Reverse Payment Patent Settlement Could Get Second Look from Full Second Circuit

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

Federal Trade Commission Chairman Jon Leibowitz cited a decision handed down today by a three-judge panel of the U.S. Court of Appeals in New York City as “further evidence that courts are rethinking their approach to pay-for-delay settlements.”

Although the Second Circuit rejected an antitrust challenge to a settlement in a patent infringement lawsuit, it invited the plaintiffs to petition for rehearing en banc.

The court concluded that it was bound by an earlier Second Circuit circuit decision--Joblove v. Barr Labs., Inc. (In re Tamoxifen Citrate Antitrust Litig.), 2006-2 Trade Cases ¶75,382. In Tamoxifen, a divided court held that a reverse payment settlement of a patent lawsuit involving a drug used to treat breast cancer did not violate the antitrust laws.

In this latest decision, the court said: "we believe there are compelling reasons to revisit Tamoxifen with the benefit of the full Court’s consideration of the difficult questions at issue and the important interests at stake." The court referred to: "the 'exceptional importance' of the antitrust implications of reverse exclusionary payment settlements of patent infringement suits."

At issue in the current dispute are patent settlement agreements between Bayer AG/Bayer Corporation--owner of the patent for the active ingredient in the antibiotic ciprofloxacin hydrochloride (Cipro)--and potential generic manufacturers of Cipro. Direct purchasers of Cipro alleged that the settlements constituted market-sharing agreements in violation of the antitrust laws. They contended that Bayer paid generic drug companies to delay entry into the prescription drug market, thereby blocking the entry of low-cost generic versions of Cipro.

The court stated the question as: "whether patent settlements in which the generic firm agrees to delay entry into the market in exchange for payment fall within the scope of the patent holder’s property rights, or whether such settlements are properly characterized as illegal market-sharing agreements." The court noted that authorities are divided on the question.

Divided Authorities

Courts generally have held that the right to enter into reverse exclusionary payment agreements fall within the terms of the exclusionary grant conferred by the branded manufacturer’s patent, the court explained. On the other hand, the FTC and the current Department of Justice Antitrust Division contend that reverse exclusionary payment settlements violate antitrust law.

Tamoxifen Standard

Under Tamoxifen, a settlement agreement did not exceed the scope of the patent where (1) there was no restriction on marketing noninfringing products; (2) a generic version of the branded drug would necessarily infringe the branded firm’s patent; and (3) the agreement did not bar other generic manufacturers from challenging the patent. The complaining direct purchasers of Cipro did not argue that the patent infringement lawsuit was a sham or that the Cipro patent was procured by fraud, and they could not demonstrate that the settlement agreement exceeded the scope of the Cipro patent, the court explained.

FTC Chairman’s Statement

In a statement issued following the Second Circuit’s decision, FTC Chairman Leibowitz expressed hope that “the courts will put an end to these deals.” He stressed that, “[i]n the meantime, the FTC will continue to explain, in court and in the halls of Congress, why these sweetheart deals for drug companies are such a bad deal for American consumers and taxpayers.”

The April 29, 2010, decision, In re: Ciprofloxacin Hydrochloride Antitrust Litigation, Docket Nos. 05-2851-cv(L), 05-2852-cv(CON), appears at 2010-1 Trade Cases ¶76,989.