Presented at AIPLA\'s IP Practice in Japan Committee Pre-Meeting (Oct. 2009)

1. Are Reverse Payment Settlements on
Reverse Gear?
AIPLA IP Practice in Japan Committee Pre-Meeting
Joerg-Uwe Szipl
Griffin and Szipl, PC
and
Ranga Sourirajan
McKool Smith, P.C.
October 13, 2009
The opinions expressed herein are not to be attributed to Griffin and Szipl,
PC‟s or McKool Smith‟s clients
Introduction
Royalty Payments
• Patentee licenses patent to licensor; licensor pays royalty
• Licensor makes, uses, or sells product or method
Reverse Payment Settlements
• Patentee pays to prevent challenge of patent
• Money, license grants, product development, delayed entry,
supply/manufacturing/inventory/promotion agreements
Pharmaceuticals
• Hatch-Waxman Act
• Paragraph IV Certification – 180-day exclusivity
• Prescription drug makers enter into settlements with generics
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2. Valley Drug v. Geneva Pharms.
Facts
• Abbott‟s drug Hytrin to treat hypertension and enlarged prostrate;
patents re terazosin hydrochloride compound
• Geneva Pharm. filed ANDA; Abbott sued
• Zenith filed ANDA, sued Abbott to delist „095 and „207 patents
• Geneva Pharm. agreed not to make generic; Abbott to pay $4.5M/mo.
• Abbott to pay $3M up front, $3M (3mo.), $6M/3mo.; Zenith not to
make generic
Procedure
• FTC sues; parties terminate agreements
• DCT: per se violation of § 1 of Sherman Act (“geographic market
allocation between horizontal competitors”)
Holding
• No per se liability; reversed DCT because it failed to consider patent‟s
exclusionary power in its antitrust analysis
Schering-Plough v. FTC
Facts
• Schering-Plough owns „743 patent re extended release formulation of
potassium chloride (K-Dur 20); Upsher-Smith filed ANDA
• Prior to trial, Schering-Plough and Upsher-Smith settled
• Upsher-Smith to refrain from entry into market; Upsher-Smith licensed
its cholesterol drug; Schering-Plough paid $60M for license and deal
• ESI Lederle settled with Schering-Plough ($30M)
Procedure
• FTC sued Schering-Plough, Upsher-Smith and ESI Lederle
• ALJ ruled against FTC; FTC appealed; Commission found payments
in violation of Sherman Act § 1 and FTC Act § 5; appeal to 11th Cir.
• DOJ – not the case to determine “the proper standards” for settlements
Holding
• No AT liability where agreement does not extend restraining effect on
competition beyond that inherent in the underlying patent
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3. Tamoxifen Litigation
Facts
• AstraZeneca‟s Nolvadex (tamoxifen), breast cancer treatment drug
• Zeneca sued Barr; DCT found Zeneca‟s „516 patent invalid
• While on appeal, parties settled and agreed to vacate DCT‟s decision;
Zeneca to pay $21M for Barr‟s delayed entry, Barr to market
• Class action suit challenging settlement between Zeneca and Barr
Procedure
• DCT grants MTD
• FTC (amicus for en banc hr‟g) – Hatch-Waxman encourages patent
challenges; “prospect of consumer benefits from such challenges is
enormous”
• DOJ (amicus for cert denial) – “correct approach is to apply the rule of
reason, rather than a rule of per se legality (or illegality)”
Holding
• Reverse settlement agreement is legal because allegations of excessive
payment was insufficient to state an antitrust claim unless the
allegations involved a fraudulently procured patent or was based on
sham litigation
Cipro Litigation
Facts
• „444 patent issued; FDA grants approval to market Cipro
• Barr files ANDA, para. IV certification; Bayer sues Barr
• Barr counterclaims invalidity, noninfringement, and unenforceability
• Bayer settles with generics before trial ($348M); Bayer files reexam
and PTO affirms patent validity
• Four generics file new ANDAs; Bayer sues generics
• Direct purchasers sue on antitrust (“AT”) grounds
Procedure
• DCT denies P‟s SJ on per se liability; P‟s add Walker Process claim;
P‟s MSJ denied
• FTC – “market division agreements between competitors” violates AT
• SCOTUS denied cert.
Holding
• Rule of reason should be applied because any anticompetitive effects
of settlement agreements are within "exclusionary zone" of patent
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4. Cipro cont.
Arkansas Carpenters Health and Welfare Fund v. Bayer,
2nd Cir. No. 05-2851
• April, 2009, 2nd Cir. Requests DOJ input
• (1) Whether settlement of patent infringement lawsuits
violates the federal antitrust laws when a potential generic
drug manufacturer withdraws its challenge to the patent’s
validity, which if successful would allow it to market a
generic version of a drug, and the brand-name patent
holder, in return, offers the generic manufacturer
substantial payments.
• (2) whether the 2nd Cir. has jurisdiction over the appeal
Cipro cont.
Arkansas Carpenters Health and Welfare Fund v. Bayer,
2nd Cir. No. 05-2851
• Brief filed July, 6, 2009 reverses Bush Administration
Position:
− Settlements involving reverse payments substantially in
excess of anticipated litigation costs may upset the
balance of Hatch-Waxman
− Reverse payments are not essential to the settlement of
patent disputes
− Such payments are unknown outside of Hatch-Waxman
context
− The anticompetitive potential of reverse payments in the
Hatch Waxman context is sufficiently clear for the
alleged infringer’s agreement not to compete and to
eschew any challenge to the patent is sufficiently clear
that such agreements should be treated as
presumptively unlawful under Section 1 of the Sherman
Act
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5. Cipro cont.
Arkansas Carpenters Health and Welfare Fund v. Bayer,
2nd Cir. No. 05-2851
− A settlement involving a payment to the alleged drug patent
infringer in exchange for its agreement to withdraw its
challenge to the patent and delay bringing its generic drug to
market is presumptively unlawful and requires the defendant
to offer justifications in order to avoid antitrust liability.
− Defendants burden is to show that, despite the reverse
payment, the agreed upon entry date and other terms of entry
reasonably reflected their contemporaneous evaluations of the
likelihood that a judgment in the patent litigation would have
resulted in generic competition before patent expiration
− DOJ did not take a position on the specific merits of this
appeal
− The present 2nd Cir. Case is related to the Fed. Cir. In re Cipro
case for which review was denied by the Supreme Court.
− The DOJ brief does not mention the 2nd Cir.’s earlier In re
Tamoxifen case which upheld a similar reverse payment
agreement
− A 2nd Cir. Holding in line with the DOJ’s new view would set up
a circuit split that could prompt Supreme Court review.
Cipro cont.
Arkansas Carpenters Health and Welfare Fund v. Bayer,
2nd Cir. No. 05-2851
• How would the analysis work under the DOJ Position?
• Because settlements may serve a legitimate purpose, they
are appropriately analyzed under the rule of reason
• Under rule of reason challenger may make a prima facie
case
− The brand name patent holder made a payment to the
generic, and
− That payment was accompanied by the generic’s
agreement to withdraw its patent challenge
• If the payment is in excess of litigation costs
competitive effects will be looked at
• If settlement does not allow market entry before
patent expiration, defendants likely win
• If market entry is before patent expiration,
defendant may meet burden.
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6. Proposed Legislation
• Bills introduced in House and Senate to Ban reverse
Payments ( S. 369, H.R. 1706)
− Both bills prohibit drug companies from receiving
anything of value from brand-name drug companies for
agreeing not to research, develop manufacture, or sell,
for any period of time, a generic drug.
− Bills are criticized by forcing patent litigation to go on to
the bitter end and may actually reduce the number of
generic drugs
• In response to criticism, Senate committee adopted a
modified bill (Sept. 18, 2009)
− FTC would make the decision to initiate a proceeding
− Reverse royalty agreements would be presumed illegal
− Drug companies would then have the opportunity to
convince a judge that the agreement is pro-competitive
Proposed Legislation
− Several factors would be considered:
− The length of time remaining in the patent
− The value to the consumers of competition
from the ANDA product allowed by the
agreement
− Form and amount of consideration received
by the ANDA filer by agreement
− The revenue the ANDA filer would have
received if they had won
− The reduction of revenues of the the NDA
filer if they had lost
− Time period between the date of the
agreement conveying value and the
settlement of the patent infringement claim
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7. Proposed Legislation
• House Bill would ban all settlements with
certain exceptions
• Agreements are allowed when the
consideration received is no more than
− The right to market the drug that is to be
manufactured under the patent infringement
claim, before the expiration of the patent or
other exclusivity, and
− the waiver of damages based on prior
marketing of the drug
Summary
• FTC has long taken the position that reverse payment
agreements settling Paragraph 4 Hatch-Waxman cases are
illegal
• Courts have refused to adopt per se analysis and have
generally upheld the agreements under a rule of reason
analysis, Supreme Court has consistently denied review
• Present DOJ has aligned with the FTC in calling for “pay for
delay” agreements to be presumptively illegal, shifting the
burden on the drug companies to defend them
• Both the House and Senate have proposed bills that would
regulate either ban such agreements or make them
presumptively illegal
• Related Issues:
− Pathway for Generic Bioequivalents
− Data Exclusivity
− Authorized Generics
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8. List of Cases and Citations
Cases
In re Ciprofloxacin Hydrochloride Antitrust Litigation, 544 F.3d 1323
(Fed. Cir. 2008), cert. denied, 129 S.Ct. 2828 (2008)
In re Tamoxifen Citrate Antitrust Litigation, 466 F.3d 187 (2d Cir. 2006)
Schering-Plough Corp. v. FTC, 402 F.3d 1056 (11th Cir. 2005), cert.
denied, 548 US 919 (2006)
Valley Drug Co. v. Geneva Pharms., Inc., 344 F.3d 1294 (11th Cir. 2003)
Legislation
H.R. 1706, “Protecting Consumer Access to Generic Drugs Act of 2009,”
77 PTCJ 609.
S. 369, 77 PTCJ 362, substitute bill at 78 PTCJ 592.
Speaker Contact Information
Joerg-Uwe Szipl
Griffin and Szipl, PC
2300 Ninth St., South, Suite PH-1
Arlington, VA 22204
gands@szipl.com
Ranga Sourirajan
McKool Smith, P.C.
1700 K Street, N.W., Suite 740
Washington, DC 20006
rsourirajan@mckoolsmith.com
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