration would most likely be procompetitive.

b. If not all settlements in which a generic firm receives something of value violate the antitrust laws, might the court in the underlying infringement case be in the best position to assess the potential anticompetitive affect of a settlement?

Answer: The merits of any infringement claim can be difficult to determine. I believe available evidence must be reviewed by a court to assess the merits of the infringement claim. In cases where a court finds no infringement, there is unlikely to be an anticompetitive effect in determining a patent holder’s rights. However, antitrust authorities may have an interest in participating in instances where there is a settlement in cases when the underlying infringement claim is not resolved through a full adjudication.

c. Do you believe it is appropriate for a government agency to continue litigating an issue
when every circuit court to address the issue has rejected the agency’s argument?

Answer: While the Federal Trade Commission has primary jurisdiction over the pharmaceutical industry, I continued to be concerned that certain reverse payment settlements, which slow the entry of generics drugs into the market, can negatively impact consumer choices and costs. Regardless of the position taken on these particular patent settlement cases, I think it is important for the antitrust agencies views are aligned on these issues, if possible. To that end, if confirmed, I pledge to work with the FTC to align the agencies’ views on this matter and develop a unified approach to dealing with reverse payment settlements. I believe that consumers are benefited by generic entry — the result is typically more choices and lower prices. If confirmed as Assistant Attorney General for Antitrust, I will work to ensure consumers’ choices are maintained. I hope these additions will further clarify my views.

Original answer to entire question 11:

Answer: While the Federal Trade Commission has primary jurisdiction over the pharmaceutical industry, I am very concerned that certain reverse payment settlements, which slow the entry of generics drugs into the market, can negatively impact consumer choices and costs. Regardless of which position you take on these particular patent settlement cases, I think it is important for the antitrust agencies to speak with one voice on this issue. To that end, if confirmed, I pledge to work with the FTC to more closely align the agencies on this matter and develop a unified approach to dealing with reverse payment settlements.

Related posts:

1. FTC Sees Increase in Reverse Payment Settlements
2. Senate Committee Hears Arguments Regarding Reverse Payments
3. Supreme Court Takes a Bye on Reverse Payments — Again

It looks like the U.S. Department of Justice (DOJ) has repealed a policy seen as being lax on antitrust violations thus opening the possibility of a more aggressive approach toward antitrust enforcement under the Obama administration.

The DOJ’s Antitrust Division has withdrawn a September report that “raised too many hurdles to government antitrust enforcement and favored extreme caution” toward antitrust enforcement action, the DOJ said. The change in policy could mean that the department looks harder at the actions of technology vendors such as Google, Oracle and IBM, as detractors have raised antitrust concerns about all three in recent months.

An Executive Summary of the Department’s report is attached. The full report can be found on the Department of Justice’s web site.

Christine A. Varney, Assistant Attorney General of the Antitrust Division, indicated that the DOJ should take close looks at the high-tech and Internet industries and new ways of measuring antitrust activity there. Varney also said the DOJ would look hard at mergers and their impact on competition.

In the speech, Vigorous Antitrust Enforcement in this Challenging Era (available here), Varney declared:

In withdrawing the Section 2 Report, I made specific reference to the Report’s conclusions. In particular, Chapter 3 of the Section 2 Report concluded that where conduct-specific tests are not applicable, “the disproportionality test is likely to be the most appropriate test[.]“(7) With this baseline, conduct is only considered anticompetitive where it results in harm to competition that is disproportionate to consumer benefits and to the economic benefits to the defendant. In other words, the anticompetitive harm must substantially outweigh procompetitive benefits to be actionable. The Report’s adoption of the disproportionality test reflected an excessive concern with the risks of over-deterrence and a resulting preference for an overly lenient approach to enforcement. The failing of this approach is that it effectively straightjacketed antitrust enforcers and courts from redressing monopolistic abuses, thereby allowing all but the most bold and predatory conduct to go unpunished and undeterred.

This may mean trouble for not just the tech giants — Microsoft, Intel, Google — but could also signal a shift in the direction for pharmaceutical “reverse payments” — settlements in the pharmaceutical industry that embody payments made by the patent-holder/brand manufacturer to the alleged patent infringer/generic manufacturer.

The FTC and Justice in the Bush Administration had been split on reverse payments.  In general, the brand-name and generic manufacturers agree to a future date at which the generic would enter the market. The allegation is that the brand manufacturer protects its monopoly position by paying off potential competitors to delay entering the market.

Earlier, 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).

Now at the Supreme Court is a case being heard on certiorari, Arkansas Carpenters Health and Welfare Fund, A.F. of L., et al. v. Bayer AG and Bayer Corp., et al., No. 08-1194; cert. petition filed on Mar. 23, 2009, 2009 WL 797579.

QUESTION PRESENTED
Whether an agreement by a patent owner to pay a potential competitor not to enter the market is illegal per se, as the Sixth Circuit has held, is legal per se, as the Second and Federal Circuits have held, or should be judged under the antitrust rule of reason, as the Eleventh Circuit has held.

The Court of Appeals for the Federal Circuit held that in cases such as this, where 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.

It’s possible that Varney’s pronouncement could mostly just signal a shift in antitrust enforcement back to standards that are reasonable. What’s troubling is anytime the government decides to make sweeping policy changes based on current economic indicators instead of solid policy theory.  Ms. Varney’s remarks signaled that the decision could be driven quite a bit by voter anxiety:

The question on every American’s mind is: “What can the Government do to help ease consumers’ burden in these troubled economic times?” This question is particularly pressing for the Antitrust Division, which in the past has come forward to play a significant role in response to economic crises. It is time for the Antitrust Division to step forward again. I believe this country’s prior experience in responding to economic crises must be considered in evaluating our response to current market conditions. As Shakespeare once put it – “what’s past is prologue.” In particular, I have considered the Government’s response to the market conditions that followed the Great Depression, and I believe there are important lessons we can learn from that era.

Maybe, the government should stop trying to ease everyone’s burden.

Related posts:

1. Trinko’s Twist: A New Antitrust Argument Against Product Hopping
2. Upcoming Patent Events: Technology Antitrust Law
3. Court of Appeals Overturns FTC in Schering-Plough Generics Antitrust Suit

According to the Commission’s complaint, filed in the United States District Court for the Central District of California, Watson and Par, through its partner Paddock Laboratories, each sought regulatory approval from the FDA to market generic versions of AndroGel. In their FDA filings, both companies certified that their products did not infringe the only patent Solvay had relating to AndroGel, and that the patent was invalid. The complaint charges that Solvay agreed to pay the generic companies to abandon their patent challenges and agree not to bring a generic AndroGel product to market for nine years, until 2015.

The court action seeks to promote competition between Solvay and generic drug makers that had sought to introduce generic versions of the branded prescription drug AndroGel. AndroGel, Solvay’s second highest selling pharmaceutical product, is a pharmaceutical gel containing synthetic testosterone. It is approved for testosterone replacement therapy in men with low testosterone levels, which often are associated with advancing age, certain cancers, and HIV/AIDS, among other conditions.

The complaint alleges that Solvay acted unlawfully to eliminate generic competition by paying Watson and Par a share of its AndroGel profits to abandon their patent challenges and agree to delay generic entry until 2015 (known as “reverse payments“). As a result, the complaint states that the defendants are cooperating on the sale of AndroGel and sharing the monopoly profits, rather than competing.

According to the Commission’s complaint, defendants’ agreements to eliminate generic AndroGel competition were, and continue to be, unfair methods of competition that violate Section 5(a) of the FTC Act. The FTC says that such payments, also called “exclusion payment settlements,” hinder the intent of the Hatch-Waxman Act of 1984.

The Commission is seeking a final court judgment declaring that Solvay’s agreements with Watson and with Par and Paddock violate Section 5(a) of the FTC Act, and injunctive relief restoring competitive conditions and barring the defendants from engaging in similar or related conduct in the future.

Today, senior Senate Judiciary Committee members Herb Kohl (D-WI) and Chuck Grassley (R-IA) unveiled The Preserve Access to Affordable Generics Act to prohibit brand-name drug manufacturers from using reverse payment agreements to keep generic equivalents off the market.

Sen. Herb Kohl (D-Wis.) had proposed a bill last year along with Sens. Dick Durbin, D.-Ill., and Charles Grassley, R.-Iowa; and now-President Barack Obama.

See the Civil Complaint [Public Version]

Related posts:

1. Paying Off Your Generic Drug Competition? No Problem.
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As Stephen reported: “According to the AGs in the states, the companies made trivial changes to the formulations of TriCor, and marketed those while withdrawing the original drug from the market. The companies deleted references to the original forms of the drug from national drug databases, according to prosecutors, making it more difficult for a generic version of TriCor to obtain generic status.”

This product hopping amounts to little more than a thinly disguised scheme to game the pharmaceutical industry’s regulatory system. It entails introducing a product change that serves little purpose but to impair generic competition and reduce the market for generics.  But product hopping is not an easy target for antitrust enforcement.  Brand name manufacturers are under no legal duty to help their generic competitors by curtailing formulation changes that broaden the selection of prescription drugs on the market and may better meet consumer preferences.  Most importantly, generic manufacturers remain free to enter the market and sell versions of the old formulation under their own separate brand name. That rival brand name manufacturers are more powerful competitors — engaging in successful advertising campaigns and directing consumers to the new formulation — falls short of an antitrust violation.

But there might be a way around this.  The Supreme Court’s 2004 decision in Verizon Communications Inc. v. Law Offices of Curtis V. Trinko emphasized the importance of attention to an industry’s regulatory regime in determining the role of antitrust law and suggested a possible “expansion of the contours” of the Sherman Act in certain regulatory contexts. Trinko may have interesting implications for antitrust enforcement in the pharmaceutical industry which, though heavily regulated, lacks an industry regulator that polices competition.

As Trinko noted, the role of antitrust law in a heavily regulated industry depends on whether “the [regulatory] regime is an effective steward of the antitrust function.”  Two Supreme Court decisions represent the extremes of antitrust law’s role in a regulated industry: (1) where unsupervised private firm discretion dominates the market and any regulatory intervention fails to police competition, as in Silver v. New York Stock Exchange, antitrust law has an active role to play, and (2) where anti-competitive conduct is thoroughly policed by the industry’s regulator,” as in Trinko, antitrust law has been ousted from its role as the guardian of competition.

In the pharmaceutical industry, while the FDA goes to great lengths to regulate drug safety and efficacy, it deliberately avoids regulating competition in the pharmaceutical industry.  According to the FDA’s stance, “the whole point of the [Hatch-Waxman] Act’s [ANDA IV] scheme is to let private parties sort out their respective intellectual property rights [and the market exclusivity they confer] through patent infringement suits while the FDA focuses on its primary task of ensuring that drugs are safe and effective.”  Since anti-competitive conduct would easily slip under the pharmaceutical industry’s regulatory radar, the industry’s regulatory system accordingly leaves ample room for antitrust law to intervene with full force, rather than squeezing it out.

Unlike in Trinko’s telecommunications industry, antitrust law has a role to play in the pharmaceutical industry.  In dicta, Trinko recognized the possible “expansion of the contours of [Sherman Act] § 2″ depending on the regulatory context.  An article by Professor C. Scott Hemphill proposes that the application of antitrust law to the heavily regulated pharmaceutical industry depends on the regulatory regime itself, particularly “its role as a congressional judgment about the proper balance between [policy goals] and competition.”  Such enforcement of the Sherman Act extends beyond policing ordinary market antitrust concerns to condemning conduct that directly undermines the specific type of competition the legislature sought to establish in fashioning the regulatory system.

The relevant regulatory system in the context of product hopping is a regime of state drug product selection (DPS) laws.  Today, every state has passed DPS laws that allow for generic substitution, though the specific provisions vary state by state.  Where a physician prescribes a brand name drug, generic substitution under state DPS laws allows pharmacists to fill that prescription with a generic equivalent.  DPS laws reflect a legislative decision to contain prescription drug costs through generic substitution, sacrificing even-footed competition between brand name manufacturers and their generic rivals.

Disfavoring the unfettered market competition of other unregulated industries, states recognized that the forces of competition don’t map on well to the prescription drug market where the customer pays but doesn’t choose, and the physician chooses but doesn’t pay.  DPS laws accordingly sought to establish a specific type of generics-favoring competition between brand name manufacturers and their generic rivals: Though brand name manufacturers may succeed in winning the prescription of physicians, there must be a choice at the pharmacy-level to fill that prescription with a generic version (unless a prescription indicates the physician’s unwillingness to permit substitution).

In this light, the real anti-competitive harm from Abbott and Fournier’s product hopping is straightforward.  In each hop, Abbott and Fournier, without justification, contacted First Data Bank and set in motion changes that ultimately prevented pharmacists from substituting prescriptions for older formulations with their generic equivalents.  This strategy stopped generic substitution that should — and would — have taken place under DPS laws.  This obstruction is the real harm Abbott and Fournier’s product hopping inflicted on competition:  They impermissibly undermined the specific type of generics-favoring competition state legislatures sought to establish in fashioning DPS laws and accordingly raises compelling regulatory antitrust concerns.

This is a summary of an earlier Law Review Note “An Antitrust Analysis of Product Hopping in the Pharmaceutical Industry,” 108 Colum. L. Rev. 1471.  See the full Note here.

This post was contributed by Guest Barista Jessie Cheng, currently a 3L at Columbia Law School.

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1. A Known Product Anticipates the Product by a Novel Process Claim
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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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