Amicus Curiae Brief — Joblove v. Barr Labs, Inc. (No. 06-830)

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No. (06-830 tt tp

IN THE

Supreme Court of the United States

In Re: TAMOXIFEN CITRATE ANTITRUST LITIGATION

JOBLOVE, ALLIED SERVS., DIV WELFARE FUND,

BENNISH, KOONAN, GREAT LAKES HEALTH PLAN INC.,

LACAVA, DONEGA, SMITH, LOVINGER, WOOLLACOTT,

WHITESIDE, PLATT, UNDERWOOD, TEAMSTERS LOCAL

237, LYNCH, CALLAWAY, MALONEY, MECHANICAL

CONTRACT, [BEW-NECA LOCAL 505 HEALTH & WELFARE

PLAN, A.F. OF L. —- A.G.C. BUILDING TRADES WELFARE

FUND, SHEET METAL WORKERS LOCAL 441 HEALTH &

_ WELFARE PLAN, LOCAL 1199 NAT’L BENEFIT FUND FOR

HEALTH AND HUMAN SERVICES, NEW YORK STATEWIDE

SENIOR ACTION COUNCIL, MARKS, BLONSTEIN,

Petitioners,

V.

BARR LABS., INC., ASTRAZENCA PHARMACEUTICALS

LP, ZENECA INC., ASTRAZENECA PLC,

Respondents.

On PETITION FOR A WRIT OF CERTIORARI TO THE

UniteD STATES COURT OF APPEALS FOR THE SECOND CIRCUIT

BRIEF OF AMICUS CURIAE

NATIONAL ASSOCIATION OF CHAIN DRUG STORES

IN SUPPORT OF PETITIONERS

DONALD BELL

Counsel of Record

Mary ELLEN KLEIMAN

NATIONAL ASSOCIATION

OF CHAIN DruG SToRES

413 North Lee Street

P.O. Box 1417-D49

Alexandria, VA 22313-1480

(703) 549-3000

Attorneys for Amicus Curiae

TABLE OF CONTENTS

|

TABLE OF CITED AUTHORITIES ............ ii

STATEMENT OF INTEREST OF AMICUS CURIAE

SPURNS 53 8 600A Eee OS 3

I. THE CIRCUITS ARE SPLIT OVER THE

FUNDAMENTAL ANTITRUST ISSUE —

THE PROPER COMPETITIVE BASELINE.

PS Ee ee EE PTT Ce Le NET ee ee ee 3

fl. THE ISSUE IS ONE OF ENORMOUS

IMPORTANCE TO CONSUMERS ....... 9

Il. THE SECOND CIRCUIT’S DECISION

CONFLICTS WITH PATENT LAW AND

THE HATCH-WAXMAN ACT .......... 13

CRIPPEN 6 ou Fen bade Caco une ¥en Fade 20

il

TABLE OF CITED AUTHORITIES

Cases: net

Andrx Pharm. Inc. v. Biovail Corp. Int’l, 256 F.3d

EO ee 7

Aronson v. Quick Point Pencil Co., 440 U.S. 257

EE eee 7

Blonder-Tongue Labs., Inc. v. University of Illinois

ee ne ia, PES CADIS) 5. cc iewecess 13, 16, 17, 18

Bonito Boats, Inc. v. Thundercraft Boats, Inc., 489

ER a 19

Cardinal Chem. Co. v. Morton Int'l, Inc., 508 U.S.

se ue PaN ce hu ne wesvncctan 16, 18, 19

Eastman Kodak Co. v. Image Tech. Servs., Inc., 504

ES ee 5

eBay Inc. v. Mercexchange, L.L.C., 126 S. Ct. 1837

GEG pone duce v ee seeeses 14, 16, 17

Geneva Pharm. Tech. Corp. v. Barr Labs., Inc., 386

EEE PED oc ews veces cce veces. 19

~ Harries y. Air King Products Co., 183 F.2d 158 (2d

EN Seve Celene ess See ee eee eee eeeeees 4

Illinois Tool Works, Inc. v. Grip-Pak, Inc., 906 F.2d

ra 15

Imperial Chem. Indus., PLC v. Barr Labs., Inc., 795

P. eunp. 20 619 (5.D.N.Y. 1992) ............. 17, 18

ili

Cited Authorities

Page

In re Cardizem CD Antitrust Litig., 332 F.3d 896 (6th

Cir. 2003), cert. denied, 543 U.S. 939 (2004) .. 7

In re Ciprofloxacin Hydrochloride Antitrust Litig.,

363 F. Supp. 2d 514 (E.D.N.Y. 2005) ......... 3

In re Etter, 756 F.2d 852 (Fed. Cir. 1985) ........ 14

In re Schering-Plough Corp., FSC Docket No. 9297,

2003 WL 22989651 (FTC Dec. 8, 2003) rev’d,

Schering-Plough Corp. v. FTC, 402 F.3d 1056

(11th Cir. 2005), cert. denied, 126 S. Ct. 2929

| ener mate tine gel erage wn 8

In re Terazosin Hydrochloride Antitrust Litig., 352

F. Supp. 2d 1279 (S.D. Fis. 2005) ......2..¢.. 5

Laboratory Corp. of America Holdings v. Metabolite

Lates., Fac... ¥26:S. CX. 2524 (AOGS) sc ies ices: 16, 19

Lear, Inc. v. Adkins, 395 U.S. 653 (1969) ...... 16, 17, 19

Medimmune, Inc. v. Genentech, Inc., 127 S. Ct. 764

CONTE 6 vscdseakeebces he ec kare 13

Nutrition 2] v. United States, 930 F.2d 867 (Fed. Cir.

BOOUS sé esakoe ade saws eee eee 15

Precision Instrument Mfg. Co. v. Automotive

Maintenance Mach. Co., 324 U.S. 806 (1945) .. 16

Ranbaxy Labs. Ltd. v. Leavitt, 469 F.3d 120 (D.C. Cir.

iv

Cited Authorities

Page

Reebok Int'l Ltd. v. J. Baker, Inc., 32 F.3d 1552 (Fed.

BER ISe e er S ere re ae 15

Schering-Plough Corp. v. FTC, 402 F.3d 1056

(11th Cir. 2005), cert. denied, 126 S. Ct. 2929

SE ae i Fed elees cewenkenesadinre se pe ie ee

SmithKline Beecham Corp. v. Apotex Corp., 247

F. Supp. 2d 1011 (N.D. Ill. 2003) ............ 10

SmithKline Beecham Corp. v. Apotex Corp., 403 F.3d _

Se re GG ob cbc ke aaad ssa bus ee ee 10

Standard Oil Co. (Indiana) v. United States, 283 U.S.

a.) a pee neenrlr arin ee Semel Ares 6,7

Stratoflex, Inc. v. Aeroquip Corp., 713 F.2d 1530 (Fed.

Cw... Bees sete PES ee ee eee aren aaee 14

Teva Pharm. USA, Inc. v. FDA, 398 F. Supp. 2d 176

Se SE Nae ort eek ees ae ees 2

United States v. Microsoft Corp., 253 F.3d 34 (D.C.

Re NE hve etieeccae das Red aa eae ea 13

Valley Drug Co. v. Geneva Pharms., Inc., 344 F.3d

1294 (11th Cir. 2003), cert. denied, 543 U.S. 939

ie aren ere prage eg en ror ee LRTI 4,5

Verizon Communications, Inc. v. Law Offices of Curtis

V. Trinko, L.L.P., 540 U.S. 398 (2004) ........ 13

Cited Authorities

Page

Zeneca Ltd. v. Novapharm Ltd., 111 F.3d 144 (Fed.

Rs EE hse bss OVS Re a ne ee ee 18

Zenith Radio Corp. v. Hazeltine Research, Inc., 395

ee PD ob cov a ka wicanitsteeiee keane 14

Statutes:

The Drug Price Competition and Patent Term

Restoration Act, Pub. L. No. 98-417, 98 Stat. 1585

(1984) (codified at 21 U.S.C. § 355) .......... 2

Medicare Prescription Drug, Improvement, and

Modernization Act of 2003, Pub. L. No. 108-173,

117 Stat. 2066 ..... PPE ee Ce roe ene pe ee 15

PgR LS & |. Pore err rrr rer renee T 2,7, 14,17

ee EE acca dew ark a Ee 4, 8, 13

Other Authorities:

146 Cone. Rec. E1538-02 (daily ed. Sep. 20, 2000) . . 15

147 Conc. Rec. $3711 (daily ed. Apr. 6, 2001) .... 15

148 Conc. Rec. $7566 (daily ed. Jul. 20, 2002) ... 15

Abbott Labs. and Geneva Pharms., No. C-3945, (FTC

Mar. 16, 2000) (Statement of Chairman Robert

Pitofsky and CommissionersySheila F. Anthony,

Mozelle W. Thompson, Orson Swindle and Thomas

B. Leary), available at http://www.ftc. gov/os/2000/

03/hoeschtandrxcommstmt.himl .............. 11

vi

Cited Authorities

John R. Allison & Mark A. Lemley, Empirical

Evidence on the Validity of Litigated Patents,

Be Fr ed. CRS CIS ok vc cbr actaunveve's

FTC, Generic Drug Entry Prior to Patent Expiration:

An FTC Study (July 2002), available at http:/

www.ftc. g0v/0s/2002/07genericdrugstudy.pdf ..

FTC, Prepared Statement of the Federal Trade

Commission (Jan. 17, 2007), available at httn://

www.ftc.gov/speeches/leibowitz/07170/oral

Pk RET Te Bre re fe, eae

FTC, To Promote Innovation: The Proper Balance of

Competition and Patent Law and Policy (Oct.

2003), available at http://ftc.gov/os/2003/10/

RR ey repre ee

XII Herbert Hovenkamp, ANTiTRUST Law: AN ANALYSIS

Or ANTITRUST PRINCIPLES AND THEIR APPLICATION,

wo gr a Re renner iD

Herbert Hovenkamp et al., IP AND ANTITRUST: AN

_ ANALYSIS OF ANTITRUST PRINCIPLES ApPLies To

INTELLECTUAL PRopERTY Law § 7.4 (2006 Supp.)

Herbert Hovenkamp et al., Anticompetitive Settlement

of Intellectual Property Disputes, 87 Minn. L. Rev.

Bi EE et Py Penner ee re

Herbert Hovenkamp et al., Balancing Ease &

Accuracy In Assessing Pharmaceutical Exclusion

Payments, 88 Minn. L. Rev. 712 (2004) .......

Page

11

13

19

6, 12

Vil

Cited Authorities

Page

Paul Janicke & Lilan Ren, Who Wins Patent

Infringement Cases?, 34 AIPLA Quart. J. 1 (2006)

ee Oe ry Se ey ER eee ee 2

William M. Landes, An Economic Analysis of Courts,

BG 5. Ese BE ares eee eekawrei res 6

Cristofer Leffler & Keith Leffler, Settling the

Controversy Over Patent Settlements: Payments by

the Patent Holders Should Be Per Se Illegal, 21

Res. L..:& Boom. 75 (AIO). coc cece tecetess 12

Keith Leffler et al., Efficiency Trade-Offs In Patent

Litigation Settlements: Analysis Gone Astray?, 39

Cr Se, Se EE ch vk ondwcd db auasewers 5, 10, 11

Bethany McLean, A Bitter Pill, Fortune, Aug. 2001

EE Te ey eee Oe Ta Per Pa ero 10

Car] Shapiro, Antitrust Limits to Patent Settlements,

34 Rand J. of Econ. 391 (Summer 2003) ...... 6

|

STATEMENT OF INTEREST OF AMICUS CURIAE

The National Association of Chain Drug Stores (“NACDS”)

is a non-profit association of nearly 200 retail pharmacy

chains. NACDS members operate more than 36,000 retail

community pharmacies and dispense approximately 70% of

Americans’ prescription drugs. Anticompetitive practices by

drug manufacturers, such as the practice at issue in this case,

harm NACDS members and their customers by maintaining

artificially high prices for prescription drugs. NACDS believes

that its industry-wide perspective on this important issue will

be of assistance to the Court and therefore submits this amicus

curiae brief in support of the petition for writ of certiorari to

the United States Court of Appeals for the Second Circuit.'

The Second Circuit panel held that the patentee lawfully

paid a challenger to withdraw its challenge to the patent and to

significantly restrict competition. If left standing, that decision

would undermine a careful statutory scheme in which Congress

sought to rid the pharmaceutical marketplace of weak or narrow

patents that block generic entry. Given the enormous

consequences for consumers — consumers whose elected

representatives reached a starkly different balance between the

interests of patent holders and consumers — review by this Court

is appropriate.

BACKGROUND

Generic entry poses a unique competitive threat to brand

pharmaceuticals. Generics typically enter the market at a steep

discount to the brand price, and the brand may lose as much as

70% of unit sales within the first few months after generic entry.

Manufacturers of branded pharmaceuticals therefore have

a strong financial incentive to obtain patents on their products

1. The written consents of all parties to the filing of this brief

have been filed with the Clerk. No counsel for a party has authored this

brief in whole or in part, and no person or entity other than amicus

curiae, its members, or its counsel has made a monctary contribution to

the preparation or submission of this brief.

2

and to sue generic firms to keep them out of the market.

The Hatch-Waxman Act? encouraged generic entry by providing

that the FDA cannot approve any additional generics until

180 days after the approval of the first generic whose application

certified that the asserted patent is invalid or not infringed.

21 U.S.C. §3559)(5)(B)(iv). This financial “bounty” granted

by Congress for generic entry through a patent challenge can be

worth hundreds of millions of dollars for the “first-filer’ on

blockbuster drugs. See Teva Pharm. USA, Inc. v. FDA, 398

F. Supp. 2d 176, 180 (D.D.C. 2005).

Congress’ program of encouraging generic entry through

patent challenges was a huge success. Of such cases litigated to

conclusion, 73% have been resolved in favor of the generic

challenger. FTC, Generic Drug Entry Prior to Patent

Expiration: An FTC Study, at 16 (July 2002), available at http:/

/www.ftc. gov/os/2002/07 genericdrugstudy.pdf, see also Paul

Janicke & Lilan Ren, Who Wins Patent Infringement Cases?,

34 AIPLA Quart. J. 1, 20 (2006) (generic challengers win 70%).

Some pharmaceutical manufacturers have responded to

their poor showing in these cases by paying the generic firm to

withdraw the patent challenge and stay out of the market

altogether, or to stay out longer than the strength of the patent

warrants. By paying cash to the generic firm not to enter or to

restrict entry, the patentee obtains exclusion based not on the

strength of its patent, but on the strength of its capital. By

accepting cash to restrict competition, the generic firm makes

returns not by earning profits on sales, but by agreeing not to

make sales in exchange for a share of the resulting monopoly

rents.

The Second Circuit here nevertheless held that such

“exclusion payment” settlements are (with few exceptions) per

se lawful under Section | of the Sherman Act. As set forth in

detail below, review by this Court is necessary because of the

2. The Drug Price Competition and Patent Term Restoration Act,

Pub. L. No. 98-417, 98 Stat. 1585 (1984) (codified at 21 U.S.C. § 355).

3

clear and irreconcilable split between the Circuits, the enormous

consequences of the Second Circuit’s decision for consumers,

and the incompatibility of that decision with the Hatch-Waxman

Act and this Court’s patent law precedents.

DISCUSSION

I. The Circuits Are Split Over The Fundamental Antitrust

Issue — The Proper Competitive Baseline.

The exclusion payment settlement here permitted the

generic firm to enter, but with a very high royalty rate that

prevented the generic product from being discounted more than

5% below the price of the branded product. Pet. App. at 58a.

Absent the royalty-rate constraint, the first generic entrant

typically enters at a price at 20% - 30% below the brand. In

Schering-Plough Corp. v. FTC, 402 F.3d 1056, 1059 (1 1th Cir.

2005), cert. denied, 126 S. Ct. 2929 (2006), the exclusion

payment agreement required the generic firm to stay out of the

market altogether for more than four years. In another case, in

exchange for exclusion payments of $398 million, the generic

firm stayed out of the market for 6 1/2 of the remaining 7-year

life of the patent. In re Ciprofloxacin Hydrochloride Antitrust

Litig., 363 F. Supp. 2d 514, 519 (E.D.N.Y. 2005), appeals

docketed, Nos. 05-2851, 05-2852, 05-2863 (2d Cir.). The

fundamental antitrust question raised by these cases is whether

exclusion payment agreements result in less competition than

is likely to result absent the exclusion payments. To answer

—Tthat question, courts must estimate how much competition is

likely to result absent the exclusion payments. This is the

fundamental issue over which the Circuits are hopelessly split:

what is the competitive baseline against which the exclusion

payment settlements are properly measured?

This inquiry starts with the fact that it is uncertain whether

and how much competition would result from patent litigation.

Infringement determinations are usually fact intensive and

subject to great uncertainty. And the question of patent invalidity

is “as fugitive, impalpable, wayward, and vague a phantom as

4

exists in the whole paraphernalia of legal concepts.” Harries v.

Air King Products Co., 183 F.2d 158, 162 (2d Cir. 1950) (Hand,

Ci}.

The uncertainty stems in large part from the fact that patents

do not receive anywhere near the scrutiny in the Patent and

Trademark Office that they receive in subsequent court

challenges. PTO proceedings are conducted ex parte, and the

PTO is simply overwhelmed: “With yearly application totals

approximating 300,000, they arrive at a rate of about 1,000 each

working day.” FTC, To Promote Innovation: The Proper Balance

of Competition and Patent Law and Policy, at Ch. 5 p. 4 (Oct.

2003), available at http://ftc.gov/os/2003/1 O/innovationrpt. pdf.

Examiners must act quickly on these applications: “new

examiners have 25 hours, and more experienced examiners

have 20 hours, to examine a biotechnology patent.” Jd. at Ch. 1

p. 34.

The circumstances are radically different when the validity

of a patent is challenged in court, where the proceedings are

inter se, the court hears from opposing experts, and the issues

generally receive as much time and attention as is necessary.

The result is that, despite the statutory presumption of validity,

35 U.S.C. § 282, nearly half of all litigated patents are found to

be invalid or unenforceable. See John R. Allison & Mark A.

Lemley, Empirical Evidence on the Validity of Litigated Patents,

26 AIPLA Q.J. 185, 206 (1998).

Against this background, courts could invoke several

different possible benchmarks to determine the “but-for’ amount

of competition when the patentee has paid the challenger to

drop the challenge and restrict competition:

First,-a court could engage in a case-by-case, ex-post

determination of patent validity and infringement as part of the

subsequent antitrust case. A panel of the Eleventh Circuit

appeared to require something like this in Valley Drug Co. v.

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

denied, 543 U.S. 939 (2004). That Court held that an appropriate

5

“e“

antitrust analysis of exclusion payments requires “an

identification of the protection afforded by the patent and

the relevant law and consideration of the extent to which the

agreements reflect a reasonable implementation of these.”

Id. at 1312. Identifying the “protection afforded by the patent”

includes “‘consider[ation] .. . of the likelihood of the [patentee’s]

obtaining such protections.” /d. On remand in Valley Drug, the

district court conducted an exhaustive analysis of the merits of

the underlying patent case and concluded that the patentee was

not likely to have obtained the protection that the exclusion

payments bought. /n re Terazosin Hydrochloride Antitrust Litig.,

352 F. Supp. 2d 1279, 1298, 1307 n.26 (S.D. Fla. 2005). The

agreement was to that extent unlawful. /d.

This potential baseline is subject to significant criticism.

Permitting any type or form of settlement of a patent challenge

is economically efficient only to the extent that the settlement

saves litigation costs. Those costs are not saved if resolution of

the patent issues is merely deferred to the subsequent antitrust

case. Moreover, the deferral of the patent issues is likely to result

in a significant temporal extension of the monopoly, as well as

the substitution of a less capable challenger. See Keith Leffler

et al., Efficiency Trade-Offs In Patent Litigation Settlements:

Analysis Gone Astray?, 39 U.S.F.L. Rev. 33, 54-55 (2004)

{hereinafter “Efficiency Trade-Offs’”’].

Second, courts could assume that the patent would be found

to be invalid or not infringed. In the pharmaceutical industry,

such an assumption is supported by the generic challengers’

73% success rate. Under this baseline, any settlement that

restricted generic entry for any time or in any way would be

presumptively anticompetitive. The problem with this potential

baseline is that this Court has repeatedly admonished that

antitrust cases should be based on marketplace realities, not

legal presumptions: “[l]egal presumptions that rest on

formalistic distinctions rather than actual market realities are

generally disfavored in antitrust law.” Eastman Kodak Co. v.

Image Tech. Servs., Inc., 504 U.S. 451, 466-67 (1992). And

6

although the patentees’ success rate in Hatch-Waxman cases

(27%) is miserable, it is not zero.

A third potential baseline is the patent litigants’ own view

of the likely outcome of the litigation, as reflected in their

objective conduct. Economists use the established economic

concept of “expected,” i.e. probability-adjusted, outcomes of

litigation’ to show that the proper baseline is the amount of

competition that the parties themselves believed, as of the time

of the agreements, was probable. See Herbert Hovenkamp

et al., Anticompetitive Settlement of Intellectual Property

Disputes, 87 Minn L. Rev. 1719, 1758 (2003) [hereinafter

“Anticompetitive Settlement”] (proper baseline is the

“competition that the patentee could . . . expect ex ante to exclude

after trial’’); Carl Shapiro, Antitrust Limits to Patent Settlements,

34 Rand J. of Econ. 391, 395 (Summer 2003) [hereinafter

“Antitrust Limits’ (“A patent settlement cannot [lawfully] lead

to lower expected consumer surplus than would have arisen

from ongoing litigation”). The patentee would not make a

payment to the challenger unless the payment reduced

competition to a level below that otherwise expected by the

patentee to result from the litigation. Likewise, when the

challenger requires a payment in order to agree to the entry date

or royalty rate offered by the patentee, that date or rate must

provide less competition than the challenger himself expects

under litigation. Shapiro, Antitrust Limits, at 407-08;

Hovenkamp, Anticompetitive Settlement, at 1759. This baseline

takes account of the key marketplace fact that patent litigation

is inherently uncertain; it focuses on the facts as of the date of

the agreement; it acknowledges that the patent litigants

themselves are best situated to assess the likely outcome of the

litigation; and it does not require a relitigation of the patent

case.

The Court used this baseline in Standard Oil Co. (Indiana)

v. United States, 283 U.S. 163 (1931), where the parties settled

3. See William M. Landes, An Economic Analysis of Courts, 14

J. L. & Econ. 61 (1971).

7

a patent litigation over blocking patents by entering into a cross-

license egreement—The Court held that the agreement was lawful

because it presumably reflected “a division of royalties according

to the value attributed by the parties to their respective patent

claims... .” Id. at 171 (emphasis added); see also Aronson vy.

Quick Point Pencil Co., 440 U.S. 257, 265 (1979) (exclusionary

power of pending patent application “depends on how likely

the parties consider it to be that a valid patent will issue”).

With respect to exclusion payments, the Sixth Circuit has

also adopted this competitive baseline. In re Cardizem CD

Antitrust Litig., 332 F.3d 896 (6th Cir. 2003), cert. denied, 543

U.S. 939 (2004). In Cardizem the patentee paid the challenger

to stay out of the market pending resolution of the patent

litigation (the Hatch-Waxman Act automatic 30-month stay,

21 U.S.C. § 355 (j)(5)(B)(iil), had expired). Relying on

marketplace realities, the Court held that a brand manufacturer’s

patent does not create an “‘impenetrable’ legal impediment to

{the generic challenger’s] production and sale of its FDA-

approved generic product.” Cardizem, 332 F.3d at 914. If the

“independent durability of [the brand manufacturer’s] patent

and the validity of its infringement claim” had been sufficient

on their own to exclude a generic competitor from the market,

then the brand manufacturer “would not have paid [the generic

competitor] $89 million to effect what the patent and

infringement suit had already accomplished.” /d. at 915. The

patentee’s payments gave it something that the patent did not

— a “guarantee[{]” against competition. Jd. at 907.

The D.C. Circuit adopted the same baseline in Andrx

Pharm. Inc. v. Biovail Corp. Int'l, 256 F.3d 799, 813 (D.C. Cir.

2001) (“Although its unilateral decision not to market its generic

version of Cardizem CD would have [presumably been lawful],

the counterclaim alleges that Andrx entered into an

anticompetitive agreement with HMRI in order to exclude

others; HMRI’s $10 million quarterly payments were

presumably in return for something that Andrx would not

8

otherwise do, that is, delay marketing of its generic.”) (emphasis

in original). So did a unanimous FTC in In re Schering-Plough

Corp., FTC Docket No. 9297, 2003 WL 22989651 at 17 (FTC

Dec. 8, 2003) (“{I]f there has been a payment from the patent

holder to the generic challenger, there must have been some

offsetting consideration. Absent proof of other offsetting

consideration, it is logical to conclude that the quid pro quo for

the payment was an agreement by the generic to defer entry

beyond the date that represents an otherwise reasonable litigation

compromise.”), rev’d, Schering-Plough Corp. v. FTC, 402 F.3d

1056 (11th Cir. 2005), cert. denied, 126 S. Ct. 2929 (2006).

A fourth potential baseline is for the court applying antitrust

law to assume that no competition was likely to result from the

patent litigation — to assume that the patent is valid and

infringed. This is essentially the baseline adopted here by the

Second Circuit, which held that exclusion payments are per se

lawful unless the antitrust claimant proves that the underlying

patent was procured by fraud or that the patent litigation was a

sham. Pet. App. at 51a - 52a. According to the Second Circuit,

a patent grants to its holder a “right to exclude,” which can be

enforced by the patentee by paying the generic firnr to withdraw

its challenge to the patent. /d. at 28a. This is justified, according

to the Second Circuit, by the rebuttable presumption of vainly,

35 U.S.C. § 282. See Pet. App. at 48a-49a.

As noted above, this Court has repeatedly cautioned that

antitrust cases must be resolved based on marketplace realities,

not on formalistic assumptions. The fact that pharmaceutical

patentees have lost 73% of the patent challenges would seem to

rule out the Second Circuit’s formalistic assumption that

patentees will almost always win.

Moreover, there is no presumption of infringement. So the

Second Circuit’s analysis, which is founded on the presumption

of validity, could not justify exclusion payments when the

generic firm’s challenge is based on non-infringement rather

than invalidity. Nor could the Second Circuit's analysis support

9

the lawfulness of exclusion payments when, as is often the case,

the challenge asserts that the patent is invalid if construed

broadly and not infringed if construed narrowly.

The impracticality of the Second Circuit’s presumption-

based approach is highlighted by the Eleventh Circuit’s decision

in Schering-Plough Corp. v. FTC, 402 F.3d 1056, 1075 (11th

Cir. 2005), cert. denied, 126 S. Ct. 2929 (2006). The thrust of

the generic firm’s challenge in Schering was noninfringement

rather than invalidity. The Eleventh Circuit expressly recognized

the impracticality of making the lawfulness of exclusion

payments “turn[ ] on validity ... as opposed to infringement.”

Id. But instead of concluding that a presumption-based approach

was therefore unworkable, the Court solved the problem by

inventing a presumption of infringement. According to the

Eleventh Circuit, “[b]y virtue of its “743 patent, Schering

obtained the legal right to exclude Upsher and ESI from the

market until they proved either that the “743 patent was invalid

or that their products ... did not infringe Schering’s patent.”

Id. at 1066-67. This is the legal abyss into which the Second

Circuit’s presumption-based approach inevitably leads.

ke EX

In all of the exclusion payment cases, the amount of

competition that occurred under the agreements is known. The

dispositive issue in each case is the “but-for” amount of

competition against which the actual competition is compared.

The Circuits are irreconcilably split as to the appropriate

competitive baseline.

II. The Issue Is One Of Enormous Importance To

Consumers.

Rarely is there as direct a connection between a judge-made

rule and a profound effect on consumers as there is in this case.

The reality is simple: if exclusion payments are lawful,

pharmaceutical patentees will use them to terminate patent

challenges that would otherwise generate billions of dollars in

10

consumer savings. These consequences to consumers —

consequences to which the Second Circuit was completely

inattentive — warrant review by this Court.

The enormous consumer gains resulting from generic entry

are shown by a few examples. In the midst of Barr Laboratories’

challenge to the patents protecting Eli Lilly’s drug Prozac, Barr

stated that it would settle only if the agreement included an

exclusion payment of at least $200 million. See Bethany

McLean, A Bitter Pill, Fortune, Aug. 2001, at 5. Lilly refused

the demand because, as acknowledged by Lilly’s CEO, “such a

settlement violated antitrust laws, and it isn’t morally right.”

Id. So Barr continued litigating the case and ultimately obtained

a judgment invalidating the Prozac patents. The resulting early

entry of generic Prozac saved consumers an estimated $2.5

billion.

By way of another example, a district court ruled that

Apotex did not infringe GlaxoSmithKline’s patent on its

blockbuster drug, Paxil. SmithKline Beecham Corp. v. Apotex

Corp., 247 F. Supp. 2d 1011, 1052 (N.D. Ill. 2003). Apotex

launched its generic Paxil product in September 2003, while

the district court ruling was on appeal and more than three years

before the patent was slated to expire. In April 2005, the Federal

Circuit affirmed the judgment in favor of Apotex. SmithKline

Beecham Corp. v. Apotex Corp., 403 F.3d 1331, 1334 (Fed.

Cir. 2005). Early entry of generic Paxil saved consumers more

than $ 2 billion.

None of these consumer savings would likely have occurred

if the Second Circuit’s ruling had been the law at the time. If

exclusion payments are permissible under the antitrust law —

if the CEOs of Lilly and the other manufacturers are told that

they are wrong to believe that an exclusion payment settlement

“violate[s] antitrust laws, and it isn’t morally right” — such

settlements will very likely become the norm.

The vast majority of pharmaceutical patent cases can be

settled. Leffler, Efficiency Trade-Offs, at 42. Of the cases that

11

can be settled, both the brand and generic manufacturer have a

strong economic incentive to divide the monopoly profits

between themselves by means of an exclusion payment rather

than to share those profits with consumers by means of licensed

generic entry. /d. at 44. Licensed entry gains far less profits for

the generic than it loses for the brand, and consumers get the

difference. Both parties’ economic incentive, therefore, is for

the brand to simply pay the generic and split the amount that

licensed entry would have brought to consumers.

This economic analysis was dramatically confirmed by

recent events. In connection with a consent decree obtained in

one of the early exclusion payment cases, the FTC announced

that it would henceforth aggressively prosecute exclusion

payment pharmaceutical settlements. Abbott Labs. and Geneva

Pharms., No. C-3945, (FTC Mar. 16, 2000) (Statement of

Chairman Robert Pitofsky and Commissioners Sheila F.

Anthony, Mozelle W. Thompson, Orson Swindle. and Thomas

B. Leary), available at http://www. ftc.gov/os/2000/03/

hoeschtandrxcommstmt.htm. Pharmaceutical manufacturers

responded by no longer settling with exclusion payments.

Instead, they settled at the same rate as they had before, but

they did so the traditional way — with early-entry licenses. See

FTC, Prepared Statement of the Federal Trade Commission, at

13 (Jan. 17, 2007), available at http://www. ftc.gov/speeches/

leibowitz/07170/oralstatement.pdf. But then came the Eleventh

Circuit’s decision in Schering and the Second Circuit’s decision

here. The pharmaceutical manufacturers’ response was swift

and dramatic: in fiscal 2006, 9 of the 11 Hatch-Waxman

litigation settlements with generic “first filers” included

exclusion payments. /d. at 17. If the Second Circuit view

prevails, all Hatch-Waxman cases that can be settled will likely

be settled with exclusion payments — and the patent-challenge

provisions of the Hatch-Waxman Act will be eviscerated.

While ignoring these consequences of holding exclusion

payments to be lawful, the Second Circuit invented non-existent

consequences of holding them to be unlawful. According to the

12

Second Circuit, permitting exclusion payments is necessary for

society to save the costs of patent litigation. See Pet. App. at

50a. Three facts undercut the Court’s assertion.

First, exclusion payments do not save any litigation costs

to the extent that the payments merely defer rather than terminate

litigation over the patent’s validity. For example, here the

patentee litigated the patent case through a judgment from the

district court, and only then (having lost) used the exclusion

payments to obtain a settlement. /d. at 10a. Other generic firms

then challenged the patent’s validity, but did not get to the same

procedural point until four years later. Jd. at 13a. Thus, the

exclusion payments here multiplied the patent litigation costs

while significantly delaying resolution of patent validity.

Second, the Second Circuit asserts, without citation or

analysis, that prohibiting exclusion payments would be

tantamount to prohibiting “all, or nearly all, settkements of

Hatch-Waxman infringement actions.” /d. at 50a. Economic

analysis shows, however, that exclusion payments are not

necessary to achieve any substantial number of efficient

settlements. See, e.g., Cristofer Leffler & Keith Leffler, Settling

the Controversy Over Patent Settlements: Payments by the

Patent Holders Should Be Per Se Illegal, 21 Res. L. & Econ.

475, 483-86 (2004). Indeed, exclusion payment settlements were

“virtually unheard of” until this recent spate of settlements in

the pharmaceutical industry. Hovenkamp, Anticompetitive

Settlement, at 1757 n.166. Patent litigants historically have

settled their cases by means of licensed entry. During the period

when the FTC was successfully prosecuting exclusion payment

agreements, pharmaceutical manufacturers had no difficulty at

all in settling cases without exclusion payments.

Third, even if a rule permitting exclusion payments would

save some litigation costs, courts should weigh those saved

litigation costs against the lost consumer welfare that would

result from propping up weak patents. But the Second Circuit

conspicuously failed to make this essential comparison. The

fact is that litigation expenses are trivial in comparison to the

13

lost consumer welfare that results from exclusion payments.

See Herbert Hovenkamp et al., Balancing Ease & Accuracy In

Assessing Pharmaceutical Exclusion Payments, 88 Minn. L.

Rev. 712, 716-17 (2004) (“while patent litigation is not cheap,

it is a tiny fraction of the amount of money that is at stake in the

cases we are discussing”); see also Blonder-Tongue Labs., Inc.

v. University of Illinois Fnd., 402 U.S. 313, 349 (1971) (“the

economic consequences of [permitting the patentee to repeatedly

litigate validity] are serious and any reduction of litigation in

this context is by comparison an incidental matter’).

Ill. The Second Circuit’s Decision Conflicts With Patent

Law And The Hatch-Waxman Act.

It is unlawful under the Sherman Act to pay a competitor to

restrict competition, including uncertain competition. See, e.g.,

United States v. Microsoft Corp., 253 F.3d 34, 79 (D.C. Cir.

2001) (en banc); XII Herbert Hovenkamp, ANTITRUST Law: AN

ANALYSIS OF ANTITRUST PRINCIPLES AND THEIR APPLICATION,

{ 2030b at 213 (2d ed. 2005). Here, of course, a court applying

antitrust law must take account of the Hatch-Waxman Act

regulatory scheme and of the fact that a patent is the source of

the uncertainty of the competition. See Verizon Communications,

Inc. v. Law Offices of Curtis V. Trinko, LL.P., 540 U.S. 398,

411-12 (2004). The Second Circuit’s decision is entirely

incompatible with patent law as reflected in no fewer than six

of this Court’s decisions and with Congress’ specific treatment

of pharmaceutical patents in the Hatch-Waxman Act.

The Qualified “Right to Exclude”

Relying on the rebuttable presumption of validity, the

Second Circuit held that the patentee has an absolute “right to

exclude” that may be enforced by paying the generic challenger

to restrict competition. Pet. App. at 28a; see also Schering, 402

F.3d at 1066. Patent law provides no such absolute right to

exclude. Instead, Congress provided for plenary judicial

determination of the validity of patents. 35 U.S.C. § 282;

see Medimmune, Inc. v. Genentech, Inc., 127 S. Ct. 764 (2007)

14

(federal courts have jurisdiction to decide patent validity even

when the parties have entered into a license and are complying

with that agreement). As this Court has explained, “The heart

of [a patentee’s] legal monopoly is the right to invoke the State’s

power to prevent others from utilizing his discovery without

his consent.” Zenith Radio Corp. v. Hazeltine Research, Inc.,

395 U.S. 100, 135 (1969). For example, the Court in eBay Inc.

v. Mercexchange, L.L.C., 126 S. Ct. 1837, 1840 (2006), held

that even after a court has entered a final judgment finding

infringement, the patentee is not automatically entitled to

exclude the adjudged infringer, but instead must satisfy the

traditional requirements for equitable relief. See also id. at 1842

(Kennedy, J., concurring) (“an injunction may not serve the

public interest” and the “suspect validity of some of these patents

may affect the calculus under the four-factor test”).

The presumption of validity relied on by the Second Circuit

Clearly does not establish an ironclad right to exclude; it “is a

procedural device, not substantive law.” Stratoflex, Inc. v.

Aeroquip Corp., 713 F.2d 1530, 1534 (Fed. Cir. 1983). The

presumption merely assigns burdens to litigants in patent trials -

and cannot “acquire an independent evidentiary role in any

[other] proceeding.” Jn re Etter, 756 F.2d 852, 856 (Fed. Cir.

1985).

The qualified nature of the “right to exclude” is confirmed

in the Hatch-Waxman Act, where Congress did grant to patentees

a procedure to obtain automatic exclusion of generic challengers,

but only for a limited period of time — 30 months. After the

expiration of 30 months, the FDA is free to approve a generic

drug for marketing regardless of whether patent litigation is

ongoing. See 21 U.S.C. § 355(j)(5)(B)(ili). Then the patentee

can obtain exclusion only the old-fashioned way — by satisfying

the requirements for a preliminary injunction, including a

showing of likelihood of success on the merits.*

4. At the preliminary injunction stage, “the patentee carries the

burden of showing likelihood of success on the merits with respect to

(Cont'd)

15

Congress’ understanding that patents are not ironclad, and

that exclusion payment agreements are anticompetitive, was

made perfectly clear in the hearings leading up to the

pharmaceutical-settlement reporting legislation.* See, e.g., 148

Conc. Rec. $7566 (daily ed. Jul. 20, 2002) (remarks of Sen.

Hatch) (“As coauthor of the [Hatch-Waxman Act], I can tell

you that I find these type of reverse payment collusiye

arrangements appalling’); 146 Conc. Rec. E1538-02 (daily ed.

Sep. 20, 2000) (remarks of Rep. Waxman) (“requir[ing]

companies seeking to reach secret, anticompetitive agreements

to disclose them to the FTC .. . [will] ensure that existing

antitrust and drug approval laws are enforced to the letter”);

147 Cona. Rec. $3711 (daily ed. Apr. 6, 2001) (remarks of Sen.

Leahy) (legislation is intended to give to the FTC “the

information they need to prevent manufacturers of patented

drugs — often brand-name drugs — from simply paying generic

drug companies to keep lower-cost products off the market’).

The Realist View of a “Patent”

The foundation of the Second Circuit’s decision is a

formalist view of what a “patent” is: a patent issued by the PTO

is presumed to be valid and therefore “the patent holder is

[permitted to] pay [ ] to protect its patent monopoly.” Pet. App.

at 38a; see also Schering, 402 F.3d at 1068 (“there is a

presumption that the “743 patent is a valid one, which gives

Schering the ability to exclude [alleged infringers]”). In contrast,

(Cont'd)

the patent’s validity.” Nutrition 2] v. United States, 930 F.2d 867, 869

(Fed. Cir. 1991) (emphasis in original); see also Reebok Int'l Ltd. v.

J. Baker, Inc. , 32 F.3d 1552, 1556 (Fed. Cir. 1994). In pharmaceutical

as well as other patent cases, courts applying patent law frequently deny

preliminary injunctions on the ground that, until a judicial finding of

validity and infringement, the alleged infringer has a “right to compete.”

See, e.g., lllinois Tool Works, Inc. v. Grip-Pak, Inc. , 906 F.2d 679, 684

(Fed. Cir. 1990).

5. Medicare Prescription Drug, Improvement, and Modernization

Act of 2003, Pub. L. No. 108-173, 117 Stat. 2066.

16

this Court has repeatedly taken a realist, clear-eyed view of

patents and the patent process. The Court has held:

A patent, in the last analysis, simply represents a

legal conclusion reached by the Patent Office.

Moreover, the legal conclusion is predicated on

factors as to which reasonable men can differ widely.

Yet the Patent Office is often obliged to reach its

decision in an ex parte proceeding, without the aid

of the arguments which could be advanced by parties

interested in proving patent invalidity.

Lear, Inc. v. Adkins, 395 U.S. 653, 670 (1969); ve also

Laboratory Corp. of America Holdings v. Metabolite Labs., Inc.,

126 S. Ct. 2921, 2929 (2006) (Breyer, J., dissenting from

dismissal of certiorari) (noting the “ongoing debate ... as to

whether the patent system, as currently administered and

enforced, adequately reflects the [balance embodied in the patent

laws]”); eBay, 126 S. Ct. at 1842 (Kennedy, J., concurring)

(courts determining injunctive relief should consider economic

and regulatory realities).

The Public Interest

This Court has long noted that “[a] patent by its very nature

is affected with a public interest” because of its potentially “far-

reaching social and economic consequences.” Precision

Instrument Mfg. Co. v. Automotive Maintenance Mach. Co.,

324 U.S. 806, 816 (1945); see also Cardinal Chem. Co. v.

Morton Int'l, Inc., 508 U.S. 83, 100-101 (1993); Blonder-Tongue

Labs., 402 U.S. at 344; Lear, 395 U.S. at 670. The Second Circuit

asserted that it had safeguarded the public interest by ensuring

that the exclusion effected by the payments did not exceed the

subject matter or temporal scope of the patent, assuming that

the patent was valid and infringed. Pet. App. at 53a - 54a.

But the requirement alluded to by the Second Circuit —

that exclusion not exceed the subject matter or temporal scope

of the patent — is just “one obvious manifestation” of the

principle that patents are affected with a public interest. Blonder-

17

Tongue Labs, 402 U.S. at 343. The Second Circuit ignored a

second aspect of the principle — “[a] second group of authorities

[that] encourage authoritative testing of patent validity.” Jd. at

344. Although patents carry a rebuttable presumption that the

PTO appropriately granted the patent, id. at 335, “Congress has

from the outset chosen to impose broad criteria of patentability

while lodging in the federal courts final authority to decide that

question,” id. at 332.

Accordingly, this Court has held that a patentee cannot

“muzzle[]” those who otherwise have an “economic incentive

to challenge the patentability of an inventor’s discovery.” Lear,

395 U.S. at 670. That conclusion is in significant tension with

the Second Circuit’s endorsement of a contractual provision

that simply pays the patent challenger to withdraw the challenge.

With respect to pharmaceutical patents, Congress

underscored the overriding public interest in avoiding

unwarranted patent-based monopolies by providing a 180-day

exclusivity bounty for generic entry via patent challenges.

See 21 U.S.C. § 355(j)(5)(B)(iv). The courts have guarded

against statutory interpretations that would “diminish[] the

incentive for the manufacturer of generic drugs to challenge a

patent ... in the hope of bringing to market a generic

competitor.” Ranbaxy Labs. Ltd. y. Leavitt, 469 F.3d 120, 126

(D.C. Cir. 2006) (invalidating FDA rule that would have such

an effect). A payment by the patentee to the generic challenger

to stay out of the market is, of course, the ultimate way to

“diminish{] the incentive for a [generic firm] ... [to] bring[] to

market a generic competitor.” Id.

The Initial Finding of Invalidity

The conflict between the Second Circuit’s decision and this

Court’s patent-law precedents is heightened by the fact that the

patentee here made the exclusion payments after the district

court in the underlying patent litigation had already found the

patent to be invalid. See Imperial Chem. Indus., PLC v. Barr

Labs., Inc., 795 F. Supp. 2d 619 (S.D.N.Y. 1992). That court

18

made key factual findings against the patentee, id. at 626-27,

which were entitled to substantial deference on appeal. By

paying off the generic challenger that had obtained the fact-

driven district court judgment, the patentee wiped the factual

slate clean and was able to start again against a different set of

challengers. See Pet. App. at 12a (settlement was contingent on

vacatur of district court judgment).

In contrast, this Court rejected the Federal Circuit’s former

practice of vacating declaratory judgments of invalidity

following an appellate determination of non-infringement.

Cardinal Chemical Co., 508 U.S. at 102. Vacating district court

judgments of invalidity “encourages endless litigation (or at least

uncertainty) over the validity of outstanding patents.”

Id. Moreover, the practice tends to “multiply the opportunities

for holders of invalid patents” to try to enforce them, which is

particularly improper because “[i]n each successive suit the

patentee enjoys the statutory presumption of validity.” /d. at

101 n.24 (quoting Blonder-Tongue, 402 U.S. at 342, 338). Here

the Second Circuit permitted the patentee to buy from its would-

be competitor the very “multipl[e] .. . opportunities” that this

Court has condemned as against public policy.

The Significance of Delay

The Second Circuit suggested that its decision is consistent -

with the vital policy of avoiding unwarranted patent-based

monopolies because an exclusion payment made to the first

generic challenger will simply invite additional challenges to

the patent by other generic firms. See Pet. App. at 49a. The

Court reached that conclusion even though the exclusion

payments here resulted in a four-year delay in the judicial testing

of the patent. See id. at 10a (exclusion payments made in March

1993, while litigants were awaiting a Federal Circuit ruling);

Zeneca Ltd. v. Novapharm Ltd., 111 F.3d 144 (Fed. Cir. 1997)

(subsequent generic challengers did not receive Federal Circuit

ruling until April 1997). Nor is this delay unusual in the

pharmaceutical industry, which has substantial regulatory

19

barriers to generic entry. See Geneva Pharm. Tech. Corp. v. Barr

Labs., Inc., 386 F.3d 485, 496 (2d Cir. 2004) (noting “particularly

high barriers to entry resulting . . . from the regulatory

requirements to sell generics”); Herbert Hovenkamp et al., IP

AND ANTITRUST: AN ANALYSIS OF ANTITRUST PRINCIPLES APPLIED

To INTELLECTUAL Property Law § 7.4 at 7-37 (2006 Supp.) (due

to regulatory barriers, exclusion payments made to first generic

challenger “‘can delay entry by another generic for three years

or more”). Exclusion payments will presumably always result

in economically meaningful delay — otherwise the patentee

would not make them. This Court has carefully guarded against

such delay. See, e.g., Lear, 395 U.S. at 673 (prohibiting practice

that “would give the licensor an additional economic incentive

to devise every conceivable dilatory tactic in an effort to

postpone the day of final judicial reckoning”); Cardinal Chem.

Co., 508 U.S. at 102 (prohibiting practice that “prolongs the

life of invalid patents”).

* * * *

In Bonito Boats, Inc. v. Thundercraft Boats, Inc., 489 U.S.

141 (1989), the Court held that the State of Florida could not

properly create patent-like rights that are broader than those

embodied in the federal patent law. Such non-federal

exclusionary nights are impermissible because “the federal patent

laws have embodied a careful balance between the need to

promote innovation and the recognition that imitation and

refinement through imitation are both necessary to invention

itself and the very lifeblood of a competitive economy.” /d. at

146; see also Laboratory Corp., 126 S. Ct. at 2922 (Breyer, J.,

dissenting from dismissal of certiorari) (“patent law seeks to

avoid the damage of overprotection just as surely as it seeks to

avoid the diminished incentive to invent that underprotection

can threaten”).

Imagine if, instead, Florida enacted a statute providing that

its courts would grant preliminary and permanent injunctive

relief in favor of patentees without inquiry into the validity of

20

the patent (or inquiry limited to whether the patent was so

obviously invalid as to render attempted enforcement a “sham’”’).

Imagine further that Florida attempted to justify its statute on

the grounds that patents once issued by the PTO are presumed

to be valid and that the policy of the federal government is to

save litigation costs. Against the background of this Court’s

patent precedents, is it not clear that Florida’s attempts to justify

its statute would be met with incredulity? And would not the

incredulity turn to astonishment if the Florida statute purported

to apply even after a federal district court had found a patent to

be invalid?

Yet the Second Circuit’s decision here permits private

parties to do exactly what no State would be permitted to do.

That decision is irreconcilable with this Court’s fundamental

patent precedents and with the Hatch-Waxman Act, and the

Court should therefore grant review.

CONCLUSION

NACDS respectfully submits that this Court should grant

certiorari to resolve a Circuit split on a matter of enormous

consequence to consumers, and to conform the law on this issue

with the Court’s patent-law precedents and the Hatch-Waxman

Act.

Respectfully submitted,

DONALD BELL

Counsel of Record

Mary ELLEN KLEIMAN

NATIONAL ASSOCIATION

OF CHAIN DruG STORES

413 North Lee Street

P.O. Box 1417-D49

Alexandria, VA 22313-1480

(703) 549-3000

Attorneys for Amicus Curiae