Tuesday, October 21, 2008

Drug Makers' Patent Settlement Pact Not Unreasonable Restraint

This posting was written by Jeffrey May, Editor of CCH Trade Regulation Reporter.

The U.S. Court of Appeals for the Federal Circuit has upheld a lower court's determination that a settlement agreement between a drug maker/patent holder and a generic drug manufacturer, which included reverse payments from the patent holder to the generic drug maker, was not an unreasonable restraint of trade in the market for ciprofloxacin.

Any anticompetitive effects caused by the settlement agreement between drug maker Bayer AG and the generic defendant Barr Laboratories, Inc. were within the exclusionary zone of the patent, the court explained.

Under the agreement, Barr agreed not to market its generic version of Cipro in the United States until after the relevant patent expired. In exchange, Bayer agreed to make a settlement payment and quarterly payments (referred to as "reverse payments" or "exclusion payments") to Barr, which totaled over $398 million.

Exclusion of Horizontal Competitor

According to complaining purchasers, the agreement allowed Bayer to exclude a horizontal competitor from the market not by enforcing its rights as a patentee, but instead by ceasing to enforce its rights and paying the competitor $398 million.

Complaining purchasers did not demonstrate that the agreement had an anticompetitive effect on the market beyond that permitted by the patent, according to the court. There was no legal basis for restricting the right of the patentee to choose its preferred means of enforcement.

Moreover, in the absence of evidence of fraud before the Patent and Trademark Office (PTO) or sham litigation, it was not necessary to consider the validity of the patent when analyzing a settlement agreement involving a reverse payment.

Rule of Reason vs. Per Se Analysis

The lower court properly applied rule of reason analysis in reviewing the agreement, according to the appellate court. The existence of reverse payments did not render the agreement a per se antitrust violation, in the court's view.

The appellate court explained that rule of reason analysis involved a three-step process: (1) the plaintiff had the initial burden of showing that the challenged action had an actual adverse effect on competition as a whole in the relevant market; (2) if the plaintiff succeeded, then the burden shifted to the defendant to establish the procompetitive redeeming virtues of the action; and (3) if the defendant carried this burden, then the plaintiff had to show that the same procompetitive effect could be achieved through an alternative means that was less restrictive of competition.

Since the complaining purchasers failed to meet their burden under the first step of the analysis, it was not necessary to consider the second or third steps of the analysis, in the court's view.

Greater Scrutiny Sought

The complaining purchasers contended that greater scrutiny was required in light of recent precedent. They argued that the district court’s treatment of the agreement was not in line with that of the other circuits, the FTC, or the Solicitor General.

They cited the Sixth Circuit’s 2003 decision,In re Cardizem CD Antitrust Litigation, (2003-2 CCH Trade Cases ¶74,059), which upheld a summary judgment ruling that a reverse payment agreement was per se illegal. They also argued that the Eleventh Circuit in Valley Drug Co. v. Geneva Pharms., Inc. (2003-2 CCH Trade Cases ¶74,222) provided a more extensive analytical framework within which to review the settlement agreements.

In addition, the Federal Trade Commission purportedly advocates a rule of reason inquiry focusing on the amount of the payment and several other factors. The Solicitor General, they alleged, had suggested that “the strength of the patent as it appeared at the time at which the parties settled” should be considered in the analysis.

State Law Claims

The court also rejected claims against the drug maker for unlawfully monopolizing the ciprofloxacin market in violation of state antitrust laws by obtaining a patent through fraud on the PTO and enforcing the patent through sham litigation. Those claims were preempted by federal patent law, the court ruled.
The October 15 decision—In re Ciprofloxacin Hydrochloride Antitrust Litigation—appears at 2008-2 Trade Cases ¶76,336.

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