It is an increasingly common case that tests the inherent conflicts between antitrust and patent law. On Oct. 15, 2008, the Court of Appeals for the Federal Circuit took a position consistent with the Second and Eleventh Circuits and rejected the antitrust claims of a group of direct and indirect purchasers contesting the legality of reverse payments made by a pharmaceutical patentholder to a generic manufacturer to settle patent litigation. The Federal Circuit, affirming the district court’s grant of summary judgment for the defendants, held that such agreements do not violate the antitrust laws so long as the patent was not procured through fraud, the underlying patent suit was not a sham, and the anti-competitive effects of the settlement agreements are not outside the exclusionary zone of the patent.
Challenges to the Patent and the Settlement Agreements
Bayer Corporation owns a patent for the active ingredient in its brand-name drug Cipro®. In 1991, Barr Labs, Inc. sought to manufacture a generic version of the drug during the 180-day exclusivity period available to Barr as a first challenger under the Hatch-Waxman Act. Barr challenged the validity and enforceability of Bayer’s patent and, in response, Bayer sued Barr for patent infringement. In settling these claims just before trial in 1996, Bayer and Barr entered into a series of agreements designed to resolve both Barr’s challenge to Bayer’s patent, and Bayer’s corresponding infringement suit. On one end, Barr agreed to delay its entry into the Cipro® market until after Bayer’s patent expired. Barr agreed not to manufacture its generic version of Cipro® in the United States, to amend its Hatch-Waxman certification to the FDA, affirm the validity of Bayer’s patent, admit infringement, and thereby relinquish its 180-day exclusivity entitlement. In return, Bayer agreed to pay Barr $49.1 million up front, and either supply Barr with limited quantities of Cipro® for resale, or alternatively, make additional quarterly payments to Barr, bringing the total reverse payment to approximately $398 million. Bayer also agreed to allow Barr to sell a generic version of Cipro® approximately six months before the patent expired in 2003.
After the settlement agreements, four other generic manufacturers—Ranbaxy, Mylan, Schein and Carlsbad—filed certifications with the FDA challenging the validity of Bayer’s patent and seeking to manufacture their own generic versions of Cipro®. Bayer sued all four companies for patent infringement and defeated Schein and Mylan on summary judgment. Bayer also won the Carlsbad case in a bench trial, again affirming the validity of its patent. A court dismissed the Ranbaxy case when Ranbaxy withdrew its certification to the FDA.
Resolution of One Dispute Leads to Another—The Antitrust Litigation
In 2000 and 2001, direct and indirect purchasers of Cipro® and advocacy groups filed several antitrust actions against Bayer and Barr, challenging the reverse payment settlements. Specifically, plaintiffs alleged that the settlement agreements constituted an illegal market allocation in violation of Sections 1 and 2 of the Sherman Act as well as state antitrust laws, and that Bayer unlawfully monopolized the ciprofloxacin market by enforcing a patent obtained by fraud on the PTO. In 2003, the United States District Court for the Eastern District of New York denied plaintiffs’ motion for partial summary judgment, finding that the settlement agreements were not per se illegal. In 2005, the district court granted summary judgment for defendants Bayer and Barr, holding that the settlement agreements could not be challenged under antitrust laws because they had no anticompetitive effect beyond the exclusionary zone of Bayer’s patent.
The appellants alleged numerous errors on the part of the district court and appealed to the Federal Circuit. On appeal, appellants contended that the settlement agreements were per se illegal because they allowed Bayer to exclude a horizontal competitor, not by enforcing its patent rights in court, but by making reverse settlement payments to Barr of $398 million. The Federal Circuit panel held that, in reviewing the settlement agreements, the district court could not confidently predict the pernicious anticompetitive effects necessary to find the agreements per se illegal. Consequently, the district court properly analyzed the agreements under the rule of reason.
Absent Fraud or Sham Litigation, Analysis of Patent Validity is Inappropriate as Part of a Rule of Reason Analysis
Appellants also argued that the district court erred by failing to embrace the position of the FTC, the Solicitor General and the Court of Appeals for the Sixth Circuit, which appellants contended requires application of a modified rule of reason analysis, taking into account the validity and strength of the patent in evaluating the legality of reverse payment settlements. The Federal Circuit again disagreed and took a position consistent with the Second and Eleventh Circuits, noting that pursuant to statute, a patent possesses a presumption of validity. The court confirmed that the proper approach in reverse payment cases is two-part: (1) The district court must determine if there is any evidence that the patent was procured by fraud on the PTO, or that the infringement suit was a sham or objectively baseless; (2) if no such evidence exists, the only remaining question is whether the agreements restricted competition beyond the exclusionary zone of the patent. The Federal Circuit upheld the district court’s findings that Bayer properly procured its patent and that Bayer’s infringement suit had merit. The district court also correctly noted that Bayer had prevailed in several subsequent infringement suits. As a result, the Federal Circuit agreed that there is no legal basis for restricting Bayer’s preferred means of enforcing its patent rights.
Only Anticompetitive Effects Beyond the Exclusionary Zone of the Patent May be Redressed by Antitrust Law
The Federal Circuit noted that a patent is an exception to the general rule against monopolies and that, by its very nature, a patent is anticompetitive. As a result, the Federal Circuit agreed with the district court that before antitrust law may be invoked to redress a claim, it must be determined whether the anticompetitive effects fall beyond the exclusionary zone of the patent. The Federal Circuit affirmed that the essence of the Bayer-Barr settlements was simply to exclude a generic manufacturer from profiting from Bayer’s invention—an action “well within Bayer’s rights as a patentee.” However, had the Bayer-Barr settlements included, in addition to reverse payments, a provision by which Barr maintained its 180-day exclusivity period (barring entry of competitors) or an agreement that Barr would not manufacture even non-infringing versions of its generic drug, such agreements likely would have exceeded the exclusionary zone of the patent and triggered potential antitrust liability, as was the case in a recent Sixth Circuit decision. The Federal Circuit noted, however, that the Bayer-Barr settlements contained no such provisions. As a result, when considering the scope of the settlement agreements, and the well-established judicial policy favoring settlements, the Federal Circuit agreed that the settlements were not violative of the Sherman Act, even though they may have some adverse effects on competition.
The Settlement Agreements Did Not Create a Bottleneck or Prevent Other Patent Challenges
The Federal Circuit rejected appellants’ argument that the settlement agreements were anticompetitive because, in the pharmaceutical patent context of the Hatch- Waxman Act, a brand-name manufacturer can protect its monopoly for years simply by paying off the first challenger. Appellants argued this is the case because the first challenger is entitled to a 180-day period of exclusivity, which creates a bottleneck and reduces the incentive for any other generic manufacturers to undertake the time and expense of bringing subsequent challenges to the brandname patent. In this case, the Federal Circuit affirmed the district court’s reasoning that while the Hatch-Waxman Act may create burdens for generic manufacturers, it also offers significant benefits—namely the ability to get approval for a generic version of a patented drug without having to endure the rigorous FDA new drug application process, and also the ability to “challenge the validity of a patent without incurring the costs of market entry or the risks of damages from infringement.” The Federal Circuit found these incentives clearly at work in this case, as evidenced by the fact that four other generic manufacturers challenged Bayer’s patent after the Bayer-Barr settlements.
In addition, the Federal Circuit found no bottleneck effect because as part of the settlement agreements, Barr admitted infringement of Bayer’s patent and amended its certification with the FDA, thereby relinquishing its rights to the 180-day exclusivity period—an issue that the Federal Circuit held was properly decided in 2003 by the district court in denying plaintiffs’ motion for partial summary judgment.
Pharmaceutical patent infringement litigants may find reassurance in the Federal Circuit’s decision validating the Bayer-Barr reverse payment settlements, particularly because the decision joins recent and similar decisions of the Second and Eleventh Circuits. However, the legality of such settlement agreements is contingent upon the parties’ awareness of the need to limit the anticompetitive effects of their settlements to the exclusionary zone of the underlying patent. Pharmaceutical companies would be well-served to consult with experienced counsel to avoid running afoul of antitrust laws when structuring such reverse payment settlement agreements.