From the Bleacher Seats: Amici Weigh in for the FTC in ANDROGEL Drug Patent Settlement Agreement Supreme Court Case

By Kurt R. Karst –

Excitement is building (and will soon reach fever pitch) over the U.S. Supreme Court’s March 25, 2012 Oral Argument in Federal Trade Commission v. Watson Pharmaceuticals, Inc. (Docket No. 12-416) concerning whether drug patent settlement agreements (aka “reverse payment agreements” or “pay-for-delay agreements”) are generally per se lawful, or presumptively anticompetitive and unlawful under federal competition laws.  As we previously reported, the Supreme Court agreed to hear the case after the U.S. Court of Appeals for the Eleventh Circuit affirmed, in April 2012, a February 2010 decision by the U.S. District Court for the Northern District of Georgia largely dismissing multidistrict litigation brought by the FTC (and certain private plaintiffs) challenging certain drug patent settlement agreements in which Solvay Pharmaceuticals, Inc. (“Solvay”) allegedly paid some generic drug companies to delay generic competition to Solvay’s drug product ANDROGEL (testosterone gel).  The Eleventh Circuit, following the Court’s previous holdings in Valley Drug Co. v. Geneva Pharm., Inc., 344 F.3d 1294, 1296 (11th Cir. 2003), Schering-Plough Corp. v. FTC, 402 F.3d 1056 (11th Cir. 2005), and Andrx Pharmaceuticals, Inc. v. Elan Corp., 421 F.3d 1227 (11th Cir. 2005), held that “absent sham litigation or fraud in obtaining the patent, a reverse payment settlement is immune from antitrust attack so long as its anticompetitive effects fall within the scope of the exclusionary potential of the patent.”  This “scope of the patent test” is different from the so-called “quick look rule of reason” analysis advocated by the FTC in its opening brief in the ANDROGEL case.  As the U.S. Court of Appeals for the Third Circuit explained in In Re: K-DUR Antitrust Litigation in rejecting the “scope of the patent test” and applying the “quick look” rule, under the “quick look” rule “the finder of fact must treat any payment from a patent holder to a generic patent challenger who agrees to delay entry into the market as prima facie evidence of an unreasonable restraint of trade, which could be rebutted by showing that the payment (1) was for a purpose other than delayed entry or (2) offers some pro-competitive benefit.”  (Two petitions to the U.S. Supreme Court appealing the Third Circuit’s ruling are still pending – Docket Nos. 12-245 and 12-265.) 

Several amicus briefs have been submitted to the U.S. Supeme Court from various parties in support of the FTC’s position.  A brief rundown of each amicus brief is provided below.

AARP/AMA/ NLARx/ U.S. PIRG.  In a joint brief, AARP, the American Medical Association (“AMA”), the National Legislative Association for Prescription Drug Prices (“NLARx”), and the federation of state Public Interest Research Groups, U.S. PIRG, argue that if left to stand, the Eleventh Circuit’s ANDROGEL decision “will have a devastating impact on American consumers.”  According to the groups, the Eleventh Circuit’s decision defeats the protections of the Hatch-Waxman Amendments and undermines the enforcement of the Sherman Act, will result in increased use of drug patent settlement agreements to prevent competition and that harms consumers, and will not protect incentives to innovate as some have argued.  Last November, the AMA came out in support of federal legislation to “end the practice of pay for delay in prescription medicine.”

Knowledge Ecology International (“KEI”).  KEI, which is an international non-profit, non-governmental organization focused on the management of “knowledge resources” in the context of social justice, argues in its amicus brief that if the Eleventh Circuit’s decision stands, then it is “likely to
permit pharmaceutical companies to preserve improper monopolies over weak patents and greatly delay the entry of generics into the market, thereby adversely impacting patients.”  Instead, says KEI, the Supreme Court should adopt the Third Circuit’s “quick look rule of reason” analysis with respect to the antitrust scrutiny applied to drug patent settlement agreements.

Direct Purchasers.  A groups of companies consisting of the Louisiana Wholesale Drug
Company, Inc., CVS Pharmacy, Inc., Rite Aid Corporation, Walgreen Co., Eckerd Corporation, The Kroger Co., Safeway Inc., Albertson’s, Inc., Hy-Vee, Inc., and Maxi Drug, Inc. provide in their amicus brief a series of cases involving several drug products that they contend show the threat drug patent settlement agreements pose to competition in the pharmaceutical market.  According to them, these case show the inadequacies of the Eleventh Circuit’s decision, which “virtually impels horizontal competitors to join together to split monopoly profits that would otherwise be competed away to the benefit of consumers.”  Applying a “quick look rule of reason” analysis, however, “would substantially encourage competition,” because “the parties would be free to reach an alternative no-payment settlement with an earlier entry date or litigate to a conclusion that would lead to earlier generic entry or establish the brand’s right to exclude.”

American Antitrust Institute (“AAI”)/Academics.  AAI, a self-described “independent and non-profit education, research, and advocacy organization devoted to advancing the role of competition in the economy, protecting consumers, and sustaining the vitality of the antitrust laws,” and a long list of academics, including professors of economics, business, innovation, antitrust law, and intellectual property law, argue in their amicus brief that the Eleventh Circuit’s decision is flawed and threatens to undermine competition in the drug industry and the Hatch-Waxman Amendments by unnaturally delaying generic drug competition.  According to the amici, the goal of 180-day exclusivity under the Hatch-Waxman Amendments “was to encourage generic manufacturers to challenge weak patents and enter the market earlier with cheaper drugs.  But this carefully crafted scheme has been upended by brands’ payments of millions of dollars to generics to abandon their patent challenges and delay entering the market.”  That is, 180-day exclusivity “has been twisted from an incentive for generics to challenge patents to a barrier to entry preventing challenge.”  Applying a “quick look” analysis is the way to go when evaluating drug patent settlement agreements under the antitrust laws, say amici. 

State Attorneys General.  The Attorneys General from 36 states, the District of Columbia, and the Commonwealth of Puerto Rico say in their amicus brief that they have a “strong interest in vindicating the [FTC’s] position” that drug patent settlement agreements presumptively violate the federal antitrust laws, because they “cause direct and substantial economic harm to the States and their residents by increasing drug prices and restricting consumer choice.”  Citing to the Third Circuit’s K-Dur decision, the Attorneys General write that:

Drug patent settlement agreements under which a brand-name manufacturer extends financial consideration to a generic challenger, and the challenger agrees to delay entry into the market, carry an overwhelming tendency to perpetuate monopolies improperly, beyond any point justified by the strength of the patents held by the brand-name manufacturers.  Consequently, this Court should adopt a presumption that pay-for-delay drug patent settlements are anticompetitive and unlawful.  Such a settlement should be treated as an unreasonable restraint of trade, unless the settling parties can show that the agreement has procompetitive benefits or that the payment does not represent an inducement to delay entry.

A similar group of state Attorneys General filed a brief in support of the FTC’s Petition for Writ of Certiorari in the ANDROGEL case.

America’s Health Insurance Plans (“AHIP”).  In a rather brief amicus brief, AHIP, the national association representing the health insurance industry, says that drug patent settlement agreements that delay generic competition are “insidious” and are “economically damaging . . . artifices” that must be torn down. 

Public Patent Foundation (“PUBPAT”).  PUBPAT is a non-profit legal services organization affiliated with the Benjamin N. Cardozo School of Law that “represents the public interest in ensuring that only valid patents remain in force so that full and fair competition can take place without the impediment of improperly granted patents.”  Based on that description, you know exactly where they are headed in their amicus brief.  But as opposed to other amicus briefs, PUBPAT takes a different route to end up with the conclusion that drug patent settlement agreements are presumptively anticompetitive and unlawful.  PUBPAT takes issue with the Patent and Trademark Office:

People unfamiliar with the patent system, including specifically the Court of Appeals in this case, tend to give patents entirely too much credit.  Rather than being rock-solid undeniable fortresses of legal dominance over the claimed subject matter, patents today are nothing more than some overly worked patent examiner’s decision to allow claims requested by an applicant.  They result from a Patent Office with perverse incentives to grant, rather than deny, applications and, in reality, give their owner nothing more than, at best, a fifty-fifty chance of having any exclusionary power at all.  In fact, in the vast majority of pharmaceutical patent cases, 70% or more, the generic challenger wins.

As such, the Court of Appeals’ assumption that a given patent has a potential exclusionary power equal to its full term is factually meritless and legally unsustainable.  The Court of Appeals also erred by failing to recognize the substantial pro-competitive benefits of legal challenges to patents, and in particular the judiciary’s critical role in checking patent quality and patent scope, which this Court has repeatedly recognized.  In short, earnest patent litigation is pro-competitive, as are legitimate settlements thereof that recognize the relative strengths and weaknesses of the parties’ respective positions. However, settlements with transparent bribes for challengers to take a dive cannot be reconciled with any sound public policy or legal precedent.

Some shades of PUBPAT’s criticisms are reflected in an opinion piece noted at the end of this post.

National Association of Chain Drug Stores (“NACDS”).  NACDS, which represents various traditional drug stores, supermarkets, and mass merchants with pharmacies, is well known in the drug patent settlement agreement space, having filed 9 amicus briefs in 6 appellate cases and in the U.S. Supreme Court.  In their latest amicus brief, NACDS once again rails against drug patent settlement agreements.  In doing so, NACDS seeks to refute the suggestion by some courts that exclusion payments are a “natural byproduct” of the Hatch-Waxman Amendments.  Rather, says NACDS, they are a “subversion” of the Hatch-Waxman Amendments.

Representative Henry A. Waxman (D-CA).  In arguing for reversal of the Eleventh Circuit’s decision, Rep. Waxman seeks to provide in his amicus brief additional color on the policies underlying his namesake law and later amendments to it, such as the 2003 Medicare Modernization Act.  Quoting from the K-Dur decision, Rep. Waxman says:

The policy chosen by the Eleventh Circuit, however much it may benefit brand-name manufacturers who wish to preserve their monopoly profits and generic manufacturers who seek a slice of those profits, “is bad policy from the perspective of the consumer, precisely the constituency Congress was seeking to protect.”  Judicial policy preferences “should not displace countervailing public policy objectives or, in this case, Congress’s determination—which is evident from the structure of the Hatch–Waxman Act and the statements in the legislative record—that litigated patent challenges are necessary to protect consumers from unjustified monopolies by name brand drug manufacturers.”  The predictable result of the policy that the Eleventh Circuit has substituted for that of Congress will be less competition and higher drug prices for all Americans.

Apotex, Inc.  Generic drug manufacturer Apotex has been a staunch advocate of legislation to address drug patent settlement agreements, including legislation that brings 180-day exclusivity into the fray (see here).  Apotex’s amicus brief, therefore, argues for heightened antitrust scrutiny of drug patent settlement agreements.  That is, Apotex argues for a reversal of the Eleventh Circuit’s adoption of the “scope of the patent test.”  In doing so, Apotex seeks to bring to the Supreme Court’s attention what the company says are “several errors in a critical assumption underlying the scope-of-the-patent test.”  In particular, says Apotex, is the erroneous assumption that non-settling generic drug manufacturers will come forward to challenge weak drug patents:

Non-settling generic manufacturers do not have the same incentives to challenge a patent in the face of a settlement agreement between a brand-name manufacturer and the initial generic challenger.  In fact, non-settling generic manufacturers are actively discouraged from continuing to maintain their own challenges to the patent at issue.  Moreover, in many situations, the underlying economics would allow brand-name manufacturers to essentially “buy off” all possible challengers.

As a result, . . . the scope-of-the-patent does not properly “recognize and reflect the distinctive economic and legal setting of the regulated industry to which it applies.”  This misapprehension of the economic and legal landscape further demonstrates why this Court should reject the scope-of- the-patent test in favor of the “quick look,” truncated rule-of-reason analysis adopted by the Third Circuit in K-Dur. [(Emphasis in original)]

That’s it for the amicus briefs filed thus far in the ANDROGEL case.  However, we also want to point out a rather interesting opinion piece that appeared in Politico late last week authored by Alfred Engelberg.  Mr. Engelberg, who is a trustee of the Brookings Institution and the founder of the Engelberg Center for Health Care Reform at Brookings, was also patent counsel to the Generic Pharmaceutical Industry Association and acted as the organization’s principal representative on patent matters during Hatch-Waxman negotiations.  He has written extensively about the law (see, e.g., here). 

According to Mr. Engelberg, the U.S. Supreme Court is unlikely to rule for the FTC in the ANDROGEL case.  Nevertheless, says Mr. Engelberg, Congress should act to amend Hatch-Waxman and the patent laws to deal with the unforeseen consequence of reverse payments.  The economic realities that existed in 1984 don’t exist today, says Mr. Engelberg:  

In 1984, when Hatch-Waxman was enacted, the generic drug industry consisted of small, financially unstable companies that lacked the ability to pay damages for patent infringement and preliminary injunctions preventing such infringement were rarely granted by the courts.  The automatic 30-month injunction and the 180-day generic exclusivity rules were enacted as a reasonable response to these economic realities to protect pharmaceutical patent owners. . . .

Today, the generic drug industry is dominated by large public companies that are as fully capable of measuring the risks and rewards of challenging a patent as other industries.  If the special patent provisions of Hatch-Waxman did not exist, one or more generic manufacturers would enter the market as soon as their product was approved by the FDA notwithstanding the existence of a poor quality patent that was acting as a scarecrow to competition.  That risk would be rewarded because the generic manufacturer would immediately begin earning the profits the 180-day market exclusivity was intended to produce and the public would get the immediate benefit of a lower drug price.  If the patent actually has merit, the courts will protect the patent owner by awarding an injunction against future infringement and compensation for lost profits from past infringement.  But low-quality patents would no longer provide an automatic delay in competition, and the first generic challenger would enjoy no advantage over other generic manufacturers willing to take the same patent risk.  In these circumstances, reverse payments would no longer make economic sense.  And, in the long run, pharmaceutical companies are not likely to waste time and money attempting to enforce worthless patents that have no power to prevent market entry.

In addition to fixing the flaws in the Hatch-Waxman Act, Congress must act to strengthen a patent system that issues far too many low-quality pharmaceutical patents.

If the U.S. Supreme Court does ultimately rule against the FTC in the ANDROGEL case, there may, in fact, be a flurry of legislative activity.  Indeed, within hours of the FTC issuing its Fiscal Year 2012 Patent Settlement Report (see our previous post here), Senators Amy Klobuchar (D-MN) and Chuck Grassley (R-IA) issued a press release saying that they plan to renew efforts to end drug patent settlement agreements.