court my name is tom sol i represent the proposed direct purchaser class a little traffic cop at the beginning i would like to take ten minutes as my part of my argument case i would like to address two issues first the fundamental observation the fundamental economic observation about settlements of patent cases in this kind of situation which is crucial i think the courts understanding of these cases generally and then i filed an application and making a claim that patents listed for that brand drug are either unenforceable invalid or not infringed when that litigation starts therefore the positions of the parties don't have any damage claim instead the position is this the brand company's position is we have a valid and it isn't forcible you do infringe it therefore you should stay out of the market until the last patent expires that's the the generics position in that litigation is different their position is either you have an invalid patent or it's not in forcible or it's not in range we should be allowed to be on the market today when that case gets settled and most of those cases do most of those cases do settle on competitive terms the way that those cases are to be settled the court in a state supreme court is by an agreed entry date somewhere in between the positions of those parties and when those parties do that that settlement will reflect the party's perceptions of the strengths and weaknesses of that lawsuit and therefore will fairly adjust the rights of the parties and therefore also make generics  with the strengths or weaknesses of those patents that's a fundamental observation is the first part of the fundamental observation of activists the second part of the decision then holds this if you see some other payment other than the agreed entry day moving from the brand company to the generic company and that payment is larger than the litigation expenses that the brand company might incur from their going forward because it's going to settle lawsuits it's going to with those if you see a payment that is larger than that what's it for if the allegations are that it's for a entry date where the brand company gets to stay on the market longer than it otherwise would then that's going to be subject to the rule of threes the existence of a reverse anything larger than the avoided litigation costs raises an inference that the entry date is not a fair resolution of the merits of the claim but instead may end up being something that's later therefore get into all the business of discovery and and find out and get involved the reason to in his opinion is that it is larger than the avoid litigation costs that's the one quantitative yes but i think in fairness also in context of the decision that one one or two points says a squarely and certainly in location means that it's large enough to have in some way caused the generic to agree on an entry date that's later than it otherwise would have there's a qualitative test to it as well and so i think that now all morphed that i think that's the answer to what our position is and i think that's what the allegations of this case show now before i talk about the allegations this case i think it's important to to show to articulate that if you out there and the the general parameters of what the size of things were many millions of dollars we could talk about many millions of dollars that sufficient to get into the whole reason similarly the third circuit recently it is not in the settlement document here either the allegations in the case are that the tens or hundreds of millions of dollars of this payment certainly far surpass any notion of what the allegation is of what the contemplated future litigation costs were there's also some language in activists that talks about how in patent cases like this the future litigation costs at a certain point in time might be  much as like five or ten million dollars and i thought you not talking about anything of the magnitude of the size of the payments that are involved here or in most of these other cases when you're talking about many tens or hundreds of millions of dollars  activists itself as well so if you look then to the payments that are alleged here they come into sensually the payment if you will comes in for forms the first and most fundamental and  most dentists positive is what's called a no authorized generic agreed but essentially this agreement what this means is that the brand company promises your wanted show cut promises watson that when you go on the market watson we agree not to compete with you we will not take our branded pills label them as generics and compete with you in the market for the first six months that you're on the market and by doing that as we lead watson then therefore knows t of those for sure that because it's the only generic on the market it's going to charge consumers more because it's the only generic on the market it doesn't have to compete with another generic we plea that that is worth many tens or hundreds of millions of dollars in this market because in this market this is a two hundred million dollar a year drug so that's first and foremost there then also is a promise to watson by want to chill out that want to choke will not settle with any other generic companies and allow them into the market during that first six months and that's crucial because that basically make sure that watson knows it's going to be able to be in the market for those six months on its own  rather then have competition anybody else that's also obviously worth many tens of billions of dollars and then there are also two additional deals that had that the that we played are a part and parcel of this overall package percent of the net sales in context in other words what we say is that this case is literally no different than the activists case in terms of the details of the meeting and the need to go forward on a real reason activists they were first payment does not need to be in cash and you trust analyses focus on economic substance and not form so i'd like to of made three point involving economic substance first economically and note agee agreement operates like a cash payment second economic the economic substance of a no  agreement qualifies as a for first payment under the act of this decision and third the district court's decision here elevated form over economic substance contrary to  active itself provides limiting principles first of all there is the principle that the settlement involves an economic payment that isn't wasn't patent litigation settlements that are reported to the f t c is that a vast majority of those settlements don't involve payments so when you have a payment where you have something in the agreement that wasn't at issue have to be leading your honor the knowledge about what was involved comes from the fact of in the patent litigation there there is the the dispute is regarding the village it is or the not infringement of the patent and so the natural and traditional way to settle that case is on an entry date so when you introduce these new elements to me like you're going t it's not a per se ruled that the other part of this however is that there is a an opportunity for the brand to share monopoly profits with the generic and that's also what makes an unusual under activist the other aspect that makes it not per se is the fact that the plaintiff under activist must allege market power surely surely just alleged market power but the the the reason why it is different and in and falls within the rule of reason is the requirement that there be the allegation market power as well as the large payment and as mr sobel described that large payment is unusual because of the fact that normally we see these types of litigation settling on the terms of an entry date date with watson that watson state would be moved up accordingly we allege that this is competitive for and we believe that's a plausible allegation for reasons that i'll get into but the very first the reasons that my brother and have said you may consider just remaining that issue but i'm happy to address the substance of it it clearly is a plausible allegation for the following reasons number one the federal trade commission itself alleged secondly the c e o and chairman of one of the largest generic manufacturers in the world went before congress and swore under oath that these excel aeration clauses were and i competitive and he gave the reasons why and he's clearly you know in gauged in the industry is knowledgeable about the industry and he says there and i competitive under oath then we have the whole body of law both literal economic literature and judicial opinions that most favored nation sloss as can be and i competitive and our allegation is not that all that celebration clauses are there or that there are per se illegal we say they're subject to the rule of reason and that our allegation that this excel aeration clause is and i competitive is plausible and that we ought to be allowed to create a record on it and just on the policy issue i will tell you one of the great things about the rule of reason and what the court did and activists is this going to give everybody a chance to get into the records in these cases get into discovery an expert reports and determine what is pro these agreements of their occurring right now the cost of litigation is a drop in the bucket and if  right here if the f t c is correct that what the supreme court had in mind was a rule that said any time there is a patent settlement between pharmaceutical companies because of this record the word trash anywhere in that opinion it used the term money myth it used the term when it was expressing the kind of payment that issue it used the word money it used the word dollars repeatedly it never used the word it never adopted the supreme court never a thought that the definition of payment that you see the spouse and the f t c and the plants friesen this case stepping clear that the supreme court an activist was not focusing on dictionary definition of a man or an all consideration articulation of what what a pain it could be how do we know that because what the court said and it very clear it said that what it's trying to do in this opinion is to distinguish between traditional settlements summits involving traditional settlement considerations and i'm referring says twenty to thirty said twenty to thirty three and other references in the court's opinion referring to traditional settlements which may involve that which involve the kinds of normal back and forth and normal kinds of agreements which may include things like compromising the damage claim or a business transaction done alongside the  and cash and what he said cash in close quibbling close family lives but i think what the supreme court was trying to do here and i think the only fair reading of what the supreme court was doing here was distinguishing between traditional settlements and the payment your honner i think it makes a big difference in a variety of ways one way is the ability to quantify and this came up in some of the questions that arose earlier the the the way to distinguish between a traditional settlement one that clearly can be very valuable and let me just to finish the point on that the supreme court identified as following in the traditional category at least three types of settlement that are clearly very valuable and which you could say involve payments for example a fair value business transaction alongside a patent something supreme court said that doesn't raise the same kinds of concerns the court said this twenty to thirty six of it's opinion that if you have and there's clearly consideration flowing there or just the simple entry date only  settlement every day of early entry that the generic gets is worth tens or hundreds of millions of dollars what the compromise of the damage claim the court put into the category of traditional settlement and the court said there that that could be viewed as if you have a hundred million dollars damages claim you settle it for forty million dollars it's a sixty million dollar implicit no pain so what the court is focusing on is this distinction between consideration that flows through traditional settlements and then on the other hand need good consideration and when we talk about cash it's categories of pain that are that are raised here and with respect to the to the no way to be which is really an exclusive agreement you know it's a it's  license tween a single license or in a single licensee and the supreme court for decades in its jurisprudence has drawn the distinction between the kinds of conduct that you know basically at the heart of the act of this decision here is a balancing between patent policy concerns and any trust policy concerns and what the court said in activists is that describing its predators purpose the to strike that balance that we've done over the years is first we ask the question is a conduct specifically authorized by the that you do not defend that district court rationale using the term cash but you would draw the distinction elsewhere and you would  clauses side feel and non h e agreements but act have as doesn't actually talk in language like that so from your point of view you would like us to dismiss the case not just send it back on the theory that the theory was wrong because you say these pleadings decision ourselves based on the meeting and what i would say your honor is that the work of the words of activists tell you that you can and should dismiss this complaint and that combined with the pleading standards under and it all tell you that you should dismiss this case and the reason i say that is i don't i think we are really when you focus on of language of activists to do the thing in question and by the way there wasn't that issue an activist an exclusive license term like what we're now talking about here so the court had no reason to specifically address that issue have been specifically authorized by the path act either expressly or by fair implication and the court cited specifically cited the u s versus general electric a in which there was a license provided by general electric to westinghouse and there was vertical price fixing it made a vertical price fixing associated with that license which at the time was a per se violation of the shock of it and the government came licenses involving multiple patent holders that that is conduct that is authorized by the patent act and therefore not subject to the any trust scrutiny so the court is is clearly perving out in saying pleading are you saying that i think i would need the pleading standard if you accept then we don't believe you should accept that the mere fact that there may be value in an exclusive license we acknowledge that there's value in of the possibility that back could be an actor have his case well your honor again subject to our basic position that this is conduct the falls into the traditional category as i understand that  in this case the answer is no because there's no dispute that the that when you're looking at these things you should look at them at the time the agreement was done and when you see the plane of statistics and their calculations they made and certainly the allegations in the complaint they say nothing about the situation at the time that so many question was entered into in two thousand and nine in two thousand and nine among other things the very legality of author right brand companies using authorized generics was being called into question there was legislation pending  congress that would have offered that would have made it on lawful to have been authorized generic the incoming presidential administration was saying that they supported oblong authorized generics f t c officials were suggesting  by branded companies of authorized generics could be an antitrust violation and so the fundamental issue with a payment is is there some kind of transfer of  to say i'm not going to introduce an authorized generic at a time where they may well have been outlawed in the next six months and beyond that your honor in addition to better than what congress is going to do well then you have f t c officials commenting there might be any trust problems there was a large study going on being funded by the f t c that was calling into question the whole practice of authorized generics so at a bare minimum i'm pleading and judge smith i think was very correct in saying we need something concrete in the pleadings to make it possible that there was some kind of viable payment here and at a minimum that needs to take into account the circumstances at the time there's also facts lead in these complaints that further undermine the value of any alleged promise not to introduce unauthorize market with and the so the idea that we're chilcote was going to take this low western branded product off the market and and replace it with another branded product that it would be promoting but then at the same time introduce an authorized generic of the old branded product that for just further undermines the plausibility of this promise made back in two thousand and nine when the any trust laws were very different about how the treatment of these patent settlements could be viewed as a large payment of payment all we would contest we would submit let alone a large payment and so for all of those reasons we circumstances that may have been totally within your control and now well in order to succeed in putting together it's leading your honor i respectfully i would disagree with that i mean the points that i made the point about the subsequent branded products coming onto the markets replace the old one the plaintiffs pledge that that's part of their pleadings in this case it just happens on their mind the value of any promise introduce an authorized generic the fact of the situation at the time the legislative environment the the conduct of the f t c at the time those are matters of public record everyone knew about those and then i would go back again to the whole idea that this this type of license falls within that which is specifically authorized by the patent act if i could spend just a couple of minutes thinking about the size  contemporaneous business transactions which are also alleged as payments to court that's another situation where we have a heating failure because what the court said what the activist court said is that strike that balance between patent any trust considerations what you need to do is look at whether you have a of a traditional kind of settlement form and and the court said that where a reverse payment reflects traditional settlement considerations such as fair value for services that is not the same concern of the pantie using it profits to as an e q payment for the judge to have the generic stay off the marketplace so their value falls into that that traditional category of settlement now the plaintiffs say well that's that's a defense because elsewhere in the opinion the court uses the word justification around around mentioning fair value but i think that passage i just read to you from twenty to thirty six and also even more clearly had twenty to thirty seven of the court's opinion where the court says the likelihood of a reversal in bringing about anti competitive of x that's the threshold issue that the plaintiffs have to be and ultimately prove is is there in any competitive the fact the court says depends upon a variety of factors including its independence from other services for which it might represent pain fair value and so that is something that needs to be pled the pla nothing on there they played one side of the equation there for business transactions that are at issue here three of them involve the generic having to actually pay royalties back to the brand not the other way around one of them a coke promotion agreement doesn't solve the brand if the ref i finished doesn't call the brand paying money to the generic but in return for services they allege nothing about the services even though they have the relevant who jersey said that the payment has to be able to be reduced to a dollar value well that seems to be the art the argument that i got from your colleague the disc that there is that the reasonable estimates i think the claim has to be plausible if it doesn't have to be reduced you don't need exact cash values where it wasn't it has to be the value has to be the terms of the district court can determine the plaintiff has made a plausible claim that the payment is large and unjustified now in this case there's nothing alleged about lupin there's no value of budged about any payment to or not there's no cash value there's nothing that's converted to a cash value all that said in the complaint is that the alleged payments to lupin were large and valuable under it all facts that were alleged sufficient to make the claim plausible in the lupin context there were no facts at all pled and they did not argue any differently here today they didn't argue any differently in their brief or they argued was there's a different standard the larger justified standard articulated by the supreme court actually doesn't apply all we have to show is that the pain was something of value that would cause the the generic not come to market and was something they couldn't receive had the case gone to verdict there is nothing and activists supporting that activist is not discussed that standard at any paragraph or case because paragraph or litigation only involves injunctive relief so after this discusses whether in a paragraph or case a payment is anticompetitive not all payments are at the competitive that the the value of a payment loop and not there was no basis for the district court to conclude anything about the value of the payment to have been in that situation the plaintiff should not work for nor burden of a seven horridge and justify show that there is an actionable claim under activist y o person make it clear the third circuit has already decided all the issues that are before you here today and they were been eight district court decisions that have also come down on not a single district court or the third circuit disagree with our position except for judge smith his ruling and other ruling that happened below in the third circuit which then are going to be reversed by the third  limiting principles the limiting principles or to the first is that the payment has to be in excess of avoided litigation costs and then second that it has to be alleged to be in exchange for a generic to like those of a limited principles there are also two other things that are called sort of bonus points for a plane if you will that the supreme court remarks about an activist if the pain is something that you couldn't win in the litigation that sends up a big red flag so says judge wright so for example you can't win a patent infringement lawsuit a right to be marketed by yourself without authorized generic competition if you win the patent lawsuit the generic still is going to face competition by the brand when the generic enters the market i can't be one it's completely extraneous to litigation and we know that there are protests from the pleadings we also know that no one can win a co promotion deal in patent bridgeman lawsuit no one can win it distribution agreement in the patent lawsuit these are all things that hurt strain is the other bonus point that if you will the judge prior talks about is if the generic ends up being better off financially through the settlement then if the generic had won the litigation and we plead that so in this deal watson ends up being better off cutting a deal where we can get no authorized generic competition eventually when it enters the market an  activist by the way involved didn't involve a bag of cash passed off you know at dunkin donuts or something like that it involved this deal just like this coke promotion deals where in exchange for one thing the generic get some cash well that's precisely what we're alleging here it's the same kind of thing so this notion that activist was only limited to cash the cash came in the context of a business deal precisely the kind of thing that we are alleging here but we actually have here here more because we have not only business transactions in which cash is being passed but we're also having this no authorized generic agreement which is essentially look at it's a naked agreement not to compete  pun intended to the defendants to engage in this kind of conduct and i think if you go through our reply brief we unfortunately don't have this issue ad nauseum in terms of what all of the supreme court cases hold in this regard  bottom but the supreme court cases hold regarding licenses it's just like a contract you have a right to enter a contract it doesn't mean you have a right to price for us you have a right to enter into a license that doesn't mean you get to use licenses in anti competitive finally this notion of judge johnson about the environment in two thousand and nine which this worked well what you were just told is not true but the truth is that at this time in two thousand and nine in terms of first what the law was regarding reversed payments is that the circuit there was only one two circuit courts that come out one circuit court only one circuit court had upheld the scope of the patent test another circuit court had said that these deals are per se illegal a third circuit actually had come out with a different test so it was quite a question as to whether or not there was going to be antitrust liability but but sophisticated drug companies knew what they were doing with their eyes wide open because no sophisticated drug companies going to outside the record what people thought about authorized generic agreements that they were excuse me that of what unauthorized generic was was a very very pro competitive having brand companies compete with the first generic reduces price approach therefore if you enter into an agreement not to do that it's going to be not competitive and that was widely accepted and the fact that authorized generics were lawful and that therefore agreements not entered that would be