Amicus Curiae Brief — Illinois Tool Works Inc. v. Independent Ink, Inc.

——

~~ Suprecne Court, U.S.

FILSD

SEP, 28 ams.

Or THE CLERK

No. 04-1329 a

IN THE

SUPREME COURT OF THE UNITED STATES

ILLINOIS TOOL WORKS INC., ET AL.,

Petitioners,

Vv. :

INDEPENDENT INK, INC.,

Respondent.

On Writ of Certiorari To The

United States Court of Appeais

For the Federal Circuit

BRIEF OF AARP, THE PUBLIC PATENT

FOUNDATION AND CONSUMERS UNION AS

AMICI CURIAE IN SUPPORT OF RESPONDENT

DANIEL B. RAVICHER

PUBLIC PATENT FOUNDATION

1375 Broadway, Suite 600

_-New-York, NY 10018

(212) 545-5337

Counsel for Amicus Curiae

Public Patent Foundation

ROBERT SCHNEIDEX

1300

Austin, TX 78701

(914) 378-2928

Counsel for Amicus Curiae

Consumers Union

September 28, 2005

BARBARA JONES

Counsel of Record

AARP Foundation Litigation

200 So. Los Robles, Suite 400

Pasadena, CA 91101

(626) 585-2628

BRUCE VIGNERY

AARP Foundation Litigation

MICHAEL SCHUSTER

AARP

601 E Street, N.W

Washington, DC 20049

(202) 434-2060

Counsel for Ai.zicus Curiae AARP

QUESTION PRESENTED

Whether, in an action arising under Section 1 of the Sherman

Act, 15 U.S.C. § 1, alleging unlawful tying of a patent license

to the purchase of a nonpatented good, market power in the

tying product market should be presumed from the tying party’s

patent over the tying product.

TABLE OF CONTENTS

Page

QUESTION PRESENTED ..n.cssccscccsssccscccsccsssncnsssccscecsescessee

TABLE OF AUTHORITIES ....-cccccssscccccccscccsssssesesssssssssssssen iii

INTEREST OF AMICI CURIAE coccsssssscssesessssssssssssssssesesssssse 1

SUMMARY OF ARGUMENT .cccccccccscssssssssssssessssssssssssssesve 4

me Se 5

lL THE PHARMACEUTICAL INDUSTRY

ILLUSTRATES HOW PATENTS

FREQUENTLY CONFER MARKET POWER....... 5

A. Patents Confer Market Power When The

Scope Of The Patent Defines The Scope

Of The Relevant Market .............ccsssssseeeseeees 7

B. Patents Routinely Confer Market Power

In The Pharmaceutical Industry ..................... 8

od The Market Power Conferred By Patents

in the Pharmaceutical Industry Has

I icicianesisinitainciacieitnigehastnthabibirpunsennainnes 12

f. ©THE PHARMACEUTICAL INDUSTRY IS

RELEVANT TO THIS CASE BECAUSE OF

THE NEW TREND IN PHARMACEUTICAL

lM. MAINTAINING THE PRESUMPTION WILL

NOT LEAD TO AN OUTBREAK OF

LITIGATION.................. -hcesiscinsiaitneiiabipaerieseneypleanineaiae 20

ICRI ES cccntticceserspieserseventeenesiecvinssaccinsaivimnniseneiacsiatiog 20

TABLE OF AUTHORITIES

CASES

Abbott Labs. & Geneva Pharm., Inc.,

F.T.C. Docket Nos. C-3945, 3946

(May 22, 2000), http://www. ftc.gov/os/2000/05/

SOC RIIR 0.ncvencesessevecchevsewwecnesornsevenees

Biovail Corp., F.T.C. Docket No.C-4060 (Oct. 2, 2002),

http://www. ftc.gov/os/2002/10/bioavailcmp.pdf........ 9

Brown Shoe Co. v. United States,

Pe ais Ge CIID derctnirnevustnnrinnsseenemiinsiionaie

Doddridge v. Thompson,

22 U.S. (9 Wheat.) 469 (1824) ..........c.cceceeeeeees

Eastman Kodak Co. v. Image Technical Services,

Fe Ps SSO CRS ORD cinieperiserstiiisnintinnereninmnmvintines

Hoechst Marion Roussel, Inc. & Andrx Corp.,

F.T.C. Docket No. 9293 (Mar. 16, 2000),

http://www. ftc.gov/os/2000/03/

hoechstandrx ycomplaint.htm..............c0eeceeeeees

In re Cardizem CD Antitrust Litig., 332 F.3d 896

(6" Cir. 2003), cert denied sub nom Andrx

Pharma., Inc. v. Kroger Co., No. 03-779

SEDGE: Tie, ae rccenerninpetinecsnennenipenaseinnivenstrtnnue

Indep. Ink, Inc. v. Ill. Tool Works, Inc.,

396 F.3d 1342 (Fed. Cir. 2005) ...........:ccceceeeee

iv

Jefferson Parish Hosp. Dist. No. 2 v. Hyde,

SEBS. B.IGOGD cecreceieeessreserinminineestinnnntinntaniatia

Merck KgaaA v. Integra Lifesciences I, Ltd.,

~U.S._, 125 S. Ct. 2372 (20085) ...............-0e00200

Northern Pacific Railway Co. v. United States,

FSS US. 1, 6 CIIGE) vevecvrcessovssnensitevinesnineninviotentes

Sandoz Pharmaceuticals .Corp.,

115 F.T.C. 625 (1992)(No. C-3385)

(consent order), http://www.ftc.gov/bc/

rxupdateO21 108.Htm......sssssssscsscssscsssesseseeessecesee

Schering-Plough v. FTC,

402 F.3d 1056 (11th Cir. 2005) petition for

cert. filed (Aug. 29, 2005)(No. 05-273) ........00+

SmithKline Corp. v. Eli Lilly & Co.,

575 F.2d 1056 (3d Cir. 1978) ...........ccccesseeesenseees

Standard Oil Co. v. United States,

FST UB. BOS CIPS cceveecersensneccenpenonserseniioonenbacton

United States v. E.I. Du Pont de Nemours & Co.,

SSE U.S. STF. CIDSG) wevcesecovsnccsoevsvwssussetoosintosonntncs

United States v. Grinnell Corp.,

FO4 U.S. SES (EDGES) cocescorssoresoencovesewsessencepensesvsnse

Valley Drug Co., v. Geneva Pharms., Inc.,

344 F.3d 1294 (11th Cir. 2003) cert. sub nom

Vv

Walgreen Co. v. Abbot Labs., No. 03-1178

STATUTES

Drug Price Competition and Patent Term Restoration

Act of 1984 (Hatch-Waxman Act) Pub. L. No. 98-

417, 98 Stat. 1585 (1984) (codified at 15 U.S.C.

§§ 68b-68c, 70b; 21 U.S.C. §§ 301 note, 355,

360cc; 28 U.S.C. § 2201; 35 U.S.C. § 156, 271,

A SERRE ne ae eT OEE 13

Patent Misuse Reform Act,

BP re Oe I crecncccunsensnceveresnscevssessewseences 5

a Un ED casictinhthnigeetdocmerseninntaiesntescmremensrscccsneens 6

RULES

ID SEED 00 oP acpupasevansescepseanaseeseovmarscoeesscenesacsscesee |

Supreme Court Rule 37.6...........-..+-: i ihehaiddeescietnintmntenendscnseccses 1

MISCELLANEOUS

Marcia Angell, The Pharmaceutical Industry: To Whom

is It Accountable ?, 342 New Eng J. Med. 1902

a sichinithdasob cheek leiah tl aarintteigndhetndaclenedscsemaaueravennteenes 19

Jerry Avorn, Torcetrapib and Atorvastatin - Should

Marketing Drive the Research Agenda? 352 New

Eng. J. Med. 2573 (June 23, 2005)............ccccceeecereeees 17

vi

John H. Barton, Reforming the Patent System, 287 Science

1933-1934 (March 17, 2000), http://www.biotech-

info.net/reforming. htiml ...................sccccseeeeseeeeeeeeeeeeees 6

Andy Coghlan, Blockbuster Challenge, New Scientist

Magazine (June 12, 2004),

http://www.sciencejobs.com/insider/article.action?

article.id=insider 1 05 &focusld=uk...................0cee00e0 17

Cong. Budget Office, How Increased Competition from

Generic Drugs Has Affected Prices and Returns

in the Pharmaceutical Industry (July 1, 1998),

http://www.cbo.gov/ftpdocs/6xx/doc655/

ES REISER EN EEE 13, 14

Federal Trade Commission, To Promote Innovation:

The Proper Balance of Competition and Patent

Law and Policy ch. 3, at 4 (Oct. 2003),

available at http://www. .ftc.gov/os/2003/10/

SRO URIERIIIE INES crore sesscssctysnscusiecentnnnennensesnenceses 10, 15

FTC Antitrust Actions in Pharmaceutical Services and

Products, Bureau of Competition FTC

(Nov. 8, 2002), http://www.ftc.gov/bc/

SUITES BI cccncserccctentnccemmmocsereptocenneesnanencene 15

Vanessa Fuhrmans, Abbott Lifts Price of Norvir 400%:

Cost of Longtime HIV Drug Jumps, Reigniting

Debate Over Drug Pricing Policies, Wall St. J.

(Dec. 19, 2003), http://www.aegis.com/news/wsj/

EE CO CD inicciinatenienntihadiintntenmninpintinenass 19

Daniel J. Gifford, How Do The Social Benefits and Costs

of the Patent System Stack Up in Pharmaceuticals ?,

12 J. Intell. Prop. L. 75 (Fall 2004) 2000.00... ccccecseeeeeee 13

vii

Lara J. Glasgow, Stretching the Limits of Intellectual

Property Rights: Has the Pharmaceutical Industry

Gone Too Far? 41 IDEA 227 (2001) .............cccecceees 16

David Gross et al., Trends in Manufacturer Prices of Brand

Name Prescription Drugs Used by Older Americans

— First Quarter 2005 Update, AARP Public Policy

Institute (July 2005), http://assets.aarp.org/

rgcenter/health/dd122_drugprices.pdf ...............--+--+-+- 2

Michie I. Hunt, Prescription Drugs and Intellectual

Property Protection: Finding the Right Balance

Between Access and Innovation, Nat’! Inst. for Health

Care Mgmt. (Aug. 2000) http://www.nihcm.org/

I BE ccncncessecsnecrnansectnsmnemennnanmsennemmeanssinesees 12

Johnson & Johnson, Quarterly Report (Form 10-Q) (July 3,

2005), http://www.sec.gov/Archives/edgar/

data/200406/000020040605000 1 06/

Timothy J. Muris, Chairman, FTC, Everything Old is New

Again: Health Care and Competition in the 21st

Century, 7th Annual Competition in Health Care

Forum (Nov. 7, 2002), http://www.ftc.gov/speeches/

muris/murishealthcarespeech021 1 .pdf ..............000-+++ 15

Kevin Outterson, Pharmaceutical Arbitrage: Balancing

Access and Innovation in International Prescription

Drug Markets, 5 Yale J. Health Pol’y, L. & Ethics

EIT ccseccrtciintnnndndainndinteabntieimniemistnnndasinndieeapeians 13

viii

Pfizer's Caduet Debuts Nationwide to Treat High Blood

Pressure and High Cholesterol, Pfizer News

Release (June 23, 2004), http://www.pfizer.com/

Pfizer Inc., Annual Report (Form 10-K) (Dec. 31, 2004),

http://www.sec.gov/Archives/edgar/data/78003/000

095012305002379/y06 1 24e 1Ovk. htm ..0...... ee eeeeeee 1]

Pfizer Inc., Quarterly Report (Form 10-Q) (July 3, 2005),

http://www.sec.gov/archives/edgar/data/78003/0000

078003050002 1 3/q2-OSpfe I htm ...............eeceeeeceseee 11

Schering-Plough Corp., Annual Report (Form 10-K)

(Dec. 31, 2004), http://www.sec.gov/Archives/

edgar/data/3 10158/000095012305002785/

I accctercmnstnitintapeiniessinanpenmecmemannmte 11

Aaron Smith, Vytorin outsells rival cholesterol drugs,

CNN Money (July 26, 2005), http://money.cnn/

2005/07/26/news/fortuneSOO/vytoriny .............000040 18

The Prescription Access Litigation Project, PAL

Challenges Abbott on 400% AIDS-Drug Price

Hike, 9 PAL News (Summer 2004),

http: ihwww. communitycatalyst.org/resource.php?

Young & Ostrow, Pfizer's strategy criticized - New

Cholesterol Drug Bound to Old, Detroit Free Press

(June 23, 2005), http://www.freep.com/money/

business/pfizer23e_20050623 htm ..............ccceeeeeeeees 17

In the

SUPREME COURT OF THE UNITED STATES

ILLINOIS TOOL WORKS INC., ET AL.,

Petitioners,

v.

INDEPENDENT INK, INC.,

Respondent.

On Writ of Certiorari To The

United States Court of Appeals

For the Federal Circuit

BRIEF OF AARP, THE PUBLIC PATENT

FOUNDATION AND CONSUMERS UNION AS

AMICI CURIAE IN SUPPORT OF RESPONDENT

INTEREST OF AMICI CURIAE”

AARP is a nonpartisan, nonprofit membership

organization of over 35 million persons, age 50 or older,

dedicated to addressing the needs and interests of older

Americans. AARP seeks through education, advocacy, and

service to enhance the quality of life for all by promoting

independence, dignity, and purpose. In its efforts to promote

independence, AARP works to foster the health and economic

security of individuals as they age by attempting to ensure the

availability of quality and economical health coverage. As the

country’s largest membership organization, AARP has a long

' In accordance with Supreme Court Rule 37.6, AARP, Consumers Union

and the Public Patent Foundation (amici curiae) state that: (1) no counsel to

a party authored this brief, in whole or in part; and (2) no person or entity,

other than amici curiae, their members and counsel have made a monetary

contribution to the preparation or submission of this brief. The written

consents of the parties to the filing of this brief have been filed with the

Clerk of the Court pursuant to Supreme Court Rule 37.3.

2

history of advocating for access to affordable health care and

for controlling costs without compromising quality.

A decision in this case will determine how litigation

regarding patents used in tying arrangements will be conducted

in virtually every consumer industry in America. Tying can

affect the price of many consumer products and services, and is

an emerging issue in the prescription drug marketplace. AARP

is interested in this case to the extent it will affect tying

arrangements in the pharmaceutical industry.

Access to prescription drug treatments is particularly

important to the older population which, because of its hi

rates of chronic and serious health conditions, has the hi

rate of prescription drug use. AARP conducts research and

engages in educational activities and advocacy to increase

access to affordable prescription drugs. Since May of 2004,

AARP’s Public Policy Institute has issued a series of reports

that closely monitor the pricing actions of the pharmaceutical

industry. See, e.g., David Gross et al., Trends in

Manufacturer Prices of Brand Name Prescription Drugs Used

by Older Americans — First Quarter 2005 Update, AARP

Public Policy Institute (July 2005), available at

http://assets.aarp.org/rgcenter/health/dd 122drugprices. pdf.

AARP has filed amicus curiae briefs in prescription drug

litigation aimed at lowering the costs of prescription

drugs including In re Cardizem CD Antitrust Litig., 332 F.3d

896 (6" Cir. 2003), cert denied sub nom Andrx Pharma., Inc. v.

Kroger Co., No. 03-779 (Oct. 12, 2004); Valley Drug Co., v.

Geneva Pharms., Inc. 344 F.3d 1294 (11 Cir. 2003) cert. sub

nom Walgreen Co. v. Abbot Labs., No. 03-1178 (Oct. 12,

2004). AARP also filed an amicus curiae brief in the recent

case of Merck KgaA v. Integra Lifesciences I, Ltd., U.S._, 125

S. Ct. 2372 (2005)(involving patent infringement exception).

The Public Patent Foundation (“PUBPAT”) is a not-for-

profit legal services organization founded in 2003 to represent

the public's otherwise unrepresented interests in the patent

system, and most particularly the public's interests against the

harms caused by wrongly issued patents and unsound patent

3

policy. PUBPAT provides the general public and specific

persons or entities otherwise deprived of access to the patent

system with representation, advocacy, and education and it is

funded by grants from the Rockefeller Foundation, the Echoing

Green Foundation, the Rudolph Steiner Foundation and the

Open Society Institute and by private donations from the

blic. PUBPAT has argued for sound patent policy before the

nited States Court of s for the Federal Circuit, the

United States Patent & Trademark Office, the European

Parliament, and the United States House of Representatives

Subcommittee on Courts, the Internet, and Intellectual

Property.

- PUBPAT has an interest in this matter because the

Court’s decision will have a significant effect on the public’s

interests represented by PUBPAT and because PUBPAT’s

mission is to represent those interests against harm that could

be or is caused by unsound policy with respect to patents.

More specifically, resolution of this matter will determine how

patents on one product that are used through tying

arrangements to eliminate competition on another un-patented

product are evaluated under antitrust Jaw. PUBPAT has an

interest in ensuring that the power of patents is adequately

seeps in such circumstances so that patents are not

lowed to be unjustifiably extended in ways that harm

competition.

Consumers Union (“CU”) is a nonprofit membership

organization chartered in 1936 io provide consumers with

information, education and counsel about goods and services

and to advocate for state and federal policies that advance and

protect consumers’ interests. CU has a long history of

advocating for health care including safe, effective, and

affordable prescription drugs.

CU is the nonprofit publisher of Consumer Reports

magazine, with approximately 4.5 million print subscribers and

more than two million subscribers to its online site

ConsumerReports.org, which regularly carries articles on

health-related topics, including federal and state consumer

4

protection laws, policies and programs. Consumer Reports

ranks 7th nationally among print periodicals in terms of number

of subscriptions.

CU has an interest in this case because it will affect

patent litigation in cases of illegal tying. Tying can affect the

price of many consumer products and services, and is an

emerging issue in the prescription drug marketplace. The

outcome of this case may affect the ability of consumers to

afford necessary medicines, and the case therefore raises

significant concerns for consumer health and costs.

SUMMARY OF ARGUMENT

Patents are designed to confer market power upon

inventors. The commercial reality in many markets, including

the pharmaceutical industry, is that patents do in fact give their

owners market power. The issue here is not whether patents

can confer market power on their owner, but rather whether the

presumption that they do makes sound policy. This Court has

long recognized - and correctly so - that the presumption is

indeed reasonable because it is precisely those technologies

over which patents are most likely to confer market power that

a patent holder will implement a tying arrangement that harms

competition. The class of patents to be looked at when

deciding whether to have a presumption or not is not all issued

patents, but instead only those patents that an owner could

successfully attempt to leverage through a tying arrangement,

because it is those tying arrangements that will end up being

challenged in court.

Patents often confer market power on their owner

because they define the relevant market (the drug covered by

the patent) and the exclusive rights they provide their owner

give power within that market. This fact is widely recognized

throughout the pharmaceutical] industry by the drug companies

themselves. Tying in the form of combination pills, which are

part patent protected drug and part non-exclusive drug, is an

emerging business model in the pharmaceutical industry.

Competition in the market for the non-exclusive component of

5

a combination pill is injured as a result of such tying, which is

only successful because of the market power provided by the

patent on the other component. This results in higher prices

and fewer choices in the market for the tied non-exclusive

component. Thus, as just one example, the presumption that a

patent confers market power on its owner makes sound policy

in cases involving the tying of separate pharmaceutical

products and it should not be abandoned.

Further, pragmatically speaking, economic rationality

ensures that the only people who will bring tying claims are

those being competitively injured as a result of the tying

arrangement. Under those circumstances, as discussed above,

it is extremely likely that market power in the tying product

market is provided by the patent, because it is that market

power that is being leveraged to cause the competitive harm in

the tied product market. Truth be told, tying arrangements

involving patents occur all the time, but contrary to what

Petitioner and their amici would have this Court believe, only a

very few are ever challenged as being anticompetitive. With

respect to those cases, the market power resulting from the

patent on the tying product is clear and the presumption of

market power should be maintained.

ARGUMENT

I. THE PHARMACEUTICAL INDUSTRY

ILLUSTRATES HOW PATENTS

FREQUENTLY CONFER MARKET POWER

The presumption that a patent confers market power on

its Owner is just as correct today as it has been throughout the

nearly sixty years that this Court has recognized it. Jefferson

Parish Hosp. Dist. No. 2 v. Hyde, 466 U.S. 2, 16 (1984) (“if the

government has granted the seller a patent or similar monopoly

over a product, it is fair to presume that the inability to buy the

product elsewhere gives the seller market power’). This is

because a patent confers on its owner the exclusive right to

manufacture, use, and sell the particular invention during its

twenty year term. 35 U.S.C. §154(a)(1)-(2). As such, it has

6

been recognized that, “[b]y their nature, patents create an

environment of exclusion, and consequently, cripple

competition.” Schering-Plough v. FTC, 402 F.3d 1056, 1065-

1066 (ilth Cir. 2005), petition for cert. filed (Aug. 29,

2005)(No. 05-273). Petitioner and its amici concede as much.

(See, e.g., United States Br. 9) (“[i]t is certainly possible that a

patent holder could possess market power sufficient to support

a per se tying claim”).

In fact, the market power conferred by a patent has

actually increased over time. For one reason, trends in

Congress have been to strengthen, not weaken, intellectual

perty rights. John H. Barton, Reforming the Patent System,

287 Science 1933-1934 (March 17, 2000), available at

http://www.biotech-info.net/reforming.html. In addition, there

has long been a statutory presumption of validity of a patent

that strongly favors the holder of even an invalid patent. 35

U.S.C. § 282; see also Doddridge v. Thompson, 22 U.S. (9

Wheat.) 469, 483 (1824) (holding that a patent is presumed

valid until the contrary is shown). Thus, generally speaking,

the presumption that a patent confers on its owner market

power in the market for the patent protected invention is

correct.

The pharmaceutical industry illustrates the direct causal

relationship between the issuance of a patent and the receipt of

market power. Thus, when a pharmaceutical company receives

a patent on a new drug, that patent gives the company the

exclusive right to sell the new drug, which is frequently so

innovative that it creates its own market. That exclusive right

in the new market gives the company considerable market

power, which it would not have without the patent. The

pharmaceutical industry is one example of the correctness of

the presumption that patents confer market power on their

owner, but it is also correct in many other industries with

respect to many other technologies.

7

A. Patents Confer Market Power When The Scope

Of The Patent Defines The Scope Of The

Relevant Market.

In antitrust law, relevant product markets are

determined by examining the reasonable interchangeability of

products. See Brown Shoe Co. v. United States, 370 U.S. 294,

325 (1962) (“The outer boundaries of a product market are

determined by the reasonable interchangeability of use or the

cross-elasticity of demand between the product itseif and

substitutes for it.”) Market power is the ability for a single

seller to raise price and restrict output within a relevant market.

Eastman Kodak Co. v. Image Technical Services, 504 U.S. 451,

464 (1992); see also United States v. E. I. Du Pont de Nemours

& Co., 351 U.S. 377, 391 (1956) (“Monopoly power is the

power to control prices or exclude competition.”).

In this case, the Federal Circuit held that in tying cases

“a patent presumptively defines the relevant market as the

nationwide market for the patented product itself, and creates a

presumption of power within this market.”. Indep. Ink, Inc. v.

Ill. Tool Works, Inc., 396 F.3d 1342, 1352 (Fed. Cir. 2005). A

patent will always give its holder market power in cases where

the patent itself defines the relevant market, since a patent

allows its holder to completely exclude competition from that

market. The patent holder is given an unfettered ability to raise

price and restrict output in that market during the term of the

patent and that power granted by the patent is significant.

While it may not always be correct to define a market as

one patented product, this type of narrow market definition is

common in antitrust law.” For example, a product may

constitute its own market when it is so highly differentiated that

for some consumers nothing else will do. United States v.

Grinnell Corp., 384 U.S. 563, 574 (1966). In fact, even one

? The Federal Trade Commission often argues for this type of narrow market

definition in its antitrust cases involving the pharmaceutical industry, as

discussed in the next section.

brand of a particular product can constitute a separate market

for antitrust purposes. Kodak, 504 U.S. at 482. In addition, a

broader product market may contain “well-defined submarkets .

.. which, in themselves, constitute product markets for antitrust

purposes.” Brown Shoe, 370 U.S. at 325. In general, this Court

has emphasized that market definition must take into account

the “‘commercial realities’ faced by consumers.” Kodak, 504

U.S. at 482 (citation omitted). The commercial reality in many

markets, including specifically the pharmaceutical industry, is

that patents do give their owners market power.

B. Patents Routinely Confer Market Power In The

Pharmaceutical Industry.

Petitioner and its amici concede that patents can confer

market power in certain markets; they just argue that this is a

rare occurrence. For example, the American Intellectual

Property Law Association (“AIPLA”) argues that “the mere -

issuance of a patent neither defines a relevant product market

nor conveys market power in a relevant market, except in very

rare cases.” (AIPLA Br. 3) (emphasis added). They believe

this is rare because “[iJn AIPLA’s experience, virtually all

patents cover improvements to existing products that represent

modest, incremental advances. Rarely do they claim pioneering

inventions that open entirely new economic markets. Thus, the

issuance of a patent, standing alone, only rarely affords its

owner or licensor any appreciable market power in a relevant

product market in the antitrust sense, i.e., the power to raise

prices or restrict output in that market.” Jd. at 5.

This implies that in industries where innovators patent

inventions that are totally new products, as opposed to

improvements to existing products, patents do give their

owners market power. The pharmaceutical industry is an

example of one industry where patent inventions can be totally

new products.

The United States makes the argument that “[a] market

participant’s possession of a patent right, and the consequent

statutory right to exclude infringing products from the

9

marketplace, cannot give the participant market power if-as is

usually the case-there are noninfringing alternatives to the

patented product that qualify, in the economic sense, as good

substitutes.” (United States Br. 11) (emphasis added). By this,

the Government makes the point that products do not have to

be substantially identical in the patent infringement sense in

order to function as economic substitutes for antitrust purposes.

Id. at n.6. As an example, the Government points out that

wooden pencils and mechanical pencils could both be included

in a “pencil” or “manual writing instrument” market. /d.

Unlike pencils, however, many patented prescription

drug products do not have acceptable noninfringing substitutes

because even within a therapeutic class there may be significant

differences in effectiveness and toxicity. For example, one

Court of Appeals found that although there is a “certain degree

of interchangeability among all antibiotics” there are certain

features of cephalosporins (including their effectiveness against

a wider range of infectious organisms, their ability to treat

penicillin-allergic patients, and their production of fewer side

effects) that reduce their interchangeability with other drugs

and make them a relevant product market. SmithKline Corp. v.

Eli Lilly & Co., 575 F.2d 1056, 1064 (3d Cir. 1978) (“Thus,

although there is a certain overlap in therapeutic capability, . . .

cephalosporins possess sufficiently unique features to warrant

their characterization as a discrete product market, one lacking

interchangeability with antibiotics in general.”). In many recent

antitrust cases involving the pharmaceutical industry, the

Federal Trade Commission (“FTC”) has determined that the

relevant market constitutes of only a branded drug and its

generic bioequivalents as listed in the Food and Drug

Administration (“FDA”) Orange Book.” The FTC’s market

> See, e.g., Biovail Corp., F.T.C. Docket No. C-4060 (Oct. 2, 2002)

(Complaint FJ 18-20, 22), available at http://www.fic.gov/os/2002/10/

bioavailcmp.pdf; Abbott Labs. & Geneva Pharm., Inc., F.T.C. Docket Nos.

C-3945, 3946 (May 22, 2000) (Complaint JJ 10, 12), available at

http://www. ftc.gov/os/2000/05/c394S5complaint.htm (“The relevant product

market for assessing respondents’ anticompetitive conduct is terazosin

hydrochloride . . . . Other drugs are not effective substitutes for terazosin

10

definitions highlight the fact that differences in safety, efficacy,

and side effects reduce the interchangeability of prescription

drugs, even within the same therapeutic class.

The pharmaceutical industry itself has always

emphasized the importance of patents to their market power.

When the Federal Trade Commission and the Department of

Justice held hearings on patents and competition policy,

pharmaceutical representatives testified that “patent protection

is indispensable in promoting pharmaceutical innovation for

drug products containing new chemical entities[NCEs] . . . By

preventing rival firms from free riding on the innovating firms’

discoveries, patents can enable pharmaceutical firms to cover

their fixed costs and regain the capital they invest in R&D

efforts.” Federal Trade Commission, To Promote Innovation:

The Proper Balance of Competition and Patent Law and Policy

ch. 3, at 4 (Oct. 2003), available at http://www.ftc.gov/os/

2003/10/innovationrpt.pdf [hereinafter FTC Report). See also

id. at 9 (“Participants in the Hearings overwhelmingly

expressed the view that patent rights for pharmaceuticals are

essential for brand-name companies to prevent free riding and

recoup their significant investments in research and

development of NCEs.”). The drug companies also routinely

tell their investors about the severe economic consequences of

patent expiration. In a quarterly report filed with the Securities

and Exchange Commission, Pfizer cautioned its investors that

HCL because they are different in terms of chemical composition, safety,

efficacy, and side effects. In addition, there is little price sensitivity between

terazosin HCL and non-terazosin HCL products.”); Hoechst Marion

Roussel, Inc. & Andrx Corp., F.T.C. Docket No. 9293 (Mar. 16, 2000)

(Complaint J 12), available at http://www ..ftc.gov/os/2000/03/

hoechstandrxycomplaint.htm (“A relevant product market for assessing

respondents’ anticompetitive conduct is once-a-day diltiazem. . . . Other

calcium channel blockers are not acceptable substitutes for diltiazem for

several reasons, including, inter alia, the differences in efficacy and side

effects, and the risks associated with switching patients from one calcium

channel blocker to another. In addition, narrower relevant product markets

may be contained within the market for once-a-day diltiazem products.”’).

11

“{t}he loss of patent protection with respect to any of our major

could have a material adverse effect on revenue and

SOs) Whee dlensent Quarterly Report (Form 10-Q) (July 3,

When discussing various legal proceedings in which it

soos Reasdenic eadaanicmameay tek “ohans 00 anny of tinea

cases could result in a loss of patent protection for the drug at

issue, which could lead to a significant loss of sales of that drug

and could materially affect future results of operations.” Jd. In

of a basic product patent or loss of patent protection resulting

from a legal challenge normally results in significant

competition from generic products against the originally

patented product and can result in a significant reduction in

sales of that product in a very short peri OT 2000)" One

Annual Report (Form 10-K) (Dec. 31, 2004). Other

pharmaceutical companies make similar statements to investors

about the direct relationship between patent protection and

market power.

r

Lastly, the circumstances in which Petitioner's amici

concede that patents confer market power (circumstances they

allege are “rare” and “not usual”) are precisely those situations

* Available at http://www.sec.gov/Archives/edgar/data/7 8003/

000007 8003050002 1 3/q2-05pfe 1 -hum.

> Available at hitp://www.sec.gov/Archives/edgar/data/78003/

0000950 12305002379/y061 24e 1 0vk.htm.

® See Schering-Plough Corp., Annual Report (Form 10-K) (Dec. 31, 2004),

available at hup://www.sec.gov/Archives/edgar/data/3 10158/

0000950 12305002785/y05567e10vk.htm (“When a product patent expires,

the patent holder often loses effective market exclusivity for the product.

This can result in a rapid, sharp and material decline in sales of the formerly

patented product, particularly in the U.S.”), Johnson & Johnson, Quarterly

Report (Form 10-Q) (July 3, 2005), available at http://www.sec.gov/

Archives/edgar/data/200406/000020040605000 | 06/secondqtrteng.txt (“In

the event the Company is not successful in defending a lawsuit resulting

from an Abbreviated New Drug Application filing, the generic firms will

then introduce generic versions of the product at issue, resulting in very

substantial market share and revenue losses.”’).

12

where the patent holder will be able to execute an effective

tying arrangement. If the owner of a ee

its customers to also buy its pencil boxes, it would not be

successful, because consumers would have the ability to

ils from other manufacturers that did not require

Srathaneleue Although these types of arrangements

are tried frequently, no one ever liti them because they do

not cause competitive harm. pencil manufacturer's

competitors are not impacted by the tie, except that they may

actually benefit from it in that it will force consumers away

from the tying party's products.

To the contrary, it is precisely those “rare” and “not

usual” cases where a patent prevents consumers from accessing

substitutes that the tying arrangement works to the benefit of

the tying party and the detriment of competition. The market

power in the tying product, provided by the patent that excludes

alternatives to the tying product, is what enables the forced

purchasing of the tied product. That forcing creates the

anticompetitive injury sufficient to justify another party to

challenge the arrangement under antitrust law, something that

is “rare” and “not usual”. Therefore, even if the frequency with

which patents confer market power on their owner is “rare” or

“not usual,” in some industries, that does not i t the

reasonableness of presuming that the small number of patents

involved in tying arrangements which are harmful enough to

justify being challenged in court do confer market power on

their owner. Additionally, in many industries, like the

tical industry, there is no doubt that a patent does in

confer market power.

Cc. The Market Power Conferred By Patents in the

Pharmaceutical Industry Has Increased.

Over the past two decades, Congress has enacted a

series of laws that have greatly increased the effective patent

life enjoyed by brand name prescription drugs. Michie I. Hunt,

Prescription Drugs and Intellectual Property Protection:

Finding the Right Balance Between Access and Innovation,

Nat'l Inst. for Health Care Mgmt. (Aug. 2000), available at

13

http://www .nihcm.org/prescription.pdf. The market power that

goes hand in hand with owning a patent on a prescription drug

has been by commentators and in fact “the

operation of t system is on the forefront of

controversies, both ic and international, about its effects

upon pricing and exclusion in the pharmaceutical industry.”

Daniel J. Gifford, How Do the Social Benefits and Costs of the

Patent System Stack Up in Pharmaceuticals?, 12 J. Intell. Prop.

L. 75, 78 (Fall 2004). The market power conferred by patents

oe ee oe en ea anes

intervention has been suggested by some parties. ‘ special

case for government intervention in tical prices

derives from the monopoly market power granted by the state

to patented drugs.” Kevin Outterson, Pharmaceutical

Arbitrage: Balancing Access and Innovation in International

Prescription Drug Markets, 5 Yale J. Health Pol’y, L. & Ethics

193, 239 (2005).

It is not surprising that patents in the pharmaceutical

industry confer market power, since that is the intended

consequence of the current regulatory environment. The

pharmaceutical industry involves a delicate balance between

the need for innovators to recoup research and development

expenditures and the desire for consumers to pay affordable

~o for drugs. Congress has attempted to achieve this

ance through the Drug Price Competition and Patent Term

Restoration ro of 1984, Pub. L. No. 98-417, 98 Stat. 1585

(1984) (codified at 15 U.S.C. §§ 68b-68c, 70b; 21 U.S.C. §§

301 note, 355, 360cc; 28 U.S.C. § 2201; 35 U.S.C. § 156, 271,

282) (known as the Hatch-Waxman Act). Hatch-Waxman

made it easier for generic drugs to enter the market by creating

an abbreviated approval process for generics. Cong. Bud a

Office, How Increased Competition from Generic Drugs

Affected Prices and Returns in the Pharmaceutical Industry xii

(July 1, 1998) [hereinafter CBO Report], available at

http://www.cbo.gov/ftpdocs/6xx/doc655/pharm.pdf.

One of the additional goals of Hatch-Waxman was to

allow pharmaceutical companies to recoup their investments in

research and development. According to the Congressional

14

Budget Office (“CBO”) Report, pharmaceutical innovators

“quickly lose over 40 percent of their market, on average, to

generic drugs.” Jd. at 37. oo

were enacted to partially offset this for branded drug

companies because the patents give them exclusive rights for a

period of time so they can recoup their investment in research

and development. Jd. According to the CBO, “[t}he patent

system provides a period of protection during which

manufacturers of innovator drugs can charge relatively hi

salons, ciation gualite Ghat enti Geamn t> entmemeanete ter

costs of a drug's discovery and development.” /d. at 13. This

period of exclusivity provided by patents is expressly and

specifically designed to give innovators meena ocr ne in the

sense that they can charge s itive prices for a

of time in order to recoup their deve t costs. Ss me

did not give market power to their owner, ee ee

fail because the patent holder would not be able to protect its

profits from competition.

Therefore, not only has the presumption that patents

confer market power on their owner maintained its veracity

since first being promulgated decades ago, recent changes in

patent law has increased its soundness with respect to

pharmaceutical patents.

” Although some patented drugs may eventually face competition from

other branded drugs in the same therapeutic class, this process usually takes

at least 6 years. CBO Report at xi. In addition, other drugs within the same

therapeutic class may not be reasonably interchangeable due to differences

in effectiveness and toxicity. Furthermore, the CBO points out that “[wJhen

a breakthrough drug ts introduced, by definition it has no close substitutes

on the market. Demand for the drug is therefore fairly insensitive to price,

since no alternative treatment of equal quality and effectiveness exists.” Id.

at 19-20.

15

ll. ©THE PHARMACEUTICAL INDUSTRY IS

RELEVANT TO THIS CASE BECAUSE OF THE .-

NEW TREND IN PHARMACEUTICAL TYING

ARRANGEMENTS.

As discussed above, the Hatch-Waxman Act attempted

to balance the public’s need for affordable medicines with the

innovator’s need to recoup R&D costs. To achieve this

balance, the Hatch-Waxman framework extends the innovator’s

market exclusivity while making it easier for generic drugs to

enter the market once that exclusivity period has expired.

When companies improperly expand the scope of their market

exclusivity, it destroys the delicate Hatch- Waxman balance and

harms the interest. Pharmaceutical companies have a

reputation for “gam{[ing]}” the system in an attempt to “restrict

competition beyond what the Hatch-Waxman Amendments

intended.” FTC Report ch. 3, at 13. Indeed, almost twenty- -five

percent of new ro pe nmaime investigations by the FTC in recent

years roa tets involv tical products.”

Pharmaceutical tying occurs when a drug manufacturer

forces a patient to buy an un-patented drug or medical product

in order to have the right to purchase a patented one. For

example, Sandoz Pharmaceutical required purchasers of its

schizophrenia drug clozapine, the first new drug for the

treatment of schizophrenia in twenty years, to also purchase

Sandoz's distribution and patient-monitoring services.

Sandoz’s ““tying’ arrangement raised the price of clozapine

treatment and prevented others - such as private laboratories,

the Veterans Administration, and state and local hospitals -

from providing the related blood tests and necessary patient

monitoring.” Sandoz Pharmaceutic cals Corp., 115 F.T.C. 625

(1992)(No. C-3385)(consent order).

* Timothy J. Muris, Chairman, FTC, Everything Old is New Again:

Health Care and Competition in the 2/st Century, 7th Annual Competition

in Health Care Forum 3 n. 13 (Nov. 7, 2002), http://www.ftc.gov/speeches/

muris/murishealthcarespeech0?2 | | .pdf (prepared remarks of Timothy Muris).

* Summarized at FTC Antitrust Actions in Pharmaceutical Services and

16

An expansion of this new trend in the pharmaceutical

industry is to “tie” two different medications together into a

combination pill; precluding the consumer from buying only

one of the medications in the combination pill separately.

Tying through combination pills that are part patent-protected

drug and part non-exclusive drug is becoming more prevalent

as an attempt by pharmaceutical industries to maximize profits

and exclude generic manufacturers from entering the market

after the patent expires on the otherwise non-exclusive

medication in the combination . Lara J. Glasgow,

Stretching the Limits of Intellectual Property Rights: Has the

Pharmaceutical Industry Gone Too Far? 41 IDEA 227, 231-

232, 250 (2001). These combination pills allow the branded

drug company to tie a non-exclusive drug to a patent-protected

drug that still enjoys market exclusivity. This harms

competition in the market for the non-patented component

because consumers are forced to buy the tying party's non-

exclusive drug in order to get the patent protected component.

This forcing destroys what would otherwise be a fully

competitive market for the non-exclusive drug.

The tying scheme is only successful because of the

market power provided by the patent on the patent-protected

component. The resulting anti-competitive injury is seen as

higher prices and fewer medical choices in the market for the

non-patent protected drug. These are exactly the type of

arrangements that tying law condemns because “[t]hey deny

competitors free access to the market for the tied product, not

because the party imposing the tying requirements has a better

product or a lower price but because of his power or leverage in

another market. At the same time buyers are forced to forego

their free choice between competing products.” Northern

Pacific Railway Co. v. United States, 356 U.S. 1, 6 (1958).

One example of this tying through combination pill

strategy used by the pharmaceutical industry involves the tying

Products, Bureau of Competition FTC (Nov. 8, 2002),

http://www. fic.gov/bc/rxupdate02 I 108. htm.

17

of a promising new heart medication with another drug that

would otherwise be subject to full and fair competition. Pfizer

is developing a new drug, torcetrapib, that has been heralded as

a novel weapon against heart disease that may be an important

clinical tool in preventive cardiology. Jerry Avorn, Torcetrapib

and Atorvastatin - Should Marketing Drive the Research

Agenda? 352 New Eng. J. Med. 2573, 2573-2574 (June 23,

2005).'” However, “{e]nthusiasm about this potentially

important new therapeutic tool has been tempered by concern

about how the company will study and market the drug.” Jd. at

2574. This is because Pfizer plans on marketing the new drug,

which it expects to have fully protected by a patent, only with

its own statin, which is but one drug in a class of statins. The

nt on Pfizer's statin, marketed under the brand name

ipitor, is due to expire in 2010, which would otherwise leave

it subject to full competition from generics. The tying

arrangement accomplished by the torcetrapib - Lipitor

combination pill will prevent this full competition

happening. Not only will the tying of torcetrapib to Lipitor in

one combination pill have a harmful effect on c tition, it

will also cause clinical problems for patients who cannot

tolerate'”’ (or afford) Lipitor. Those patients will have no way

of obtaining torcetrapib for use with another statin that might

be better for them. Jd. By combining the two pills, patients

will not be able to take torcetrapib without Lipitor, even if

Lipitor is not the safest and most effective statin for them. “The

torcetrapib-Lipitor bundling studies illustrate where this trend

"0 See also Young & Ostrow, Pfizer's strategy criticized - New

Cholesterol Drug Bound to Old, Detroit Free Press (June 23, 2005),

http://www. freep.com/money/business/pfizer23e_20050623.htum.

'! People with different genetic make-ups respond differently to many

medicines. Some people metabolize a drug before it can act. Because

people have different genetic make-ups some genetic researchers believe

that many drugs only work in a third to a half of the patients who take them.

See, e.g., Andy Coghlan, Blockbuster Challenge, New Scientist Magazine

(June 12, 2004), available at hup://www.sciencejobs.com

/insider/article action article.id=insider 1 OS&focusid=uk.

18

can lead. The current trial designs may not optimally meet the

scientific needs of prescribers, the clinical needs of patients, the

economic needs of payers, or the regulatory needs of

policymakers. But they superbly meet the business needs of the

sponsor - to create new knowledge in a way that will protect the

market share of the largest drug company’s most important

product.” Jd. at 2575. For patients, the tying of these two drugs

in one combination pill limits their medical choices and [serves

no purpose other than the suppression of competition.

Another combination drug is Vytorin, a combination of

Zetia, a Schering-Plough drug and Zocor, Merk’s statin. See

Aaron Smith, Vytorin outsells rival cholesterol drugs, CNN

Money (July 26, 2005), http://money.cnn.com/2005

/07/26/news/fortune500/vytorin/ (“...Zocor is the second most

profitable statin. However, the drug’s patent is set to expire

June 2006. Drug sales generally plummet when a name brand

goes generic, but Merck hopes to continue making revenue

from t by including it in Vytorin.”). Again, the market

power held by the pharmaceutical company in the tying product

facilitates their ability to tie it to the sale of an un-patented

drug, injuring competition in the market for the tied product.

Yet another example of tying through combination pills

involves Chicago-based Abbott Laboratories. The maker of the

extremely unique and powerful AIDS “booster” drug called

Norvir. Abbott bundled Norvir with its own protease inhibitor

(PI) drug, Lopinavir, which was but one of several PI's

'2 Pfizer also has another combination drag involving atorvastatins.

Caduet is a combination pill that treats both hizh blood pressure and high

cholesterol. See Pfizer's Caduet Debuts Naticnwide to Treat High Blood

Pressure and High Cholesterol, Pfizer News Release (June 23, 2004),

http://www. pfizer.com/pfizer/are/news_releases/2004pr/mn_2004_0623.jsp.

According to the Orange Book, Caduet is a combination of amlodipine

besylate and atorvastatin calcium. Pfizer's exclusivity period on amlodipine

besylate alone (marketed as Norvasc) expires in 2006-2007. But by

combining it with atorvastatin calcium, their exclusivity period may extend

to 2018.

19

available in the marketplace. The Norvir/Lopinavir

combination drug is called Kaletra. Although Abbott still

manufactures Norvir separately, patients who did not buy

Kaletra (Norvir bundled with Lopinavir) were forced to pay a

much higher price for Norvir. The result of this pricing strategy

was a 400 percent increase in the price of patented Norvir to

patients who did not. buy Abbott’s bundled drug, Kaletra."

Abbott is capable of accomplishing this “forcing” because of

the market power ithas in the AIDS “booster” market, which is

a direct result of it having a patent on its “booster,” Norvir.

The possibilities of drug manufacturers combining two

drugs in one pill are endless and, as a result, the possible

economic and health consequences for the public from such

arrangements should be recognized and addressed. Medically,

the soundness of fixed drug combinations, as opposed to

flexible combinations of separate drugs, is debatable. Marcia

Angell, The Pharmaceutical Industry: To Whom is It

Accountable?, 342 New Eng J. Med. 1902, 1903 (2000).

Economically, there remains a powerful truth in the common

sense observation of Justice Frankfurter that in many cases

“[tlying agreements serve hardly any purpose beyond the

suppression of competition.” Standard Oil Co. v. United States,

337 U.S. 293, 305-306 (1949). Legally, pharmaceutical

companies should not be given free reign to limit competition

to their products that go off-patent through tying arrangements

with new patented drugs. Such free reign left unmonitored by

antitrust law would cause substantial harm to the public.

Although the case currently before the Court admittedly

does not involve pharmaceutical products, Petitioners have

"> See The Prescription Access Litigation Project, PAL Challenges Abbott

on 400% AIDS-Drug Price Hike, 9 PAL News (Summer 2004),

http://www.communitycatal yst.org/resource. php ?doc_id=66; Vanessa

Fuhrmans, Abbort Lifts Price of Norvir 400%: Cost of Longtime HIV Drug

Jumps, Reigniting Debate Over Drug Pricing Policies, Wall St. J. (Dec. 19,

2003), http://www.aegis.com/news/wsj/2003/W J03 1209.html.

20

nonetheless asked the Court to change antitrust law for the

entire spectrum of patentable technology. This is a broad

request, which should be met with equally broad consideration.

Further, it is not the intent of AARP, PUBPAT and CU to

argue that the umption only makes sense with respect to

pharmaceutical products, but rather that the presumption makes

sense with respect to many technologies. Pharmaceuticals are

merely an example of significant concern to our members and

constituency.

III. | MAINTAINING THE PRESUMPTION WILL NOT

LEAD TO AN OUTBREAK OF LITIGATION

Various amici in this case note the high cost of antitrust

litigation and the burden of those costs on mid and small size

businesses and start-up companies. (See, e.g., AIPLA Br. 11-

12.) They continue to argue that maintenance of the

presumption that a patent confers market power on its owner in

the market for the patented product would result in an outbreak

of expensive and burdensome litigation. That result, however,

has not been observed in the many decades during which the

presumption has existed. Therefore, it is difficult to see how

keeping the law the same would cause a dramatic rise in

litigation. Further, there will always be a presumption one way

or the other: either patents are presumed to confer market

power on their owner or they are presumed not to confer market

power on their owner. What Petitioner and its amici seem to

really desire is a dramatic shift in the law of tying cases that

they hope will make it harder for plaintiffs to prevail and, as

such, discourage potential plaintiffs from bringing tying claims

at all. To be sure, we could reduce the amount of litigation by

stating that nothing a company does can violate any antitrust

law, but such would obviously be disastrous policy.

CONCLUSION

The presumption that a patent confers market power on its

owner is just as correct today as it has been throughout the sixty

years that this Court has recognized it. The Federal Circuit’s

decision should be affirmed.

Daniel B. Ravicher

Public Patent Foundation

1375 Broadway, Suite 600

New York, NY 10018

(212) 545-5337

Robert Schneider

Consumers Union

1300 Guadalupe

Austin, Texas

(914) 378-2928

21

Respectfully submitted,

Barbara Jones*

AARP Foundation Litigation

200 South Los Robles, Ste.400

Pasadena, CA 91101

(626) 585-2628

Bruce Vignery

AARP Foundation Litigation

Michael Schuster

AARP

601 E Street N.W.

Washington, DC 20049

(202) 434-2060

Counsel for Amici Curiae

* Counsel of Record