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Legal Alert Eleventh Circuit Strikes Down FTC’s Finding that Settlement Keeping Generic Off Market is Antitrust Violation April 29, 2005 Summary On March 8, 2005, the Eleventh Circuit held that it was not an antitrust violation for a generic drug manufacturer to agree to delay entrance into the market as part of settling patent litigation commenced under the Hatch-Waxman Amendments dealing with abbreviated new drug applications (ANDAs). In reaching its decision, the Court found that the per se analysis and the rule of reason analysis under antitrust principles are not directly applicable to ANDA cases. Instead the Court focused on balancing the exclusionary rights of the patents with the manner by which the generic applicant remained off the market (the contract terms). As long as the agreement keeping the generic off the market is ancillary to some legitimate transaction and not a “naked” restraint of trade, it seems the Eleventh Circuit will not find antitrust violations when a pioneer drug company pays a generic to delay entrance into the relevant market. In the case at bar, the fact that the exclusion terms in the agreements were less than the term which the patent would have allowed exclusion for weighed heavily in the finding of no antitrust violations. The Court reversed the determination by the Federal Trade Commission (“Commission” or “FTC”) holding two separate agreements entered into by Schering-Plough involving ANDAs filed on its potassium chloride delayed release drug violated Section 5 of the FTC Act, 15 U.S.C. § 45(a) and Section 1 of the Sherman Act, 15 U.S.C. § 1. Relevant Background Schering-Plough holds the ‘743 patent directed to an extended release formulation of potassium chloride.1 In 1995, Upsher-Smith filed an ANDA for its generic versions asserting the invalidity of the ‘743 patent. In 1995, Schering-Plough instigated suit against Upsher-Smith and before the trial was to commence, the two parties engaged in settlement discussions. ScheringPlough and Upsher-Smith agreed that Upsher-Smith would refrain from entry into the market with its potassium chloride product until September 2, 2001. Furthermore, Schering-Plough agreed to a separate deal whereby it obtained a license from Upsher-Smith to market a 1 U.S. Patent No. 4,863,743 is set to expire on September 5, 2006. 1 © 2005 Sutherland Asbill & Brennan LLP. All Rights Reserved. This alert is for informational purposes and is not intended to constitute legal advice. cholesterol drug outside of North America. Upsher-Smith was paid $60M for its license and the deal, including Upsher-Smith’s agreement not to enter the potassium chloride market until the specified date, was entered in June of 1997. In 1995, ESI Lederle filed its ANDA for an extended release potassium chloride formulation. Schering-Plough subsequently filed suit against ESI and the district court ordered court-supervised mediation. Ultimately after nearly fifteen months of mediation, ScheringPlough agreed to pay ESI $5M (attributed to legal fees) in exchange for ESI’s commitment to remain off the market with its potassium chloride product until January 1, 2004. ScheringPlough further agreed to pay up to $10M if ESI obtained FDA approval by a certain date. The agreement was signed in the presence of the mediator on January 23, 1998. Procedural History The FTC filed a complaint against Schering-Plough, Upsher-Smith, and ESI for the two separate settlement agreements alleging violation of both § 1 of the Sherman Act and § 5 of the FTC Act. Specifically, the FTC viewed the agreements as an anticompetitive horizontal restraint of trade as well as attempts to monopolize. The FTC complaint was first tried before an administrative law judge (ALJ) who ruled in favor of the contracting parties finding “that the theories advanced by the FTC, namely, that the agreements were anticompetitive, required either a presumption of (1) that Schering-Plough’s ‘743 patent was invalid; or (2) that Upsher’s or ESI’s generic products did not infringe the ‘743 patent.” Schering-Plough Corp. v. FTC, 402 F.3d 1056 (11th Cir. March 8, 2005). The ALJ further stressed “that the presence of payments did not make the settlement anticompetitive, per se. Rather, the strength of the patent itself and its exclusionary power needed to be assessed.” Id. at 1061. The ALJ moved beyond applying a per se standard in determining whether antitrust laws had been violated; instead, the ALJ noted that patents are already exclusionary, the proper determination is whether the parties are doing anything beyond what the patent would allow. The ALJ’s decision, binding unless appealed, was in fact appealed by the FTC staff to the Commission, which determined that the payments made by Schering-Plough to Upsher-Smith and ESI did not represent “legitimate consideration for the licenses granted by Upsher-Smith or ESI’s ability to secure FDA approval of its generic.” Id. at 1062. The Commission found the payments to be a violation of both § 1 of the Sherman Act and § 5 of the FTC Act. The defendants appealed the Commission’s decision. 2 © 2005 Sutherland Asbill & Brennan LLP. All Rights Reserved. This alert is for informational purposes and is not intended to constitute legal advice. Discussion In reviewing the Commission’s reversal of the ALJ’s findings, the Court noted that it was to consider all evidence of record in determining whether the agency’s findings of fact were reasonable. Id. The Court looked at the reasoning set forth in Valley Drug Co. v. Geneva Pharm., Inc., 344 F.3d 1294 (11th Cir. 2003), in which another panel of the Eleventh Circuit held that when dealing with pharmaceutical patent issues arising under Hatch-Waxman, both the per se and rule of reason analyses for determining antitrust violations were inappropriate. Schering-Plough, at 1065-66. Because both the rule of reason and per se analyses look to determine if the challenged activity was anticompetitive the application of those tests to patent based dealings fails -- patents are the epitome of exclusion, “and, consequently cripple competition.” Id. at 1066. In applying Valley Drug to both the Upsher-Smith and ESI agreements, the Court again restated that the allocation of markets seen in Valley Drug was allowed to stand “for a rather simple reason: one of the parties owned a patent.” Id. at 1064. As a result, a determinative factor as to whether an agreement such as either the Upsher-Smith or ESI settlement agreements violates the antitrust laws is whether the anticompetitive effect is any broader than the patent’s inherent exclusionary power. Id. If the agreement does not extend the restraining effect on competition beyond that inherent in the underlying patent, then the agreement should withstand challenge. The Eleventh Circuit found support for its method of analysis with Judge Posner: Suppose a seller obtains a patent that it knows is almost certainly invalid (that is, almost certain not to survive a judicial challenge), sues its competitors, and settles the suit by licensing them to use its patent in exchange for their agreeing not to sell the patented product for less than the price specified in the license. In such a case, the patent, the suit, and the settlement would be devices -- masks -- for fixing prices, in violation of antitrust law. Id. at 1067 (quoting Asahi Glass Co., Ltd. v. Pentech Pharmaceuticals, Inc., 289 F. Supp. 2d. 986, 991 (N.D. Ill. 2003)). A court must therefore consider (1) the scope of the exclusionary potential of the patent; (2) the extent to which the agreements exceed the scope; and (3) the resulting anticompetitive effects. Id. at 1066 (citing Valley Drug). The Eleventh Circuit found that because the ‘743 patent was presumed valid, ScheringPlough possessed the right to exclude both generics from entering the market until either they proved the patents were invalid or un-infringed, or the term of the patent expired. Noting that the antitrust laws cannot divest rights granted by exclusionary statutes, the Court stated “a patent 3 © 2005 Sutherland Asbill & Brennan LLP. All Rights Reserved. This alert is for informational purposes and is not intended to constitute legal advice. holder does not incur antitrust liability when it chooses to exclude others from producing its patented work.” Id. at 1067. Because both the Upsher-Smith and ESI agreements provided rights within the statutory exclusion rights under the ‘743 patent, impermissible exclusion was not occurring. Id. at 1076.2 Upsher-Smith Settlement The Eleventh Circuit found that under the agreement Upsher-Smith was allowed to enter the market with its generic potassium chloride formulation on September 2, 2001 -- more than five years before the expiration of the ‘743 patent. Moreover, Upsher-Smith was to receive $60M as payment for a license Schering-Plough was taking on a cholesterol product. Therefore, in exchange for staying off the market with its potassium chloride formulation, Upsher-Smith was able to license its cholesterol product. The FTC took the position that a payment made by a pioneer drug manufacturer to a generic manufacturer to keep the generic from market entry raises a “red flag” as a potential antitrust violation. Id. at 1069. The Commission reasoned that, based on unremarkable testimony by the FTC’s witness, $60M was a wholly inadequate sum for Schering-Plough to pay for the license it received on the cholesterol product. The Court disagreed stating the record showed Schering-Plough made its own determination of value “and just because the agreement also includes Upsher-Smith’s entry date into the potassium chloride supplement market, one cannot infer that the payments were solely for the delay rather than the licenses.” Id. at 1071. The Eleventh Circuit then considered whether the market entry delay under which the agreements operated generates anticompetitive effects. The Court determined that because the patent language defined the bounds of the exclusion it was an ancillary restraint. Id. Antitrust laws permit an agreement limiting competition provided the limitations is secondary or ancillary to a legitimate transaction. Id. at 1073. For the Upsher-Smith agreement, “no other products were delayed by the ancillary restraints contained in the agreements.” Id. Nothing in the Upsher-Smith agreement dealing with the generic’s delay in entering the market detracted or expanded beyond the primary purpose of settling litigation. Id. The Court went on to consider the ramifications of the Hatch-Waxman Act on patent litigation dealing with pharmaceuticals. Specifically, that without settlements such as this, if the pioneer drug was victorious, competition would be lessened even more. Id. at 1075. Therefore, the anticompetitive effects were no more onerous than the patents themselves dictating a finding that Schering-Plough and Upsher-Smith did not violate antitrust laws. 2 It should be noted that while the Court made no mention of patent misuse principles, the concept of impermissible extensions of either a temporal or provisional nature supports the reasoning of looking to the exclusionary scope of the patents first. 4 © 2005 Sutherland Asbill & Brennan LLP. All Rights Reserved. This alert is for informational purposes and is not intended to constitute legal advice. ESI Settlement As with the Upsher-Smith agreement, the Court focused almost exclusively on the fact that the primary goal of the agreement was to settle litigation. Id. at 1071-72. The Court found that this agreement “is not a ‘naked payment’ aimed to delay the entry of product that is ‘legally ready and able to compete with Schering.” Id. at 1072. The litigation between Schering-Plough and ESI was extreme and prolonged. Id. It was clear, therefore, to the Court that the ESI agreement was ancillary to the settlement of the litigation, and therefore was not contrary to antitrust principles. Potential Split in Circuits While the Eleventh Circuit has shied away from applying either a per se rule or rule of reason analysis to settlements where the potential generic entrant remains off the market, the Sixth Circuit previously applied a per se analysis to a far more egregious set of facts. In In re Cardizem, 332 F.3d 896 (6th Cir. 2003), the agreement not only prohibited the generic from entering the market in exchange for yearly payments, but also prohibited the generic “from marketing other bioequivalent or generic versions of [the drug] which were not at issue in the pending” litigation because not covered by the relevant patents. Id. at 908. Unlike both the Valley Drug and Schering-Plough cases in the Eleventh Circuit, the Cardizem facts indicated a “naked” restraint of trade which eliminated competition outside the scope of the asserted patents. In light of such facts, application of the per se rule likely led to the correct result -- applying the Eleventh Circuit’s approach of comparing the scope of the agreement to the native exclusionary ability of the patent likely leads to the same result as the claimed scope of the patents was clearly being extended to the detriment of competition. Because most of these cases will touch on commerce in all circuits, unfavorable FTC determinations involving these types of agreements will likely result in appeals to the Eleventh Circuit. Current Status On April 22, 2005, the FTC staff filed a petition for rehearing en banc seeking the full Eleventh Circuit’s reversal of the panel’s decision in Schering-Plough. A update to this Legal Alert will follow if, or when, the en banc Court accepts review. If you are interested in more information about these developments, please contact John North or Clay Holloway. John North Clay Holloway 404.853.8358 404.853.8275 [email protected] [email protected] 5 © 2005 Sutherland Asbill & Brennan LLP. All Rights Reserved. This alert is for informational purposes and is not intended to constitute legal advice.