As summarized in the April, 2005 edition of the Antitrust Law Blog, in Schering-Plough Corp. v. FTC, 402 F.3d 1056 (11th Cir. 2005), the Eleventh Circuit held that a reverse payment settlement of patent infringement suit was lawful under the antitrust laws.  Reverse payment settlements are those in which the plaintiff patentee pays the alleged infringer to stay off the market for some period of time and commonly occur in the context of the Hatch-Waxman Act.  In so ruling, the Eleventh Circuit reversed a unanimous decision by the FTC.  The basic rationale of the Eleventh Circuit decision was that Schering’s payments were bona fide consideration for drug licenses, not just payments to keep generics off the market.  Moreover, since the entry date was still prior to the expiration of the patent and otherwise within the scope of the patent, the court also held that the settlements were within the patent’s lawful exclusionary power and therefore not anticompetitive. 

Not surprisingly, in August 2005, the FTC filed a petition for a writ of certiorari asking the Supreme Court to review the Eleventh Circuit’s ruling.  The Supreme Court requested the views of the Solicitor General.  This led to an unusual and remarkable development. The SG filed a brief joined by the DOJ Antitrust Division ("DOJ") in May 2006 in which it opposed the FTC’s cert petition and revealed significant differences between the enforcement agencies’ views on how reverse payment patent settlements should be treated under the antitrust laws.  This in turn led to a reply brief from the FTC.  Although the court denied cert on June 26, 2006, the two briefs shed light on how these agencies will approach enforcement actions in the future with respect to these reverse payment agreements.  


To be sure, the FTC and DOJ both agree that reverse payment patent settlements may constitute unlawful collusive restrictions on competition that harm consumers.  The agencies also agree that reverse payment settlements in the Hatch-Waxman context are particularly worrisome because of the provision in that law that grants the first generic ANDA-filer a 180-day exclusive marketing period that does not commence until the generic enters the market or the relevant patent is held invalid or not infringed.  This provision creates a strong incentive for the pioneer to pay the first generic ANDA-filer to stay off the market, thereby postponing the commencement of the 180-day exclusivity period and keeping other generics out of the market indefinitely.   


The DOJ, however, argued in its brief that the FTC is unduly suspect of all reverse payment settlements.  According to the DOJ, the public policy favoring settlement of litigation, the statutory right of patentees to exclude competition with in the scope of their patents, the fact that the Hatch-Waxman regime enables prospective generic manufacturers to in effect force patent holders to initiate infringement litigation before any infringement has occurred, and the consequent increase in the risks of litigation for the patent holder, indicate that some reverse payment settlements are reasonable.  Thus, the DOJ argued, the proper standard for evaluating such settlements should include an objective assessment of the merits of the patent claims, viewed ex ante, and other relevant factors surrounding the parties’ negotiations. 


By contrast, in the words of the DOJ, the FTC approach "apparently rejects any direct effort to evaluate the likelihood that the patent holder would prevail on its claim" and instead assesses the "expected value" of the patent holder’s lawsuit against the generic in evaluating the settlement and appears to hold that a reverse payment, in the absence of a specific alternative explanation, necessarily renders the settlement anticompetitive because the generic may have entered earlier in the absence of the payment.  The DOJ criticized this approach for placing undue weight on the settling parties’ subjective views of the strength of the claims as reflected in the settlement and evincing too high a degree of suspicion of reverse payments. 


In any event, the DOJ counseled the Supreme Court to deny cert because this particular case was not the appropriate vehicle for determining the proper antitrust treatment of reverse payment patent settlements.  The DOJ noted that the Eleventh Circuit’s finding that the reverse payments to Upsher were bona fide consideration for drug licenses foreclosed antitrust challenge to this settlement even under the FTC’s theory.  As such, the DOJ argued, the Supreme Court would not even reach the antitrust issues in this case unless it departed from its normal practice of allowing the courts of appeal to assess whether substantial evidence supported agency findings and itself reviewed a voluminous and complex record to determine whether substantial evidence supported the Commission’s factual findings.  Further, the evidence concerning the parties’ settlement was limited and poorly developed.  The circumstances surrounding the Schering-ESI settlement were also unusual in that it was negotiated under the active supervision of a magistrate who exerted "unseemly" pressure on Schering and ESI to settle.  These unique circumstances make the Schering-ESI settlement an inappropriate case on which to base the general law of reverse payment settlements. 


The DOJ also argued that cert should be denied because the Eleventh Circuit did not actually address the FTC’s proposed antitrust theory.  Instead of addressing the FTC’s theory that a patent holder may lawfully exclude infringing products only to the extent of the "expected value" of the patent holder’s lawsuit, the Eleventh Circuit understood the FTC’s position to be that but for the reverse payments, the parties would have settled on earlier entry dates and found no evidence to support that contention.  Noting that the Second Circuit may address the "expected value" theory in an upcoming case, In re Ciprofloxacin Hydrochloride Antitrust Litigation, the DOJ contended that this weighed against review in this case. 


Finally, the DOJ argued that there was no circuit split justifying review in this case.  The Sixth Circuit’s opinion in In re Cardizem CD Antitrust Litigation, 332 F.3d 896 (6th Cir. 2003) ("Cardizem"), addressed reverse payments to exclude drugs that were not within the scope of the patent alleged to be infringed.  Thus, the per se condemnation of the settlement in that case is not inconsistent with the Eleventh Circuit’s approval of Schering’s settlements involving both drugs and entry dates within the scope of Schering’s patent.  The DOJ also characterized the Second Circuit’s decision in In re Tamoxifen Citrate Antitrust Litigation, 429 F.3d 370 (2nd Cir. 2005), issued after the FTC filed its cert petition, as consistent with the Eleventh Circuit’s decision.  In that case, the Second Circuit held that reverse payment patent settlements did not constitute a per se antitrust violation and also explicitly approved of the Eleventh Circuit’s focus on whether the exclusionary effects of the agreement exceeded the exclusionary scope of the patent.


The FTC’s Reply Brief both critiqued the DOJ’s proposed approach and responded to the DOJ’s arguments against cert.  Regarding the DOJ’s contention that the antitrust evaluation of a reverse payment settlement should include an evaluation of the patent merits, the FTC argued that a significant drawback of that position is that "parties contemplating settlement will not know, at the time of settlement, whether particular settlement terms will appear unreasonable to a future antitrust tribunal."  Further, and more fundamentally in the view of the FTC, "such an after-the-fact assessment is simply unnecessary where, as here, the contemporaneous actions of knowledgeable economic actors – particularly the generic firms’ refusal to defer entry absent substantial payments by the patent-holder – provide a more reliable indication of the strength of the patent, and of [the agreement’s] exclusionary nature."       


Regarding cert, the FTC maintained that the DOJ’s proffered reasons for denying review were unpersuasive.  According to the FTC, reviewing the Commission’s factual findings would not be an overly onerous task because they were well grounded in the record.  Further, the allegedly unique circumstances of the ESI settlement do not weigh against cert because the Eleventh Circuit’s broad ruling applies to all reverse payment settlements.  Moreover, according the FTC, the Sixth Circuit opinion in Cardizem does indeed conflict with the ruling in Schering-Plough.  As the FTC put it, the Eleventh Circuit condoned reverse payment settlements as long as the exclusion is within the nominal scope of a non-sham patent claim whereas the Sixth Circuit recognized "the potential of such agreements ‘to bolster the patent’s effectiveness’ by ‘paying the only potential competitor…to stay out of the market.’"  Finally, the FTC implored the Supreme Court to grant review because, it contended, the economic impact of the Eleventh Circuit’s ruling on consumers of prescription drugs is "staggering" and warned that the ruling "’opened a Pandora’s box’ of anticompetitive settlements between brands and generic competitors."  

On June 26th, the Supreme Court denied cert.  Nonetheless, the case is noteworthy in that it revealed a conflict between the two agencies on a very significant and timely enforcement issue.  Such a public fissure between the agencies is exceedingly rare.  The Supreme Court, however, chose not to resolve this conflict at this time.  Although the Eleventh Circuit decision currently stands, the future of these controversial agreements is unclear.  In response to the cert denial, Senators Herb Kohl (D-WI), Patrick Leahy (D-VT), Chuck Grassley (R-IA), and Charles Schumer (D-NY) introduced legislation to explicitly prohibit branded drug manufacturers from paying generics to stay off the market.


Authored by:

Anik Banerjee