Federal Circuit Finds No Antitrust Liability for Hatch-Waxman Reverse Payment Settlements

In re Ciprofloxacin Hydrochloride Antitrust Litigation (Fed. Cir. 2008)

Bayer's patent on Cipro was challenged by Barr. However, the parties settled on the eve of trial. In all, Bayer paid $398 million to Barr to ensure that it didn't receive a judgment of invalidity or unenforceability. Subsequently, Bayer filed for reexam to ensure that there would not be a later inequitable conduct problem. When other companies later challenged the patent, it was repeatedly found valid.

To many, the Barr settlement looked like a way to prop-up the drug price at the expense of consumers, health insurance companies. Various groups filed suit – arguing violations of Sections 1 and 2 of the Sherman Act and violations of state antitrust and consumer protection laws.

On summary judgment, the Federal District Court in New York applied a rule of reason to find no antitrust violations as follows:

1. The relevant market is CIPRO and Bayer had market power in that market.
2. However, any "adverse effects on competition" due to the settlement could not create antitrust violations because the settlement was "within the exclusionary zone of the '444 patent."

In its holding, the district court rejected the notion that the "exclusionary zone" would be narrowed or altered by the potential invalidity of the patent. Furthermore, the district court held that unenforceability due to prosecution misconduct cannot be the subject to a Walker-Process antitrust violation – rather, the misconduct must be market-based misconduct. And, the Walker-Process argument failed because Bayer later successful litigation showed that its approach with Barr was not a 'sham.'

On appeal, the Federal Circuit affirmed the summary judgment in favor of the pharmaceutical companies.

Per Se vs Rule of Reason: Some activities are considered so pernicious that they will be considered per se violations of the Sherman Act. Most actions, however, are judged under the rule of reason to determine if the particular activities had a potentially pro competitive impact. Here, the federal circuit could find no basis for "confidently predict[ing]" that such reverse-payment settlement agreements were unlawful – and consequently should be judged under the rule of reason.

Patents and Antitrust: Patents lead to anticompetitive behavior – that is the nature of the right to exclude. A patentee will not have antitrust liability for activity within the "zone of exclusion" of its patent. On appeal, the Federal Circuit agreed that the reverse payment was within the zone of exclusion.

Reverse Payments: In patents, a reverse payment is a payment by a patentee to an accused infringer to end litigation and perhaps to keep the infringer off the market. Remember, typically, it is the patentee who is looking for damages, not seeking to pay. The plaintiffs argued that such a reverse payment could not be considered within the ordinary scope of patentee behavior. The appellate court disagreed, finding that through the payment, Bayer was protecting its market share in its patented product and thus was well within its rights.

Pursuant to the Agreements, the generic defendants agreed not to market a generic version of Cipro until the '444 patent expired and not to challenge the validity of the '444 patent, and Bayer agreed to make payments and optionally supply Cipro for resale. Thus, the essence of the Agreements was to exclude the defendants from profiting from the patented invention. This is well within Bayer's rights as the patentee. . . . A settlement is not unlawful if it serves to protect that to which the patent holder is legally entitled—a monopoly over the manufacture and distribution of the patented invention.

In addition, the court found that settlements are favored even when anti-competitive.

Furthermore, there is a long-standing policy in the law in favor of settlements, and this policy extends to patent infringement litigation. Settlement of patent claims by agreement between the parties—including exchange of consideration—rather than by litigation is not precluded by the Sherman Act even though it may have some adverse effects on competition.

And, settlements normally include a promise not to challenge validity – something allowed under antitrust laws:

Settlements in patent cases, however, frequently provide that the alleged infringer will not challenge the validity of the patent. Thus, the mere fact that the Agreements insulated Bayer from patent validity challenges by the generic defendants was not in itself an antitrust violation.

Affirmed

Notes

• On the panel were Circuit Judges Schall and Prost and Judge Ward from the Eastern District of Texas sitting by designation. The opinion was written by Judge Prost.
• Expect petitions for en banc hearing and certiorari. The reverse payment issue has been brewing for some time.
• During the post-9/11 anthrax scares, the Federal Government threatened to break the patent and begin manufacturing a generic version if sufficient supplies were not available. [Link]

Comments

[AllSeeingEye]

I would guess that as long as the consideration for reverse payments does not include resale price control, or the like or does not involve collusion with other suppliers, then it shouldn't run afoul of the Antitrust laws. Just my guess as a simple patent attorney. Would be nice to hear from some antitrust guys on this topic.

[AllSeeingEye]

Let me just qualify that as long as the consideration does not involve price manipulation or output restriction to artificially raise prices, then it should be OK. Again, just a guess.

[Alan McDonald]

Am I missing something here?

Do we really think the Supremes are going to permit a patent owner to pay off a competitor to not challenge the validity of a patent so it can keep its monopoly?

The same court that wants licensees to challenge licensed patents without fear because they are in the best position to do so?

[Andrew Dhuey]

I haven't studied the decision closely, but when you see language like "respectfully disagree" regarding another circuit's decision (6th), the odds of Supreme Court review go way up.

[John Roethel]

I agree with Alan. Remember Lear v. Adkins? Patents are supposed to be infected with the public interest which is why licensees can challege validity. It is clearly anticompetitive to the public to allow reverse payments.

Note to Alan: On the other hand, it's not the same Court anymore. When resale price maintenance is no longer a per se violation, then all the antitrust law we learned years ago is obsolete. Sad, very sad!

[Alan McDonald]

John,

I have to agree with you on the resale price case!