Opinion ID: 76900
Heading Depth: 2
Heading Rank: 3

Heading: The Anticompetitive Effects

Text: 52 Our final line of inquiry turns to whether these agreements were indeed an unfair method of competition. The FTC Act's prohibition on such agreements encompasses violations of other antitrust laws, including the Sherman Act, which prohibits agreements in restraint of trade. 15 U.S.C. § 45(a); California Dental Ass'n., 526 U.S. at 763 n. 3, 119 S.Ct. 1604. In California Dental, the Supreme Court required that the anticompetitive effect cannot be hypothetical or presumed. Rather, the probe must turn to whether the effects actually are anticompetitive. Id. at 775 n. 12., 119 S.Ct. 1604 53 The restraints at issue here covered any sustained release microencapsulated potassium chloride tablet. Such a specific clause — an ancillary restraint — is routine to define the parameters of the agreement and to prevent future litigation over what may or may not infringe upon the patent. See Rothery Storage & Van Co. v. Atlas Van Lines, Inc., 792 F.2d 210, 224 (D.C.Cir.1986) (The ancillary restraint is subordinate and collateral in the sense that it serves to make the main transaction more effective in accomplishing its purpose.). Ancillary restraints are generally permitted if they are reasonably necessary toward the contract's objective of utility and efficiency. See Law v. NCAA, 134 F.3d 1010, 1019 (10th Cir.1998). 54 The efficiency-enhancing objectives of a patent settlement are clear, and [p]ublic policy strongly favors settlement of disputes without litigation. Aro Corp. v. Allied Witan Co., 531 F.2d 1368, 1372 (6th Cir.1976). See also Schlegal Mfg. Co. v. U.S.M. Corp., 525 F.2d 775, 783 (6th Cir.1975) (The importance of encouraging settlement of patent-infringement litigation ... cannot be overstated.). In order for a condition to be ancillary, an agreement limiting competition must be secondary and collateral to an independent and legitimate transaction. Rothery Storage, 792 F.2d at 224. Naturally, the restraint imposed must relate to the ultimate objective, and cannot be so broad that some of the restraint extinguishes competition without creating efficiency. Even restraints ancillary in form can in substance be illegal if they are part of a general plan to gain monopoly control of a market. United States v. Addyston Pipe & Steel Co., 85 F. 271, 282-83 (6th Cir.1898). Such a restraint, then, is not ancillary. 55 Under the Schering-Upsher agreement, the scope of the products subject to the September 1, 2001 entry date demonstrate an efficient narrowness. No other products were delayed by the ancillary restraints contained in the agreements. The '743 patent claims a controlled release [microencapsulated] potassium chloride tablet. The language in the Schering-Upsher agreement covers the identical reach of the '743 patent. There is no broad provision that detracts from the efficiency of settling the underlying patent litigation. Nevertheless, the Commission rejected the notion that the narrow restraints were legitimate and reasonable means of accomplishing the settlement, and refused to consider that this settlement preserved public and private resources, and that the resultant certainty ultimately led to more intense competition. 56 The Commission's opinion requires the conclusion that but for the payments, the parties would have fashioned different settlements with different entry dates. Although it claimed to apply a rule of reason analysis, which we disagree with on its own, the Commission pointedly states that it logically concluded that  quid pro quo for the payment was an agreement by the generic to defer entry date beyond the date that represents an otherwise reasonable litigation compromise. We are not sure where this logic derives from, particularly given our holding in Valley Drug. It is not obvious that competition was limited more than that lawful degree by paying potential competitors for their exit ... litigation is a much more costly mechanism to achieve exclusion, both to the parties and to the public, than is settlement. Id. at 1309. 57 The Commission rationalizes its decision not to consider the exclusionary power of the patent by asserting that the parties could have attained an earlier entry without the role of payments. There is simply no evidence in the record, however, that supports this conclusion. The Commission even recognized that the January 1, 2004 entry date in the ESI settlement was non-negotiable. For its part, Schering presented experts who testified to the litigation truism that settlements are not always possible. Indeed, Schering's experts agreed that ancillary agreements may be the only avenue to settlement. 58 The proposition that the parties could have simply compromised on earlier entry dates is somewhat myopic, given the nature of patent litigation and the role that reverse payments play in settlements. It is uncontested that parties settle cases based on their perceived risk of prevailing in and losing the litigation. Pre-Hatch-Waxman, Upsher and ESI normally would have had to enter the market with their products, incurring the costs of clinical trials, manufacturing and marketing. This market entry would have driven down Schering's profits, as it took sales away. As a result, Schering would have sued ESI and Upsher, seeking damages for lost profits and willful infringement. Assuming the patent is reasonably strong, and the parties then settled under this scenario, the money most probably would flow from the infringers to Schering because the generics would have put their companies at risk by making infringing sales. 59 By contrast, the Hatch-Waxman Amendments grant generic manufacturers standing to mount a validity challenge without incurring the cost of entry or risking enormous damages flowing from any possible infringement. See In re Ciprofloxacin Hydrochloride Antitrust Litigation, 261 F.Supp.2d 188, 251 (E.D.N.Y.2003). Hatch-Waxman essentially redistributes the relative risk assessments and explains the flow of settlement funds and their magnitude. Id. Because of the Hatch-Waxman scheme, ESI and Upsher gained considerable leverage in patent litigation: the exposure to liability amounted to litigation costs, but paled in comparison to the immense volume of generic sales and profits. This statutory scheme could then cost Schering its patent. 60 By entering into the settlement agreements, Schering realized the full potential of its infringement suit — a determination that the '743 patent was valid and that ESI and Upsher would not infringe the patent in the future. Furthermore, although ESI and Upsher obtained less than what they would have received from successfully defending the lawsuits (the ability to immediately market their generics), they gained more than if they had lost. A conceivable compromise, then, directs the consideration from the patent owner to the challengers. Id. Ultimately, the consideration paid to Upsher and ESI was arguably less than if Schering's patent had been invalidated, which would have resulted in the generic entry of potassium chloride supplements. 61 In fact, even in the pre-Hatch-Waxman context, implicit consideration flows from the patent holder to the alleged infringer. Id. If Schering had been able to prove damages from infringing sales, and settled before trial for a sum less than the damages, the result is a windfall to the generic manufacturers who essentially keep a portion of the profits. If this were true, then under the Commission's analysis, such a settlement would be a violation of antitrust law because the infringer reaped the benefit of the patent holder's partial surrender of damages. Like the reverse payments at issue here, such a rule would discourage any rational party from settling a patent case because it would be an invitation to antitrust litigation. Id. 62 The Commission's inflexible compromise-without-payment theory neglects to understand that [r]everse payments are a natural by-product of the Hatch-Waxman process. Id. Pure compromise ignores that patents, payments, and settlement are, in a sense, all symbiotic components that must work together in order for the larger abstract to succeed. As Judge Posner emphasized in Asahi, [i]f any settlement agreement can be characterized as involving `compensation' to the defendant, who would not settle unless he had something to show for the settlement. If any settlement agreement is thus classified as involving a forbidden `reverse payment,' we shall have no more patent settlements. Asahi Glass Co., 289 F.Supp.2d at 994. We agree. If settlement negotiations fail and the patentee prevails in its suit, competition would be prevented to the same or an even greater extent because the generic could not enter the market prior to the expiration of the patent. See In re Ciprofloxacin Hydrochloride Antitrust Litigation, 261 F.Supp.2d 188, 250-52 (E.D.N.Y. 2003). A prohibition on reverse-payment settlements would reduce the incentive to challenge patents by reducing the challenger's settlement options should he be sued for infringement, and so might well be thought anticompetitive. Asahi Glass Co., 289 F.Supp.2d at 994. 63 There is no question that settlements provide a number of private and social benefits as opposed to the inveterate and costly effects of litigation. See generally D. Crane, Exit Payments in Settlement of Patent Infringement Lawsuits: Antitrust Rules and Economic Implications, 54 Fla. L.Rev. 747, 760 (2002). Patent litigation breeds a litany of direct and indirect costs, ranging from attorney and expert fees to the expenses associated with discovery compliance. Other costs accrue for a variety of reasons, be it the result of uncompromising legal positions, differing strategic objectives, heightened emotions, lawyer incompetence, or sheer moxie. Id.; see also, S. Carlson, Patent Pools and the Antitrust Dilemma, 16 Yale. J. Reg. 359, 380 (1999) (U.S. patent litigation costs $1 billion annually). 64 Finally, the caustic environment of patent litigation may actually decrease product innovation by amplifying the period of uncertainty around the drug manufacturer's ability to research, develop, and market the patented product or allegedly infringing product. The intensified guesswork involved with lengthy litigation cuts against the benefits proposed by a rule that forecloses a patentee's ability to settle its infringement claim. See In re Tamoxifen Citrate Antitrust Litig., 277 F.Supp.2d 121, 133 (E.D.N.Y.2003) (noting that the settlement resolved the parties' complex patent litigation, and in so doing, cleared the field for other ANDA filers). Similarly, Hatch-Waxman settlements, likes the ones at issue here, which result in the patentee's purchase of a license for some of the alleged infringer's other products may benefit the public by introducing a new rival into the market, facilitating competitive production, and encouraging further innovation. See H. Hovenkamp, et al., Anticompetitive Settlement of Intellectual Property Disputes 87 Minn. L.Rev. at 1719, 1750-51 (2003); see also H. Hovenkamp Antitrust Law: An Analysis of Antitrust Principles and Their Application, ¶ 1780a (1999). 65 Despite the associated benefits of settlements — which include the avoidance of the burdensome costs and the resolution of uncertainty regarding the respective rights and obligations of party litigants — the Commission manufactured a rule that would make almost any settlement involving a payment illegal. 26 Furthermore, the Commission's minimal allowance for $ 2 million in litigation costs is rather naive. While we agree that a settlement cannot be more anticompetitive than litigation, see Valley Drug, 344 F.3d at 1312, we must recognize [a] suitable accommodation between antitrust law's free competition requirement and the patent regime's incentive system. 344 F.3d at 1307. 66 We have said before, and we say it again, that the size of the payment, or the mere presence of a payment, should not dictate the availability of a settlement remedy. Due to the asymmetrics of risk and large profits at stake, even a patentee confident in the validity of its patent might pay a potential infringer a substantial sum in settlement. Id. at 1310. An exception cannot lie, as the Commission might think, when the issue turns on validity ( Valley Drug ) as opposed to infringement (the Schering agreements). 27 The effect is the same: a generic's entry into the market is delayed. What we must focus on is the extent to which the exclusionary effects of the agreement fall within the scope of the patent's protection. Id. Here, we find that the agreements fell well within the protections of the '743 patent, and were therefore not illegal.