In a per curiam decision issued on April 29, 2010, a Second Circuit Court of Appeals panel ruled in Arkansas Carpenters Health & Welfare Fund v. Bayer AG (“Cipro”),1 that Bayer AG, the manufacturer of the branded antibiotic Cipro, and four drug manufacturers seeking regulatory approval to market a generic version of the drug did not violate Section 1 of the Sherman Act when they settled Bayer’s patent infringement suit, in part by agreeing to a so-called “reverse payment.” Specifically, under the settlement arrangement, also called a “pay for delay” agreement by some observers, the four generic manufacturers agreed not to enter their generic products into the market for more than six of the remaining seven years of the Cipro patent in return for more than $350 million in total payments by Bayer.
The panel affirmed the district court’s summary judgment dismissal of the suit, concluding that it was “bound” to do so because of a ruling four years earlier in a case involving the pharmaceutical Tamoxifen decided by a different Second Circuit panel.2 In the earlier decision, the court had ruled that reverse payment settlements of patent infringement suits do not violate the federal antitrust laws so long as the applicable patent was not procured by fraud or the patent suit was objectively baseless, and the settlement does not impose restrictions on the generic drug’s market entry beyond the scope of the applicable patent.
However, because the Cipro panel deemed the issue so important, it took the extremely unusual step of inviting the plaintiffs to petition for rehearing by the full Court of Appeals. Such a Petition was immediately thereafter filed, and has been supported by amici briefs filed by the U.S. Department of Justice (DOJ), Federal Trade Commission (FTC), 34 state attorneys general, four consumer groups, and 86 law, economics, and business professors.
The Hatch-Waxman Act
The 1984 Hatch-Waxman Act was intended to promote the introduction of generic drugs by allowing manufacturers of such products to obtain streamlined FDA approval on the basis of a simplified Abbreviated New Drug Application (ANDA) showing that the generic drug is the bioequivalent of the previously approved branded drug. The applicant either must certify that it will not market the generic version of the drug until the brand manufacturer’s patent expires, or must claim that the patent is not valid or that the generic drug will not infringe the patent. In return, the first company to file such an ANDA obtains a 180 day period of generic drug exclusivity. However, the brand manufacturer can challenge the ANDA by filing a patent infringement suit within 45 days after an ANDA is filed, and if it does so, ANDA approval is stayed for 30 months.
While the Hatch-Waxman Act 180-day exclusivity period was intended to encourage generic drug market entry, critics claim that it actually incentivized branded and generic drug manufacturers to limit competition through reverse payment settlements of patent infringement suits filed in response to ANDA filings. Under such settlements, the generic drug manufacturer agrees to delay market entry in return for a payment by the brand manufacturer. Critics contend that such arrangements are beneficial to both parties because the generic manufacturer stands to make less profit from earlier market entry than the profits lost by the brand manufacturer as a result of such entry. Meanwhile, according to the critics, consumers are injured by higher drug prices for the brand during the period of exclusion.
Prior Court of Appeals Decisions
The FTC began challenging reverse payment settlements in the late 1990s, obtaining a number of consent settlements pursuant to which such arrangements were terminated. However, it lost its first litigated challenge when the Eleventh Circuit reversed the FTC’s ruling that a reverse payment settlement by Schering Plough constituted a per se violation of the Sherman Act. Ruling instead that patent litigation settlements should be encouraged, the Eleventh Circuit declared that a reverse payment agreement is not per se illegal if the exclusion of the generic product does not extend beyond the protection of the patent.3 This created a conflict among the circuits because the Sixth Circuit had ruled two years earlier that such agreements are per se illegal.4 However, when the FTC sought to bring the conflict before the Supreme Court in late 2005, the DOJ opposed, and the Supreme Court denied certiorari.
In the Second Circuit’s 2006 Tamoxifen decision, that court ruled that reverse payment settlements do not violate the Sherman Act so long as the exclusionary period does not extend beyond the scope of the patent, even if the patent at issue is “fatally weak,” so long as it was not procured by fraud and the infringement suit is not objectively baseless.5 This view thereafter was adopted by the Federal Circuit, relying on the Second Circuit’s Tamoxifen decision in part because the case before it was on appeal from a district court within the Second Circuit.6
The Cipro Case
Relying on the Tamoxifen decision, the district court for the Eastern District of New York, in the Cipro case granted Bayer’s summery judgment motion on the ground that the plaintiffs had not shown that the challenged settlement agreement had an actual effect on competition.7 Declaring that a patent should be treated as presumptively valid, the court ruled that the proper standard for determining the validity of a reverse payment settlement should be whether the agreement restrained competition beyond the scope of the applicable patent, and the Cipro plaintiffs had failed to make such a showing.8 The decision was appealed to the Second Circuit.
In July 2009, at the request of the Second Circuit, the Obama Administration DOJ rejected the DOJ’s prior position, and instead supported the Cipro plaintiffs. According to the court: “While acknowledging that patent-holders are entitled to settle disputes over the validity of their patent, the … [DOJ] proposes that excessive reverse payment settlements be deemed presumptively unlawful unless a patent-holder can show that settlement payments do not greatly exceed anticipated litigation costs.”9 The court also noted that Senator Hatch, one of the co-sponsors of the Hatch-Waxman Act, had stated: “I find these type[s] of reverse payment collusive arrangements appalling.”10
The Second Circuit Cipro panel also quoted the DOJ’s view that the Tamoxifen standard was inappropriate because it permits patent holders “to contract their way out of the statutorily imposed risk that patent litigation could lead to invalidation of the patent,”11 and the panel referred to evidence showing that exclusionary payment settlements had increased since the Tamoxifen decision.12 It also stressed that in the case before it, there was a complete pretrial record while the Tamoxifen panel had reached its decision on a pre-discovery motion to dismiss.13 Finally, the panel noted its belief that “Tamoxifen relied on an unambiguous mischaracterization of the Hatch-Waxman Act,” by erroneously stating that only the first-filer was eligible for the 180-day exclusivity period.14 Nevertheless, it concluded that it was “bound” to review the district court’s ruling under the standard adopted in Tamoxifen,15 and it therefore affirmed dismissal of the suit.16
Based on all these considerations, the Second Circuit panel then declared “there are compelling reasons to revisit Tamoxifen with the benefit of the full Court’s consideration of the ‘difficult’ questions at issue and the important interest at stake. We therefore invite the plaintiffs-appellants to petition for rehearing in banc.”17
The petition for rehearing in banc in the Cipro case will only be accepted if a majority of the sitting Second Circuit judges agree to do so. In view of the considerable support for the petition, and the now consistent positions of the FTC and DOJ, it is quite likely that the Second Circuit will grant such review. Reversal is not guaranteed, however, in view of the varying views that have been expressed within the circuits and the differing academic opinions as to the legal standard that should be adopted stressed in the amicus brief filed by the 86 professors. In fact, the in banc Second Circuit could disavow the standard adopted by the Tamoxifen panel while nevertheless concluding that the agreement reached by Bayer and the generic manufacturers in this case withstands rule of reason scrutiny under a standard which remains to be developed. What is doubtful, however, is that the Second Circuit will consider reverse payment agreements to be per se unlawful in view of the past decisions favoring patent litigation settlements. And considering the consistent position that has now been announced by the federal antitrust enforcement agencies, it is quite possible that the Supreme Court will accept certiorari in this case no matter who wins before the Second Circuit.