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

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## Record

- **Collection:** Supreme Court brief
- **Document type:** Amicus Curiae Brief
- **Published:** January 1, 2007

## Text

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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

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Source: Frix Law Library, https://www.frixlaw.com/law-library/documents/brief%3Amicro_IA40386016_1892%3A7. Public record. Not legal advice.