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

Heading: The Scope of Schering's Agreements

Text: 36 The FTC's complaint characterized the agreements at the center of this contest as horizontal market allocation agreements, whereby Schering reserved its sales of K-Dur 20 for several years, while Upsher and ESI refrained from selling their generic versions of K-Dur 20 during that same time period. Adding to the FTC's ire is the presence of reverse payments, represented by settlement payments from the patent owner to the alleged infringer. The Commission ruled that the coupling of reverse payments with an agreement by the generics not to enter the market before a particular date, raise[d] a red flag that distinguishes this particular litigation settlement from most other patent settlements, and mandates a further inquiry. Slip. Op. at 29. 37 In the context of Schering's settlement with Upsher, the FTC argues that the $60 million payment from Schering to Upsher was not a bona fide royalty payment under the licenses Schering obtained for Niacor and five other Upsher products. Instead, according to the FTC, the royalty payments constituted payoffs to delay the introduction of Upsher's generic. The FTC concedes that its position fails if it cannot prove a direct causal link between the payments and the delay. 38 The trial before the ALJ covered 8,629 pages of transcript, involved forty-one witnesses, and included thousands of exhibits. The trial revealed that Schering personnel evaluated Niacor, and forecast its profit stream with a net present value of $225-265 million. Upsher itself had invested significant time and financial resources in Niacor. Moreover, Schering had a long-documented and ongoing interest in licensing an extended-release niacin product, as evidenced by its efforts to acquire Niaspan from Kos Pharmaceuticals. 39 Evidence at trial also demonstrated that the personnel who evaluated Niaspan's potential were unaware of the ongoing litigation between Upsher and Schering, and had little, if any, incentive to inflate Niacor's value. Indeed, many of the estimates in conjunction with the Niacor evaluation traced the independent conclusions of the team that evaluated Niaspan. Schering's witnesses corroborated the documentary evidence, and the ALJ found the $60 million payment to Upsher to be a bona fide fair-value payment. 40 The Commission chose to align its opinion with the two witnesses presented by the FTC. One witness, Dr. Nelson Levy (Levy) was proffered as an expert in pharmaceutical licensing and valuation. He concluded that the $60 million payment was grossly excessive, and that Schering's due diligence in evaluating Niacor fell astonishingly short of industry standards. Levy cited Upsher and Schering's post-settlement behavior, as proof of the agreement's artificial nature. We are troubled by Levy's testimony. Interestingly, Levy arrived at his conclusions without performing a quantitative analysis of Niacor or any of the other Upsher products licensed by Schering. Additionally, Levy lacked expertise in the area of cholesterol-lowering drugs and niacin supplements. Finally, Levy's unpersuasive appraisal of the post-settlement behavior blatantly ignored the parties' ongoing communications and the fact that the niacin market essentially bottomed out. Although the Commission's opinion does not state that it in relying on Levy's testimony, it curiously mirrors each of Levy's conclusions. 41 The FTC also offered Professor Timothy Bresnahan (Bresnahan) to prove that Schering's payment was not for the Niacor license. While Bresnahan neither challenged Niacor's sales projections nor discounted its economic value, Bresnahan nonetheless opined that the payment was for Upsher's delayed entry, and not Niacor. Bresnahan based his conclusions on his interpretation of the parties' subjective incentives to trade a payment for delay. Bresnahan specifically pointed to Schering's failed transactions with Kos and the lack of other competitors vying for Niacor as evidence that the payment was not connected to the license. 42 Like the Levy testimony, the Commission did not expressly adopt Bresnahan's theories, but his rationale and the Commission's conclusions became one and the same. The Commission is quite comfortable with assenting to Bresnahan's rather amorphous incentive theory despite its lack of empirical foundation. 19 Unfortunately, Bresnahan's so-called incentives do not rise to the level of legal conclusions. We understand that certain incentives may rank high in these transactions, but it also true that the possibility of an outside impetus often lays dormant. The simple presence of economic motive weighs little on the scale of probative value. See Serfecz v. Jewel Food Stores, 67 F.3d 591, 600-01 (7th Cir.1995) (The mere existence of mutual economic advantage, by itself, does not tend to exclude the possibility of independent, legitimate action and supplies no basis for inferring a conspiracy.). 43 The ALJ rejected the FTC's experts, concluding that testimony from Schering's witnesses provides direct evidence that the parties did not exchange money for delay. The Commission disagreed, and determined that Niacor was not worth $60 million. To prove its point, the Commission relied on somewhat forced evidence: (1) the unconvincing fact that doctors gave Kos' niacin product mixed reviews, causing Schering to value those profits at an apparently contemptible $254 million; (2) the meretricious argument that Schering's personnel did not adequately assess Niacor's safety; 20 (3) the Commission's questionable non-expert opinion that Schering should have done more due diligence; 21 (4) the Commission's belief that the European market — where Schering held the Niacor license — for a niacin product was less desirable than the U.S. market; 22 and (5) Schering's post-settlement decision to discontinue its Niacor efforts in light of the poor sales effected by Kos' Niaspan. 23 44 To borrow from the Commission's own words, we think its conclusion that Niacor was not worth $60 million, and that settlement payment was to keep Upsher off the market is not supported by law or logic. Substantial evidence requires a review of the entire record at trial, and that most certainly includes the ALJ's credibility determinations and the overwhelming evidence that contradicts the Commission's conclusion. Universal Camera, 340 U.S. at 487-488, 496, 71 S.Ct. 456 (1951); see also Equifax Inc. v. FTC, 678 F.2d 1047, 1052 (11th Cir.1982). 45 The ALJ made credibility findings based upon his observations of the witnesses' demeanor and the testimony given at trial. The Commission rejected these findings, and instead relied on information that was not even in the record. The Supreme Court has noted the importance of an examiner's determination of credibility, and explained that evidence which supports an administrative agency's fact-finding may be less substantial when an impartial, experienced examiner who has observed the witnesses and lived with the case has drawn conclusions different from the [agency's] . . . Id. 24 Additionally, the Court instructs that [t]he findings of the examiner are to be considered along with the consistency and inherent probability of testimony. Id. 46 We think that this record consistently demonstrates the factors that Schering considered, and there is nothing to undermine the clear findings of the ALJ that this evidence was reliable. The Commission's finding that the Upsher licenses were worth nothing to Schering overlooks the very nature of the pharmaceutical industry where licenses are very often granted on drugs that never see the market. 25 Likewise, the essence of research and development is the need to encourage and foster new innovations, which necessarily involves exploring licensing options and selecting which products to pursue. 47 Finally, we note that the terms of the Schering-Upsher agreement expressly describes three payments totaling $60 million as up-front royalty payments. The surrounding negotiations, trial testimony, and the record all evidence that both parties intended royalty to denote its traditional meaning: that Schering would pay Upsher for the licenses and production rights of Upsher's products. See e.g., Sierra Club, Inc. v. C.I.R., 86 F.3d 1526, 1531 (9th Cir.1996) (noting that `royalty' commonly refers to a payment made to the owner of property for permitting another to use the property) (citing Black's Law Dictionary 1330-31 (6th ed.1979)). There is nothing to refute that these payments are a fair price for Niacor and the other Upsher products. Schering-Plough made a stand-alone determination that it was getting as much in return from these products as it was paying, and just because the agreement also includes Upsher's entry date into the potassium chloride supplement market, one cannot infer that the payments were solely for the delay rather than the licenses. See Valley Drug, 344 F.3d at 1309. Thus, the substantial and overwhelming evidence undercuts the Commission's conclusion that Schering's agreement with Upsher was illegal.
48 The Commission separately addressed Schering's settlement with ESI. Although it purported to analyze this agreement under the same scheme as it did the Upsher settlement, there is far less development of the factual record to support the Commission's conclusion that the settlement was unreasonable. At trial, the FTC called no fact witnesses to testify about the ESI settlement, and its economic expert offered only brief testimony. The Commission's opinion itself spends little time on the ESI settlement, and begins with the recognition that the case is based on relatively limited evidence. On the other hand, Schering produced experts who posited that Schering would have won the patent case, and that the ESI's January 1, 2004, entry date reasonably reflected the strength of Schering's case. The FTC did not rebut this testimony, but rather ignored it. 49 It seems the sole indiscretion committed in the context of the ESI settlement is the inclusion of monetary payments. The Commission ignored the lengthy mediation process, and insisted that the parties could have reached an alternative settlement with an earlier entry date. We do not pretend to understand the Commission's profound concern with this settlement, but it takes particular exception to the $10 million payment, which was contingent on FDA approval of the generic product. The Commission also subtly questions the validity of the $5 million for legal costs. We might only guess that if the legal fee tallied $2 million — the arbitrary cap the Commission would allow for such settlements — it would not garner the same scrutiny. 50 The Commission, however, refused to consider the underlying patent litigation, and its certainty to be a bitter and prolonged process. All of the evidence of record supports the conclusion of the ALJ that this is not the case of a naked payment aimed to delay the entry of product that is legally ready and able to compete with Schering. The litigation that unfolded between Schering and ESI was fierce and impassioned. Fifteen months of mediation demonstrates the doubt of a peaceful conclusion (or a simple compromise, as the Commission would characterize it). 51 That the parties to a patent dispute may exchange consideration to settle their litigation has been endorsed by the Supreme Court. See Standard Oil Co. v. United States, 283 U.S. 163, 170-71 n. 5, 51 S.Ct. 421, 75 L.Ed. 926 (1931) (noting that the interchange of rights and royalties in a settlement agreement may promote rather than restrain competition). Veritably, the Commission's opinion would leave settlements, including those endorsed and facilitated by a federal court, with little confidence. The general policy of the law is to favor the settlement of litigation, and the policy extends to the settlement of patent infringement suits. Flex-Foot, Inc. v. CRP, Inc., 238 F.3d 1362, 1368 (Fed.Cir.2001); Foster v. Hallco Manufacturing Co., 947 F.2d 469, 477 (Fed.Cir.1991); Aro Corp. v. Allied Witan Co., 531 F.2d 1368, 1372 (6th Cir.1976). Patent owners should not be in a worse position, by virtue of the patent right, to negotiate and settle surrounding lawsuits. We find the terms of the settlement to be within the patent's exclusionary power, and reflect a reasonable implementation of the protections afforded by patent law. Valley Drug, 344 F.3d at 1312.