Patent Protection or <i>Per Se</i> Antitrust Violation?

When the generic manufacturer makes such a paragraph IV certification, it must notify the patent-holder of its ANDA. If the patent-holding drug company responds by filing a patent-infringement suit against the generic within 45 days, then the FDA must withhold its approval of the generic drug for 30 months. The current disagreement between the circuits arises from similarly structured patent litigation settlement agreements. In both cases, a patent-holding drug maker paid a generic drug company millions of dollars in exchange for the generic's delayed entry into the market. The U.S. Court of Appeals for the Sixth Circuit in In re: Cardizem CD Antitrust Litigation, 332 F.3d 896 (6th Cir. 2003), found the heart of the agreement to be a naked restraint of trade and, thus, a per se violation of ' 1 of the Sherman Act. The U.S. Court of Appeals for the Eleventh Circuit, in Valley Drug Co. v. Geneva Pharmaceuticals Inc., 2003 U.S. App. LEXIS 19069 (11th Cir. 2003), found a similar agreement to be the protection of a legal monopoly granted by a patent, but acknowledged that some provisions of the agreement could be anticompetitive.

In Cardizem, Andrx Pharmaceuticals filed an ANDA and a paragraph IV certification for a generic version of Cardizem' CD, a drug used to treat angina and hypertension and to prevent heart attacks and strokes. Hoechst Marion Roussel, which held a license for the Cardizem' patent, filed a patent-infringement suit against Andrx, and the parties later entered into a patent settlement agreement. Pursuant to the agreement, Hoechst paid Andrx a total of $89.8 million in less than one year. In exchange, Andrx withheld its FDA-approved generic product from the market and did not relinquish its 180-day exclusivity provision.

The Sixth Circuit affirmed the district court's holding that the agreement was a per se violation of ' 1 of the Sherman Act. The court stated, “[t]here is simply no escaping the conclusion that the Agreement … was, at its core, a horizontal agreement to eliminate competition in the market for Cardizem' CD throughout the entire United States, a classic example of a per se illegal restraint of trade.” 332 F.3d at 908. The Sixth Circuit rejected the defendants' arguments that the agreement merely protected Hoechst's patent rights and stated, “it is one thing to take advantage of a monopoly that naturally arises from a patent, but another thing altogether to bolster the patent's effectiveness in inhibiting competitors by paying the only potential competitor $40 million per year to stay out of the market.” 332 F.3d at 908.

In Valley Drug, Abbott Laboratories held patents for Hytrin', a drug used to treat hypertension and enlarged prostate. Zenith Goldine Pharmaceuticals and Geneva Pharmaceuticals separately filed ANDAs and paragraph IV certifications for terazosin hydrochloride (terazosin HCL), the generic version of Hytrin'. Abbott filed an infringement suit against Geneva for its tablet terazosin HCL, but, due to an oversight, Abbott did not oppose Geneva's capsule version of the drug. Zenith, meanwhile, filed suit against Abbott to force it to delist certain patents and to seek a declaration that Zenith's product did not infringe the patents. Abbott later entered into patent settlement agreements with both parties.

Pursuant to the settlement agreements, Geneva and Zenith promised not to enter the market with a tablet or capsule version of terazosin HCL. They also agreed to retain their ANDA rights, including the 180-day exclusive marketing period. In exchange, Abbott agreed to pay Geneva $4.5 million each month; and it agreed to pay Zenith $3 million up front, $3 million after 3 months and $6 million every following 3 months. The parties terminated their agreements almost 1 year after a district court declared Abbott's patent was invalid.

In the Eleventh Circuit

The U.S. Court of Appeals for the Eleventh Circuit overturned the district court's holding that the settlement agreements were per se unlawful. The district court found the agreements amounted to a geographic market allocation between horizontal competitors in which the parties allocated the entire United States terazosin HCL market to Abbott. The Eleventh Circuit, however, found the agreements were not per se illegal because Abbott's patent granted it a legal monopoly and the right to exclude competitors from the Hytrin' market. The court explained, “[u]nlike some kinds of agreements that are per se illegal whether engaged in by patentees or anyone else, such as tying or price-fixing, the exclusion of infringing competition is the essence of the patent grant.” Valley Drug Co., 2003 U.S. App. LEXIS 19069 at *32-33. The court remanded the case to the district court to determine if any of the agreements' provisions were more exclusionary than Abbott's patents permitted.

In its opinion, the Eleventh Circuit expressly disagreed with the Sixth Circuit's decision in Cardizem. The court concluded that the Sixth Circuit improperly characterized an entire settlement agreement as per se illegal and failed to acknowledge that some of the agreement's provisions fell within the scope of the patent's protection. Id. at *48 n.26. Unlike the Sixth Circuit, the Eleventh Circuit did not find it suspicious that a patent-holding drug company would pay a generic manufacturer millions of dollars in exchange for the generic's delayed entry into the market. The court stated that only the parties themselves can assess whether settlement payments accurately reflect the costs, rewards and risks of patent litigation; the size of the payments should not matter. Id. at *44-46. The Eleventh Circuit feared that casting a negative pall on such payments, sometimes called “reverse” settlement payments, would discourage parties from settling patent litigation.

Good-Faith Defense

The Eleventh Circuit paid little regard to the fact that Abbott's patent was found ultimately to be invalid. The court explained that a patent obtained in good faith provides a complete defense against a monopolization claim and that the plaintiffs failed to allege that Abbott procured its patent by fraud or that the drug companies knew the patent was invalid. The court pondered that “exposing settling parties to antitrust liability for the exclusionary effects of a settlement reasonably within the scope of the patent merely because the patent is subsequently declared invalid would undermine the patent incentives.” Id. at *39. Essentially, the specter of antitrust liability and treble damages could deter drug companies not only from settling patent litigation, but also from engaging in research and development.

The FTC, unlike the Eleventh Circuit, has adopted a hard line on settlement agreements that delay the entry of generic competitors into the drug market. Specifically, the FTC challenged the agreements under scrutiny in both circuit court cases. (Decision and Order, Hoechst Marion Roussel Inc., Carderm Capital LP and Andrx Corp. 9293, available at http://www.ftc.gov/os/2001/05/hoechstdo.htm (May 11, 2001); Decision and Order, Abbott Laboratories and Geneva Pharmaceuticals Inc., C-3945, C-3946, available at http://www.ftc.gov/os/2000/05c3945.do.htm, www.ftc.gov/os/2000/05c3946.do.htm , www.ftc.gov/os/2000/05c3946.do.htm May 26, 2000).) Moreover, FTC Commissioner Thomas B. Leary has stated that, “the ultimate competitive impact of a pharmaceutical patent settlement is really dependent on the merits of the underlying patent litigation.” Thomas B. Leary, “Antitrust Issues in the Settlement of Pharmaceutical Patent Disputes, Part II,” available at http://http://www.ftc. gov/speeches/leary/learypharmaceuti calsettlement.htm (May 17, 2001).

He also indicated he was “tempted” to support the presumption that settlement agreements incorporating reverse payments were illegal, and that a generic drug manufacturer's promise to retain its 180-day exclusive marketing period could intensify the anticompetitive effects of such an agreement. Id. Thus, it appears that despite the Eleventh Circuit's opinion, Hatch-Waxman patent settlement agreements will not escape the FTC's scrutinizing eye.

Supreme Court to Examine?

Given the nation's increasing concern regarding rising health care costs, the notorious split between the Sixth and Eleventh circuits may prompt the Supreme Court to examine whether such settlements are “so plainly anticompetitive that no elaborate study of the industry is needed to establish their illegality.” National Society of Professional Engineers v. U.S. 435 U.S. 679, 692 (1978). Historically, the Supreme Court has reserved this characterization for agreements concerning market allocation (Palmer v. BRG of Georgia Inc., 498 U.S. 46 (1990)) and price-fixing (FTC v. Superior Court Trial Lawyers Ass'n., 493 U.S. 411 (1990)).

The Court might also address the policy questions stemming from the intersection of antitrust and intellectual property law. Would the per se illegality of these agreements freeze innovation in the pharmaceutical industry and dampen parties' incentive to settle patent litigation? Or would the legality of such agreements chill competition between patented and generic drugs?

As the winter months approached, a storm was brewing in the antitrust world. The U.S. Courts of Appeals for the Sixth and Eleventh circuits have split over the per se illegality of Hatch-Waxman patent-settlement agreements by which a patent-holding drug maker pays a generic drug company to delay its entry into the market. The Federal Trade Commission (FTC) has harshly criticized these agreements, and now the Supreme Court has an opportunity to calm the fury.

The Issue

At the heart of the storm lies the following question: When does a patent-holding drug company step beyond the bounds of the legal monopoly granted by its patent and into the realm of per se antitrust liability? The Hatch-Waxman Act sets the background for the two circuit court cases. In 1984, Congress passed the Hatch-Waxman Act, formally known as the Drug Price Competition and Patent Term Restoration Act (21 USC ' 355) with the express purpose of “mak[ing] available more low-cost generic drugs.” H.R. Rep. No. 98-857, pt.1, at 14-15 (1984), reprinted in 1984 USCCAN 2647. The Hatch-Waxman Act establishes a special FDA approval procedure for generic drug companies. The generic must file an Abbreviated New Drug Application (ANDA) and certify that its generic drug will not infringe any existing patent (a “paragraph IV certification”). The act also provides a 180-day exclusive marketing period to the first company to file an application with the FDA for a particular generic drug.

When the generic manufacturer makes such a paragraph IV certification, it must notify the patent-holder of its ANDA. If the patent-holding drug company responds by filing a patent-infringement suit against the generic within 45 days, then the FDA must withhold its approval of the generic drug for 30 months. The current disagreement between the circuits arises from similarly structured patent litigation settlement agreements. In both cases, a patent-holding drug maker paid a generic drug company millions of dollars in exchange for the generic's delayed entry into the market. The U.S. Court of Appeals for the Sixth Circuit in In re: Cardizem CD Antitrust Litigation, 332 F.3d 896 (6th Cir. 2003), found the heart of the agreement to be a naked restraint of trade and, thus, a per se violation of ' 1 of the Sherman Act. The U.S. Court of Appeals for the Eleventh Circuit, in Valley Drug Co. v. Geneva Pharmaceuticals Inc., 2003 U.S. App. LEXIS 19069 (11th Cir. 2003), found a similar agreement to be the protection of a legal monopoly granted by a patent, but acknowledged that some provisions of the agreement could be anticompetitive.

In Cardizem, Andrx Pharmaceuticals filed an ANDA and a paragraph IV certification for a generic version of Cardizem' CD, a drug used to treat angina and hypertension and to prevent heart attacks and strokes. Hoechst Marion Roussel, which held a license for the Cardizem' patent, filed a patent-infringement suit against Andrx, and the parties later entered into a patent settlement agreement. Pursuant to the agreement, Hoechst paid Andrx a total of $89.8 million in less than one year. In exchange, Andrx withheld its FDA-approved generic product from the market and did not relinquish its 180-day exclusivity provision.

The Sixth Circuit affirmed the district court's holding that the agreement was a per se violation of ' 1 of the Sherman Act. The court stated, “[t]here is simply no escaping the conclusion that the Agreement … was, at its core, a horizontal agreement to eliminate competition in the market for Cardizem' CD throughout the entire United States, a classic example of a per se illegal restraint of trade.” 332 F.3d at 908. The Sixth Circuit rejected the defendants' arguments that the agreement merely protected Hoechst's patent rights and stated, “it is one thing to take advantage of a monopoly that naturally arises from a patent, but another thing altogether to bolster the patent's effectiveness in inhibiting competitors by paying the only potential competitor $40 million per year to stay out of the market.” 332 F.3d at 908.

In Valley Drug, Abbott Laboratories held patents for Hytrin', a drug used to treat hypertension and enlarged prostate. Zenith Goldine Pharmaceuticals and Geneva Pharmaceuticals separately filed ANDAs and paragraph IV certifications for terazosin hydrochloride (terazosin HCL), the generic version of Hytrin'. Abbott filed an infringement suit against Geneva for its tablet terazosin HCL, but, due to an oversight, Abbott did not oppose Geneva's capsule version of the drug. Zenith, meanwhile, filed suit against Abbott to force it to delist certain patents and to seek a declaration that Zenith's product did not infringe the patents. Abbott later entered into patent settlement agreements with both parties.

Pursuant to the settlement agreements, Geneva and Zenith promised not to enter the market with a tablet or capsule version of terazosin HCL. They also agreed to retain their ANDA rights, including the 180-day exclusive marketing period. In exchange, Abbott agreed to pay Geneva $4.5 million each month; and it agreed to pay Zenith $3 million up front, $3 million after 3 months and $6 million every following 3 months. The parties terminated their agreements almost 1 year after a district court declared Abbott's patent was invalid.

In the Eleventh Circuit

The U.S. Court of Appeals for the Eleventh Circuit overturned the district court's holding that the settlement agreements were per se unlawful. The district court found the agreements amounted to a geographic market allocation between horizontal competitors in which the parties allocated the entire United States terazosin HCL market to Abbott. The Eleventh Circuit, however, found the agreements were not per se illegal because Abbott's patent granted it a legal monopoly and the right to exclude competitors from the Hytrin' market. The court explained, “[u]nlike some kinds of agreements that are per se illegal whether engaged in by patentees or anyone else, such as tying or price-fixing, the exclusion of infringing competition is the essence of the patent grant.” Valley Drug Co., 2003 U.S. App. LEXIS 19069 at *32-33. The court remanded the case to the district court to determine if any of the agreements' provisions were more exclusionary than Abbott's patents permitted.

In its opinion, the Eleventh Circuit expressly disagreed with the Sixth Circuit's decision in Cardizem. The court concluded that the Sixth Circuit improperly characterized an entire settlement agreement as per se illegal and failed to acknowledge that some of the agreement's provisions fell within the scope of the patent's protection. Id. at *48 n.26. Unlike the Sixth Circuit, the Eleventh Circuit did not find it suspicious that a patent-holding drug company would pay a generic manufacturer millions of dollars in exchange for the generic's delayed entry into the market. The court stated that only the parties themselves can assess whether settlement payments accurately reflect the costs, rewards and risks of patent litigation; the size of the payments should not matter. Id. at *44-46. The Eleventh Circuit feared that casting a negative pall on such payments, sometimes called “reverse” settlement payments, would discourage parties from settling patent litigation.

Good-Faith Defense

The Eleventh Circuit paid little regard to the fact that Abbott's patent was found ultimately to be invalid. The court explained that a patent obtained in good faith provides a complete defense against a monopolization claim and that the plaintiffs failed to allege that Abbott procured its patent by fraud or that the drug companies knew the patent was invalid. The court pondered that “exposing settling parties to antitrust liability for the exclusionary effects of a settlement reasonably within the scope of the patent merely because the patent is subsequently declared invalid would undermine the patent incentives.” Id. at *39. Essentially, the specter of antitrust liability and treble damages could deter drug companies not only from settling patent litigation, but also from engaging in research and development.

The FTC, unlike the Eleventh Circuit, has adopted a hard line on settlement agreements that delay the entry of generic competitors into the drug market. Specifically, the FTC challenged the agreements under scrutiny in both circuit court cases. (Decision and Order, Hoechst Marion Roussel Inc., Carderm Capital LP and Andrx Corp. 9293, available at http://www.ftc.gov/os/2001/05/hoechstdo.htm (May 11, 2001); Decision and Order, Abbott Laboratories and Geneva Pharmaceuticals Inc., C-3945, C-3946, available at http://www.ftc.gov/os/2000/05c3945.do.htm, www.ftc.gov/os/2000/05c3946.do.htm , www.ftc.gov/os/2000/05c3946.do.htm May 26, 2000).) Moreover, FTC Commissioner Thomas B. Leary has stated that, “the ultimate competitive impact of a pharmaceutical patent settlement is really dependent on the merits of the underlying patent litigation.” Thomas B. Leary, “Antitrust Issues in the Settlement of Pharmaceutical Patent Disputes, Part II,” available at http://http://www.ftc. gov/speeches/leary/learypharmaceuti calsettlement.htm (May 17, 2001).

He also indicated he was “tempted” to support the presumption that settlement agreements incorporating reverse payments were illegal, and that a generic drug manufacturer's promise to retain its 180-day exclusive marketing period could intensify the anticompetitive effects of such an agreement. Id. Thus, it appears that despite the Eleventh Circuit's opinion, Hatch-Waxman patent settlement agreements will not escape the FTC's scrutinizing eye.

Supreme Court to Examine?

Given the nation's increasing concern regarding rising health care costs, the notorious split between the Sixth and Eleventh circuits may prompt the Supreme Court to examine whether such settlements are “so plainly anticompetitive that no elaborate study of the industry is needed to establish their illegality.” National Society of Professional Engineers v. U.S. 435 U.S. 679, 692 (1978). Historically, the Supreme Court has reserved this characterization for agreements concerning market allocation ( Palmer v. BRG of Georgia Inc. , 498 U.S. 46 (1990)) and price-fixing ( FTC v. Superior Court Trial Lawyers Ass'n. , 493 U.S. 411 (1990)).

The Court might also address the policy questions stemming from the intersection of antitrust and intellectual property law. Would the per se illegality of these agreements freeze innovation in the pharmaceutical industry and dampen parties' incentive to settle patent litigation? Or would the legality of such agreements chill competition between patented and generic drugs?