Amicus Curiae Brief — Louisiana Wholesale Drug Co. v. Bayer AG

14 we),

In The

Supreme Court of the Gnited States

LOUISIANA WHOLESALE DRUG CO., INC.

CVS PHARMACY, INC., RITE AID CORPORAT ION,

ARTHUR'S DRUG STORE, INC.

Petitioners,

Vv.

BAYER AG, BAYER CORP., formerly doing business

as Miles, Inc., HOKCHST MARION ROUSSEL, INC.,

THE RUGBY GROUP, INC.,

WATSON PHARMACEUTICALS, INC..,

BARR LABORATORIES, INC.,

Respondents.

¢

On Petition For A Writ Of Certiorari

To The United States Court Of Appeals

For The Second Circuit

¢

BRIEF AMICI CURIAE OF CONSUMER

FEDERATION OF AMERICA, PRESCRIPTION ACCESS

LITIGATION LLP, THE NATIONAL LEGISLATIVE

ASSOCIATION ON PRESCRIPTION DRUG PRICES

AND U.S. PIRG IN SUPPORT OF THE PETITIONERS

-- #

DAVID A. BALTO MICHAEL A. CARRIER

Counsel of Record Professor of Law

LAW OFFICES OF RUTGERS LAW SCHOOL-CAMDEN

DAvID A. BALTO 217 North Fifth Street

1350 I Street, NW Camden, NJ 08102

Suite 850

Washington, DC 20005

(202) 577-5424

david.balto@yahoo.com

Counsel for Amici Curtae

COCKLE LAW BRIEF PRINTING CO (800) 225-6964

OR CALL COLLECT (402) 342-2831

TABLE OF CONTENTS

Page

Pe BP AIIE Bt oani seks tees sdececeseacstecetssesessws

TABLE OF AUTHORITIES .................. ela

STATEMENT OF INTEREST OF

AMICI CURIAE......... Or reborn Reon ERO 1

SUMMARY OF ARGUMENT ...............00.00.. ee. 4

Pi a | Sy ER De Peon ene ee Saeee Cae

I. This Court Should Grant Certiorari Ti

Resuscitate the Text and Legislative His-

tory of the Hatch-Waxman Act.................. 6

Il. This Court Should Grant Certiorari To

Ensure the Consistent Application of

big) eens Ae TEE ee PUN Sh Ae 1]

Ill. The Court Below, Like Courts in the

Federal and Eleventh Circuits, Relied on

Erroneous Arguments in Creating a Rule

of Near-Per Se Legality .........................064. 17

IV. This Case Presents an Ideal Vehicle for

the Court To Address Vital Competitive

ae ROE METRE ID DA RILS CD 26

CONCLUSION ............. Pimgrnuiyes vciaer weer eee ee. eae

TABLE OF AUTHORITIES

Page

CASES

Arkansas Carpenters Health and Welfare Fund

v. Bayer AG, 625 F.3d 779 (2d Cir. 2010) ......... 20, 23

Credit Suisse Securities v. Billing, 551 U.S. 264

UNI ool esse catdaacams chanesaccs curse ese schidcreaiaednaees 11, 12,13

Egyptian Goddess, Inc. v. Swisa, Inc., 543 F.3d

I, AE, SND och acnasiccsscdsansacscésstanccusanciacserves 21

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

AN GME, DD osnssvccssencvencsuvavnsarsensvesenseveenss 18, 27

In re Ciprofloxacin Hydrochloride Antitrust

Litig., 544 F.3d 1323 (Fed. Cir. 2008).........: 17, 23, 24

In re Tamoxifen Citrate Antitrust Litig., 466

A BE GE, BIO) vseviccsecsssevasssceccnsssacensseves passim

Lear, Inc. v. Adkins, 395 U.S. 653 (1969)................... 22

MedImmune, Inc. v. Genentech, Inc., 549 U.S.

es aa ce erageop mle vabaracauneass 2)

New Eng. Braiding Co. v. A.W. Chesterton Co.,

fe wy Bo Ee ee: ) ee 21]

Palmer v. BRG of Georgia, 498 U.S. 46 (1990).......... 15

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

(LEGh Cir. BO0D)..........0005.. as cue 16, 17, 24, 25, 27

United States v. Topco Assocs., Inc., 405 U.S.

a a a A eam ancacabenannacade 15

Verizon Communications v. Law Offices of

Curtis V. “>inko, 540 U.S. 398 (2004)..................... 1]

TABLE OF AUTHORITIES — Continued

Page

STATUTES

Bh AeA, BE IFIED ovsicccescnoscvecacensacscdvcroncapeacades )

Be ere RY co vaca se evaeaessciasnddece cacsosaiansoonsssses 7

Be Fe Fo avec nn ce sete nevsatvdsascavesssoriens 8

es © PE BID) ic dssisivceynsvucisvessensacecsvexvacscoedes 8

21 U.S.C. § SOB MEM B)........:ccccccccscssccses. See eet 7

a ee coc gsag ccc ses sus nce gc ee eden seeoeaasnind ee 8

Ee BF I vis sien diesen spkdn ven doisenspesesdcssotevvncesasavvers 7

Drug Price Competition and Patent Term

—— Act of 1984, Pub. L. No. 98-417,

Be Sr. DE FLD oon vnvccssesiiceecavccsvacessuscscevbecvennccheaes 6

OTHER AUTHORITIES

130 CONG. REC. 24425 (Sept. 6, 1984)..........................8

130 CONG. REC. 24427 (Sept. 6, 1984)............0. ee. 7

148 Conc. REc. 87566 (July 30, 2002)............... eaeeees LO

Alfred B. Engelberg, Special Patent Provisions

for Pharmaceuticals: Have They Outlived

Their Usefulness?, 39 IDEA 389 (1999)............19, 20

C. Scott Hemphill, An Aggregate Approach to

Antitrust: Using New Data and Rulemaking

To Preserve Drug Competition, 109 CoLum. L.

By Pe acon ap ccc eecieenec ebb ne cdeicecadinigeantiel

1V

TABLE OF AUTHORITIES — Continued

Page

C. Scott Hemphill, Paying for Delay: Pharma-

ceutical Patent Settlement as a Regulatory

Design Problem, 81 N.Y.U. L. Rev. 1553

CN ic oaleieasiionritien eatatatitdeeeoaatalosis seamen 14

Carl Shapiro, Antitrust Limits to Patent Set-

tlements, 34 RAND. J. ECON. 391 (2003)............000... 16

Community Catalyst Blog, Senate Fix on Pay-

for-Delay Vital After Court Denies Hearing,

Sept. 9, 2010, available at http://blog.

communitycatalyst.org/index.php/2010/09/09/

senate-fix-on-pay-for-delay-vital-after-court-

TRI TUOIT NII occu onions cence sa ceceoindecsss eres susieunicusaisseioe

Cristofer Leffler & Keith Leffler, Settling the

Controversy Over Patent Settlements, 21 RES.

Behe A Ae Fe INE Fira Gakic tcc hcc ea tussaunbowetaveneedchvssneest 20

Federal Trade Commission, Agreements Filed

with FTC under Medicare Prescription Drug,

Improvement, and Modernization Act of

2003: Summary of Agreements Filed in FY

SM ated toe at tsa a ye coe oelakiandatvas a taeh i coreniieientexixe 29

4/4 &

Federal Trade Commission, Agreements Filed

with FTC under Medicare Prescription Drug,

Improvement, and Modernization Act of

2003: Summary of Agreements Filed in FY

NE ahs rea ates anna outertndeondedaiesteianavonmsay one 25, 26

Federal Trade Commission, Agreements Filed

with FTC under Medicare Prescription Drug,

Improvement, and Modernization Act of

2003: Summary of Agreements Filed in FY

| RR EAN na A PNA PON RE AEA So" SS EP 25, 26

TABLE OF AUTHORITIES — Continued

Page

Federal Trade Commission, Generic Drug

Entry Prior to Patent Expiration: An FTC

Study (2002).............. 23

Federal Trade Commission, Pay-for-Delay: How

Drug Company Pay-Offs Cost Consumers

Billions, An FTC Staff Study (Jan. 3, 2010)........2, §

Generic Pharmaceuticals: Hearing No. 107-1081

Before Subcomm. on Commerce, Science, and

bo

ce

Transportation, 107th Cong. (2002) ..................006. 27

H.R. Rep. No. 98-857, pt, 1 (1984) 0.0... 6, 7,8

H.R. REp. No. 98-857, pt, 2 (1984) 00.0.0 ..ccceceecceeees 6,8

Herbert Hovenkamp, et al., Anticompetitive

Settlements of Intellectual Property Disputes,

87 MINN. L. REV. 1719 (2008) ............ccecccsseseceee 16

Herbert Hovenkamp, et al., IP AND ANTITRUST,

SD. Ce Be iki cincacacercnccesccccse: 14

Herbert Hovenkamp, Sensible Antitrust Rules

for Pharmaceutical Competition, 39 U.S.F.L

BEV. Th Ce ne cccccases . 14

John R. Allison & Mark A. Lemley, Empirical

Evidence on the Validity of Litigated Patents,

26 AIPLA Q.J. 185 (1998) .0... ee cccesceeeeeeceeeeees 22

Keith Leffler & Cristofer Leffler, Efficiency

Trade-Offs in Patent Litigation Settlements,

SO USBF, Fey ET tiki sasececcnnsssvecsssesccccccess .20

Kimberly A. Moore, Judges, Juries, and Patent

Cases, 99 MICH. L. REv. 365 (2000) ........................ 22

V1

TABLE OF AUTHORITIES — Continued

Page

Michael A. Carrier, Unsettling Drug Patent

Settlements: A Framework for Presumptive

Illegality, 108 Micu. L. REv. 37 (2009)....... ..+.Passim

Motion of Representative Henry A. Waxman as

Amicus Curiae Supporting Petitioner at *v,

FTC v. Schering-Plough Corp., 548 U.S. 919

(2006), 2005 WL 2462026 ...0.... ee eeeeeeeeeeeeeeeeeees 10

Patstats.org, Univ. of Houston Law Ctr. Deci-

sions for 2000-2004, Issue Codes 1-16, 23, 24,

available at http://www.patstats.org/2000-04.

BUIUL cs sicspune vancnceasileeke eisai Siaeie ak Senaeietteaa es tedies snare aan eae 22

Prepared Statement of FTC Before Subcomm.

on Antitrust, Competition Policy, and Con

sumer Rights of Sen. Jud. Comm. (June 9,

BG WIPE xcoahskcnorinasissiaanns 15

Prepared Statement of FTC Before Subcomm

on Courts and Competition Policy of House

Jud. Comm. (July 27, 2010), available at http

www.ftc.gov/os/testimony/100727antitrustover

sight.pdf..... aceacuae

Thomas Rice & Karen Y. Matsuoka, 7h:

Impact of Cost-Sharing on Appropriate Utili

zation and Health Status: A Review of the

Literature on Sentors, 61 MED. CARE REs. &

REV. 415 (2004)..... . 7 3

STATEMENT OF INTEREST OF AMICI CURIAE

Amici Curiae Consumer Federation of America,

Prescription Access Litigation LLC, U.S. PIRG, and

National Legislative Association on Prescription

Drug Prices (collectively “Amici”) respectfully support

Petitioners’ petition for certiorari because of the

concerns of skyrocketing drug costs and reduced

access to affordable generic drug:

All of the amici are public interest groups and

advocates for competitive health care markets. Pre-

scription Access Litigation LLC (“PAL”) is a project of

Community Catalyst, Inc., a nonprofit, nonpartisan

organization building consumer and community

participation in the shaping of the U.S. health sys

tem. PAL is a coalition of more than 130 consumer,

labor, and community organizations in 35 states, with

a combined membership of over 16 million people

The Consumer Federation of America is an associa

tion of nearly 300 nonprofit consumer organizations

that was established in 1968 to advance the consumer

interest through research, advocacy, and education

No counsel for a party authored this brief in whole in

part, and no such counsel or party made a monetary contribu

tion intended to fund the preparation or submission of this brief

No person other than amici curiae or their counsel made a

monetary contribution intended to fund its preparation o1

submission. The parties have consented to the filing of this brief

and the parties have also been given at least 10 days notice of

amici’s intention to file

Consumer Federation of America, www.consumerfed.

org (last visited Jan. 3, 2011).

National Legislative Association on Prescription

Drug Prices (“NLARx”) is a national nonprofit, non-

partisan organization of state legislators who support

policies to reduce prescription drug prices and expand

access to affordable medicines. NLARx has promoted

policies since 2000 to expand access to generic drugs

and increase competition in the marketplace. U.S.

PIRG, the federation of state Public Interest Re-

search Groups (“PIRGs”), works on behalf of Ameri-

can consumers through public outreach to advocate

for affordable health care and prescription drugs.

The Hatch-Waxman Act created incentives to

challenge brand-drug patents and bring generic drugs

to the marketplace sooner. Reverse-payment agree

ments have exactly the opposite effect. Under the

agreement at issue here, Bayer paid Barr $398 mil

lion in exchange for its agreement to stay out of the

market for six and a half of the remaining seven

years of the ciprofloxacin (“Cipro”) patent

‘ew competition problems are as critical as pay

for-delay settlements such as the one involving Cipro

These agreements are currently shielding more than

$20 billion of branded drugs from generic competi

tion. Federal Trade Commission, Pay-for-Delay: How

Drug Company Pay-Offs Cost Consumers Billions, An

FTC Staff Study, at 2 (Jan. 3, 2010); Prepared State

ment of FTC Before Subcomm. on Courts and Compe

ry

tition Policy of House Jud. Comm. (July 27, 2010),

at 4-5, available at http://www.ftc.gov/os/testimony/

100727antitrustoversight. pdf.

The cost of these settlements to consumers and

their health plans has been estimated at between

$3.5 billion and $12 billion per year. FTC, Pay-for

Delay; C. Scott Hemphill, An Aggregate Approach to

Antitrust: Using New Data and Rulemaking ‘To

Preserve Drug Competition, 109 CoLum. L. REv. 629,

649 (2009).

Beyond the financial costs, these agreements

have severe consequences for public health. Artificial-

ly inflated drug costs lead to high out-of-pocket costs

that force patients to split pills in half or to skip

taking their medications. Such consumer-coping

strategies expose patients to worsening symptoms,

escalating medical conditions, and even death. Thom-

as Rice & Karen Y. Matsuoka, The Impact of Cost-

Sharing on Appropriate Utilization and Health

Status: A Review of the Literature on Seniors, 61 MED.

CARE RES. & REv. 415, 420, 427-28 (2004). Just to

give one example, a pastor in Ohio with narcolepsy

pays $17,000 a year to insure himself and his family.

But his insurance does not cover the high price of

Provigil — $650-$850 per month — forcing him to

reduce or skip doses on days he “won't be driving

much” so he can extend his supply of the drug. Com-

munity Catalyst Blog, Senate Fix on Pay-for-Delay

Vital After Court Denies Hearing, Sept. 9, 2010,

available at http://blog.communitycatalyst.org/index.

php/20 10/09/09/senate-fix-on-pay-for-delay-vital-after-

court-denies-hearing.

Amici have a long history of advocating for access

to affordable health care and for controlling costs

without compromising quality. Because prescription

drug spending has skyrocketed over the last decade

and a half and national health expenditures on

prescription drugs have quadrupled, Amici have a

strong interest in the challenged settlement here,

which thwarted the entry of generic ciprofloxacin into

the marketplace, thereby reducing access to afforda

ble prescription drug treatments. If the reasoning of

the decision below is allowed to stand, millions of

consumers will be harmed by being denied access to

more affordable prescription drugs. This Court should

grant Petitioners’ petition for certiorari and reverse

the Second Circuit’s decision.

SUMMARY OF ARGUMENT

The Hatch-Waxman Act presents Congress’s

nuanced views on the intersection of patent and

antitrust law in the pharmaceutical industry. This

legislation includes multiple provisions to foster

generic competition and brand-drug innovation. But a

central tenet of the Act — promoting challenges to

invalid patents to lower price for consumers — has

been eviscerated by settlement agreements like the

one at issue here. Bayer’s payment of $398 million to

Barr renders ineffective the central role played by

generics in challenging invajid patents.

The decision by the court below, based on the

precedent in In re Tamoxifen Citrate Antitrust Litig

466 F.3d 187 (2d Cir. 2006), repeated many of the

errors on which courts in the Federal and Eleventh

Circuits have relhed. Four arguments, slavishly

followed by the courts, have introduced the gravest

mistakes: (1) settlements are beneficial, (2) patents

are presumed valid, (3) reverse payments fall within

the scope of the patent, and (4) reverse-payment

settlements are a natural by-product of the Act. Strict

adherence to these arguments flies in the face of the

Hatch-Waxman Act and unnecessarily increases price

and jeopardizes patients’ health

ARGUMENT

This Court should grant certiorari for three

primary reasons:

(1) To resuscitate the text and legislative

history of the Hatch-Waxman Act;

(2) ‘To ensure the viability of Trinko in the

pharmaceutical regulatory regime;

(3) To reverse the erroneous holdings of

Cipro and other courts

I. This Court Should Grant Certiorari To

Resuscitate the Text and Legislative His-

tory of the Hatch-Waxman Act.

This Court should grant certiorari to rescue the

Drug Price Competition and Patent Term Restoration

Act of 1984, Pub. L. No. 98-417, 98 Stat. 1585 (1984),

commonly known as the Hatch-Waxman Act. Through

this legislation, Congress enacted a complex regulato

ry regime to solve urgent problems. The marketplace

in the early 1980s suffered from sparse generic entry

and stifled brand-drug firm innovation.

Fostering Generic Competition. First, Con

gress promoted generic competi{ion. Generic drugs

have the same active ingredients and performance as

brand drugs. At the time of the Hatch-Waxman Act,

however, generic firms needed to undertake lengthy,

expensive trials to demonstrate safety and effective-

ness. FDA approval took years, and because the

required tests constituted infringement, generics

could not even begin the process during the patent

term. At the time Congress enacted Hatch-Waxman,

there was no generic on the market for 150 brand-

name drugs whose patents had already expired. H.R.

Rep. No. 98-857, pt. 1, at 17 (1984).

The Act’s drafters lamented the “practical exten

sion” of the patentee’s “monopoly position” beyond

expiration. H.R. Rep. No. 98-857, pt. 2, at 4 (1984).

They sought to “make available more low-cost

generic drugs.” H.R. Rep. No. 98-857, pt. 1, at 14.

Generic competition would save the federal and state

~]

governments many millions of dollars each year. And

riven that older Americans used nearly 25 percent of

prescription drugs, competition would “do more to

contain the cost of elderly care than perhaps anything

else this Congress has passed.” H.R. Rep. No. 98-857,

pt. 1, at 17; 180 Cong. Rec. 24427 (Sept. 6, 1984).

The first tool created to accelerate generic entry

was the Abbreviated New Drug Application (““ANDA”)

process that allowed generic firms to rely on the

brand drug’s safety and effectiveness studies and

avoid the expensive and lengthy new-drug-

application process. — 21 U.S.C. § 355(4)(2)(A),

§ 35548 )(B).

Second, Congress resuscitated the experimental

use defense. The Act exempted from infringement the

manufacture, use, or sale of a patented invention for

uses “reasonably related to the development and

submission of information” under a federal law regu-

lating the manufacture, use, or sale of drugs. 35

U.S.C. § 271(e)(1).

Third, Congress increased competition by (as

discussed more fully below) creating a 180-day period

of marketing exclusivity, reserved for the first generic

to certify that the brand firm’s patent was invalid or

not infringed.

Encouraging Brand Drug Innovation. In

addition to promoting generic competition, Hatch

Waxman included several mechanisms to increase

incentives for brand-firm innovation.

8

First, Congress increased the effective patent life

by extending the patent term, with the extension

currently amounting to half the time the drug is in

clinical trials plus the period _— awaiting FDA

approval after tmals. 35 U.S.C. § 156(c). Second,

Congress granted an automatic Sea siass of FDA

approval to patent holders who sue Paragraph IV

generic filers within 45 days. This period provides an

additional exclusionary right benefiting brand firms

who — even without obtaining a preliminary injunc-

tion or demonstrating entitlement to one — will not

face generic competition for a substantial period

time. 21 U.S.C. § 355q)(5)(B)gn). Finally, Congress

provided for periods of market exclusivity not based

on patents, such as the four-year exclusivity period

a! a drug with a new active ingredient. 21 U.S.C

3554 (5 CEG).

The Act’s drafters emphasized the equilibrium

between competition and innovation. Representative

H{enry Waxman underscored the “fundamental bal-

ance of the bill.” 130 Cong. Rec. 24425 (Sept. 6, 1984).

The Energy and Commerce Committee Report ex-

plained that allowing early generic challenges “fairly

balanced” the exclusionary rights of patent owners

with the “rights of third parties” to contest validity

and market products not covered by the patent. H.R.

Rep. No. 98-857, pt. 1, at 28. And the House Judiciary

Committee noted that it “has merely done what the

Congress has traditionally done in the area of intel-

lectual property law: balance the need to stimulate

9

innovation against the goal of furthering the public

interest.” H.R. Rep. No. 98-857, pt. 2, at 30.

Central Role of 180-Day Exclusivity. A cen-

tral element of this equilibrium was the 180-day

period of marketing exclusivity. This period was

reserved for the first generic firm to successfully

challenge a patent and introduce competition before

the end of the patent term.

When the FDA approves a new drug application

(“NDA”), it lists the drug and any relevant patents in

a publication Known as the Orange Book. Before

entering the market, a generic applicant must pro-

vide one of four certifications for each patent listed in

the Orange Book relating to the relevant NDA.

The first three certifications — no patent on the

drug, an expired patent, and a promise to wait until

the patent expires do not result in periods of

exclusivity. Only the “Paragraph IV” certification, by

which the generic claims that the patent is invalid

or not infringed, leads to exclusivity. 21 U.S.C.

§ 355 )2)(A)(vil). Given the drafters’ goals to encour-

age entry against invalid patents before the end of

the patent term, exclusivity limited to Paragraph IV

makes sense.

In contrast to this straightforward purpose,

settlements like the one at issue in this case have

twisted the 180-day period beyond recognition. This

period has morphed into a regulatory barrier to entry

that allows brand drug firms to block all challenges

to its patents, however weak or narrow, simply by

10

settling with the first-filing Paragraph IV generic.

Outside this drug context, patent settlements typical-

ly involve a challenger paying a patentee to enter the

market. Here, in contrast, brand drugs pay generics

not to enter the market.

Drafters’ disapproval of reverse-payment

settlements. In the years since the passage of the

Hatch-Waxman Act, the primary drafters of the

legislation have expressed their disapproval of re-

verse-payment settlements. Representative Waxman

explained that such agreements “iurn[{] the

legislation on [its] head.” Motion of Representative

Henry A. Waxman as Amicus Curiae Supporting

Petitioner at *v, FTC v. Schering-Plough Corp., 548

U.S. 919 (2006), 2005 WL 2462026. Waxman empha-

sized that the purpose of the legislation was to pro-

mote generic competition, not to allow generics “to

exact a portion of a brand-name manufacturer’s

monopoly profits in return for withholding entry into

the market.” Jd.

Senator Hatch similarly found such agreements

“appalling.” And his assessment mirrored that of

Waxman in making clear that “|[wJe did not wish to

encourage situations where payments were made to

generic firms not to sell generic drugs and not to

allow multi-source generic competition.” 148 Cong.

Rec. $7566 (July 30, 2002).

1]

This Court Should Grant Certiorari To

Ensure the Consistent Application of

Trinko.

In Verizon Communications v. Law Offices of

Curtis V. Trinko, 540 U.S. 398 (2004), this Court

articulated a powerful framework governing the

intersection of antitrust and regulation. Applied to

this case, the structure underscores the importance of

ensuring that the antitrust analysis fits the regulato-

ry structure of the Hatch-Waxman Act.

Application of Trinko to Hatch-Waxman

Regulatory Regime. As this Court explained in

Trinko, “lajntitrust analysis must always be attuned

to the particular structure and circumstances of the

industry at issue.” /d. at 411. Courts must take

“careful account” of “the pervasive federal and state

regulation characteristic of the industry.” Jd. And the

analysis must “recognize and reflect the distinctive

economic and legal setting of the regulated industry

to which it applies.” /d.

In Trinko, this Court found that the Telecornmu-

nications Act of 1996 “deter|red| and remedlied|

anticompetitive harm” by requiring incumbent local

exchange carriers (“ILECs”), which had _ state-

provided monopolies in the provision of local phone

service, to share their networks with competitors. /d.

at 412.

Consistent with this approach, this Court in

Credit Suisse Securities v. Billing concluded that the

securities law regime “impiicitly precludiled]” the

—

bo

application of the antitrust laws. 551 U.S. 264, 267

(2007). Practices by which underwriting firms forced

securities buyers to purchase shares, pay high com-

missions, and purchase less desirable securities fel]

“squarely within the heartland of securities regula-

tions” that the Securities and Exchange Commission

(“SEC”) could, and did, supervise. Jd. at 285.

Just as the telecommunications and securities

regimes presented comprehensive frameworks, the

Hatch-Waxman Act offers an exhaustive scheme that

prescribed Congress’s desired balance between com-

petition and innovation in the drug industry. The

drafters used patent term extensions, market exclu-

sivity, and 30-month stays to foster innovation. And

they revived the experimental use defense and creat-

ed a streamlined approval process and marketing-

exclusivity period to promote generic competition.

Michael A. Carrier, Unsettling Drug Patent Settle-

ments: A Framework for Presumptive Illegality, 108

Micu. L. REv. 37, 69 (2009). Congress’ careful balance

of innovation and competition in the drug industry is

particularly valuable in freeing courts from the

thorny task of reconciling the patent and antitrust

laws.

Keverse-Payment Settlements Gutting Re-

gime’s Effectiveness. Reverse-payment settlements

have blown a hole in Hatch-Waxman’s effectiveness.

In determining the appropriate role for antitrust

enforcement, it is not just the presence of the regula-

tory regime that matters, but also its effectiveness.

Id. at 70-71. For if antitrust is forced to stand down

13

due to an ineffective regime, there would be a signifi-

cant danger of false negatives that are addressed by

neither antitrust nor regulation.

The importance of a regulatory regime’s effec-

tiveness is evident in this Court’s rulings. In Trinko,

the Court explained that phone companies that

provided local service were required to “be on good

behavior” and not to discriminate in providing access

to certain facilities before they could enter the long-

distance market. 540 U.S. at 412. In addition, firms

that did not satisfy these conditions were subject to

financial penalties, daily or weekly reporting re-

quirements, and the suspension or revocation of long-

distance approval. Jd. at 412-14. In Credit Suisse, the

Court noted the SEC’s active enforcement, pointing

as one example to its detailed definitions of “what

underwriters may and may not do and say during

their road shows” and bringing actions against un-

derwriters who violated the regulations. 551 U.S. at

aii.

In contrast, in the Hatch-Waxman setting, gener

ic firms have recently been ineffective in promoting

competition through the central mechanism of patent

challenges. The Act’s drafters encouraged challenges

to invalid patents, seeking to obtain earlier market

entry and jower prices for consumers. Carrier, 108

Micu. L. REv. at 71.

Although generic entry has burgeoned in the

quarter-century since Congress enacted the law,

generics are increasingly not serving their designated

14

function. /d.; C. Scott Hemphill, Paying for Delay:

Pharmaceutical fatent Settlement as a Regulatory

Design Problem, 81 N.Y.U. L. REv. 1553, 1615 (2006);

Herbert Hovenkamp, Sensible Antitrust Rules for

Pharmaceutical Competition, 39 U.S.F.L. REv. 11, 19

(2004). They are agreeing not to challenge patents

and not to enter markets in exchange for payment.

Many settlements even provide more money than the

generic could have received by proving invalidity and

noninfringement and entering the market.

The 180-day bounty, in particular, has been

twisted from an incentive for the generic to challenge

patents to a barrier to entry preventing challenge. By

settling with the first challenger, the brand firm can

significantly delay other generics’ entrance into the

market. See Herbert Hovenkamp, et al., IP AND

ANTITRUST, § 15.3 at 15-45 (2d ed. 2010). Later generics

would be less motivated to pursue a challenge since

they would be further behind in the approval process,

would not be entitled to the market exclusivity

period, and would receive a return dependent on the

outcome of the first filer’s suit. Hemphill, Paying for

Delay, at 1586. Such hurdles loom large given the

costs of developing generic drugs, receiving FDA

approval, and pursuing costly patent litigation.

In short, the Hatch-Waxman Act’s carefully

balanced regulatory regime is not working as intend-

ed to promote competition.

Significant Antitrust Harm of Agreements.

The settling parties’ usurpation of the Hatch-Waxman

regime ensures that antitrust is essenvial in remedy-

ing anticompetitive behavior. Antitrust’s responsibil-

ity is bolstered by the severe anticompetitive dangers

threatened by reverse-payment settlements. As FTC

Chairman Jon Leibowitz has recently explained,

“lajgreements to eliminate potential competition and

share the resulting profits are at the core of what the

antitrust laws proscribe.” As a result, the Commission

“believes strongly that these pay-for-delay settle-

ments are prohibited under the antitrust laws.”

Prepared Statement of FTC Before Subcomm. on

Antitrust, Competition Policy, and Consumer Rights

of Sen. Jud. Comm. (June 9, 2010), at 4.

Of all the types of business activity, agreements

by which competitors divide markets threaten the

most dangerous anticompetitive effects. Market

division restricts all competition between the parties

on all grounds. Even price fixing allows the parties to

compete on factors other than price.

This Court has explained that “[o]ne of the

classic examples of a per se violation ... is an agree-

ment between competitors at the same level of the

market structure to allocate territories in order to

minimize competition.” United States v. Topco Assocs.,

Inc., 405 U.S. 596, 608 (1972). Courts have consist-

ently found territorial allocations among competitors

to be per se illegal. In Palmer v. BRG of Georgia, 498

U.S. 46, 49-50 (1990), for example, this Court applied

per se illegality to an agreement by which competi-

tors divided markets, agreeing not to compete in the

other’s territory.

16

Settlement agreements by which brands pay

generics not to enter the market threaten dangers

similar to territorial market allocation. But instead of

allocating geographic space, they allocate time, with

the brand blocking all competition for a period of

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

(11th Cir. 2005).

Uniquely Concerning Aspects of Reverse

Payments. The question of market division depends

on the patent’s validity and infringement. These

determinations are difficult to conduct in antitrust

litigation. But conspicuous red flags appear in the

form of substantial payments to generics not war-

ranted by the strength of the patent. Carrier, 108

Micu. L. REV. at 73.

Assisting in the raising of the flags are the

aligned incentives of the settling parties. By delaying

generic entry, the brand firm increases its monopoly

profits. It then uses some of these profits to pay the

generic. See, e.g., Carl Shapiro, Antitrust Limits to

Patent Settlements, 34 RAND. J. ECON. 391, 394 (2003);

Herbert Hovenkamp, et al., Anticompetitive Settle-

ments of Intellectual Property Disputes, 87 MINN. L.

REV. 1719, 1759 (2003). Sharing monopoly profits is

more profitable for the brand and generic firms than

competing for duopoly (and, as additional generics

enter, even smaller) profits.

By contrast, other types of settlements do not

align the parties’ incentives as directly and can lead

to more competition. One example is a traditional

licensing agreement by which an alleged infringer

17

pays a patentee to enter the market. Such an agree-

ment offers different incentives, with the patentee

seeking higher royalties and the infringer desiring

lower payments. Carrier, 108 MICH. L. REv. at 74.

In the Hatch-Waxman context, an agreement

concerning the generic entry date, without any cash

payment, should reflect the odds of the parties’ suc-

cess in patent litigation. A brand is likely to gain

additional exclusivity by supplementing the parties’

entry-date agreement with a payment to the generic

The guid pro quo for the payment would appear to be

the generic’s agreement to stay off the market beyond

the expected entry date

Ill. The Court Below, Like Courts tn the Fed-

eral and Eleventh Circuits, Relied on E:

roneous Arguments in Creating a Rule of

Near-Per Se Legality.

The court below, lke previous court in the

Second, Federal, and Eleventh Circuits, Jn re Ciprof

loxacin Hydrochloride Antitrust Litig., 544 F.3d 132

Fed. Cir. 2008), In re Tamoxifen Citrate Antitrust

Litig., 466 F.3d 187 (2d Cir. 2006), Schering-Ploug/

Corp. v. FTC, 402 F.3d 1056 (11th Cir. 2005), relied on

general arguments that are inapt in the setting of the

. rw )

Hatch-Waxman Act.” These courts have taken upon

The Sixth Circuit, in contrast ncluded that a rever

payment settlement was “a horizontal agreement to eliminate

ompetition a classic example of a per se illegal restraint of

Continued on following paye

18

themselves the Herculean task of reconciling compe

tition and innovation. They have done this even

though the legislature’s preferred equilibrium ap

pears before them on the silver platter of the Hatch

Waxman Act.

The TVamoxifen standard, on which the court

below relied, established a much-too-permissive stan

dard of near-per se legality. It held that “absent an

extension of the monopoly beyond the patent’s scope

and absent fraud the question is whether the

underlying infringement lawsuit was ‘objectively

baseless in the sense that no reasonable litigant could

realistically expect success on the merits.’” 466 F.3d

at 213. The requirement that there be sham or fraud

inappropriately borrows a concept from the different

etting of First Amendment petitioning (which de

erves a higher bar than private agreements among

rivals not to compete). The high bar warranted by the

important policies fostered by petitioning 1s not ay

propriate for private, collusive arrangements amor

horizonta! competitors

argument

Ser ond LZ

beneficial

.— payment

19

the patent, and (4) reverse-payment settlements are a

natural by-product of the Act.

“Settlements are Beneficial” Fallacy. First,

courts have voiced a general policy in favor of settle

ment. They have recognized that settlements con-

serve resources, provide certainty that encourages

investment, and result in licenses increasing compet!

tion. Carner, 108 Micn. L. Rev. at 60. For these

reasons, the 7Jamoxifen court explained that “‘courts

are bound to encourage’ settlementis].” 466 F.3d

at 202

But reverse-payment agreements are not typical

settlements. They are agreements that dispose of the

validity and infringement challenges central to the

Hatch-Waxman scheme. Any general preference in

the law for settlement was significantly weakened by

the Act’s specific framework. Carrier, 108 Micu. L

REV. at 60. A 180-day period of exclusivity for the first

ANDA to challenge a patent only makes sense in the

context of encouraging patent challenges Moreover,

the purpose of the exclusivity period, to ensure that a

veneric competitor could not “free mde” on a rival's

litigation efforts before the first filer recovered litiga

tion costs, is not promoted if the litigation never

produces a judgment benefiting other generics. Alfred

B. Engelberg, Special Patent Provisions for Pharma

ceuticals: Have They Outlived Their Usefulness?, 39

[DEA 389, 423 (1999

In addition, the 180-day bounty itself demon

trates the unique nature of these agreements

20

General patent settlements do not prevent other

competitors from challenging the patent. In these

cases, even if the settling defendant agrees not to

challenge the patent, many others often wait in the

wings to do so. In contrast, the Hatch-Waxman boun

ty creates a regulatory barrier to entry that can

significantly delay other patent challenges. Jd. In

short, general policies favoring settlements should

vive way to an industry-specific resolution that

encourages patent challenge

Finally, prohibiting exclusion payments does not

undermine the general policy in favor of settlement

The patent litigants can settle via other means, such

as traditional early-entry licenses. As_ discussed

below, litigants can and do settle Ilatch- Waxman

cases without exclusion payments, with those pay

ments “serv[ing] no obvious redeeming social pur

pose ” Arkansas Carpe nters Health and Wi lfare Fur

v. Baver AG. 625 F.3d 779 (2d Cir. 2010) (Pooler, J

dissenting from denial of rehearing en banc). Indeed

economists have shown that exclusion payments ar

not needed to achieve efficient settlements. Se

Cristofer Leffler & Keith Leffler, Settling the Cont:

versy Over Patent Settlements, 21 RkES. L. ECON. 47

184-85 (2004): Keith Leffler & Cristofer Leffle:

Kfficiency Trade-Offs in Patent Litigation Settlement

39 US.F._L. Rev. 33, 42 (2004

“Patents are Presumptively Valid” Fallacy.

Second, courts have upheld settlement agreements

based on Section 282 of the Patent Act. which state

that patents “shall be presumed valid.” Courts have

7

relied on this presumption to determine the validity

that is so crucial to deciding the appropriate antitrust

treatment. The Jamoxifen court, for example, found

that the presumption of validity allows parties to

settle “weak patent cases” even though “such settle

ments will inevitably protect patent monopolies that

are, perhaps, undeserved.” 466 F.3d at 211. For five

separate reasons, however, the Patent Act’s presump

tion of validity is entitled to far less weight than

courts have accorded it

First, even if a patent 1s presumed to be valid,

the burden of proof is always on the patentee, not the

infringer, to prove infringement. F.g., Hgyptian

Goddess, Inc. v. Swisa, Inc., 543 F.3d 665 (Fed. Cir

2008). In fact, courts’ focus on validity has led to an

insufficient recognition of the issue of infringement

Second, the presumption is only procedural in

nature. Patentees cannot, for example, rely on the

presumption as substantive evidence in preliminary

injunction proceedings. New Eng. Braiding Co

1.W. Chesterton Co., 970 F.2d 878, 882 (Fed. Cir

1992

Third, the presumption should be entitled to the

least amount of deference where the parties enter

agreements that prevent validity from even being

challenged. Carmer, 108 Micu. L. Rev. at 64. As this

Court has recognized, patent litigation plays an

important role in testing weak patents and ensuring

that the public does not suffer the adverse effects of

invalid ones. MedI]mmune, Inc. v. Genentech, Inc., 549

22

U.S. 118 (2007): Lear, Inc. v. Adkins, 395 U.S. 653

(1969).

Fourth, the Hatch-Waxman Act’s text and legisla-

tive history demonstrate the importance of invalidity

challenges. Congress’s 180-day bounty to the first

generic to challenge a patent’s invalidity was crucial

to the regime. Settlements preventing patent chal

lenges thus are a particularly inappropriate setting

for the presumption. Carrier, 108 MIcH. L. REv. at 64.

kifth, empirical studies have consistently shown

that a significant percentage of granted patents are

invalid. Surveys have found that

* courts invalidated 46% of patents between 1989

and 1996, John R. Allison & Mark A. Lemley, Empiri

cal Evidence on the Validity of Litigated Patents. 26

AIPLA Q.J. 185, 205 (1998);

¢ the alleged infringer prevailed in 42% of the

patent cases that reached trial between 1983 and

1999, Kimberly A. Moore, Judges, Juries, and Patent

Cases, 99 Micu. L. Rev. 365, 385 (2000): and

* in patent cases between 2000 and 2004, courts

found 43% of patents invalid and 75% not infringed,

Patstats.org, Univ. of Houston Law Ctr. Decisions for

2000-2004, Issue Codes 1-16, 23, 24, avatlable at

http://www. patstats.org/2000-04.htm

In the context of generic challenges in particular

the rate of invalidity is even higher. In a study of

Paragraph IV challenges between 1992 and 2000, the

FTC found that the generic prevailed in 73% of the

23

cases. Federal Trade Commission, Generic Drug

Entry Prior to Patent Expiration: An FTC Study at 16

(2002). This invalidity rate is particularly concerning,

and the potential anticompetitive effects especially

staggering, given the importance of the drugs that

have been the subject of lawsuits. Carrier, 108 MICH.

L. REV. at 65.

“Scope of Patent” Fallacy. The third argument

to which courts have deferred involves the patent's

scope. Courts have upheld reverse payments as a type

of activity falling within the temporal scope of the

patent. The court below asked whether entry-

delaying settlements fell “within the scope” of the

patentee’s rights or whether they were “illegal mar-

ket-sharing agreements.” Arkansas Carpenters, 604

F.3d at 104. And the Tamoxifen court found that the

settlement did not “unlawfully extend the reach” of

the patent. 466 F.3d at 213; see also Ciprofloxacin,

544 F.3d at 1336 (“The essence of the inquiry is

whether the agreements restrict competition beyond

the exclusionary zone of the patent.”).

The concept of temporal scope, however, cannot

do all the work courts require of it. The overriding

question in these cases (besides infringement) is

whether the patent is valid. If it is, then an agree-

ment allowing entry before the end of the patent term

is within the scope. But if the patent is not valid, it

does not have any scope. For that reason, judicial

inquiries into the temporal scope of the patent

assume validity and thus frustrate antitrust analy-

sis. In assuming the very validity it seeks to prove,

therefore, temporal scope is not an appropriate

inquiry. Carrier, 108 Micu. L. REv. at 66.

“Natural By-Product” Fallacy. The fourth

argument that some courts have accepted centers on

the “natural” status of reverse payments under the

Act. The Tamoxifen court noted that reverse pay-

oe

ments were “particularly to be expected in the drug

patent context because the Hatch-Waxman Act creat-

ed an environment that encourages them.” 466 F.3d

at 206; see also Schering, 402 F.3d at 1074 (“Reverse

payments are a natural by-product of the Hatch-

Waxman process’); Ciprofloxacin, 544 F.3d at 1333

n.ll (“sizable” reverse payments are a “not unex

pected” occurrence under Hatch-Waxman).

Courts are correct that reverse payments have

accompanied settlement agreements under the Act.

But that is a far cry from a conclusion that such a

development is beneficial. In fact, it may reflect no

more than the parties’ preference for sharing monopo-

ly profits. To consider the point more broadly, we

would not justify collusion in an industry based on

rivals’ effortlessly engaging in it. Similarly, the legali-

ty of reverse-payment settlements in no way depends

on their frequency. Carrier, 108 MicH. L. REv. at 66-

67.

Finally, as an empirical matter, reverse payments

are not needed to settle disputes between brands and

generics. Such payments disappear when challenged

and reappear when the antitrust coast is clear. Be-

tween 1992 and 1999, 8 of the 14 final settlements

between brands and generic first-filers involved

reverse payments. Federal Trade Commission,

Agreements Filed with FTC under Medicare Prescrip-

tion Drug, Improvement, and Modernization Act of

2003: Summary of Agreements Filed in FY 2005, at 4.

In 2000, the FTC announced that it would chal-

lenge such settlements. Abbott Labs and Geneva

Pharms., File No. 981-0395 (Mar. 16, 2000). In the

succeeding four years, between 2000 and 2004, not

one of 20 reported agreements involved a_ brand

paying a generic to delay entering the market. Feder-

al Trade Commission, Agreements Filed with FTC

under Medicare Prescription Drug, Improvement, and

Modernization Act of 2003: Summary of Agreements

Filed in FY 2006, at 4. During this period, parties

continued settling their disputes, but in ways less

restrictive of competition, such as through licenses

allowing early generic entry.

In 2005, after the Schering and Tamoxifen courts

took a lenient view of these agreements, the reverse-

payment floodgates opened. Between 2005 and 2007,

31 of 72 final settlements between brand and generic

firms included such payments. /d.; Federal Trade

Commission, Agreements Filed with FTC under

Medicare Prescription Drug, Improvement, and

Modernization Act of 2003: Summary of Agreements

Filed in FY 2007, at 3. Equally concerning, in recent

years, roughly 70 to 80 percent of settlements be-

tween brand firms and first generic filers have in-

volved reverse payments. /d. at 5; FY 2006

Agreements, at 6.

26

In short, the court below, relying on Tamoxifen,

together with courts in the Eleventh and Federal

Circuits, relied on inappropriate arguments in up-

holding reverse-payment settlements. These argu-

ments fly in the face of the Hatch-Waxman Act, and,

when accepted by courts, stifle the very generic

competition at the heart of the Act.

IV. This Case Presents an Ideal Vehicle for

the Court To Address Vital Competitive

Questions.

This case presents an ideal vehicle to remedy the

anticompetitive harms presented by reverse-payment

settlements. Like the earlier cases, it involves a

simple, and undisputed, payment from the brand to

the generic to delay entering the market.

The latest round of settlements, and the ones

that would confront this Court in future cases, are

more complicated. They involve agreements that the

parties claim entaii “independent” side deals. Brand

firms have paid generics for intellectual property

licenses, the supply of raw materials or finished

products, and product promotion. And they have paid

milestones, up-front payments, and development fees

for unrelated products. FY 2007 Agreements, at 2; FY

2006 Agreements, at 4-5.

27

This case cleanly presents the important anti-

trust issues for review, allowing the Court to sidestep

the potentially nettlesome question of whether the

payment is for delay at all.

In 2003, a representative of the brand firms’

trade association, the Pharmaceutical Research

Manufacturers Association (“PhRMA”), explained to

Congress that wholesale changes to the Hatch

Waxman Act were not needed. Why? Because reverse-

payment cases such as Cardizem and Schering

Plough “outline facts that would have been violations

of the antitrust laws and/or the patent laws whether

the Hatch-Waxman Act existed or not.” Generic

Pharmaceuticals: Hearing No. 107-1081 Before

Subcomm. on Commerce, Science, and Transpor-

tation, 107th Cong. at 71 (2002). If PhRMA itself

could admit the serious antitrust concerns with these

agreements, there should be no question that the rule

of near-per se legality is inappropriate.

~ —

CONCLUSION

This Court should grant certiorari to reverse the

court below, to give effect to the Hatch-Waxman Act,

and to save consumers billions of dollars from anti

competitive settlements.

Respectfully submitted,

January 7, 2011

DAVID A. BALTO MICHAEL A. CARRIER

Counsel of Record Professor of Law

LAW OFFICES OF RUTGERS LAW SCHOOL-CAMDE!

DAVID A. BALTO 217 North Fifth Street

1350 I Street, NW Camden, NJ 08102

Suite 850

Washington, DC 20005

(202) 577-5424

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Counsel for Amici Curia