Nos. 10-2077, 10-2078, 10-2079

 

IN THE UNITED STATES COURT OF APPEALS

FOR THE THIRD CIRCUIT

 

In Re: K-DUR ANTITRUST LITIGATION

 

ON APPEAL FROM A FINAL ORDER OF THE UNITED STATES

DISTRICT COURT FOR THE DISTRICT OF NEW JERSEY

GRANTING DEFENDANTS’ MOTIONS FOR SUMMARY JUDGMENT

 

BRIEF OF THE FEDERAL TRADE COMMISSION AS AMICUS CURIAE

SUPPORTING APPELLANTS AND URGING REVERSAL

 

WILLARD K. TOM

General Counsel

JOHN F. DALY

Deputy General Counsel for Litigation

LAWRENCE DeMILLE-WAGMAN

Assistant General Counsel for Litigation

Federal Trade Commission

600 Pennsylvania Ave., N.W.

Washington, D.C. 20580

(202) 326-2448
-iTABLE OF CONTENTS

 Page

TABLE OF AUTHORITIES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . iii

INTEREST OF THE FEDERAL TRADE COMMISSION ................. 1

STATEMENT OF THE CASE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2

A. Pharmaceutical Patents ................................... 3

B. The Hatch-Waxman Act . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4

C. Exclusion-Payment Patent Settlements ...................... 7

D. The 2003 Medicare Modernization Act ...................... 8

E. Trends in Exclusion-Payment Patent Settlements .............. 9

F. The K-Dur Settlements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10

G. The Commission’s Litigation . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11

H. The Present Litigation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11

SUMMARY OF ARGUMENT . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12

ARGUMENT . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14

I. The Variety of Approaches to the Exclusion Payment Problem . . 15

A. Per Se Lawfulness and the Disagreement

Within the Second Circuit . . . . . . . . . . . . . . . . . . . . . . . . . . 15

B. Per Se Unlawfulness Under Some Circumstances . . . . . . . 16

C. Decisions Considering the Strength of the Patent . . . . . . . . 17
-iiII. Legal and Policy Analysis of Exclusion-Payment Settlements . . . 19

A. The Decision Below Conflicts With Fundamental

Antitrust and Patent Principles and the Policies of

the Hatch-Waxman Act . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19

B. Exclusion-Payment Settlements Should Be Treated as

Presumptively Unlawful . . . . . . . . . . . . . . . . . . . . . . . . . . . 22

CONCLUSION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28

COMBINED CERTIFICATIONS
-iiiTABLE OF AUTHORITIES 

CASES Page

In re Abbott Labs.,

FTC Dkt. No. C-3945 (May 22, 2000) ............................ 9

Andrx Pharms., Inc. v. Biovail Corp. Int’l,

256 F.3d 799 (D.C. Cir. 2001) . . . . . . . . . . . . . . . . . . . . . . . . . . . 16, 17, 24

Andrx Pharms., Inc. v. Elan Corp. Int’l

421 F.3d 1227 (11th Cir. 2005) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19

Ark. Carpenters Health & Welfare Fund v. Bayer AG,

604 F.3d 98 (2d Cir.), on pet. for rehearing, 

625 F.3d 779 (2d Cir. 2010) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15, 16

Asahi Glass Co., Ltd. v. Pentech Pharms., Inc.,

289 F. Supp. 2d 986 (N.D. Ill. 2003) . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15

Atari Games Corp. v. Nintendo of America, Inc.,

897 F.2d 1572 (Fed. Cir. 1990) ................................. 4

In re Bristol-Myers Squibb Co.,

FTC Dkt. No. C-4076 (April 14, 2003) ........................... 1

California Dental Ass’n v. FTC,

526 U.S. 756 (1999) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23, 25

In re Cardizem CD Antitrust Litig.,

332 F.3d 896 (6th Cir. 2003) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16

In re Ciprofloxacin Hydrochloride Antitrust Litig.,

544 F.3d 1323 (Fed. Cir. 2008) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15, 18

Eli Lilly & Co. v. Medtronic, Inc.,

496 U.S. 661 (1990) .......................................... 5
-ivFTC v. Watson Pharm., Inc.,

687 F. Supp. 2d 1371 (N.D. Ga. 2010), appeal docketed, 

No. 10-12729-DD (11th Cir.) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1, 19

In re Geneva Pharm., Inc.,

FTC Dkt. No. C-3946 (May 22, 2000) ...................... 9

Glaxo Wellcome, Inc. v. Impax Labs., Inc.,

356 F.3d 1348 (Fed. Cir. 2004) ................................. 3

In re Hoechst Marion Roussel, Inc.,

FTC Dkt. No. 9293 (May 8, 2001) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1, 9

King Drug Co. of Florence, Inc. v. Cephalon, Inc.,

702 F. Supp. 2d 514 (E.D. Pa. 2010) . . . . . . . . . . . . . . . . . . . 1, 17, 18, 19

Lear, Inc. v. Adkins,

395 U.S. 653 (1969) .......................................... 4

NCAA v. Bd. of Regents of Univ. of Oklahoma,

468 U.S. 85 (1984) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25

N. Tex. Specialty Physicians v. FTC,

528 F.3d 346 (5th Cir. 2008) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25

Palmer v. BRG of Georgia, Inc.,

498 U.S. 46 (1990) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17, 20, 25

Polygram Holding, Inc. v. FTC,

416 F.3d 29 (D.C. Cir. 2005) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25, 26

Pope Mfg Co. v. Gormully,

144 U.S. 224, 234 (1892) ...................................... 4

In re Schering-Plough Corp.,

FTC Dkt. No. 9297, 136 F.T.C. 956 (2003),

vacated and set aside, Schering-Plough Corp. v. FTC,

402 F.3d 1056 (11th Cir. 2005) . . . . . . . . . . . . . . . . . . . . . 2, 11, 23, 26, 27
-vSchering-Plough Corp. v. FTC,

402 F.3d 1056 (11th Cir. 2005) . . . . . . . . . . . . . . . . . . . . . . . . 9, 18, 19, 24

In re Tamoxifen Citrate Antitrust Litigation,

466 F.3d 187 (2d Cir. 2006) . . . . . . . . . . . . . . . . . . . . . . . 15, 18, 22, 26, 27

United States v. Line Material Co.,

333 U.S. 287 (1948) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20

United States v. Masonite Corp,

316 U.S. 265 (1942) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20, 21

United States v. Singer Mfg. Co.,

374 U.S. 174 (1963) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20

Valley Drug Co. v. Geneva Pharms.,

344 F.3d 1294 (2003) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18

Verizon Communs. Inc. v. Law Offices of Curtis V. Trinko,

540 U.S. 398 (2004) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23

FEDERAL STATUTES 

Federal Trade Commission Act, 15 U.S.C. §§ 41 et seq. . . . . . . . . . . . . . . . . . . . 1

15 U.S.C. § 45 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11

21 U.S.C. § 355(b)(1) .............................................. 5

21 U.S.C. § 355(j) ................................................. 5

21 U.S.C. § 355(j)(2)(A)(vii)(IV) ..................................... 5

21 U.S.C. § 355(j)(5)(B)(iii) ......................................... 5

21 U.S.C. § 355(j)(5)(B)(iv) ......................................... 6
-vi35 U.S.C. § 154 ................................................... 3

35 U.S.C. § 156 ................................................... 5

35 U.S.C. § 271(a) ................................................ 3

35 U.S.C. § 271(e)(2) .............................................. 5

35 U.S.C. § 282 ¶ 2(1)-(3) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21

The Drug Price Competition and Patent Term Restoration Act of 1984, 

Pub. L. No. 98-417 ........................................... 1

The Medicare Prescription Drug, Improvement, and Modernization Act of 2003

Pub. L. No. 108-173, §§ 1111-1118 .............................. 9

Pub. L. No. 108-173, 117 Stat. 2066, § 1112

(codified at 21 U.S.C. § 355 note) ............................... 2

LEGISLATIVE

148 Cong. Rec. S7566 (daily ed. July 30, 2002) ......................... 8

H.R. Rep. No. 98-857 (1984) ........................................ 4

S. Rep. No. 107-167 (2002) ......................................... 8

Generic Pharmaceuticals: Marketplace Access and Consumer Issues: 

Hearing Before Senate Commerce Comm., 

107th Cong., 2d Sess. (2002) ................................... 6

Paying Off Generics to Prevent Competition with Brand Name Drugs:

Should It Be Prohibited?: Hearing Before Senate Judiciary Comm., 

110th Cong., 1st Sess. (2007) ................................... 6
-viiRULES AND REGULATIONS

21 C.F.R. § 314.53 ................................................ 3

3d Cir. LAR 29 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2

Fed. R. App. P. 29 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2

MISCELLANEOUS 

John Allison & Mark Lemley, Empirical Evidence on the Validity

of Litigated Patents, 26 AIPLA Q.J. 185 (1998) .................... 4

David Balto, Pharmaceutical Patent Settlements: The Antitrust Risks,

55 Food & Drug L. J. 321 (2000) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17

Elizabeth H. Dickinson, FDA’s Role in Making Exclusivity Determinations,

54 Food & Drug L.J. 195 (1999) ................................ 4

Federal Trade Commission, Agreements Filed with the Federal

Trade Commission under the Medicare Prescription Drug, 

Improvement, and Modernization Act of 2003: Summary of

Agreements Filed in FY 2004 (2005)

(www.ftc.gov/os/2005/01/050107medicareactrpt.pdf) ............... 9

Federal Trade Commission, Agreements Filed with the Federal

Trade Commission under the Medicare Prescription Drug,

Improvement, and Modernization Act of 2003: Summary of

Agreements Filed in FY 2005 (2006)

(www.ftc.gov/os/2006/04/fy2005drugsettlementsrpt.pdf) . . . . . . . . . . . . 10

Federal Trade Commission, Agreements Filed with the Federal

Trade Commission under the Medicare Prescription Drug,

Improvement, and Modernization Act of 2003: Summary of

Agreements Filed in FY 2010 (2011)

(http://www.ftc.gov/os/2011/05/1105mmaagreements.pdf) . . . . . . . . . . 10
-viiiFederal Trade Commission, The Evolving IP Marketplace: Aligning 

Patent Notice and Remedies with Competition (2011) 

(http://www.ftc.gov/ os/2011/03/110307patentreport.pdf) ............ 1

Federal Trade Commission, Generic Drug Entry Prior to Patent

Expiration (2002) (www.ftc.gov/os/2002/07/genericdrugstudy.pdf) . . 2, 7

Federal Trade Commission, Pay-for-Delay: How Drug

Company Pay-Offs Cost Consumers Billions (2010) 

(http://www.ftc.gov/os/2010/01/100112payfordelayrpt.pdf) . . . . . 3, 7, 23

Federal Trade Commission, To Promote Innovation: The Proper 

Balance of Competition and Patent Law and Policy (2003)

(www.ftc.gov/os/2003/10/innovationrpt.pdf) ...................... 1

J. George, “Hurdles ahead for Cephalon,” Philadelphia Bus. J.,

Mar. 20, 2006 (http://assets.bizjournals.com/philadelphia/

 stories/2006/03/20/story1.html) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18

S. Hemphill, An Aggregate Approach to Antitrust: Using New

Data and Rulemaking to Preserve Drug Competition,

109 Colum. L. Rev. 629 (2009) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24

Herbert Hovenkamp, et al., Anticompetitive Settlement of Intellectual

Property Disputes, 87 Minn. L. Rev. 1719 (2003) . . . . . . . . . . . . . . . . . 27

Herbert Hovenkamp, THE ANTITRUST ENTERPRISE (2005) . . . . . . . . . . . . . . . . 25

XII Herbert Hovenkamp, Antitrust Law ¶ 2046 (2d ed. 2005) . . . . . . . . . . . . . 24

Paul Janicke & Lilan Ren, Who Wins Patent Infringement Cases?, 

34 AIPLA Q.J. 1 (2006) ....................................... 7

James T. O’Reilly, Prescription Pricing & Monopoly Extension: 

Elderly Drug Users Lose the Shell Game of Post-Patent Exclusivity, 

29 N. Ky. L. Rev. 413 (2002) ................................... 6
-ixCheryl Gay Stolberg et al., Keeping Down the Competition: How 

Companies Stall Generics and Keep Themselves Healthy, 

The New York Times, July 23, 2000 ............................. 8

U.S. Department of Justice & Federal Trade Commission, Antitrust Enforcement and Intellectual Property Rights: Promoting Innovation and

Competition (2007) (http://www.ftc.gov/reports/innovation/P040101

PromotingInnovationand Competitionrpt0704.pdf) .................. 1

U.S. Department of Justice & Federal Trade Commission, Antitrust

Guidelines for the Licensing of Intellectual Property (1995)

(www.usdoj.gov/atr/public/ guidelines/0558.htm) .................. 1

Martin A. Voet, THE GENERIC CHALLENGE: UNDERSTANDING

PATENTS, FDA & PHARMACEUTICAL LIFE-CYCLE

MANAGEMENT (3d ed. 2011) ................................... 3
1 See, e.g., Federal Trade Commission, The Evolving IP Marketplace:

Aligning Patent Notice and Remedies with Competition (2011) (http://www.ftc.gov/

os/2011/03/110307patentreport.pdf); U.S. Department of Justice & Federal Trade

Commission, Antitrust Enforcement and Intellectual Property Rights: Promoting

Innovation and Competition (2007) (http://www.ftc.gov/reports/innovation/P040101

PromotingInnovationand Competitionrpt0704.pdf); Federal Trade Commission, To

Promote Innovation: The Proper Balance of Competition and Patent Law and Policy

(2003) (www.ftc.gov/os/2003/10/innovationrpt.pdf); U.S. Department of Justice &

Federal Trade Commission, Antitrust Guidelines for the Licensing of Intellectual

Property (1995) (www.usdoj.gov/atr/public/guidelines/0558.htm).

2 The Drug Price Competition and Patent Term Restoration Act of 1984,

Pub. L. No. 98-417 (codified at various sections of Titles 15, 21 and 35 of the U.S.

Code).

3 See, e.g., FTC v. Watson Pharm., Inc., 687 F. Supp. 2d 1371 (N.D. Ga.

2010), appeal docketed, No. 10-12729-DD (11th Cir., argued May 13, 2011); In re

Bristol-Myers Squibb Co., FTC Dkt. No. C-4076 (April 14, 2003); In re Hoechst

Marion Roussel, Inc., FTC Dkt. No. 9293 (May 8, 2001).

-1-

INTEREST OF THE FEDERAL TRADE COMMISSION

The Federal Trade Commission (the “Commission” or “FTC”) is an independent federal agency, charged with promoting a free and competitive marketplace and

protecting consumer interests. See 15 U.S.C. §§ 41 et seq. The Commission has substantial experience concerning the balance between antitrust and intellectual property

laws,1

 the “Hatch-Waxman Act,”2 and the types of agreements at issue here.3 Indeed,

it is currently litigating a challenge to a drug maker’s use of exclusion payments, in

another district court in this Circuit. SeeKing Drug Co. of Florence, Inc. v. Cephalon,
4 The Commission is also familiar with the particular agreements at issue

here, having challenged those agreements in an administrative proceeding. See In re

Schering-Plough Corp., 136 F.T.C. 956 (2003), vacated & set aside, Schering-Plough

Corp. v. FTC, 402 F.3d 1056 (11th Cir. 2005).

5 See Federal Trade Commission, Generic Drug Entry Prior to Patent

Expiration (July 2002) (www.ftc.gov/os/2002/07/genericdrugstudy.pdf) (hereinafter

“FTC Generic Drug Study”).

6 The Medicare Prescription Drug, Improvement, and Modernization Act

of 2003, Pub. L. No. 108-173, 117 Stat. 2066, § 1112 (codified at 21 U.S.C. § 355

note).

-2-

Inc., 702 F. Supp. 2d 514 (E.D. Pa. 2010) (denying motion to dismiss).4

 The Commission has also gathered empirical evidence regarding exclusion-payment agreements:

in 2002, the Commission conducted a comprehensive study of generic drug entry,5

and since January 2004, has reviewed drug patent settlements filed pursuant to the

2003 amendments to the Hatch-Waxman Act,6

 and has reported those results annually.

See notes 17-19, infra.

The Commission files this brief pursuant to Fed. R. App. P. 29 and 3d Cir. LAR

29, in support of appellants, urging reversal.

STATEMENT OF THE CASE

The legality of exclusion payments in pharmaceutical patent settlements is a

question of first impression in this Circuit but is already the subject of active debate

among judges in other circuits. This Court’s resolution of the question will have a

profound impact on American consumers’ ability to receive the benefits of generic
7 Federal Trade Commission, Pay-for-Delay: How Drug Company

Pay-Offs Cost Consumers Billions, (2010) (http://www.ftc.gov/os/2010/01/100112

payfordelayrpt. pdf).

8 See Martin A. Voet, THE GENERIC CHALLENGE: UNDERSTANDING

PATENTS, FDA & PHARMACEUTICAL LIFE-CYCLE MANAGEMENT 59 (3d ed. 2011)

(describing pharmaceutical patent categories); 21 C.F.R. § 314.53 (noting categories

of patents that may be listed in the Orange Book, including active ingredient patents,

formulation and composition patents, and method-of-use patents).

9 See, e.g., Glaxo Wellcome, Inc. v. Impax Labs., Inc., 356 F.3d 1348, 1357

(Fed. Cir. 2004) (finding non-infringement where the defendant was able to design

around patent claim regarding time release); see also Voet, supra, at 62-63 (explaining

that “[a] formulation patent offers the least desirable patent protection because

-3-

drugs: according to an FTC staff analysis published in January 2010, exclusionpayment settlements are costing consumers about $3.5 billion per year.7

A. Pharmaceutical Patents

The patent laws grant inventors the exclusive right to practice an invention for

a limited time. 35 U.S.C. §§ 154, 271(a). In the case of pharmaceuticals, some patents

may claim the chemical compound itself, while others claim particular features of a

drug product, such as coatings or other characteristics that affect how its active

ingredient is released into the body.8

 Patents on drug product characteristics may

prolong exclusivity well beyond expiration of the compound patent, but they can often

be “invented around.” For example, the time-release profile achieved through a

patented time-release mechanism might be achievable through another, non-infringing,

mechanism.9 In addition, the mere fact that a patent has been issued by the Patent and
typically it can be avoided by using a different formulation”); Elizabeth H. Dickinson,

FDA’s Role in Making Exclusivity Determinations, 54 Food & Drug L.J. 195, 197

(1999) (“With the listing of formulation patents in the Orange Book, the assertion that

the patent will not be infringed is very common, because competitor companies have

been able to design around the patented formulation”).

10 See John Allison & Mark Lemley, Empirical Evidence on the Validity of

Litigated Patents, 26 AIPLA Q.J. 185, 205 (1998) (examining all written, final

validity decisions by either district courts or the Federal Circuit from 1989 through

1996 and finding that 46% of litigated patents were declared invalid). 

11 See, e.g., Atari Games Corp. v. Nintendo of America, Inc., 897 F.2d 1572,

1576 (Fed. Cir. 1990) (“the aims and objectives of patent and antitrust laws may seem,

at first glance, wholly at odds. However, the two bodies of law are actually complementary, as both are aimed at encouraging innovation, industry and competition.”).

12 See, e.g., H.R. Rep. No. 98-857, Pt. 1, at 14-17 (1984); id. Pt. 2, at 5-6.

-4-

Trademark Office does not mean that it is valid; alleged infringers frequently prevail

in litigation by demonstrating that the patent is invalid.10

The antitrust laws have long recognized that patents are an important incentive

for innovation.11 However, “‘[i]t is as important to the public that competition should

not be repressed by worthless patents, as that the patentee of a really valuable invention

should be protected in his monopoly * * * .’” Lear, Inc. v. Adkins, 395 U.S. 653, 663-

64 (1969) (quoting Pope Mfg Co. v. Gormully, 144 U.S. 224, 234 (1892)).

B. The Hatch-Waxman Act

The Hatch-Waxman Act’s purpose is to foster entry of low-cost generic drugs

into the market while safeguarding brand-name drug patent rights.12 The Act allows
-5-

for accelerated approval of a generic drug by the Food and Drug Administration

(“FDA”) through an Abbreviated New Drug Application (“ANDA”), upon a showing

that the new (generic) drug is “bioequivalent” to one already approved. 21 U.S.C.

§ 355(j). Patent holders benefit from an extension of the patent term that compensates

for patent life lost through the time required for FDA approval. 35 U.S.C. § 156.

The Act contains a detailed structure designed to facilitate challenges to patents

that are either invalid or too narrow to legitimately prevent the entry of generic drugs.

The branded drug company submits to the FDA a list of patents that it claims cover its

drug. 21 U.S.C. § 355(b)(1). A generic firm submitting an ANDA must make a

certification regarding each listed patent. Most pertinent here, a “Paragraph IV

certification” must state that the patent is either invalid or not infringed. 21 U.S.C.

§ 355(j)(2)(A)(vii) (IV). Once a generic makes a Paragraph IV certification, a special

procedure permits the patent holder to bring suit immediately, before the generic

applicant even markets its product, so as to allow speedy resolution of the patent claim.

35 U.S.C. § 271(e)(2); see Eli Lilly & Co. v. Medtronic, Inc., 496 U.S. 661, 676 (1990).

During the first 30 months of the patent litigation, FDA normally cannot approve the

generic product. 21 U.S.C. § 355(j)(5)(B)(iii).

The Act also encourages generic competitors to challenge patents: it rewards

the first filer of a “Paragraph IV-ANDA” with 180 days of marketing exclusivity,
13 Generic Pharmaceuticals: Marketplace Access and Consumer Issues:

Hearing Before Senate Commerce Comm., 107th Cong., 2d Sess. 56, 61 (2002)

(Statement of Kathleen D. Jaeger, Pres. & CEO, Generic Pharma. Ass’n). For a more

recent estimate on savings from generic drugs, see Paying off Generics to Prevent

Competition with Brand Name Drugs: Should it Be Prohibited?: Hearing Before

Senate Judiciary Comm., 110th Cong., 1st Sess. 164, 166 (2007) (Statement of

Michael Wroblewski, Project Director, Consumers Union) (consumer savings in 2006

from generic competition to Zocor, Pravachol, Zoloft, Wellbutrin, and Flonase are

estimated at $6.6 billion).

-6-

during which time subsequent ANDA applicants must stand in line and await FDA

approval. 21 U.S.C. § 355(j)(5)(B)(iv). No parallel economic incentive is provided

for ANDA filings that do not challenge the branded drug’s patent. See James T.

O’Reilly, Prescription Pricing & Monopoly Extension: Elderly Drug Users Lose the

Shell Game of Post-Patent Exclusivity, 29 N. Ky. L. Rev. 413, 414 (2002) (Congress

provided the 180-day generic exclusivity period as “a reward for challenging monopolists’ abuse of weak patents”).

Hatch-Waxman has brought great benefits to consumers. As acknowledged by

a former president of the Generic Pharmaceutical Association — an organization of

generic drug firms, some of which have benefitted financially from pay-for-delay deals

— successful challenges to patents involving the “blockbuster” drugs Prozac, Zantac,

Taxol, and Plantinol alone are estimated to have saved consumers more than $9

billion.13
-7-

Experience has also borne out Congress’s premise that many patents purportedly

standing in the way of generic entry will not withstand challenge. The Commission

studied all patent litigations initiated between 1992 and 2000 between branded drug

manufacturers and Paragraph IV generic challengers, and found that generics prevailed

with respect to73% of the drug products that were the subject of patent litigation that

resulted in a court decision. FTC Generic Drug Study, supra note 5, at 19-20. A later

analysis similarly concluded that, of the 2002-2004 Federal Circuit decisions with a

final ruling on a drug patent claim, accused infringers had a 75% success rate. See

Paul Janicke & Lilan Ren, Who Wins Patent Infringement Cases?, 34 AIPLA Q.J. 1,

5 (2006).

C. Exclusion-Payment Patent Settlements 

The pernicious impact of exclusion-payment settlements is that, by delaying the

marketing of potentially noninfringing generic drugs, they deprive consumers of the

economic benefits that normally attend the introduction of generic drugs. Typically, a

branded manufacturer loses about 90% of its unit sales after generic products enter the

market. See note 7, supra. While generic entrants gain that unit volume, they do not

gain most of the revenues lost by the branded manufacturer because, as generic competition sets in, the price for generics falls, on average, by about 85% — i.e., to about 15%

of what the branded manufacturer was charging. Pay-for-Delay, note 7,supra, at 8. As
14 For example, if a branded drug is earning $1 billion a year before generic

entry, the manufacturer will only earn about $100 million a year once generic

competition has matured, and all the generic companies put together will only earn

about $135 million a year (90% x 15% x $ 1 billion), thus leaving approximately $765

million a year for the public through the benefits of competition. 

15 In the words of Rep. Waxman, “[t]he law has been turned on its head.

* * * We were trying to encourage more generics and through different business

arrangements, the reverse has happened.” Cheryl Gay Stolberg et al., Keeping Down

the Competition: How Companies Stall Generics and Keep Themselves Healthy, The

New York Times, July 23, 2000, at A11 (quoting Rep. Waxman). Similarly, Senator

Hatch characterized such agreements as “appalling.” 148 Cong. Rec. S7566 (daily ed.

July 30, 2002).

-8-

a result, the vast majority of the benefit of generic entry goes not to the generic sellers,

but to the public, in the form of lower prices.14 Both branded and generic companies

thus have strong incentives to enter into exclusion-payment settlements, which allow

them to share a continuing stream of monopoly profits while depriving the public of the

benefits of early generic entry.

D. The 2003 Medicare Modernization Act

Prompted by concern over the anticompetitive effects of agreements such as

those at issue here, Congress amended Hatch-Waxman as part of the 2003 Medicare

Amendments, supra note 6. Those amendments sought in part to stamp out the “abuse

of the Hatch-Waxman law” resulting from “pacts between big pharmaceutical firms and

makers of generic versions of brand name drugs, that are intended to keep lower-cost

drugs off the market.” S. Rep. No. 107-167, at 4 (2002).15 Among the corrective
16 See, e.g., In re Abbott Labs., FTC Dkt. No. C-3945 (May 22, 2000); In

re Geneva Pharm., Inc., FTC Dkt. No. C-3946 (May 22, 2000); In re Hoechst Marion

Roussel, Inc., FTC Dkt. No. 9293 (May 8, 2001).

17 Federal Trade Commission, Bureau of Competition, Agreements Filed

with the Federal Trade Commission under the Medicare Prescription Drug, Improvement, and Modernization Act of 2003: Summary of Agreements Filed in FY 2004

(www.ftc.gov/os/2005/01/050107medicareactrpt.pdf) 1-2 (2005).

-9-

measures to address such abuses, the amendments require branded and generic

companies who enter into patent litigation settlements to file those settlement

agreements with the Commission and the Department of Justice for antitrust review.

Pub. L. No. 108-173, §§ 1111-1118.

E. Trends in Exclusion-Payment Patent Settlements

From 2000 through 2003, the Commission initiated a number of enforcement

actions involving exclusion-payment patent settlements, most of which resulted in

consent orders.16 Following those actions, drug makers apparently refrained from

entering into settlements with substantial exclusion payments, and litigants instead

reached settlements in other ways. For example, in the first year following Congress’s

filing requirement, fourteen agreements resolving patent infringement actions were

reported, and not one involved an exclusion payment.17 In contrast, during the

following reporting year (during which the Eleventh Circuit handed down its decision

in Schering, note 4, supra), there were eleven final settlements of brand-generic patent

litigation, of which three (27%) included both compensation to the generic and a
18 Federal Trade Commission, Bureau of Competition, Agreements Filed

with the Federal Trade Commission under the Medicare Prescription Drug,

Improvement, and Modernization Act of 2003: Summary of Agreements Filed in FY

2005 (www.ftc.gov/os/2006/04/fy2005drugsettlementsrpt.pdf) 3-4 (2006).

19 Federal Trade Commission, Bureau of Competition, Agreements Filed

with the Federal Trade Commission under the Medicare Prescription Drug,

Improvement, and Modernization Act of 2003: Summary of Agreements Filed in FY

2010 (http://www.ftc.gov/os/2011/05/1105mmaagreements.pdf) 2 (2011).

-10-

restriction on its entry.18 In the most recent report, the number of patent settlements that

included both compensation to the generic and a restriction on entry increased 60%,

from 19 in FY 2009 to 31 in FY 2010.19

F. The K-Dur Settlements

Schering marketed K-Dur 20, a potassium supplement used to treat high blood

pressure. The active ingredient of K-Dur 20 was not patentable, but Schering held a

patent on the drug’s time-release formulation. That patent expired in September 2006.

In 1995, both Upsher and ESI filed ANDAs with Paragraph IV certifications

seeking approval for generic versions of K-Dur 20. Schering sued them both. In 1997,

on the eve of trial, Schering entered into a settlement with Upsher. Schering agreed to

pay Upsher $60 million, and Upsher agreed to abandon its challenge and forgo entry

until 2001. Upsher also agreed to grant Schering a bundle of licenses, for which

Schering would make conventional milestone and royalty payments. In 1998, Schering

also entered into an agreement with ESI. A portion of this settlement covered a side
-11-

deal, but Schering separately agreed to pay ESI up to $15 million in exchange for ESI’s

agreeing not to market its generic version of K-Dur until January 2004.

G. The Commission’s Litigation

In March 2001, the Commission issued an administrative complaint charging that

Schering’s agreements with Upsher and ESI violated Section 5 of the FTC Act, 15

U.S.C. § 45. In re Schering, 136 F.T.C. at 1076-91. In 2003, the Commission held that

both agreements violated Section 5, but the Eleventh Circuit set aside that decision. See

note 4, supra.

H. The Present Litigation

In this case, purchasers of K-Dur 20 allege that Schering’s settlement agreements

with Upsher and ESI violated the Sherman Act, and the district court granted defendants’ motions for summary judgment. A-9-10. The district court adopted a Special

Master’s Report that concluded that, absent a showing that the patent infringement suit

was “objectively baseless,” there could be no antitrust challenge unless the settlement

restrained competition beyond “the scope of Schering’s patent.” A-56. The Report

deemed the agreements “well within” the patent’s scope because the entry dates that the

parties agreed to were before the patent expired and no products other than the generic

products at issue in the litigation were delayed by the agreements. Id.
-12-

SUMMARY OF ARGUMENT

This appeal presents a legal issue on which a number of federal courts have taken

varying approaches, none of which has succeeded in balancing the competing interests.

The court below followed rulings from the Second and Federal Circuits, which have

adopted an extremely permissive attitude toward exclusion-payment settlements,

condoning them unless they involve “sham” claims of patent infringement, or extend

to items not even arguably within the patent’s scope. Those rulings have been controversial, prompting disagreement among the judges of the Second Circuit. (Part I.A.)

Other courts have taken different approaches. Rulings of the Sixth and D.C.

Circuits suggest that these settlements may be subject to per se condemnation under the

antitrust laws, at least in some circumstances. (Part I.B.) Still other courts — including

another district court within this Circuit — have suggested the need for further inquiry

into the strength of the asserted patent claims in order to assess the reasonableness of

such settlements for the purpose of antitrust analysis. (Part I.C.)

The decision below is problematic in that it conflicts not only with basic antitrust

principles, but with patent law and the policies of the Hatch-Waxman Act. Agreements

made by patent holders are subject to antitrust scrutiny, particularly where, as here, they

eliminate potential competition by splitting monopoly rents with would-be competitors.

The district court’s rule — which allows such agreements as long as the patent infringe-
-13-

ment claim rises above the level of a “sham” — is especially inappropriate in light of

the policies of Hatch-Waxman, in which Congress expressly sought to encourage challenges to weak or narrow patents, and thereby spur early generic entry. The court’s rule

would negate such challenges by allowing a branded company simply to pay generic

filers to stay out of the market until the patent expires. Economic realities make such

deals irresistible as long as they are condoned by the courts. (Part II.A.)

Patent settlement agreements should be assessed under the antitrust rule of reason

— a rule that, as recent Supreme Court teachings make clear, is flexible enough both

to take into account the patent context and to recognize a presumption of illegality for

types of agreements whose likely anticompetitive impact is clear. Parties may settle

patent disputes in a variety of ways, and many settlements — e.g., those in which the

parties compromise on an entry date, without payment by the patent holder — pose little

competitive problem. On the other hand, where a settlement includes a substantial

payment, that payment must be a quid pro quo for something; if the challenger is

offering a commitment to stay out of the market for a specified time, it follows that the

payment is to secure exclusion of a potential competitor. Because such an agreement

closely parallels market allocation arrangements universally recognized as unlawful, a

presumption of antitrust illegality is justified. Such a presumption is bolstered by the

policies of Hatch-Waxman and by experience that shows the vulnerability of many
-14-

pharmaceutical patents, the weakest of which will be the most likely to result in

exclusion-payment settlements. (Part II.B.)

ARGUMENT

This appeal poses a question of both doctrinal and practical importance. The

ruling below would condone, in the vast majority of cases, exclusionary deals that are

profitable for both the branded and generic companies, but deprive consumers of the

benefits of competition, by allowing branded companies to pay the generic to stay out

of the market until patent expiration. Such agreements are already proliferating, in the

shadow of similarly lenient rulings — delaying generic entry and costing consumers

billions of dollars a year.

At the same time, resolution of the legal issue presented — which lies at the

intersection of the patent laws, the Hatch-Waxman Act, and the antitrust laws — has

proven elusive. The courts that have considered it have taken a variety of approaches,

yet none has achieved a satisfactory accommodation of the interests at stake, which

must recognize the likely anticompetitive nature of such agreements, yet afford an

opportunity to defend settlements that benefit or do not harm competition. This case

presents an opportunity for this Court to untangle this problem.
20 See Ark. Carpenters Health & Welfare Fund v. Bayer AG (“CA2

Cipro”), 604 F.3d 98 (2d Cir.), on pet. for rehearing, 625 F.3d 779 (2d Cir. 2010);

In re Ciprofloxacin Hydrochloride Antitrust Litig. (“CAFC Cipro”), 544 F.3d 1323

(Fed. Cir. 2008); In re Tamoxifen Citrate Antitrust Litig., 466 F.3d 187 (2d Cir. 2006);

see also Asahi Glass Co., Ltd. v. Pentech Pharms., Inc., 289 F. Supp. 2d 986 (N.D. Ill.

2003).

-15-

I. The Variety of Approaches to the Exclusion Payment Problem

A. Per Se Lawfulness and the Disagreement Within the Second Circuit

The Second and Federal Circuits, as well as the court below, treat exclusionpayment settlements as lawful so long as the exclusionary terms of the agreement are

nominally within the patent’s scope, regardless of the strength or weakness of that

patent or the patent-holder’s claims of infringement.20 In the Second Circuit, however,

that position was not adopted without controversy. After a divided panel of that court

adopted that rule in Tamoxifen, another panel, considering the appeal in CA2 Cipro,

unanimously stated that, while it was bound by the decision in Tamoxifen, it “believe[d]

there [were] compelling reasons to revisit Tamoxifen with the benefit of the full Court’s

consideration of the difficult questions at issue and the important interests at stake.”

604 F.3d at 110. The plaintiff-appellants filed a petition for rehearing en banc, but it

was denied. Judge Pooler dissented from the denial, stating that “exclusion payment

settlements seem plainly inconsistent with the stated purpose of the Hatch Waxman Act,

which is to encourage patent challenges as a way of increasing consumer access to

low-cost drugs.” 625 F.3d at 781.
21 In advising the Supreme Court not to grant certiorari in that case, the

Solicitor General (joined by the Commission) stated that the Sixth Circuit’s holding

appeared to be limited to situations in which part of the agreement goes beyond the

literal scope of the patent grant, and that it involved an interim settlement that did not

even yield finality as to the patent dispute. See Brief for the United States as Amicus

Curiae, Andrx Pharms., Inc. v. Kroger Co., No. 03-779, filed July 2004, at 11-17.

-16-

B. Per Se Unlawfulness Under Some Circumstances

The Sixth Circuit has held exclusion-payment settlements to be per se unlawful,

at least under some circumstances. See In re Cardizem CD Antitrust Litig., 332 F.3d

896 (6th Cir. 2003). Although the reach of that holding remains subject to debate,21 the

court’s opinion contains broad language condemning such settlements:

There is simply no escaping the conclusion that the

Agreement, all of its other conditions and provisions

notwithstanding, was, at its core, a horizontal agreement to

eliminate competition in the market for Cardizem CD

throughout the entire United States, a classic example of a

per se restraint of trade.

Id. at 909. Accordingly, some observers – including the CA2 Cipro panel — have characterized the Sixth Circuit position as one of per se illegality. See 604 F.3d at 105.

An earlier ruling of the D.C. Circuit also recognized the anticompetitive nature

of exclusion-payment settlements, and suggested that at least some such agreements

could be unlawful per se. Andrx Pharms., Inc. v. Biovail Corp. Int’l, 256 F.3d 799

(D.C. Cir. 2001), involved a claim by a subsequent generic filer that a settlement

agreement between a branded company and the first generic filer, which delayed
-17-

generic entry, was anticompetitive. Although the court of appeals affirmed dismissal

on the pleadings, it directed that the dismissal be without prejudice, because the second

generic could have a valid antitrust claim based on such an agreement. See 256 F.3d

at 807-12. In so doing, the court expressed doubt that the restraint could be justified as

“ancillary,” but “rather could reasonably be viewed as an attempt to allocate market

share and preserve monopolistic conditions” — language that clearly suggests the

availability of per se treatment. See id. at 811; see generally Palmer v. BRG of Georgia,

Inc., 498 U.S. 46, 49 (1990) (market allocation is per se unlawful). The Biovail court

also recognized, more generally, that 

“[a] payment flowing from the innovator to the challenging

generic firm may suggest strongly the anticompetitive intent

of the parties entering the agreement and the rent-preserving

effect of that agreement.”

Id. at 809 (quoting D. Balto, Pharmaceutical Patent Settlements: The Antitrust Risks,

55 Food & Drug L. J. 321, 335 (2000)).

C. Decisions Considering the Strength of the Patent

Other courts — including another district court within this Circuit — have issued

rulings suggesting the need for an inquiry into the strength of the underlying patent

claims when analyzing exclusion-payment settlements. In King Drug, supra, the court

denied a motion to dismiss a case in which the FTC, among other plaintiffs, is
22 The Commission’s complaint alleges that Cephalon had a narrow patent

that would not prevent generic competition to its branded product; that Cephalon, the

generic companies, and Wall Street observers expected generic entry in 2006; that it

paid each of the four generic companies (more than $200 million collectively) to

abandon their patent challenges and forgo entry until 2012; and that it thereby blocked

competition by any other potential generic entrant as well. The result, as described

by Cephalon’s then chief executive, was dramatic: “We were able to get six more

years of patent protection. That’s $4 billion in sales that no one expected.” See J.

George, “Hurdles ahead for Cephalon,” Philadelphia Bus. J., Mar. 20, 2006

(http://assets.bizjournals.com/philadelphia/stories/2006/03/20/story1.html).

-18-

challenging a series of settlements with generic drug makers.22 That court articulated

a “scope of patent framework.” The King Drug court noted respects in which its ruling

was consonant with those in Tamoxifen and CAFC Cipro, 702 F. Supp. 2d at 528-29,

but the details of its ruling show that it contemplates a broader inquiry into the strength

of the relevant patent. In particular, and in contrast to the approach adopted by the

lower court here, the King Drug court makes clear that one way plaintiffs may satisfy

the scope of the patent test is by establishing “non-infringement” or “patent invalidity.”

Id. at 533. Litigation in that case is ongoing.

King Drug relied substantially on two rulings from the Eleventh Circuit,

Schering, supra, and Valley Drug Co. v. Geneva Pharms., 344 F.3d 1294 (2003). See

702 F. Supp. 2d at 534-35. As that court pointed out, Valley Drug involved a remand

for evidentiary proceedings. Id. Those proceedings included a factual inquiry into the

“protection afforded by the patent,” based on “the likelihood of [the patentee’s]

obtaining such protections,” as viewed at the time of the agreements. See 344 F.3d at
23 In petitioning for certiorari in Schering, the FTC expressed its concern

that the Eleventh Circuit’s rulings could be interpreted as effectively imposing a

“sham” standard. See Petition for Certiorari, FTC v. Schering-Plough Corp., No. 05-

273, at 14-15 (Aug. 2005). Others, however, have disagreed with that reading.

Notably, the Solicitor General differed in his brief in Schering, in which he concluded

that “[n]either Valley Drug nor [Schering] holds * * * that evidence of invalidity or

non-infringement available at the time of settlement would be irrelevant in assessing

the permissibility of an exclusion-payment.” Brief for the United States as Amicus

Curiae, at 17-18 (May 2006). In any event, the Eleventh Circuit will have an

opportunity to clarify its standard in a pending appeal, for which argument was held

recently. See FTC v. Watson Pharmaceutical, note 3, supra.

-19-

1312. And the Schering ruling was based, in part, on the fact that the FTC “had not

raised allegations that the patent itself was invalid * * * .” 702 F. Supp. 2d at 535; see

Schering, 402 F.3d at 1068. The Schering court also expressly “underscore[d] the need

to evaluate the strength of the patent.” Id. at 1076. Although there has been

disagreement regarding the meaning of the Eleventh Circuit’s test,23 it appears to

provide for an inquiry based on the strength of the patent and the patent-holder’s claims

of infringement. See also Andrx Pharms. v. Elan Corp., 421 F.3d 1227, 1236 (2005)

(reversing dismissal on the pleadings in a case challenging a patent settlement

agreement, noting the “fact-intensive” nature of antitrust cases).

II. Legal and Policy Analysis of Exclusion-Payment Settlements

A. The Decision Below Conflicts With Fundamental Antitrust and

Patent Principles and the Policies of the Hatch-Waxman Act

The decision below follows the permissive approach adopted by the Second and

Federal Circuits, condoning an agreement between potential rivals to share monopoly
-20-

profits instead of competing. In the absence of countervailing considerations, such an

agreement is a plain violation of the antitrust laws. See Palmer, 498 U.S. at 49-50. The

court below erred in supposing that such an agreement is somehow justified by virtue

of Schering’s patent rights. On the contrary, the result below is inconsistent with the

Supreme Court’s patent jurisprudence and the specific congressional policies embodied

in the Hatch Waxman Act, as well as with basic antitrust principles.

Agreements among competitors are not exempt from scrutiny under the Sherman

Act just because a patent is involved. See, e.g., United States v. Masonite Corp., 316

U.S. 265 (1942) (patent agency agreements held to violate the antitrust laws); United

States v. Line Material Co., 333 U.S. 287, 308 (1948) (“holder of the patents cannot

escape the prohibitions of the Sherman Act” by “aggregating patents” in pooling

arrangement). This principle remains true even if the agreement takes the form of a

litigation settlement. See United States v. Singer Mfg. Co., 374 U.S. 174, 197-200

(1963) (White, J., concurring) (competitors’ collusive termination of patent interference

proceeding runs afoul of the Sherman Act).

Masonite is particularly instructive, for it provides a close analogy to the present

situation. There, a patent owner sued or threatened to sue its potential competitors for

patent infringement, but resolved those disputes by licensing the competing firms to sell

its product — at a price it set. The Supreme Court concluded that this arrangement
-21-

amounted to price-fixing, because Masonite had eliminated potential competition by

splitting monopoly rents with would-be competitors:

Active and vigorous competition then tend[ed] to be impaired, not from any preference of the public for the patented

product, but from the preference of the competitors for a

mutual arrangement for price-fixing which promises more

profit if the parties abandon rather than maintain competition.

316 U.S. at 281.

Schering has likewise managed to divide the market with potential competitors

by sharing monopoly profits. As in Masonite, it is no answer to say that Schering’s

patent rights might have enabled it to exclude Upsher and ESI from the market entirely

by prevailing in litigation. That is not what it did. Instead, it avoided the risks of

litigation by entering into agreements that allowed the companies effectively to divide

the market. Exclusion payments exclude competition no matter how weak or narrow

a patent claim is — an opportunity not provided by the patent system itself, under which

weak patents can be invalidated and narrow patents can be declared not infringed. See

35 U.S.C. § 282, ¶ 2 (1)-(3).

Moreover, through Hatch-Waxman, Congress created a special incentive for

generic drug companies to challenge weak patents. As described above (at 5-6),

Congress provided a specific incentive, in the form of the 180-day exclusivity, to

encourage generic firms to challenge weak or narrow patents that interfere with generic
-22-

entry. The ruling below would render this careful plan an exercise in futility, however,

by allowing exclusion-payment settlements whenever a patent-holder can make nonsham arguments that its patent is valid and infringed.

The economic realities of the pharmaceutical industry, moreover, make these

deals irresistable if they are condoned. Given the large gap between branded and

generic prices, a branded manufacturer can pay the generic firm more than the generic

could hope to earn even if it entered the market, and still have a great deal of monopoly

profits left over. See note 14, supra, and accompanying text. Even the weakest patents

can be protected. See Tamoxifen, 466 F.3d at 211. Hatch-Waxman would thus yield

consequences that Congress plainly did not intend: frequent payments from branded

firms to generics, but less benefit to consumers. A trend toward settlements with

compensation to the generic along with an agreement to defer entry indeed appears to

have established itself in the wake of court decisions permitting such settlements. See

supra at 9-10 & nn. 17-19.

B. Exclusion-Payment Settlements Should Be Treated as Presumptively

Unlawful

How, then, should exclusion-payment settlements be treated under the antitrust

laws? Although the settlements that Schering entered into are a form of market

allocation, they should not be condemned as per se antitrust violations. Rather, they

should be evaluated under the rule of reason — which embraces a range of analyses,
24 The Supreme Court has emphasized that antitrust law should give due

consideration to whatever the commercial context may be. See Verizon Communications Inc. v. Law Offices of Curtis V. Trinko, 540 U.S. 398, 411-12 (2004) (taking

regulatory context into account in Section 2 analysis).

25 From FY2004 to FY2009, drug companies filed 218 final settlements

involving brand-name and generic companies, and 70% of those agreements did not

involve compensation to the generic and deferred entry. Pay-for-Delay, note 7,supra,

at 4.

-23-

from full market analysis to abbreviated “quick look” scrutiny. See generally

California Dental Ass’n v. FTC, 526 U.S. 756 (1999). The rule of reason is sufficiently

flexible to take full account of patent interests and the Hatch-Waxman context.24

The essential task in such a rule of reason analysis is to distinguish between

exclusion that results from the strength of the patent and any additional exclusion that

results from a private agreement. Many pharmaceutical patent cases have been settled

by the parties’ agreement on an entry date prior to the patent’s expiration, but without

payments by the patent holder.25 Such settlements can be defended on the ground that

any exclusion simply reflects the strength of the patent as understood by the parties.

These settlements are thus unlikely to raise serious antitrust concerns, as the

Commission has recognized. Schering, 136 F.T.C. at 987.

When, however, settlements of such patent litigation do include substantial

payments from the patent holder to the challenger — instead of vice-versa, which is the

way that most patent disputes are settled outside of the Hatch-Waxman context — one
26 The rule we urge should apply whenever the patent holder provides

economic value to the challenger in any form. In recent years, it has become clear that

supposed “side deals” are frequently used as subterfuges to mask payments for delay.

Straightforward payments have “given way to more complex arrangements,” making

it more difficult for an antitrust plaintiff to demonstrate a net flow of consideration to

the generic firm. See S. Hemphill, An Aggregate Approach to Antitrust: Using New

Data and Rulemaking to Preserve Drug Competition, 109 Colum. L. Rev. 629, 663-66

(2009). As Professor Hemphill notes, because of “the absence of brand-generic deals

outside of settlement” agreements, “a presumption that the side deal provides disguised payment to the generic firm for delayed entry is appropriate.” Id. at 668-69.

27 Although in some cases, a settlement without payment may not be

achievable, this analysis does not presume the possibility of such settlements. Cf.

Schering, 402 F.3d at 1066 n.15. Rather, it is based on the recognition that, as

compared with delayed entry secured through an exclusion payment, competition and

consumers are better off either with a payment-free settlement, or with an average

“expected value” of the outcome of litigation.

-24-

must ask, what is the quid pro quo for those payments?26 In the absence of another

explanation, the patent holder is evidently buying a greater degree of exclusion than it

could have achieved otherwise — as compared either with a hypothetical settlement that

does not entail payment, or with the expected outcome of litigation.27 Accordingly,

courts and commentators have recognized the inference of anticompetitive purpose and

effect that can be drawn from such payments. See Andrx Pharm., 256 F.3d at 809; XII

Herbert Hovenkamp, ANTITRUST LAW ¶ 2046, at 327 (2d ed. 2005).

In such cases, antitrust and patent-law principles, evidentiary considerations, and

the policies of Hatch-Waxman all support a presumption that settlements involving both

payment (in any form) by the patent holder and forbearance from entry by the
-25-

challenger are anticompetitive, thus shifting the burden to the parties to justify the

agreement. The Supreme Court has long recognized that an agreement effecting a

“naked restraint on price and output requires some competitive justification” to avoid

condemnation. NCAA v. Bd. of Regents of Univ. of Oklahoma, 468 U.S. 85, 110 (1984).

Payments that, on their face, appear to be in exchange for market exclusion are similar

to the agreements the Supreme Court condemned as per se unlawful in Palmer. They

thus bear a “close family resemblance [to] another practice that already stands convicted

in the court of consumer welfare,” and can properly be treated as “inherently suspect.”

Polygram Holding, Inc. v. FTC, 416 F.3d 29, 36-37 (D.C. Cir. 2005); see N. Tex.

Specialty Physicians v. FTC, 528 F.3d 346, 361 (5th Cir. 2008) (upholding the

Commission’s application of “inherently suspect” analysis, including burden-shifting,

as “comport[ing] with the framework provided by the Supreme Court” in California

Dental). As Professor Hovenkamp has put it, “if structural evidence makes the practice

look suspicious,” the law should “force the defendant to show why it should be

exonerated.” Herbert Hovenkamp, THE ANTITRUST ENTERPRISE 146 (2005).

General evidentiary principles also support use of a presumption. The principal

means by which a court may satisfy itself that a particular settlement is not competitively harmful is by ascertaining that the payment was for something other than delay.

Evidence of other reasons for the payment, if it exists, is far more likely to be in the
-26-

settlement parties’ hands than in the hands of one challenging the agreement. The

parties may, alternatively, be able to establish that their agreement achieves beneficial

efficiencies. See Schering, 136 F.T.C. at 999-1002. The opportunity for such showings

of competitive justification is typically afforded before an “inherently suspect” practice

is condemned. See Polygram, 416 F.3d at 35-36. But the parties’ superior access to

any such evidence further supports use of a burden-shifting presumption.

Practical considerations concerning pharmaceutical patent litigation further

demonstrate the propriety of such a rule. Experience shows that a high proportion of

brand-name patent holders lose patent lawsuits litigated to a decision. See p. 7, supra.

This evidence suggests that exclusion-payment agreements are likely to involve brandname patents that could not withstand the very type of legal challenges that HatchWaxman sought to encourage. In other words, exclusion payments are most likely to

be used to protect the weakest patents. See, e.g., Tamoxifen, 466 F.3d at 212 (acknowledging that such settlements can protect patents that are “fatally weak”).

Use of such a presumption also has the benefit of obviating a detailed factual

inquiry into the underlying patent claims. As discussed above, some courts have suggested that such an inquiry into the strength of the patent is needed to resolve antitrust

claims. See pp. 17-19, supra. Although such an approach is certainly preferable to a

rule that protects agreements that perpetuate exclusion based on the weakest patents, as
28 The Commission, and a number of courts, have recognized the difficulties posed by such inquiries. See, e.g., Schering, 136 F.T.C. at 992-98; Tamoxifen,

466 F.3d at 203-04.

29 See, e.g., Tamoxifen, 466 F.3d at 206; Herbert Hovenkamp, et al.,

Anticompetitive Settlement of Intellectual Property Disputes, 87 Minn. L. Rev. 1719,

1751 (2003).

-27-

the Second and Federal Circuits have adopted, it nevertheless requires that courts and

litigants must revisit patent issues the parties previously sought to resolve without

litigation.28 Such an inquiry is unnecessary if the courts draw the straightforward

inference that — in the absence of an explanation to the contrary — a substantial

payment from a patent holder to a challenger, accompanied by the challenger’s

commitment to refrain from market entry for a specified period of time, reflects an

improper agreement to restrict market competition.

Perhaps most important, recognition of this presumption — that agreements

containing both payments to patent challengers and commitments by those challengers

to forbear from market entry are anticompetitive unless justified — is especially

appropriate in light of the context in which this issue arises. Exclusion payment

settlements most commonly appear in the context of pharmaceuticals subject to HatchWaxman,29 and the policies of that law underscore the need for a rule that protects

consumers from collusive agreements to stifle generic entry. The most reliable way to

effectuate those policies is to recognize a rule of presumptive illegality.
-28-

Accordingly, the Commission submits that the lessons of economics, the teachings of experience, and an appropriate balancing of important congressional objectives

justify a rule that proof of an exclusion-payment agreement is sufficient to establish a

prima facie case of illegality. At that point, the settlement parties should be required

to make a showing of how and why their agreement is not anticompetitive. If the

parties meet their burden, the burden of showing that the agreement is nevertheless

anticompetitive would shift back to the plaintiff.

CONCLUSION

For the foregoing reasons, this Court should reverse the district court’s ruling,

and remand for consideration of the issues according to the standard set forth herein.

Respectfully submitted,

WILLARD K. TOM

General Counsel

JOHN F. DALY

Deputy General Counsel for Litigation

s/ Lawrence DeMille-Wagman 

LAWRENCE DeMILLE-WAGMAN

Assistant General Counsel for Litigation

Federal Trade Commission

600 Pennsylvania Ave., N.W.

Washington, D.C. 20580

May 18, 2011 (202) 326-2448
COMBINED CERTIFICATIONS

1) Bar membership – Because this brief is filed on behalf of an administrative

agency of the United States, there is no bar membership requirement.

2) Word count – I certify that this brief complies with Fed. R. App. P. 29(d) and

Fed. R. App. P. 32(a)(7). It contains 6555 words, as counted by the WordPerfect word

processing program. 

3) Typeface and type style – This brief complies with the typeface requirements of

Fed. R. App. P. 32(a)(5) and the type style requirements of Fed. R. App. P. 32(a)(6).

It was prepared using the WordPerfect word processing program in a 14-point

proportionally-spaced Times New Roman typeface.

4) Service upon counsel – I hereby certify that on May 18, 2011, I served ten

copies of the Brief of the Federal Trade Commission as Amicus Curiae Supporting

Appellants and Urging Reversal on this Court by express overnight delivery. On the

same day, I used this Court’s CM/ECF system to serve this brief on the following

counsel, who represent all the parties to this matter:

Attorneys for Defendant Schering-Plough Corp.

John W. Nields, Jr. (jnields@cov.com) William J. O’Shaughnessy

Alan M. Wiseman (awiseman@cov.com) (Woshaughnessy@McCarter.com)

Thomas A. Isaacson (isaacson@cov.com) McCarter & English LLP

Covington & Burling LLP Four Gateway Center

1201 Pennsylvnia Ave., NW 100 Mulberry Street

Washington, DC 20004 Newark, NJ 07102

Charles Loughlin

(charles.loughlin@bakerbotts.com)

Baker Botts

1299 Pennsylvania Ave., NW

Washington, DC 20004

Attorneys for Defendant Upsher-Smith Laboratories, Inc.

William E. Goydan Christopher M. Curran

(Wgoydan@wolffsamson.com) (ccurran@whitecase.com)

Wolff & Samson, P.C. Jaime M. Crowe (jcrowe@whitecase.com)

One Boland Drive White & Case LLP

West Orange, NJ 07052 701 Thirteenth Street, NW

Washington, DC 20005
Attorneys for Defendant Wyeth

Robert Michels (rmichels@winston.com) Brian J. McMahon

Winston & Strawn (bmcmahon@gibbonslaw.com)

33 West Wacker Drive Gibbons Del Deo Dolam Griffinger

4th Floor & Vecchione, P.C.

Chicago, IL 60601 One Riverfront Plaza

Newark, NJ 07102

Attorneys for Louisiana Wholesale & Direct Purchaser Plaintiffs

Peter S. Pearlman (Psp@njlawfirm.com) Bruce Gerstein 

Cohn Lifland Pearlman Hermann & Knopf LLP (Bgerstein@garwingerstein)

Park 80 Plaza West-One Joseph Opper

Saddle Brook, NJ 07663 (Jopper@garwingerstein.com)

Kimberly Hennings

(khennings@garwingerstein.com)

Garwin Gerstein & Fisher, LLP

1501 Broadway, Ste. 1416

New York, NY 10036

Daniel Berger (danberger@bm.net) Stuart Des Roches (Stuart@odrlaw.com)

David F. Sorensen (dsorensen@bm.net) John G. Odom (jodom@odrlaw.com)

Neill W. Clark (nclark@bm.net) Andrew Kelly (akelly@odrlaw.com)

Eric Cramer (ecramer@bm.net) Odom & Des Roches

Daniel Simons (dsimons@bm.net) Poydras Center

Berger & Montague, PC 650 Poydras Street, Ste. 2020

1622 Locust Street New Orleans, LA 70130

Philadelphia, PA 19103

Michael Heim (mheim@hpcllp.com) David P. Smith (DPSmith@psfllp.com)

Russell A. Chorush (rchorush@hpcllp.com) Percy Smith & Foote LLP

Heim Payne & Chorush LLP 720 Murray Street

600 Travis, Ste. 6710 P.O. Box 1632

Houston, TX 77002-2910 Alexandria, LA 71309
Attorneys for Direct Purchaser Plaintiffs Albertson’s, Inc.

Eckerd Corp., The Kroger Co., Hy-Vee, Inc., Safeway, Inc. And

Walgreen Co.

Scott E. Perwin (sperwin@kennynachwalter.com) Lauren C. Ravkind

Richard Alan Arnold (lravkind@kennynachwalter.com)

(rarnold@kennynachwalter.com) Kenny Nachwalter P.A.

1100 Miami Center 111 Congress, Ste. 1060

201 South Biscayne Blvd. Austin, TX 78701

Miami, FL 33131

Attorneys for Direct Purchaser Class Plaintiffs CVS Pharmacy, Inc.

And Rite Aid Corp.

Steve D. Shadowen (sshadowen@hangley.com)

Barry J. Refsin (brefsin@hangley.com)

Hangley Aronchick Segal & Pudlin

One Logan Square, 27th Floor

Philadelphia, PA 19103

5) Identical compliance of briefs – I certify that the text of the electronic brief,

which was submitted to this Court, is identical to the paper copies that were served

on this Court.

6) Virus check – I certify that I have run a virus check on this brief and no virus was

detected. I used Symantec AntiVirus version 5/17/2011 rev. 3.

s/ Lawrence DeMille-Wagman 

Lawrence DeMille-Wagman