Hatch-Waxman Reverse Payment Settlement Is Lawful Under Antitrust Laws Since Anticompetitive Effects Were Within the Exclusionary Zone of the Patent
October 15, 2008
Last Month at the Federal Circuit - November 2008
Judges: Schall, Prost (author), Ward (District Judge sitting by designation)
[Appealed from: E.D.N.Y., Judge Trager]
In In re Ciprofloxacin Hydrochloride Antitrust Litigation, No. 08-1097 (Fed. Cir. Oct. 15, 2008), the Federal Circuit affirmed the district court’s grant of SJ, holding that reverse payment settlement agreements were not in violation of section 1 of the Sherman Act. The Court also affirmed the district court’s dismissal of state antitrust claims.
Bayer AG and Bayer Corporation (collectively “Bayer”) own U.S. Patent No. 4,670,444 (“the ’444 patent”), directed to ciprofloxacin hydrochloride, the active ingredient in Cipro® (“Cipro”). The FDA approved marketing Cipro in October 1987 and granted an additional six-month period of marketing exclusivity after the ’444 patent expired on December 9, 2003. In October 1991, Barr Laboratories, Inc. (“Barr”) filed an ANDA containing a Paragraph IV certification asserting that the ’444 patent was invalid and unenforceable. In January 1992, Bayer sued Barr for patent infringement. Before trial, the parties settled their suit. Under the settlement agreement, Barr agreed not to challenge the validity or enforceability of the ’444 patent in exchange for a settlement payment. In addition, Bayer entered into a supply agreement with Barr where Bayer agreed to either supply Barr with Cipro for sale or make quarterly payments (referred to as reverse or exclusion payments) to Barr until December 31, 2003, in return for Barr agreeing not to manufacture, or have manufactured, a generic version of Cipro in the United States.
In 2000 and 2001, direct and indirect purchasers of Cipro and advocacy groups (collectively “purchasers”) filed several antitrust actions in federal courts against Bayer, Barr, and the other generic manufacturer parties to the settlement agreements, challenging the agreements. The suits were consolidated in the Eastern District of New York. The purchasers alleged that the settlement agreements constituted an illegal market allocation in violation of sections 1 and 2 of the Sherman Act and various state antitrust and consumer protection laws. The district court granted Bayer and the generic manufacturers’ motion for SJ, finding that the agreements did not have anticompetitive effects under section 1 of the Sherman Act. The district court also granted Bayer’s motion to dismiss the state law antitrust claims, finding the claims preempted by federal patent law.
On appeal, the Court affirmed the district court’s finding that the agreements were not an unreasonable restraint on competition in violation of section 1 of the Sherman Act. The Court rejected the purchasers’ argument that the district court should have concluded that the agreements were per se unlawful or should have applied a proper rule of reason analysis.
The Court first found the agreements not to be per se unlawful since there was no basis for the district court to confidently predict that the agreements at issue would be found to be unlawful under a rule of reason analysis.
Next, applying the law of the Second Circuit, the Court stated that the starting point in a rule of reason analysis is to define the relevant market and to determine whether Bayer possesses market power in the relevant market. The Court held that the district court undertook a full rule of reason analysis. The district court first determined that the relevant market is ciprofloxacin and that Bayer had market power within the market. The district court then determined that there was no evidence that the agreements created a bottleneck on challenges to the ’444 patent or otherwise restrained competition outside the exclusionary zone of the patent. The district court concluded that the purchasers had failed to demonstrate that the agreements had an anticompetitive effect on the market for ciprofloxacin beyond that permitted by the ’444 patent, thus failing to meet their burden under the first step of the rule of reason analysis.
Addressing the purchasers’ argument that the district court erred in concluding the agreementswere within the exclusionary zone of the ’444 patent and in essence per se legal, the Court concluded that the district court did not find the agreements to be per se legal, but rather simply recognized that any adverse anticompetitive effects within the scope of the ’444 patent could not be redressed by antitrust law. The Court noted that a patent is an exception to the general rule against monopolies and to the right of access to a free and open market. The Court held that the essence of the agreements was to exclude Barr from profiting from the patented invention, a right within Bayer’s rights as a patentee. Noting the long-standing policy in the law in favor of settlements, the Court stated that “[s]ettlement 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.” Slip op. at 14.
The Court also held that provisions not to challenge the validity of the ’444 patent did not render the agreements violative of the antitrust laws. Since settlements in patent cases frequently provide that the alleged infringer will not challenge the validity of the patent, the mere fact that the agreements insulated Bayer from patent validity challenges by Barr was not in itself an antitrust violation. The Court noted that four other generic manufacturers filed Paragraph IV ANDAs and initiated challenges to the validity of the ’444 patent.
Next, the Court addressed the purchasers’ argument that the Court should adopt the legal standards applied by other regional circuits and government agencies in evaluating agreements involving exclusion payments in the context of the Hatch-Waxman Act. The purchasers asserted that the other legal standards provide for greater antitrust scrutiny of agreements than the standard adopted by the district court. The Court found the district court’s analysis to be sound since the district court considered whether there was evidence of sham litigation or fraud before the PTO and whether any anticompetitive effects of the agreements were outside the exclusionary zone of the ’444 patent. The Court distinguished the Sixth Circuit’s decision in In re Cardizem CD Antitrust Litigation, 332 F.3d 896 (6th Cir. 2003), wherein the Sixth Circuit found a reverse payment agreement to be a per se violation of antitrust laws. The Court concluded that the In re Cardizem agreement clearly had anticompetitive effects outside the exclusion zone of the patent. There, in addition to a reverse payment, the settlement agreement included an agreement by the generic manufacturer to not relinquish its 180-day exclusivity period, thereby delaying the entry of other generic manufacturers. The agreement also required that the generic manufacturer would not market noninfringing versions of the generic drug.
Reviewing the analytical approach followed by the Second and Eleventh Circuits, the Court concluded that in cases such as this, wherein all anticompetitive effects of the settlement agreement are within the exclusionary power of the patent, the outcome is the same whether the court begins its analysis under antitrust law by applying a rule of reason approach to evaluate the anticompetitive effects or under patent law by analyzing the right to exclude afforded by the patent. “The essence of the inquiry is whether the agreements restrict competition beyond the exclusionary zone of the patent.” Slip op. at 19. The Court further agreed with the Second and Eleventh Circuits and the district court that, in the absence of evidence of fraud before the PTO or sham litigation, the court need not consider the validity of the patent in the antitrust analysis. The Court rejected the FTC and Solicitor General’s arguments that an evaluation of the validity of the patent is necessary in an antitrust analysis. The Court noted that patents hold a statutory presumption of validity. Thus, the Court held that the district court correctly concluded that there is no legal basis for restricting the right of a patentee to choose its preferred means of enforcement and no support for the notion that the Hatch-Waxman Act was intended to thwart settlements.
The Court next rejected the purchasers’ assertion that the district court erred in finding that other generic companies could still challenge the ’444 patent and their incentive to challenge the patent would grow with the chance that the patent would be held invalid, rendering any anticompetitive effects of the agreements short-lived. According to the purchasers, the incentives to initiate and vigorously challenge a patent under the Hatch-Waxman Act are significantly reduced because of the effort, time, and expense of filing a Paragraph IV ANDA. The Court noted that while the Hatch-Waxman Act creates certain burdens for generic manufacturers, it also provides significant benefits. Thus, the Court held that the district court reasonably concluded that the incentive to mount a challenge would increase with the chance that the ’444 patent would be held invalid. The Court also held that the district court did not err in not considering evidence showing that the agreements preserved Barr’s claim to the 180-day exclusivity period since that theory had already been addressed in the first district court opinion denying the purchasers’ motions for partial SJ.
Finally, the Court affirmed the district court’s dismissal of the purchasers’ state antitrust claims. The purchasers argued that federal patent law does not preempt state law monopolization claims when the patent was procured by fraud. The Court noted that the record is not clear whether the district court considered case law cited by the purchasers concerning their preemption argument, but since the Court agreed with the district court’s determination that no fraud had occurred, it held that the district court’s dismissal of the state antitrust claims was not erroneous.