In In re Terazosin Hydrochloride Antitrust Litig., 2005 U.S. Dist. LEXIS 108 (S.D. Fla. January 5, 2005), the Southern District of Florida held, on remand from the Eleventh Circuit, that “reverse” payments to settle patent infringement litigation under Hatch-Waxman were per se illegal.
Under the Hatch-Waxman Act, the FDA lists all approved new drugs in a publication called the “Orange Book.” The listing for each new drug includes any patents claiming the new drug owned by the new drug manufacturer. Hatch-Waxman further provides that after the FDA has approved a new drug, a generic drug company may seek approval to sell a generic version of the drug by filing and receiving approval of an Abbreviated New Drug Application (“ANDA”). In filing this application, the FDA requires that the generic manufacturer make one of four certifications. For purposes of this case, it is the Paragraph IV Certification that is relevant: the generic manufacturer certifies that the patents listed claiming the drug it seeks to manufacture are invalid or not infringed by the proposed generic drug. If the new drug manufacturer files a patent infringement suit against the generic producer within forty-five days of the generic producer’s Paragraph IV Certification, the FDA will automatically impose a stay on final FDA approval of the generic drug for thirty months or until there is a court decision on the validity of the patent, whichever is earlier.
In 1996, Abbott Laboratories (“Abbott”) listed the drug terazosin hydrochloride in the Orange Book as well as a patent that claimed it (the ‘207 patent). Geneva, a generic drug manufacturer, filed an ANDA seeking to market a generic version of this drug and made a Paragraph IV Certification with respect to the ‘207 patent. Abbott brought a patent infringement suit within forty-five days. While this suit was pending, Abbott and Geneva entered into an agreement in which Abbott agreed to pay Geneva a monthly fee if it would refrain from marketing generic terazosin hydrochloride until an appellate judgment on the validity of the ‘207 patent. On September 1, 1998, the district court ruled that the ‘207 patent was invalid because what it claimed was sold in the United States more than one year prior to the filing date of the patent application (the “on-sale bar” doctrine). Abbott appealed this holding to the Federal Circuit, which ultimately affirmed the district court’s invalidation of the ‘207 patent based on the “on-sale bar” doctrine. Antitrust plaintiffs challenged the agreement between Abbott and Geneva for Geneva not to market generic terazosin hydrochloride until after the Federal Court ruled on the patent as a violation of Section One of the Sherman Act.
The Southern District of Florida originally characterized the challenged agreement as a market allocation agreement between competitors that allocated the entire market to Abbott, who then shared its monopoly profits with Geneva and, as such, per se illegal. In re Terazosin Hydrochloride Antitrust Litig., 164 F.Supp.2d 1340 (S.D. Fla. 2000). Reviewing this holding on appeal, the Eleventh Circuit found that this characterization of the agreement was “premature.” Valley Drug Co. v. Geneva Pharms. Inc., 344 F.3d 1294 (11th Cir. 2003) The Eleventh Circuit noted that Abbott was in possession of a patent that lawfully permitted it to exclude others and that it was possible that the exclusionary effect of the Abbott-Geneva agreement “may have been no broader than the potential exclusionary effect of the ‘207 patent.” Id. The Eleventh Circuit instructed that the district court should, on remand, find whether the Abbott-Geneva agreement had exclusionary effects beyond those of the ‘207 patent before subjecting the agreement to traditional antitrust analysis.
In In re Terazosin Hydrochloride Antitrust Litig., the Southern District of Florida held, on remand from the Eleventh Circuit, that the exclusionary effects of the Abbott-Geneva agreement did indeed exceed the exclusionary potential of the ‘207 patent and that the agreement was illegal per se under Section One. The court adopted a three-part test to assess whether the exclusionary effect of the agreement exceeded the exclusionary effect of the relevant patent: (1) the court would first determine the extent of the protections afforded to Abbott by its patent and the relevant law; (2) the court would then evaluate the likely outcomes of the ‘207 patent litigation, specifically the likelihood of Abbott obtaining injunctive relief to keep Geneva off the market while Abbott appealed the district court’s finding of invalidity, judged as of the time the Abbott-Geneva agreement was made; and (3) the court would determine whether the agreement represented a reasonable implementation of the protections to which Abbott was entitled by holding the ‘207 patent, in light of the applicable law, the pending litigation, and the general policy justifications supporting settlements of intellectual property disputes.
With respect to the scope of the protections of the patent, the defendants argued that the ‘207 patent did not expire until 2014 and that the proper characterization of the extent of the protections afforded to Abbott, in light of the presumption of validity accorded to patents, was that Abbott could totally exclude generic competition until 2014. However, remarking that Geneva presented a substantial challenge to the validity of the ‘207 patent based on solid Federal Circuit precedent, the court found that the chance that the ‘207 patent would be held invalid was high at the time the challenged agreement was made and that this probability must be taken into account in assessing the protections of the patent. The court thus held that the expiration date of the patent was inconclusive as to the scope of the protections of the patent.
The court then considered the likely outcome of the ‘207 patent litigation. The defendants argued that Abbott could have obtained a preliminary injunction to keep Geneva’s product off the market until after the Federal Circuit issued a final ruling on the ‘207 patent’s validity. The proper determination to be made here, according to the court, was whether it was “more probable than not” that Abbott would be entitled to a preliminary injunction. The court noted that a party must demonstrate a likelihood of success on the merits in order to obtain a preliminary injunction. As such, the court proceeded to assess the likelihood of Abbott prevailing in its patent infringement suit against Geneva as of the time of the agreement, which was made two years into the patent infringement litigation and approximately five months before the district court held the ‘207 patent invalid. At this point in time, Geneva’s motion for summary judgment had been fully briefed for almost one year. In that motion, Geneva asserted that what was claimed by the ‘207 patent had been sold more than one year before the filing of the ‘207 patent and that the ‘207 patent was therefore invalid under the “on-sale bar” doctrine. The court found that Geneva effectively demonstrated that there were at least three sales of the anhydrous terazosin hydrochloride claimed by the ‘207 patent more than a year before the filing of the patent and that Abbott’s arguments in defense were unconvincing and unlikely to succeed. Noting that an inability to demonstrate a likelihood of success on the merits is fatal to a request for a preliminary injunction, the court held that Abbott would likely not have obtained one. The court also observed that its conclusion that Abbott would not be able to demonstrate a likelihood of success on the merits for purposes of a preliminary injunction necessarily meant that the likely ultimate outcome of the patent litigation would be that the ‘207 patent would be found invalid.
The court then considered whether the agreement was a reasonable implementation of the patent’s protections and found that it was not. The court noted that the settlement did not actually settle any litigation at all; rather, by keeping Geneva off the market until a final appellate decision on the patent, the agreement merely resolved a hypothetical preliminary injunction motion that Abbott never actually filed and actually prolonged the patent dispute to Abbott’s advantage by delaying generic entry. The court was also unconvinced by defendant’s argument that the agreement was reasonable in light of the fact that the Federal Circuit had a high reversal rate in patent cases. The court emphasized that it found that the facts of this case indicated that there was a high likelihood that the ‘207 patent would be ruled invalid and the reversal rate for district court patent decisions generally was therefore irrelevant.
Thus, because the ‘207 patent was of doubtful validity, Abbott would likely not have been able to obtain a preliminary injunction against Geneva preventing it from marketing its product, and the Abbott-Geneva agreement was not a reasonable implementation of the protections of the likely invalid patent, the court concluded that the challenged agreement exceeded the exclusionary scope of the ‘207 patent. Proceeding in accordance with the Eleventh Circuit’s instructions, the court then subjected the agreement to traditional antitrust analysis.
Noting that Geneva and Abbott were actual or potential competitors and that the agreement essentially provided that Abbott would pay Geneva to refrain from competing with Abbott until the Federal Circuit’s decision on the ‘207 patent, the court reaffirmed its prior characterization of the agreement as a horizontal agreement between competitors to eliminate competition. Since such horizontal restraints are per se illegal, the court held, the Abbott-Geneva agreement must be considered per se illegal.
To avoid per se treatment, the defendants argued that the challenged provision was reasonably ancillary to the following pro-competitive qualities of the agreement: (1) the agreement permitted Abbott to continue to exploit their patent and minimize the uncertainty regarding the outcome of the patent litigation until the Federal Circuit made a final ruling; (2) the agreement allowed Geneva to enter the market long before the expiration of the ‘207 patent in 2014; (3) the agreement preserved Geneva’s opportunity to eliminate the ‘207 patent altogether; and (4) the agreement was consistent with the policies underlying the Hatch-Waxman regulatory regime. Observing that once a naked restraint of trade is found, pro-competitive justifications should not be considered, the court nevertheless addressed these points in summary fashion as “part of the threshold inquiry of whether the Agreement constitutes a naked restraint of trade.”
The court disposed of the first proffered pro-competitive quality of the agreement by noting that the agreement permitted Abbott to exploit the ‘207 patent regardless of its validity or Abbott’s likelihood of succeeding on the merits. This feature of the agreement was thus clearly not pro-competitive. The court was unconvinced by the second proffered justification because, due to the high chance that the patent would be ruled invalid, Abbott’s right to enforce the patent until 2014 was dubious as of the time the agreement was made. The court rejected the third proffered justification because the defendants did not show why the agreement was necessary to preserve Geneva’s preexisting right to challenge Abbott’s patent. Finally, the court rejected the fourth proffered justification by observing that the Hatch-Waxman Act does not evince any intent to delay generic entry beyond thirty months after the Paragraph IV certification; indeed, Hatch-Waxman provides for a stay of FDA approval until the earlier of thirty months after the certification and a court decision on the patent at issue. Thus, the Southern District of Florida remained firmly committed to its conclusion that the “reverse” payments from patentee Abbott to generic manufacturer Geneva to stay off the market until a Federal Circuit ruling on the patent infringement litigation between them was per se illegal.