In the Supreme Court of the United States

Transcription

1 No In the Supreme Court of the United States FEDERAL TRADE COMMISSION, PETITIONER v. WATSON PHARMACEUTICALS, INC., ET AL. ON WRIT OF CERTIORARI TO THE UNITED STATES COURT OF APPEALS FOR THE ELEVENTH CIRCUIT BRIEF FOR THE NATIONAL ASSOCIATION OF CHAIN DRUG STORES AS AMICUS CURIAE IN SUPPORT OF PETITIONER DON L. BELL, II MARY ELLEN KLEIMAN National Association of Chain Drug Stores 413 North Lee Street P.O. Box 1417-D49 Alexandria, VA (703) STEVE D. SHADOWEN Counsel of Record MATTHEW C. WEINER Hilliard & Shadowen LLC 39 W. Main St. Mechanicsburg, PA (855) ANNE FORNECKER MARION REILLY Hilliard & Shadowen LLC 106 E. 6th St. Suite 900 Austin, Texas 78701

2 i TABLE OF CONTENTS TABLE OF CONTENTS... i TABLE OF AUTHORITIES... ii INTEREST OF AMICUS CURIAE... 1 SUMMARY OF ARGUMENT... 2 ARGUMENT... 4 I. THE COURT OF APPEALS MISAPPREHENDED PATENT LAW AND THE BASIC ECONOMICS OF EXCLUSION PAYMENTS... 4 II. EXCLUSION PAYMENTS CONFLICT WITH THE TERMS, STRUCTURE, AND HISTORY OF THE HATCH-WAXMAN ACT A. The 180-Day Bounty B. The 30-Month Stay C. The Bolar Amendment III. SUBSEQUENT LEGISLATIVE HISTORY CONFIRMS THE UNLAWFULNESS OF EXCLUSION PAYMENTS CONCLUSION... 36

3 ii TABLE OF AUTHORITIES CASES Am. Bank & Trust Co. v. FRB, 256 U.S. 350 (1921)... 5 American Needle, Inc. v. NFL, 130 S. Ct (2010) Aspen Skiing Co. v. Aspen Highlands Skiing Corp., 472 U.S. 585 (1985)... 5 Blonder-Tongue Labs. v. Univ. of Ill. Found., 402 U.S. 313 (1971)... 6, 8, 12 ebay Inc. v. MercExchange, L.L.C., 547 U.S. 388 (2006)... 5, 14 Eli Lilly & Co. v. Medtronic, Inc., 496 U.S. 661 (1990) In re Barr Labs., Inc., 930 F.2d 72 (D.C. Cir. 1991) In re Cardizem CD Antitrust Litig., 105 F. Supp. 2d 682 (E.D. Mich. 2000), aff d, 332 F.3d 896 (6th Cir. 2003) In re Ciprofloxacin Hydrochloride Antitrust Litig., 261 F. Supp. 2d 188 (E.D.N.Y. 2003)... 15, 17 In re K-Dur Antitrust Litig., 686 F.3d 197 (3d Cir. 2012)... 6, 7, 8, 13

4 iii In re Schering-Plough Corp., FTC Docket No (June 27, 2002), rev d, 136 F.T.C. 956 (2003) In re Tamoxifen Citrate Antitrust Litig., 466 F.3d 187 (2d Cir. 2005), cert. denied, 551 U.S (2007)... passim In re Terazosin Hydrochloride Antitrust Litig., 164 F. Supp. 2d 1340 (S.D. Fla. 2000), rev d, Valley Drug Co. v. Geneva Pharms., Inc., 344 F.3d 1294 (11th Cir. 2003), cert. denied, 543 U.S. 939 (2004) In re Terazosin Hydrochloride Antitrust Litig., 352 F. Supp. 2d 1279 (S.D. Fla. 2005)... 6 Lear, Inc. v. Adkins, 395 U.S. 653 (1969)... 6, 8 Lorain Journal Co. v. United States, 342 U.S. 143 (1951)... 5 Premier Elec. Constr. Co. v. Nat l Elec. Contractors Ass n, 814 F.2d 358 (7th Cir. 1987) Roche Products, Inc. v. Bolar Pharms. Co., Inc., 572 F. Supp. 255 (E.D.N.Y. 1983)... 17, 18

5 iv Roche Products, Inc. v. Bolar Pharms. Co., Inc., 733 F.2d 858 (Fed. Cir. 1984) Schering-Plough Corp. v. FTC, 402 F.3d 1056 (11th Cir. 2005), cert. denied, 548 U.S. 919 (2006)... passim Teva Pharms. USA, Inc. v. Novartis Pharms. Corp., 482 F.3d 1330 (Fed. Cir. 2007) United States v. Line Material Co., 333 U.S. 287 (1948)... 6 United States v. Singer Mfg. Co., 374 U.S. 174 (1963)... 6 Valley Drug Co. v. Geneva Pharms., Inc., 344 F.3d 1294 (11th Cir. 2003), cert. denied, 543 U.S. 939 (2004) , 33 STATUTES 21 U.S.C , U.S.C passim 21 U.S.C. 355(c)(3)(D)(ii) U.S.C. 355(c)(3)(D)(iii) U.S.C. 355(j)(2)(A)(iv) U.S.C. 355(j)(5)(B)(iii)... 14, 16, U.S.C. 355(j)(5)(B)(iv)... 12

6 v 21 U.S.C. 355(j)(5)(D) U.S.C. 355(j)(5)(D)(i)(I)(aa) U.S.C. 355(j)(5)(D)(i)(I)(bb) U.S.C. 355(j)(5)(D)(i)(II), (III), (IV), (V) & (VI) U.S.C. 355 (j)(5)(d)(ii) U.S.C. 355 (j)(5)(d)(iii) U.S.C. 355a... 28, U.S.C U.S.C. 271(a) U.S.C. 271(e)(1)... 15, U.S.C. 271(e)(2)... 16, 17, 20, 21 Medicare, Prescription Drug, Improvement, and Modernization of 2003, Pub. L. No , , 117 Stat. 2066, passim BILLS H.R. 1, 108th Cong. (2003)... 30, 33 H.R. 1530, 107th Cong. (2001) H.R. 1706, 111th Cong. (2009) H.R. 1902, 110th Cong. (2007) H.R. 2491, 108th Cong. (2003)... 30

7 vi H.R. 3995, 112th Cong. (2012) H.R. 5235, 106th Cong. (2000) H.R. 5272, 107th Cong. (2002) H.R. 5311, 107th Cong. (2002) H.R. 5313, 106th Cong. (2000) S. 1, 108th Cong. (2003) S. 7, 108th Cong. (2003) S. 27, 112th Cong. (2011) S. 54, 108th Cong. (2003) S. 316, 110th Cong. (2007) S. 369, 111th Cong. (2009) S. 754, 107th Cong. (2001) S. 812, 107th Cong. (2002) S. 946, 108th Cong. (2003) S. 1225, 108th Cong. (2003) S. 1882, 112th Cong. (2011) S. 2993, 106th Cong. (2000)... 28, 29, 30 S. 3582, 109 Cong. (2006)... 35

8 vii CONGRESSIONAL HEARINGS Closing the Gaps in Hatch-Waxman: Assuring Greater Access to Affordable Pharmaceuticals: Before the S. Comm. on Health, Ed., Labor, and Pensions, 107th Cong. (2002) Competition in the Pharmaceutical Marketplace: Antitrust Implications of Patent Settlements: Before S. Judiciary Comm., 107th Cong. (2001) Examining Issues Related to Competition in the Pharmaceutical Marketplace: A Review of the FTC Report, Generic Drug Entry Prior to Patent Expiration: Before the Subcomm. on Health of the H. Comm. on Energy and Commerce, 107th Cong. (2002) Examining the Senate and House Versions of the Greater Access to Affordable Pharmaceuticals, Before the S. Comm. on the Judiciary, 108th Cong. (2003) Generic Pharmaceuticals: Marketplace Access and Consumer Issues: Before S. Comm. on Commerce, Sci., and Transp., 107th Cong. (2002)... 4, 26

9 viii H.R. 1706, The Protecting Consumer Access to Generic Drugs of 2009: on H.R Before the Subcomm. on Commerce, Trade, and Consumer Protection of the H. Comm. on Energy and Commerce, 111th Cong. (2009) Innovation and Patent Law Reform: s on H.R. 3285, H.R. 3286, and H.R Before the Subcomm. on Courts, Civil Liberties, and the Admin. of Justice of the H. Comm. on the Judiciary, 98th Cong. pt. 1 (1984)... 18, 19, 20 Legislative and Regulatory Responses to the FTC Study on Barriers to Entry in the Pharmaceutical Marketplace: Before the S. Comm. on the Judiciary, 108th Cong. (2003) Pay To Delay, Are Patent Settlements That Delay Generic Drug Market Entry Anti-Competitive?: on S. 369 Before the Subcomm. on Courts and Competition Policy of the H. Comm. on the Judiciary, 111 Cong. (2009) Paying Off Generics to Prevent Competition with Brand Name Drugs: Should It Be Prohibited?: on S. 316 Before the Comm. on the Judiciary, 110th Cong. (2007)... 22, 33

10 ix Paying Off Generics to Prevent Competition with Brand Name Drugs: Should It Be Prohibited?: on S. 316 Before the Comm. on the Judiciary, 110th Cong. (2007) Recent Developments Which May Impact Consumer Access to, and Demand For, Pharmaceuticals: Before the Subcomm. On Health of the H. Comm. on Energy and Commerce, 107th Cong. (2001) CONGRESSIONAL RECORD 130 Cong. Rec. H8701 (daily ed. August 8, 1984) Cong. Rec. H9105 (daily ed. Sept. 6, 1984)... 11, Cong. Rec. S10503 (daily ed. August 10, 1984)... 19, Cong. Rec. S (daily ed. July 12, 1984) Cong. Rec. E1538 (daily ed. Sept. 20, 2000)... 24, 25, Cong. Rec. S7908 (daily ed. July 27, 2000)... 24, Cong. Rec. S3711 (daily ed. Apr. 6, 2001)... 25, Cong. Rec. S11339 (daily ed. Nov. 18, 2002)... 29

11 x 148 Cong. Rec. S7342 (daily ed. July 25, 2002)... 24, Cong. Rec. S7565 (daily ed. July 30, 2002) Cong. Rec. S7618 (daily ed. July 31, 2002) Cong. Rec. S15670 (daily ed. Nov. 24, 2003) Cong. Rec. S16104 (daily ed. Dec. 9, 2003) Cong. Rec. S5486 (daily ed. Apr. 29, 2003) Cong. Rec. S8686 (daily ed. June 26, 2003) CONGRESSIONAL REPORTS H.R. Rep. No , pt. 1 (1984), reprinted in 1984 U.S.C.C.A.N , 12, 15 H.R. Rep. No , pt. 2 (1984), reprinted in 1984 U.S.C.C.A.N , 14, 15, 19 H. Rep. No (2003) S. Rep. No (2002)... 25, 29 S. Rep. No (2010)... 34

12 xi MISCELLANEOUS Abbott Labs., Agreement Containing Consent Order, File Nos Alfred B. Engelberg, Special Patent Provisions for Pharmaceuticals: Have They Outlived Their Usefulness?, 39 IDEA J.L. & Tech. 389 (1999) , 17, 18, 20 Carl Shapiro, Antitrust Limits to Patent Settlements, 34 RAND J. of Econ. 391 (2003)... 7, 8 Erika K. Lietzan, A Brief History of 180- day Exclusivity Under the Hatch Waxman Amendments to the Federal Food, Drug, and Cosmetic, 59 Food & Drug L.J. 287 (2004) FDA, 2011 Novel New Drugs (2012) FTC, Agreements Filed with the Federal Trade Commission Under the Medicare Prescription Drug, Improvement, and Modernization (FY 2012) FTC, Generic Drug Entry Prior to Patent Expiration (July 2002)... 12, 29 George L. Priest & Benjamin Klein, The Selection of Disputes for Litigation, 13 J. Legal Stud. 1 (1984)... 8 Herbert Hovenkamp, et al., Anticompetitive Settlement of Intellectual Property Disputes, 87 Minn. L. Rev (2003) , 22

13 xii Herbert Hovenkamp, et al., Balancing Ease and Accuracy In Assessing Pharmaceutical Exclusion Payments, 88 Minn. L. Rev. 712 (2004) Hoechst Marion Roussel, Inc., Agreement Containing Consent Order, Docket No (Apr. 4, 2001) Issue Brief for Congress, The Hatch Waxman : Proposed Legislative Changes Affecting Pharmaceutical Patents, Updated Nov. 25, Joseph S. Miller, Building a Better Bounty: Litigation-Stage Rewards for Defeating Patents, 19 Berkeley Tech. L.J. 667 (2004) Keith Leffler & Cristofer Leffler, Efficiency Trade-Offs in Patent Litig. Settlements: Analysis Gone Astray?, 39 U.S.F. L. Rev. 33 (2004) Keith Leffler & Cristofer Leffler, Settling the Controversy Over Patent Settlements: Payments By the Patent Holder Should Be Per Se Illegal, 21 Res. in L. & Econ. 477 (2004) Mark A. Lemley, Rational Ignorance at the Patent Office, 95 Nw. U. L. Rev (2001)... 7

14 xiii Press Release, FTC Charges Drug Manufacturers with Stifling Competition in Two Prescription Drug Markets (Mar. 16, 2000) Robert T. Cooter & Daniel L. Rubinfeld, Economic Analysis of Legal Disputes, 27 J. of Econ. Lit (1989)... 8 William M. Landes, An Economic Analysis of Courts, 14 J.L.& Econ. 61 (1971)... 8

15 In the Supreme Court of the United States No FEDERAL TRADE COMMISSION, PETITIONER v. WATSON PHARMACEUTICALS, INC., ET AL. ON WRIT OF CERTIORARI TO THE UNITED STATES COURT OF APPEALS FOR THE ELEVENTH CIRCUIT BRIEF FOR THE NATIONAL ASSOCIATION OF CHAIN DRUG STORES AS AMICUS CURIAE IN SUPPORT OF PETITIONER INTEREST OF AMICUS CURIAE 1 The National Association of Chain Drug Stores ( NACDS ) represents 123 chain members, including traditional drug stores, supermarkets, and mass merchants with pharmacies from regional chains 1 No person other than amicus curiae or its counsel authored this brief in whole or in part or made a monetary contribution intended to fund its preparation or submission. The parties have consented to the filing of this brief and such consents are being lodged herewith.

16 2 with four stores to national companies. These members operate more than 41,000 pharmacies in the United States and provide jobs for more than 3.8 million employees, including 132,000 pharmacists. With annual sales of more than $1 trillion, NACDS members account for approximately 6.6% of U.S. gross domestic product. They fill more than 2.7 billion prescriptions annually, some 72% of U.S. prescriptions. NACDS members and their patients are directly affected by anticompetitive exclusion payment agreements. Exclusion payments maintain artificially high prices for prescription drugs, undermining NACDS members efforts to bring quality prescription pharmaceuticals to patients at competitive prices. NACDS has been a determined critic of exclusion payments for more than a decade, having filed nine amicus briefs seeking adequate antitrust scrutiny of exclusion payments in six appellate cases and in this Court. NACDS is uniquely positioned to bring pertinent issues and facts to the Court s attention. SUMMARY OF ARGUMENT Other amicus briefs address in detail the economic and patent law principles that support the FTC s antitrust analysis. While touching those principles lightly, this brief focuses on the terms, structure, and history of the Drug Price Competition and Patent Term Restoration of 1984, Pub. L. No , 98 Stat (1984) (codified as amended 21 U.S.C. 355 (2012)) [hereafter the Hatch-Waxman ]. The Eleventh Circuit s scope of the patent test is entirely incompatible with the s: (1) 180-

17 3 day-exclusivity bounty for generics to enter the market by invalidating or inventing around a pharmaceutical patent; and (2) automatic exclusion of generics, under certain conditions, for up to 30 months. A payment from the patentee that countermands the statutory incentive for generics to challenge patents, and that secures exclusion beyond 30 months, contradicts the. We also refute in detail the suggestion that exclusion payments are somehow a natural byproduct of the Hatch-Waxman. Contra In re Tamoxifen Citrate Antitrust Litig., 466 F.3d 187, 206 (2d Cir. 2005), cert. denied, 551 U.S (2007); Schering- Plough Corp. v. FTC, 402 F.3d 1056, 1074 (11th Cir. 2005), cert. denied, 548 U.S. 919 (2006). The notion seems to be that Congress unintentionally deprived brand manufacturers of an ability to settle patent cases by means of waiving potential patentinfringement damages against generics, and that consequently patentees can settle these cases only by making exclusion payments. No aspect of that notion is correct. Congress did not prevent patentees from waiving damage claims against generics; instead, Congress gave patentees the choice to either sue the generic manufacturer for damages, and thereby have the ability to waive the damage claim in settlement, or forgo that option in favor of getting automatic exclusion of the generic drug from the market for 30 months. The legislative history reveals that Congress granted patentees this choice quite intentionally. Even when the patentee chooses the automatic 30-month stay, nothing in Hatch- Waxman requires or encourages patentees to settle patent cases by making exclusion payments rather than granting early-entry licenses.

18 4 Exclusion payments thus are not a natural byproduct of the, but a subversion of it. The brand manufacturers acknowledged as much in 2003 when they convinced Congress that it could put an end to exclusion payment agreements simply by requiring that they be produced to the antitrust agencies for prosecution under the Sherman. Such reporting was sufficient, testified brand manufacturer representatives, because the agreements are unlawful under the Sherman exclusion payments would have been violations of the antitrust laws and/or the patent laws whether the Hatch- Waxman existed or not. Generic Pharmaceuticals: Marketplace Access and Consumer Issues: Before S. Comm. on Commerce, Sci., and Transp., 107th Cong. 71 (2002) (remarks of Gregory J. Glover). 2 They were right. ARGUMENT I. THE COURT OF APPEALS MISAPPREHENDED PATENT LAW AND THE BASIC ECONOMICS OF EXCLUSION PAYMENTS. The Court of Appeals assumed away the legal and economic question posed by exclusion payments in the pharmaceutical industry. The Court held that, Because the patent had that potential [to exclude generics] at the time of settlement, we treat[] the holder as though it had an exclusionary right at that 2 A chart identifying the principal legislative history of the relevant portions of the legislation discussed in this brief is included as an Appendix.

19 5 time. Pet. App. 20a; see also Schering-Plough, 402 F.3d at 1066 ( By virtue of its '743 patent, Schering obtained the legal right to exclude [generics] from the market. ). If one starts with the premise that a patentee has an absolute right to exclude all competitors for the term of the patent, one might well conclude that it is not anticompetitive for the patentee to pay all competitors to stay out of the market for the duration of that term. But see ebay Inc. v. MercExchange, L.L.C., 547 U.S. 388, 394 (2006) (even after a final judgment of infringement, the patentee can get a permanent injunction only by satisfying the traditional requirements for equitable relief). The problem is that the Court of Appeals premise is incorrect. When the litigants entered into the exclusion payment agreement, the very issue they were contesting in the patent case was whether the patentee had a right to exclude the generic. The appeals court thus disregarded Justice Holmes admonition, frequently reemphasized by the Court, that, the word right is one of the most deceptive of pitfalls; it is so easy to slip from a qualified meaning in the premise to an unqualified one in the conclusion. Most rights are qualified. Am. Bank & Trust Co. v. FRB, 256 U.S. 350, 358 (1921); see also Aspen Skiing Co. v. Aspen Highlands Skiing Corp., 472 U.S. 585, 601 (1985); Lorain Journal Co. v. United States, 342 U.S. 143, 155 (1951). The Court of Appeals did acknowledge that the patentee s right to exclude is qualified by the patent s temporal scope. Pet. App. 24a-25a. But the requirement that patents be kept within their temporal scope is just one obvious manifestation of the public interest with which patents are affected.

20 6 Blonder-Tongue Labs. v. Univ. of Ill. Found., 402 U.S. 313, 343 (1971). The Court of Appeals ignored a second such manifestation [a] second group of authorities [that] encourage authoritative testing of patent validity. Id. at 344; see also In re K-Dur Antitrust Litig., 686 F.3d 197, (3d Cir. 2012) (citing numerous cases), petitions for cert. pending, No (filed Aug. 24, 2012) and No (filed Aug. 29, 2012); accord Lear, Inc. v. Adkins, 395 U.S. 653, 670 (1969) (patentee cannot muzzle[] those who have an economic incentive to challenge the patentability of an inventor s discovery ); United States v. Singer Mfg. Co., 374 U.S. 174, 200 (1963) (White, J., concurring) (settlement of patent interference was unlawful because it reflected collusion among applicants to prevent prior art from coming to or being drawn to the [PTO's] attention ); United States v. Line Material Co., 333 U.S. 287, 319 (1948) (Douglas, J., concurring) (patentee cannot lawfully create a powerful inducement for the abandonment of competition, for the cessation of litigation concerning the validity of patents, for the acceptance of patents no matter how dubious, for the abandonment of research in the development of competing patents ); In re Terazosin Hydrochloride Antitrust Litig., 352 F. Supp. 2d 1279, 1298 (S.D. Fla. 2005) ( [A]ny construction of the patent s exclusionary scope that fails to take into account the chances of the patent being held invalid would essentially afford pioneer drug manufacturers an unbridled power to exclude others without regard to the strength of their patent rights. ). With the notable exceptions of pharmaceutical and chemical patents, the vast majority of issued patents have little economic significance. So it is effi-

21 7 cient to have a patent process consisting of patent issuance based on an ex parte PTO proceeding, followed by judicial review of the comparatively few patents that turn out to have genuine economic significance. See Mark A. Lemley, Rational Ignorance at the Patent Office, 95 Nw. U. L. Rev. 1495, 1497 (2001). This efficient system would be entirely undermined if patentees who have gotten only halfway through the process the ex parte part were permitted to pay their would-be competitors to forgo the inter se part. The Third Circuit s analysis of exclusion payments is faithful to both aspects of the public interest in patents, i.e., the need to keep them within their temporal scope and to subject them to judicial testing. K-Dur, 686 F.3d at That analysis is founded on the economic concept of expected litigation outcomes: the patentee would not make a payment to the generic, and the generic would not require such a payment, unless it resulted in less competition than each of them expected to result from the litigation. Carl Shapiro, Antitrust Limits to Patent Settlements, 34 RAND J. of Econ. 391, (2003) [hereafter Shapiro, Antitrust Limits ]; Herbert Hovenkamp, et al., Anticompetitive Settlement of Intellectual Property Disputes, 87 Minn. L. Rev. 1719, 1759 (2003) [hereafter Hovenkamp, Anticom-

22 8 petitive Settlement ]. 3 In the Third Circuit s formulation, the reasonable economic inference is that the brand s payment represents a quid pro quo for later entry than the litigants otherwise expected. K-Dur, 686 F.3d at The economics are made clear by considering licensed-entry agreements, which the FTC and private plaintiffs generally do not contend violate the Sherman. Assume that the generic manufacturer entered the market for two years of the remaining seven years of the patent term. The brand manufacturer offers to waive the potential patentinfringement damages if the generic manufacturer will immediately withdraw from the market. This is simply a particular type of early-entry license a retrospective license. Such a license does not offend the public policy in favor of judicial testing of patents, because such testing is not an end in itself but simply a means of ensuring that the public does not suffer from unwarranted patent-based monopolies. See, e.g., Blonder-Tongue Labs., 402 U.S. at 343; Lear, 395 U.S. at 670. Licensed-entry settlements without exclusion payments do not offend this policy because (absent other anticompetitive provisions) they liquidate and deliver to consumers their expected savings from the patent litigation. See Shapiro, Antitrust Limits, at The economics literature on expected outcomes of litigation goes back decades. See, e.g., William M. Landes, An Economic Analysis of Courts, 14 J.L.& Econ. 61 (1971); George L. Priest & Benjamin Klein, The Selection of Disputes for Litigation, 13 J. Legal Stud. 1 (1984); Robert T. Cooter & Daniel L. Rubinfeld, Economic Analysis of Legal Disputes, 27 J. of Econ. Lit (1989).

23 9 Now assume, however, that the generic manufacturer in the example above concludes that, given its view of the patent s strength, two years of profits are not enough that its potential gains from winning, discounted by the risk of losing, mandate more than two years worth of profits. So the generic manufacturer demands that the brand manufacturer waive potential damages for the first two years and also either grant a prospective license for three additional years on the market or make an exclusion payment representing (at least) three years worth of the generic s profits. If the brand manufacturer makes the exclusion payments, consumers clearly have been denied additional expected competition. Otherwise, the generic manufacturer would not have required the payments, and the brand manufacturer would not have made them. Also clear is that the brand manufacturer excluded the generic competitor for the additional time based not on the strength of the patent, but on a sharing of the brand s monopoly profits. It is true, of course, that to achieve settlement the patentee must transfer some consideration to the generic manufacturer. But from an antitrust perspective it matters profoundly what form that consideration takes. When the coin of settlement is limited to licensed entry, the generic manufacturer s economic interests stay aligned with those of consumers both want the earliest entry that is feasible given the patent s strength. Exclusion payments, in contrast, sever the link between those interests: the generic manufacturer accepts the payments as a substitute for the profits that it would have earned by competing and generating consumer savings for a period of time commensurate with the

24 10 patent s strength. This severance is the hallmark of anticompetitive conduct. Premier Elec. Constr. Co. v. Nat l Elec. Contractors Ass n, 814 F.2d 358, 369 (7th Cir. 1987). II. EXCLUSION PAYMENTS CONFLICT WITH THE TERMS, STRUCTURE, AND HISTORY OF THE HATCH-WAXMAN ACT. The Hatch-Waxman was compromise legislation in which the generic manufacturers received, among other things, exemption from having to duplicate costly clinical trials and other studies in order to garner FDA approval, 21 U.S.C. 355(j)(2)(A)(iv) (generic need only prove that it is bioequivalent to the pioneer drug); and the brand manufacturers received, among other things, restoration of some of the patent term that expires as they await FDA approval, H.R. Rep. No , pt. 1, at 15 (1984), reprinted in 1984 U.S.C.C.A.N. 2647, [hereafter House Report pt. 1 ]. See generally Eli Lilly & Co. v. Medtronic, Inc., 496 U.S. 661, 671, (1990) (describing essential compromise); 130 Cong. Rec. H8701, at H8706 (daily ed. August 8, 1984) (remarks of Rep. Waxman) (same); 130 Cong. Rec. S (daily ed. June 12, 1984) (statement of Sen. Hatch) (same). The resulted from a unique legislative process which, in reality, was a congressionally supervised negotiation between the generic and brand-name pharmaceutical industries in which the parties were compelled to reach a compromise by the legislature. Alfred B. Engelberg, Special Patent Provisions for Pharmaceu-

25 11 ticals: Have They Outlived Their Usefulness?, 39 IDEA J.L. & Tech. 389, 391 (1999) [hereafter Engelberg, Special Patent Provisions ]; see also 130 Cong. Rec. H9105, at H9116 (daily ed. Sept. 6, 1984) (remarks of Rep. Waxman) (the reflects a compromise that has been signed off on by the original drug manufacturers, Pharmaceutical Manufacturers Association, the generic drug manufacturers, and the consumers and the elderly.... ). 4 Exclusion payments are entirely incompatible with the Hatch-Waxman s fundamental provisions. The extended the terms of pharmaceutical patents in certain circumstances, but also created specific incentives for generics to enter the market by invalidating or inventing around those patents. The also limited the patentee s ability to get automatic exclusion of competition exclusion without regard to the patent s strength to 30 months, with Congress rejecting arguments that the presumption of patent validity mandated such exclusion for the patent s entire term. Some courts have nevertheless suggested that exclusion payments are lawful because they are a natural byproduct of the increased incentive for generic entry and the limit on automatic exclusion. It is always natural or rational for incumbent manufacturers with market power to pay potential competitors not to enter the market. That s why we have the Sherman. 4 The brand manufacturers trade association was then known as the Pharmaceutical Manufacturers Association, or PMA. That association is now known as the Pharmaceutical Research and Manufacturers of America, or PhRMA.

26 12 A. The 180-Day Bounty The Hatch-Waxman intended to speed generics onto the market not only by easing the FDA approval process, but also by facilitating patent litigation between brand and generic manufacturers. See House Report pt. 1, at 14 17; H.R. Rep. No , pt. 2, at 5 6 (1984), reprinted in 1984 U.S.C.C.A.N. 2686, [hereafter House Report pt. 2 ]. The thus provides a financial bounty for a generic that invalidates or designs around a brand patent: the first generic manufacturer to file a paragraph IV certification is entitled to 180-day exclusivity, during which time the FDA cannot approve any other Abbreviated New Drug Application (ANDA) for the same drug. 21 U.S.C. 355(j)(5)(B)(iv). 5 Before the Hatch-Waxman, generic manufacturers had insufficient incentive to bring costly patent-validity challenges. A finding of invalidity would benefit not only the successful litigant, but also every potential generic manufacturer, Blonder- Tongue Labs., 402 U.S. at , thus creating a significant free-rider problem, Joseph S. Miller, Building a Better Bounty: Litigation-Stage Rewards for Defeating Patents, 19 Berkeley Tech. L.J. 667, 725 (2004). The 180-day exclusivity bounty, which can be worth hundreds of millions of dollars for the 5 Before 1998, the FDA s successful defense requirement resulted in relatively few generics being awarded 180-day exclusivity. See FTC, Generic Drug Entry Prior to Patent Expiration 57 (July 2002), available at genericdrugstudy.pdf [hereafter FTC Study ]. After the courts overturned that requirement, generic manufacturers were awarded exclusivity much more often and responded by filing many more ANDAs with Paragraph IV certifications. Id.

27 13 first-filer on a blockbuster drug, overcomes the free-rider problem. Congress plainly intended this statutory bounty to encourage litigated challenges by generic manufacturers against the holders of weak or narrow patents. K-Dur, 686 F.3d at 217. And [t]hat goal is undermined by application of the scope of the patent test which entitles the patent holder to pay its potential generic competitors not to compete. Id. Notably, a generic manufacturer can collect this statutory bounty only by entering the market and selling a low-priced product to consumers. The bounty is not a cash payment from the government treasury, but a period of generic exclusivity in the marketplace. The generic manufacturer gets a bounty only to the extent that consumers also benefit. The point of the bounty was not to enrich generics, but to get generic drugs into the hands of patients at reasonable prices fast. In re Barr Labs., Inc., 930 F.2d 72, 76 (D.C. Cir. 1991). Some courts have nevertheless suggested that exclusion payments should be permitted because they increase generics incentives to bring patent challenges. See, e.g., Tamoxifen, 466 F.3d at 206; Schering-Plough, 402 F.3d at This argument is perverse. Herbert Hovenkamp, et al., Balancing Ease and Accuracy In Assessing Pharmaceutical Exclusion Payments, 88 Minn. L. Rev. 712, 716 (2004). True, permitting exclusion payments would increase the generic manufacturer s incentive to initiate patent challenges potential earnings from a shared monopoly are greater than those from competition. But if exclusion payments were permitted, brand and generic manufacturers would use them to terminate not only the additional (marginal) chal-

28 14 lenges prompted by the increased reward, but also all the inframarginal challenges. See Keith Leffler & Cristofer Leffler, Efficiency Trade-Offs in Patent Litig. Settlements: Analysis Gone Astray?, 39 U.S.F. L. Rev. 33, 44 (2004). Consumers get savings not when generics initiate a patent challenge, but when they use it to enter the market by prevailing in the patent litigation or obtaining an early-entry license. Payments in exchange for exclusion result in more exclusion, not more entry. B. The 30-Month Stay Permitting exclusion payments would also contradict the Hatch-Waxman s 30-month-stay provision. See 21 U.S.C. 355(j)(5)(B)(iii). That provision gives the patentee automatic exclusion, i.e., government-enforced exclusion without judicial inquiry into the patent s strength. But after the 30 months expire, the FDA can approve the generic drug for marketing regardless of whether patent litigation is ongoing. Id. Thereafter the patentee can get exclusion only the old-fashioned way by satisfying the requirements for a preliminary injunction, including a showing of likelihood of success on the merits. Indeed, even a patentee with a final judgment of validity and infringement does not get automatic exclusion. ebay, 547 U.S. at Congress could have granted automatic exclusion for the duration of pharmaceutical patents. Instead, Congress rejected just such an amendment, which would have prevented the FDA from granting approval to the generic unless and until a court had declared the patent invalid or not infringed. See House Report pt. 2, at Congress concluded

29 15 that permitting the generic to enter before a court decision does not overturn[] the statutory presumption of a patent s validity. House Report pt. 1, at 28; see also House Report pt. 2, at Brand and generic manufacturers enjoy no antitrust immunity when they help themselves to a hiatus from competition that Congress refused to grant them. C. The Bolar Amendment Some courts have suggested that exclusion payments should get an antitrust pass because they are a natural byproduct of the Hatch-Waxman. See Tamoxifen, 466 F.3d at 206; Schering-Plough, 402 F.3d at 1074; In re Ciprofloxacin Hydrochloride Antitrust Litig., 261 F. Supp. 2d 188, 252 (E.D.N.Y. 2003). The argument has two premises: (1) in prohibiting generic manufacturers from entering the market during the 30-month stay, and thus preventing them from becoming potentially subject to infringement liability, the deprives patentees of the ability to settle by waiving claims for potentially infringing sales; and (2) deprived of this traditional means of settling, brand manufacturers can settle Hatch-Waxman cases (or most such cases) only by making exclusion payments. Tamoxifen, 466 F.2d at 207; Schering-Plough, 403 F.3d at ; Ciprofloxacin, 261 F. Supp. 2d at This argument is riddled with historical, logical, and economic flaws. Three provisions of the Hatch-Waxman are relevant: (1) 35 U.S.C. 271(e)(1), which provides that, it shall not be an act of infringement to make, use, offer to sell, or sell... a patented invention... solely for use as reasonably related to the development and submission of information under a Federal

30 16 law which regulates the manufacturer, use, or sale of drugs.... (a provision that ultimately became known as the Bolar Amendment ); (2) 35 U.S.C. 271(e)(2), which provides that the filing of an ANDA with a Paragraph IV certification is an act of infringement, thus providing federal courts with subject matter jurisdiction; and (3) the 30-month stay. No Loss of Ability to Waive Damages. The first premise of the natural byproduct argument that the deprives brand manufacturers of the ability to settle patent cases by means of waiving a claim for potentially infringing generic sales simply misreads the statute. The prohibits the generic manufacturer from entering for 30 months, and thus from becoming potentially liable for infringing sales, if and only if the patentee sues the generic manufacturer within 45 days after receiving the Paragraph IV certification. 21 U.S.C. 355(j)(5)(B)(iii). But this is entirely the patentee s choice. Rather than sue under the special provisions of 35 U.S.C. 271(e)(2), a patentee retains the option to bring a traditional infringement claim under 35 U.S.C. 271(a). See, e.g., Teva Pharms. USA, Inc. v. Novartis Pharms. Corp., 482 F.3d 1330, 1341 (Fed. Cir. 2007). When a patentee elects not to sue under 271(e)(2), the automatic 30-month stay does not apply, and the generic manufacturer can enter the market, and begin accumulating potential infringement liability, immediately upon receiving FDA approval. 21 U.S.C. 355(j)(5)(B)(iii). The patentee can then bring a traditional infringement case under 35 U.S.C. 271(a) and enjoy the ability to transfer consideration to the generic manufacturer by waiving the potential damage claim.

31 17 Thus, the Hatch-Waxman does not prevent patentees from settling cases by waiving damage claims. The simply allows patentees to forgo that option in exchange for an automatic 30-month stay of competition. If patentees choose to automatically exclude generics from the market and patentees do routinely choose that option they can hardly complain that they consequently have no potential damages to waive. No Unintentional Inability to Waive Damages. The natural byproduct argument also erroneously assumes that Congress unintentionally deprived patentees of their traditional ability to waive damage claims that Congress did not understand the litigation dynamics that 271(e)(2) would create. See Ciprofloxacin, 261 F. Supp. 2d at 252 (originating the argument by asserting that, [T]he statutory scheme has the unintended consequence of altering the litigation risks of patent lawsuits. Accordingly, so-called reverse payments are a natural by-product of the Hatch-Waxman process. ). On the contrary, Congress knew full well that patentees that chose the benefits of 271(e)(2) would forgo their traditional right to infringement damages. The draft of the legislation released on April 4, 1984, contained the relevant language of 271(e)(1) that is now known as the Bolar Amendment. See Engelberg, Special Patent Provisions, at 399. Section 271(e)(1) codified the holding of a then-recent district court decision that a generic s limited use of a patented drug in obtaining FDA approval did not constitute an act of infringement. See Roche Products, Inc. v. Bolar Pharms. Co., Inc., 572 F. Supp. 255, 257 (E.D.N.Y. 1983). With respect to the pend-

32 18 ing legislation, the PMA negotiators were of the view that the district court decision in Bolar did not change existing law and that codification of that decision merely preserved the status quo. Engelberg, Special Patent Provisions, at 399. Before Congress voted on the bill, however, the Federal Circuit reversed the district court s holding in Bolar. See Roche Products, Inc. v. Bolar Pharms. Co., Inc., 733 F.2d 858, 861 (Fed. Cir. 1984). This unexpected reversal caused a major rift at the highest levels of PMA. Engelberg, Special Patent Provisions, at 401. A coalition of dissident PMA members came out against the legislation, arguing to Congress that the bill s patent-litigation provisions, including the Bolar Amendment, unfairly favored generics. See, e.g., Innovation and Patent Law Reform: s on H.R. 3285, H.R. 3286, and H.R Before the Subcomm. on Courts, Civil Liberties, and the Admin. of Justice of the H. Comm. on the Judiciary, 98th Cong. pt. 1, at 444 (1984) [hereafter s ]. The coalition argued that the bill improperly institutionalize[d] and provide[d] incentive for a system of attacks on presumptively valid patents. Id. at 444 (Mem. of American Home Products, et al.); see also House Report pt. 1, at 71 (Minority View of Rep. Bliley) ( The patent provisions of this bill also encourage patent jumping and litigation over the validity of patents. ). effected an unlawful taking in violation of the Fifth Amendment by permitting generics to develop their products without incurring patent liability. s, at 449

33 19 (statement submitted by coalition of brand manufacturers). allowed generic manufacturers to challenge patents while risking only the costs of litigation. Id. at 445; see also id. at 446 ( Their risk is slight because they will not have to invest in the research required for a complete NDA. ). withdr[e]w from the patentee his current right to collect damages from such infringement. Id. at (statement of Norman Dorsen, on behalf of brand manufacturers). Despite these arguments, Congress refused to alter the Bolar Amendment or the other patentchallenge provisions. Moreover, Congress rejected proffered compromise measures, such as permitting generics to conduct FDA-related tests during only the patent s last year, House Report pt. 2, at 8-9, or requiring generics to pay licensing fees to patentees for using their products to get FDA approval, s, at 536. These alternatives conflicted with Congress overriding objective to get generics on the market as quickly as possible. See House Report pt. 2, at 8 9. But the brand manufacturers did not go away empty-handed. In exchange for ultimately acceding to the patent-challenge provisions, the PMA coalition demanded and received significant additional concessions. Congress extended the automatic stay, which originally was for 18 months, to 30 months, 130 Cong. Rec. H9105, at H9115, H9118 (daily ed. Sept. 6, 1984) (remarks of Rep. Waxman); 130 Cong. Rec. S10503, at S10504 (daily ed. August 10, 1984)

34 20 (remarks of Sen. Hatch), and granted market exclusivity for brand drugs that were not even protected by patents: five years of market exclusivity for new chemical entities ( NCEs ), and three years for drugs for which the manufacturer conducted new clinical studies, 21 U.S.C. 355(c)(3)(D)(ii), (j)(5)(d)(ii); 21 U.S.C. 355(c)(3)(D)(iii), (j)(5)(d)(iii); 35 U.S.C. 156 (2012). 6 Congress granted these concessions specifically to mollify the dissident brand manufacturers that wanted to defeat the legislation in the wake of the Bolar appellate decision. See, e.g., 130 Cong. Rec. S10503, at S10504 (daily ed. Aug. 10, 1984) (remarks of Sen. Hatch); Engelberg, Special Patent Provisions, at 405. Thus, when the patentee opts to proceed under 271(e)(2), the absence of a potential damage claim against the generics is hardly unintentional. The patent-challenge provisions were part of the carefully considered, balanced compromise reached by Congress and the industry participants. The is a compromise. As such, title II includes provisions about which PMA has had some reservations. The effects of these provisions were weighed very carefully by each of our companies. But while they cause concern, we recognize that they are the very fabric of the compromise of divided views and goals. s, at 407 (testimony of PMA representative Robert J. Lewis). 6 At a rate of some two dozen NCEs per year, see FDA, 2011 Novel New Drugs 2 (2012), available at cess/druginnovation/ucm pdf, these non-patent exclusivities are worth billions of dollars to brand manufacturers annually.

35 21 No Inability to Settle. The second premise of the natural byproduct argument that brands that choose the 271(e)(2) option can settle Hatch- Waxman cases only by making exclusion payments is also wrong. True, brands that have elected the 30-month stay cannot transfer consideration to generics by waiving a potential damage claim. But neither can patentees in traditional, nonpharmaceutical patent litigation who have requested and received a preliminary injunction. Nothing in the Hatch-Waxman changes these settlement dynamics. Just as in other, nonpharmaceutical patent cases, the litigants can settle the case with an early-entry license. Nothing in Hatch-Waxman requires consideration to take the form of an exclusion payment rather than a license. Contra Schering-Plough, 402 F.3d at 1074 (asserting that the explains the flow of settlement funds, without addressing whether the consideration need be funds rather than a license). Indeed, no theoretical or empirical analysis supports the notion that any significant number of 271(e)(2) patent cases can be settled only by the brand manufacturer s paying the generic manufacturer. Instead, a detailed economic model, which has stood unchallenged for nearly a decade, shows that essentially all such cases that can be settled can be settled without an exclusion payment. See Keith Leffler & Cristofer Leffler, Settling the Controversy Over Patent Settlements: Payments By the Patent Holder Should Be Per Se Illegal, 21 Res. in L. & Econ. 477, 486 (2004). Those economics are confirmed by real-world experience in which, after an initial antitrust crackdown (subsequently softened),

36 22 brand and generic manufacturers continued to settle the cases they simply settled with early-entry licenses rather than exclusion payments. See Paying Off Generics to Prevent Competition with Brand Name Drugs: Should It Be Prohibited?: on S. 316 Before the Comm. on the Judiciary, 110th Cong. 139 (2007) (prepared statement of the FTC) [hereafter FTC Statement ]. No Justification. Nor are exclusion payments justified because the manufacturers find it rational to make and accept them. Contra Tamoxifen, 466 F.3d at 209; Schering-Plough, 402 F.3d at That competitors have an increased incentive to make anticompetitive pacts does not render them lawful. See Hovenkamp, Anticompetitive Settlement, at For example, if Congress granted special tax incentives for additional entry into an underserved market, the incumbent manufacturers would find it rational to pay the potential new competitors not to enter. But the conspirators could not justify the payments by arguing that Congress tax policy increased the incentive to make them. See, e.g., American Needle, Inc. v. NFL, 130 S. Ct. 2201, 2213 (2010) ("But illegal restraints often are in the common interests of the parties to the restraint, at the expense of those who are not parties."). Here Congress specifically incentivized generic entry by easing regulatory burdens and offering the 180-day exclusivity bounty. That Congress created such incentives for entry is a reason to subject exclusion payments to strict antitrust scrutiny, not to excuse them as a natural byproduct of the incentives.

37 23 III. SUBSEQUENT LEGISLATIVE HISTORY CONFIRMS THE UNLAWFULNESS OF EXCLUSION PAYMENTS. The history of amendments to the Hatch- Waxman confirms that exclusion payments conflict with the. When Congress worked to prevent exclusion payments in 2003, the brand manufacturers warded off more stringent remedial legislation by arguing that the payments were already unlawful under the Sherman. Congress therefore solved the problem (or so it thought) by simply requiring that manufacturers produce all exclusion payment agreements to the FTC and DOJ so those agencies could prosecute under the Sherman. On March 16, 2000, the FTC filed complaints in two administrative proceedings charging that drug manufacturers had unlawfully used exclusion payments to delay generic competition to the drugs Cardizem CD and Hytrin. Press Release, FTC Charges Drug Manufacturers with Stifling Competition in Two Prescription Drug Markets (Mar. 16, 2000), available at 7 Three months later, a district court in a private antitrust case held that the agreement concerning Card- 7 The FTC eventually filed final consent orders in both cases. See Abbott Labs., Agreement Containing Consent Order, File Nos , available at and Hoechst Marion Roussel, Inc., Agreement Containing Consent Order, Docket No (Apr. 4, 2001), available at

38 24 izem CD was per se unlawful. See In re Cardizem CD Antitrust Litig., 105 F. Supp. 2d 682, 699 (E.D. Mich. 2000), aff d, 332 F.3d 896 (6th Cir. 2003). Shortly after the FTC filed its complaints, Congressional leaders began considering remedial amendments to prohibit the abuses that the FTC and private plaintiffs had uncovered. See, e.g., 146 Cong. Rec. S7908 (July 27, 2000) (statement of Sen. Leahy) (introducing the Drug Competition ( DCA ) in response to two recent antitrust actions by the [FTC] and a related federal court decision that exposed that [m]anufacturers of patented drugs are paying tens of millions of dollars to manufacturers of generic drugs if they agree to keep products off the market and split[ting] the profits from maintaining a monopoly at the consumer s expense ). Over the next three years, Congress held multiple hearings regarding the proper legislative response to exclusion payment agreements. The Hatch-Waxman s co-sponsors strongly condemned the agreements. See, e.g., 148 Cong. Rec. S7565, at S7566 (daily ed. July 30, 2002) (remarks of Sen. Hatch) ( I find these types of reverse payment collusive arrangements appalling ); 148 Cong. Rec. S7342, at S7348 (daily ed. July 25, 2002) (remarks of Sen. Hatch) (approvingly quoting another participant in the 1984 negotiations of the as saying [i]t was and is very clear that the law was not designed to allow deals between brand and generic companies to delay generic competition ); id. ( The FTC is doing the right thing in taking enforcement actions against those who enter anti-competitive agreements that violate our Nation s antitrust laws. ); 146 Cong. Rec. E1538 (daily ed. Sept. 20, 2000) (remarks of Rep. Waxman) (exclusion pay-

39 25 ments are a grossly anticompetitive abuse by branded and generic drug companies of the generic approval process ); Examining Issues Related to Competition in the Pharmaceutical Marketplace: A Review of the FTC Report, Generic Drug Entry Prior to Patent Expiration: Before the Subcomm. on Health of the H. Comm. on Energy and Commerce, 107th Cong. 6 (2002) (remarks of Rep. Waxman) (exclusion payments have taken a provision of the Hatch-Waxman law and turned it on its head. The provision was to encourage competition. They have used it to discourage competition, in fact, to stop competition ). The proposals that Congress considered were intended to prevent exclusion payment agreements. See, e.g., 146 Cong. Rec. E1538 (daily ed. Sept. 20, 2000) (remarks of Rep. Waxman) (DCA designed to prevent collusive deals like those challenged by the FTC in the Hytrin and Cardizem cases from recurring ); 147 Cong. Rec. S3711, at S3761 (daily ed. Apr. 6, 2001) (statement of Sen. Leahy) (reintroducing the DCA in the 107th Congress and emphasizing the need to pass legislation to prevent [exclusion payment agreements] from happening in the future ); S. Rep. No , at 4 (2002) (emphasizing the need to put an end to [exclusion payment agreements ] exploitation of the Hatch-Waxman ); 148 Cong. Rec. S7618, at S7646 (daily ed. July 31, 2002) (remarks of Sen. Leahy) (DCA is the solution to the problem of sweetheart deals between brand name and generic drug manufacturers that keep generic drugs off the market, thus depriving consumers of the benefits of quality drugs at lower prices ).

40 26 During the ensuing hearings, drug manufacturer representatives forestalled more forceful Congressional action by acknowledging that exclusion payments are already unlawful under the Sherman. For example, the brand manufacturers official representative testified that those cases [i.e., the FTC complaints involving Cardizem CD and Hytrin] outline facts and presented facts that would have been violations of the antitrust laws and/or the patent laws whether the Hatch-Waxman existed or not. Generic Pharmaceuticals: Marketplace Access and Consumer Issues: Before S. Comm. on Commerce, Science, and Transp., 107th Cong. 71 (2002) (remarks of Gregory J. Glover); see also id. at 85 (framing the issue as: Do [exclusion payments] suggest that there need to be changes in the Hatch Waxman, or do they suggest that we already have the legal and statutory authority to take care of these so-called abuses through the antitrust laws? ); Competition in the Pharmaceutical Marketplace: Antitrust Implications of Patent Settlements: Before S. Judiciary Comm., 107th Cong. 47 (2001) (statement of PhRMA) (exclusion payments are a prime example of an alleged defect in the Hatch- Waxman [that] can be addressed under existing law without amending Hatch-Waxman ); Recent Developments Which May Impact Consumer Access to, and Demand For, Pharmaceuticals: Before the Subcomm. On Health of the H. Comm. on Energy and Commerce, 107th Cong (2001) (statement of Gregory J. Glover) ( The actions of the [FTC] in challenging some recent settlements demonstrate that the anti-trust authorities are actively and adequately monitoring settlements between partner companies and generic manufacturers.