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Hayden W. Gregory is legislative consultant for the ABA Section of Intellectual Property Law in Washington, D.C. He can be reached at firstname.lastname@example.org.
There is a tension between patent law and antitrust or competition law that has played out in various forms since the enactment of the Sherman and Clayton Antitrust Acts at the end of the 19th century. This tension is not surprising, given the role that each body of law plays in our legal and jurisprudential structures.
Patents carry with them a right to exclude all others from making, using, selling or offering to sell, or importing the patented invention. Patent lawyers frequently and correctly remind us that this right to exclude is not an affirmative right to do anything, and it certainly does not create a monopoly. True; but it is also true that the results of the exercise of patent rights sure looks like a monopoly some of the time. Perhaps it is this realization that prompted Thomas Jefferson, that man for all seasons whose many contributions included serving simultaneously as our nation’s first commissioner of patents and first and only patent examiner (no second pair of eyes needed) to offer the sage observation that in establishing a patent system it is important to draw a line “between the things which are worth to the public the embarrassment of a monopoly, and those which are not.”
Antitrust law does not prohibit monopolies, but monopoly power does invite scrutiny as to possible anti-competitive effects. Patent and antitrust laws thus understandably are frequently found in interface, and sometimes in an out-and-out hockey type face-off.
While the better approach is to treat the two as compatible if not complementary, our legal system has frequently seen that interface as adversarial—in direct, perhaps irreconcilable—conflict, with an inevitable winner and an inevitable loser. Treating patent law as an exception to and outside antitrust law has sometimes prevailed, with a likely result of dealing a winning hand to the patent owner. The 1902 decision of the Supreme Court in E. Bement & Sons v. National Harrow Co., 186 U.S. 70, is perhaps an example. There the Court asserted “the general rule is absolute freedom in the use or sale of rights under the patent laws” and “the object of these laws is monopoly,” and upheld a patent pooling, price fixing, and territorial-splitting arrangement. In so doing, the Court opined: “The fact that the conditions in the contracts keep up the monopoly or fix prices does not render them illegal.”
Over time, the pendulum swung the other way, reaching its apogee in the 1970s with the infamous “nine no-no’s” of antitrust law distrust of patents. During that period of antitrust hostility, courts and the Justice Department traveled a torturous route before arriving at the recognition that the mere existence of a patent does not signal market power. Over the next two decades antitrust enforcement authorities moved away the seemingly hostile perspective of patent rights. The 1995 DOJ/FTC Antitrust Guidelines for Licensing Intellectual Property reflected a more balanced approach to the application of antitrust laws to intellectual property.
The legal system’s abandonment of those extremist views was seen by most as hewing toward a more appropriate middle ground. However, it was not long before some significant players began to question whether the middle ground had been crossed and we were in territory that was inappropriately pro-patent. This was the theme sounded by the chairman of the Federal Trade Commission (FTC) in November 2001, when he announced an extensive series of hearings to be conducted jointly by the FTC and the Antitrust Division of the U.S. Department of Justice, with an agenda that suggested a need to again rein in patent rights.
The ominous suggestion of impending governmental movement against patent rights caught the attention of the patent community, which quickly mobilized for extensive participation in the hearings to insure that a fair and balanced record was made.
Perhaps owing in part to robust participation of the patent community in the proceedings, when the FTC report on the hearings was released after almost two years in the making, its recommendations called for nothing in the nature of a fundamental realignment of the patent-antitrust interface. Entitled “To Promote Innovation: The Proper Balance of Competition and Patent Law and Policy,” the major recommendations addressed not antitrust issues but basic issues of patent law reform and improved PTO operations, and in fact received widespread support in the patent community.
One issue that FTC Chairman Muris had identified for scrutiny in the joint hearings was the practice of making a “reverse payment” to settle a pharmaceutical patent infringement suit in which a firm that owns a patented brand name drug is suing a firm that is seeking to enter the market with a generic product that is bioequivalent to the patented brand name drug. The landmark Drug Price Competition and Patent Term Restoration Act of 1984 (the Hatch-Waxman Act) contains a political trade-off under which some drug products receive an extended term of patent protection, and would-be competing drug products are able to hitchhike on the research and testing of brand name drugs and enter market more quickly.
A research-based brand name pharmaceutical firm is not permitted to market a new patented drug until it establishes the efficacy and safety of the drug through a process of regulatory review that often lasts several years. The Hatch-Waxman Act provides for extending the term of such a patent (Patent Term Restoration) to compensate for time spent in regulatory review. The “Drug Price Competition” side of the legislation refers to provisions that allow competitors to hitchhike on the extremely costly R&D of the brand name firms and market bioequivalent products without repeating the Food and Drug Administration (FDA) testing and approval process, thereby offering to the public the same drug at a greatly reduced price. A generic firm initiates this process by filing an Abbreviated New Drug Application (ANDA) with the FDA.
In addition to allowing a generic firm to enter the market through the above process upon the expiration of the patent on the branded product, the Hatch-Waxman ANDA process provides a market entry opportunity to a generic firm through another route, one that does not require the expiration of the patent. The generic firm can file what is known as a “paragraph IV certification,” identifying a bioequivalent drug that is on a required list of brand name drugs maintained by the FDA, and certifying that the new drug will not infringe the patent or that the patent is invalid. By statute, a paragraph IV certification is an act of infringement. The owner of the brand name drug then has 45 days to file an infringement suit to challenge market entry of the generic. This provision of Hatch-Waxman is designed to increase price competition by providing for early challenges to weak patents, which, if successful, will permit immediate marketing of less expensive generics. To encourage this sort of challenge, Hatch-Waxman awards the first generic manufacturer to file a paragraph IV certification a 180-day period of market exclusivity beginning on the date commercial marketing of the drug begins. This period of exclusivity is available only to the “first to file,” even if that filer does not prevail in the infringement action, or does not enter the market for other reasons. In court challenges to reverse payments, “other reasons” have been alleged to include a collusive agreement by the brand name and the generic to structure the terms of settlement of the suit so that the running of the 180-day term of exclusivity is delayed, thereby delaying market entry of competition to the brand name drug.
The “reverse payments” that are the subject of ongoing controversy in all three branches of government refer to a payment by a plaintiff-named brand firm to a defendant generic firm whereby the generic firm receives a payment for agreement not to enter the market for a period of time.
The 2003 FTC report reported briefly on the Commission’s activities in challenging the use of such payments in the settlement of some Hatch-Waxman suits, but did not offer any recommendations of doctrine or policy to guide in resolution of the underlying legal issues. To this day, those issues remain in sharp dispute. The divide has taken on a “patents v. antitrust” posture, and if a middle-ground solution is in sight, it does not appear that it is being embraced in either the judicial or the legislative proceedings where the dispute continues to play out.
For the past several Congresses, a number of bills have been proposed to ban or restrict the use of reverse payments to settle Hatch-Waxman infringement suits. Most of the action has been in the Senate. Earlier bills, such as S. 316 in the 110th Congress (2007–2008), called for amendment of the Clayton Act to make settlement of the infringement suit by a reverse payment a per se violation.
This hard-line approach proved politically unacceptable, and opponents of reverse payments ratcheted back their proposal to call for evaluation of such settlements under a traditional antitrust “rule of reason” analysis. As introduced in the 111th Congress, S. 369 took the same per se violation approach as S. 316 in the 110th Congress. S. 369 was later revised to treat such settlements as presumptive of anticompetitive effects, but such presumption can be overcome by a showing that the pro-competitive effects outweigh the anticompetitive effects. S. 27, the successor to S. 369 in the current Congress, reflects the same approach.
Section 316 in the 110th Congress and S. 369 in the 111th were each favorably reported, but neither came to a vote in the full Senate. S. 27 was favorably reported more than a year ago, has not been brought to a vote in the full Senate, and does appear likely to be. Perhaps out of recognition of inability to enact any of these more far-reaching measures, Senate proponents of curtailing reverse payment settlements have advanced proposals calling for more limited remedies. On May 24, Senator Bingaman offered an amendment to S. 3187, the Food and Drug Administration Safety and Innovation Act, that would strip eligibility for the 180-day market exclusivity from a generic firm that has filed intention to market a generic drug, but later agreed to delay market entry. The amendment provided that a generic firm that agrees to delay market entry is disqualified from first applicant status.
The Bingaman amendment failed by a vote of 28–67.
Sometimes when an issue proves to be too difficult for Congress to provide a legislative solution, a judicial response fills the void. If a case or controversy is presented, a court, unlike Congress, cannot decline to act. After Congress tried and failed, the U.S. Supreme Court provided an answer to the scope of injunctions in patent infringement cases in eBay and to remedies for copyright infringement through popular Internet file-sharing systems in Grokster.
Federal courts have certainly had ample opportunity to address legal issues arising out of reverse payment settlements, but so far no consensus response has emerged. Quite the contrary: the circuit courts of appeals that have issued decisions are sharply divided in both results and rationale.
Three federal circuit courts of appeal—the Second, Eleventh, and Federal Circuits—have upheld such payments to settle infringement suits as a permissible exercise of patent rights. The Second Circuit’s 2006 decision In re Tamoxifen Citrate Antitrust Litigation, 466 F.3d 187, is perhaps the leading case on the issue. That case concerned a settlement agreement between generic manufacturer Barr and AstraZeneca, maker of Tamoxifen, the best-selling treatment for breast cancer, which included a reverse payment to Barr of $21 million, and an agreement by Barr not to enter the Tamoxifen market until the Zeneca patent would expire some nine years hence.
The settlement agreement also called for Zeneca to grant a nonexclusive license to Barr to sell Zeneca-manufactured Tamoxifen in the United States under Barr’s label. Despite the fact that the settlement occurred after a district court had invalidated Zeneca’s patent in an infringement suit triggered by Hatch-Waxman, the Second Circuit upheld the settlement agreement. In doing so, the court relied on a “scope of the patent” test, under which there is no antitrust violation if competition is “restrained only within the limits of the patent,” as long as the patent was not obtained by fraud and the enforcement suit is not baseless. As long as the settlement does extend the term or scope of the patent, the Second Circuit seems to take the position that injury to competition is irrelevant or nonexistent: “Whatever damage is done to competition by settlement is done pursuant to the monopoly extended to the patent holder by patent law unless the terms of the settlement enlarge the scope of that monopoly.”
The court also attributed great weight to the importance and value of settling infringement suits without full litigation, and, in rejecting the dissent’s call for application of “the general rule for evaluating an anti-competitive agreement,” observed:
We think, such a rule, making every settlement of patent litigation, at least in the Hatch-Waxman Act context, subject to the inevitable, lengthy and expensive hindsight of a jury as to whether the settlement constituted a “reasonable” restraint (and, in this case, whether the Federal Circuit would have affirmed or reversed in a patent appeal), would place a huge damper on such settlements contrary to the law that we have discussed at some length that settlements are not only permitted, they are to be encouraged.
The District of Columbia, Sixth, and Third Circuits have ruled against reverse payment settlements. In the most recent of those, In re K-Dur Antitrust Litigation, decided July 16, the Third Circuit attributed considerable weight to the expressed congressional objective in enacting the Hatch-Waxman Act of making lower cost generic drugs more widely available to the public.
The Third Circuit panel applied a “rule of reason” antitrust analysis, and was highly critical of the Tomaxifen “scope of the patent” test as allowing for no antitrust scrutiny of reverse payment agreements, noting that no court that applies such a test has ever allowed a reverse payment case to go to trial. The K-Dur decision directed the district court to apply “a quick look rule of reason analysis” of settlements in which a generic receives a monetary payment in exchange for an agreement to delay market entry. The “pay for delay” arrangement will be considered prima facie evidence of an unreasonable restraint of trade, which can be rebutted by either a showing that the payment was for a reason other than delayed entry into the market, or that it offers pro-competitive benefits.
The Tomaxifen decision and rationale has come under fire within the Second Circuit itself. In Arkansas Carpenters Health and Welfare Fund v. BayerAG, 604 F.3d 98 (2010), a panel applied the Tomaxifen test and upheld a reverse payment settlement, but only because it felt itself bound by the earlier precedent. The panel recommended that the losing plaintiffs petition for rehearing en banc. Such a petition was filed but not granted, and the Supreme Court declined to grant certiorari.
Given the clear split of the circuits on these important issues concerning the application of the Hatch-Waxman provisions on the intersection of patent law and antitrust law, it seems that circumstances are ripe for resolution by the Supreme Court. However, a split in the circuits has existed for some time, and the Court has so far declined to enter the fray.