No AA IN THE UNITED STATES COURT OF APPEALS FOR THE ELEVENTH CIRCUIT

No. 04-10688-AA IN THE UNITED STATES COURT OF APPEALS FOR THE ELEVENTH CIRCUIT SCHERING-PLOUGH CORPORATION and UPSHER-SMITH LABORATORIES, INC., Petitioners, v. FEDERAL TRADE COMMISSION, Respondent. On Petition for Review from a Final Order of the Federal Trade Commission BRIEF OF WASHINGTON LEGAL FOUNDATION AS AMICUS CURIAE IN SUPPORT OF PETITIONERS AND SEEKING REVERSAL OF THE ORDER BELOW Daniel J. Popeo David Price WASHINGTON LEGAL FOUNDATION 2009 Massachusetts Ave., N.W. Washington, D.C. 20036 (202) 588-0302 Counsel for amicus curiae June 9, 2004

Schering-Plough Corp. and Upsher-Smith Laboratories, Inc. v. Federal Trade Commission No. 04-10688-AA CORPORATE DISCLOSURE STATEMENT AND CERTIFICATE OF INTERESTED PERSONS Pursuant to Fed. R. App. P. 26.1, the Washington Legal Foundation (WLF) states that it is not a corporation and does not have any parent corporation. Furthermore, pursuant to Eleventh Circuit Rule 26.1-1, WLF hereby certifies that the following persons have an interest in the outcome of this case: Bradley Scott Albert, Esq. American Home Products Corporation Andrx Corporation Sheila F. Anthony, former FTC Commissioner Yaa Apori, Esq. Arnold & Porter LLP Diane E. Bieri, Esq. Linda B. Blumenreich, Esq. Karen G. Bokat, Esq. Peter J. Carney, Esq. Hon. D. Michael Chappell Gustav P. Chiarello, Esq. Susan A. Creighton, Esq. Jaime M. Crowe, Esq. Christopher M. Curran, Esq. C 1 of 4

Schering-Plough Corp. and Upsher-Smith Laboratories, Inc. v. Federal Trade Commission No. 04-10688-AA Laurie Webb Daniel, Esq. Daniel P. Ducore, Esq. Philip M. Eisenstat, Esq. ESI-Lederle, Inc. Federal Trade Commission Richard A. Feinstein, Esq. Garry R. Gibbs, Esq. J. Mark Gidley, Esq. Andrew Ginsburg, Esq. Gregg A. Hand, Esq. Pamela Jones Harbour, FTC Commissioner Andrew Heimert, Esq. Elizabeth R. Hilder, Esq. Cathy A. Hoffman, Esq. Holland & Knight LLP Howrey Simon Arnold & White, LLP Lisa K. Hsiao, Esq. Michael B. Kades, Esq. Marilyn E. Kerst, Esq. Key Pharmaceuticals C 2 of 4

Schering-Plough Corp. and Upsher-Smith Laboratories, Inc. v. Federal Trade Commission No. 04-10688-AA Kos Pharmaceuticals, Inc. Vivian S. Kuo, Esq. Joseph P. Lavelle, Esq. Thomas B. Leary, FTC Commissioner Charles A. Loughlin, Esq. Rajeev K. Malik, Esq. Markus H. Meier, Esq. Suzanne T. Michel, Esq. Robin Moore, Esq. Judith A. Moreland, Esq. Timothy J. Muris, FTC Chairman Ernest A. Nagata, Esq. John W. Nields, Jr., Esq. Paul J. Nolan, Esq. Martha Oppenheim, Esq. Oppenheimer Wolff & Donnelly LLP Melvin H. Orlans, Esq. David M. Orta, Esq. Donna E. Patterson, Esq. Robert D. Paul, Esq. C 3 of 4

Schering-Plough Corp. and Upsher-Smith Laboratories, Inc. v. Federal Trade Commission No. 04-10688-AA David R. Pender, Esq. Jason C. Raofield, Esq. Christina M. Sarris, Esq. Schering Corporation Schering-Plough Corporation Marc G. Schildkraut, Esq. Gary H. Schorr, Esq. Laura S. Shores, Esq. Seth Silber, Esq. Karan Singh, Esq. Michael N. Sohn, Esq. Clifton Smith Orson Swindle, FTC Commissioner Mozelle W. Thompson, FTC Commissioner Upsher-Smith Laboratories, Inc. Steve Vieux, Esq. Jonathan A. Wasserman, Esq. White & Case LLP Winston & Strawn Wyeth C 4 of 4

TABLE OF CONTENTS TABLE OF AUTHORITIES............................... ii INTERESTS OF AMICUS CURIAE......................... 1 INTRODUCTION AND SUMMARY OF ARGUMENT........ 2 ARGUMENT........................................... 4 I. THE COMMISSION S HOSTILITY TO PATENT SETTLEMENTS OF THE KIND PRESENTED HERE IS UNFOUNDED.................................. 4 II. III. THE COMMISSION ERRED BY REFUSING TO ASSESS THE VALIDITY AND SCOPE OF THE PATENT RIGHTS AT ISSUE......................... 9 THE COMMISSION S APPROACH, IF UPHELD, WOULD DETER SETTLEMENTS OF PATENT DISPUTES, THUS BRINGING ANTICOMPETITIVE CONSEQUENCES.................................. 10 CONCLUSION.......................................... 14 i

TABLE OF AUTHORITIES Cases Asahi Glass Co. v. Pentech Pharmaceuticals, 289 F. Supp. 2d 986 (N.D. Ill. 2003)....................... 8, 12-13 Cardizem CD Antitrust Litigation, 332 F.3d 896 (6th Cir. 2003)............................. 9 Levine v. Central Florida Medical Affiliates, Inc., 72 F.3d 1538 (11th Cir. 1996)............................ 6-7 Monsanto v. McFarling, 302 F.3d 1291 (Fed. Cir. 2002)........................... 8 Valley Drug Co. v. Geneva Pharmaceuticals, 344 F.3d 1294 (11th Cir. 2003)........................... 2, 6, 7, 8, 12 Walker Process Equipment, Inc. v. Food Machinery & Chemical Corp., 382 U.S. 172, 86 S. Ct. 347 (1965)......... 8-9 Statutes Drug Price Competition and Patent Term Restoration Act of 1984 ( Hatch-Waxman Act ), Pub. L. No. 98-417, 98 Stat. 1585 (1984).................................... 2, 5, 9 Other Authorities Address by R. Hewitt Pate, Assistant Attorney General, U.S. Dept. of Justice, before the American Intellectual Property Association, Jan. 24, 2003........................ 10 Daniel A. Crane, Exit Payments in Settlement of Patent Infringement Lawsuits: Antitrust Rules and Economic Implications, 54 Fla. L. Rev. 747 (2002)............................... 6, 9, 11 ii

Federal Trade Commission, Generic Drug Entry Prior to Patent Expiration: An FTC Study (2002)......................... 4, 8 U.S. Const., art. I, 8 cl. 8................................... 11 iii

INTERESTS OF AMICUS CURIAE The Washington Legal Foundation (WLF) is a nonprofit public interest law and policy center based in Washington, D.C., with supporters nationwide. Since its founding in 1977, WLF has engaged in litigation and advocacy to defend and promote individual rights and a limited and accountable government, including in the area of patients interests. For example, WLF successfully challenged the constitutionality of Food and Drug Administration restrictions on the ability of doctors and patients to receive truthful information about off-label uses of FDAapproved medicines. See Washington Legal Found. v. Friedman, 13 F. Supp. 2d 51 (D. D.C. 1998), appeal dism d, 202 F.3d 331 (D.C. Cir. 2000). WLF s Legal Studies Division frequently publishes papers on legal policy issues in the areas of health care, intellectual property, and antitrust, recently including Scott P. Perlman and Lily Fu Swenson, Avoiding Collisions at the Intersection of Antitrust and Intellectual Property Laws (2003). WLF is submitting this brief because it is concerned that the Commission s ruling would have serious deleterious effects on the settlement of patent disputes and, ultimately, on the value of patent protection and on incentives for pioneer drug firms and generic drug firms to bring products to market. WLF also filed a brief in support of the parties to the patent settlement and against the antitrust 1

challenge before the Federal Trade Commission in the proceedings below and in this Court in Valley Drug Co. v. Geneva Pharmaceuticals, 344 F.3d 1294 (11th Cir. 2003). INTRODUCTION AND SUMMARY OF ARGUMENT Congress enacted the Drug Price Competition and Patent Term Restoration Act of 1984, popularly known as the Hatch-Waxman Act, Pub. L. No. 98-417, 98 Stat. 1585 (1984), to allow a prospective manufacturer of a generic version of a drug already on the market a pioneer drug to file an abbreviated application with the Food and Drug Administration. See 21 U.S.C. 355(j)(1). Under the Hatch- Waxman Act, this abbreviated application, an Abbreviated New Drug Application ( ANDA ), can rely in certain respects on the FDA s prior approval of the pioneer drug for safety and effectiveness. The Hatch-Waxman Act does not curtail any patent rights of the maker of the pioneer drug, and indeed, the Act requires the ANDA to certify that the proposed generic drug would not infringe any patent listed with the FDA as covering the pioneer drug. 21 U.S.C. 355(j)(2)(A)(vii). Congress intended for the Act to eliminate... impediments to the introduction of generic drugs to the market. Valley Drug Co. v. Geneva Pharmaceuticals, 344 F.3d 1294, 1296 (11th Cir. 2003). In doing so, Congress established balanced procedures to protect the ability of pioneer firms to assert 2

their intellectual property rights as well as the ability of potential generic entrants to contest those rights. In the present case, the Federal Trade Commission is asserting antitrust claims against a pioneer firm (Schering-Plough) and a generic firm (Upsher-Smith Laboratories) based on a garden-variety settlement of a patent dispute. The Commission s claims are based on its view that payments from a pioneer to a generic entrant show anticompetitive intent in and of themselves a view that is commercially unrealistic and counter to the law of this Circuit. The Commission s ruling is further undermined by its insistence that the supposedly sham nature of the firms patent settlement can be determined without any reference at all to the strength or weakness of the underlying patent claims. Further, as a matter of policy, the Commission s approach should be rejected because it would burden pioneer firms, generic firms, and the federal courts by creating new obstacles to settlement of patent disputes, thereby chilling both new drug innovation and new generic entry. 1 1 Except where otherwise noted, the legal arguments presented here also apply to the Commission s action based on the settlement between Schering-Plough and American Home Products. That action is before this Court in the present proceeding with respect to Schering-Plough. American Home Products was charged by the Commission s complaint counsel, but settled with the Commission prior to trial in April 2002. See Opinion at 5. 3

ARGUMENT I. THE COMMISSION S HOSTILITY TO PATENT SETTLEMENTS OF THE KIND PRESENTED HERE IS UNFOUNDED The Commission employs the derisive term reverse payment to describe a payment in a patent settlement from a pioneering company to a generic entrant, on the theory that such payments are exceptional. See Opinion of the Commission, In the Matter of Schering-Plough Corp., et al. (hereinafter Opinion ) at 5 & n.9. The Commission s own staff study of the issue, however, found that such payments are, in fact, the norm. Of twenty settlement agreements considered by the study, nine of the settlements or 45% of the total involved payments from the pioneer company to the first generic applicant. See Federal Trade Commission, Generic Drug Entry Prior to Patent Expiration: An FTC Study 31 (2002) (hereinafter FTC Study). 2 Seven of the agreements, or 35% of the total, involved payments from the generic to the pioneer. See id. at 29. (Of the remaining settlements, one provided for a royalty-free license to the generic; two were supply agreements under which the generic would relabel and resell the drug manufactured by the pioneer; and two were classified as other. See id. at 28, 30.) 2 Available for download at http://www.ftc.gov/os/2002/07/genericdrugstudy.pdf. 4

Payments from the pioneer firm to a generic firm can be more neutrally and more descriptively termed pioneer payments. The Commission concludes, in essence, that settlements involving pioneer payments are presumptively unlawful because the parties could have entered into a different settlement that would have allowed earlier entry by the generic and thus more competition. Absent proof of other offsetting consideration, it is logical to conclude that the quid pro quo for the payment was an agreement by the generic to defer entry beyond the date that represents an otherwise reasonable litigation compromise. Opinion at 26. The Commission thus assumes that any reasonable litigation compromise would take the form of a cashless settlement based purely on changing the date of entry. This view is a construct of the Commission s imagination, and that of its academic expert, Professor Timothy J. Bresnahan. The commercial reality, as illustrated by the above findings of the Commission s own staff, is that payments to the generic entrant are routine and may be necessary for settlement. They are amply justifiable by economic factors apart from unlawful anti-competitive intent, as this Court has noted. Under the process established by the Hatch-Waxman Act, the pioneer asserts its patent claims at a point when the generic firm s product exists only on paper, and when the generic firm may have only a very limited investment at risk; the generic firm s investments in marketing, manufacturing operations, and the like for the generic drug are still in the future. The pioneer, of 5

course, is in the opposite situation. Given the asymmetries of risk and large profits at stake, even a patentee confident in the validity of its patent might pay a potential infringer a substantial sum in settlement. Valley Drug, 344 F.3d at 1309. See also Daniel A. Crane, Exit Payments in Settlement of Patent Infringement Lawsuits: Antitrust Rules and Economic Implications, 54 Fla. L. Rev. 747, 761-62 (2002). 3 The Commission claims that it is not adopting a per se rule against pioneer payments, but it accomplishes much the same result by shifting the burden of proof in its own favor. Under the Commission s ruling, the defendant drug companies had the burden to show either that the settlement agreement was procompetitive or that the payments were independently justified by the value of certain crosslicenses. See Opinion at 6, 29, 36, 39-40. This burden-shifting is improper. The question of whether settlement agreements are procompetitive is not an affirmative defense; it is an element of the Commission s cause of action. Rule of reason analysis requires the plaintiff to prove (1) an anticompetitive effect of the defendant s conduct on the relevant market, and (2) that the conduct has no procompetitive benefit or justification. 3 Indeed, it appears highly likely that the patent dispute between Schering-Plough and American Home Products would not have settled if the parties could only adjust the date of entry and did not have the option of a payment from the pioneer to the generic. According to the Commission s own findings, the generic entry date of January 1, 2004, in that settlement was apparently non-negotiable. Opinion at 82. 6

Levine v. Central Florida Medical Affiliates, Inc., 72 F.3d 1538, 1551 (11th Cir. 1996) (emphasis added). The fact that a regulator or an academic observer can imagine an alternative agreement that might yield earlier entry does not amount to an antitrust cause of action. A patent is, by design and by definition, a grant of a temporary monopoly. The lawful exercise of that monopoly privilege may well involve excluding others and may well generate supra-competitive profits, as this Court has observed: [A] patentee can choose to exclude everyone from producing the patented article... or grant exclusive territorial licenses carving up the United States among its licensees.... Within reason, patentees can also subdivide markets in ways other than territorial, such as by customer class.... Such arrangements undoubtedly tend to result in lower production and higher prices of the patented article than if competition were unrestrained, but these anticompetitive tendencies do not render them in violation of the Sherman Act. Valley Drug, 344 F.3d at 1305 (citations omitted). Here, the pioneer firm had an unquestioned right to litigate its patent claims fully rather than settle. Had it done so and won, it would have retained its monopoly for an additional five years beyond the entry date that the settlement actually provided that is, through the patent expiration date of September 6, 2006, not the agreement s date of September 2001. (Had the pioneer firm litigated and lost, it would still have retained exclusivity as a practical matter during the 7

pendency of district court proceedings, at least. 4 ) In this case, as in Valley Drug, the settlement agreement was less restrictive than the terms of the pioneer s presumptively-valid patent. The effect of the Zenith Agreement on the production of Zenith s infringing terazosin product appears to be no broader than the potential exclusionary effect of the... patent, and was actually narrower to the extent it permitted Zenith to market its drug before the... patent expired. 344 F.3d at 1305. See also Monsanto v. McFarling, 302 F.3d 1291, 1298 (Fed. Cir. 2002) (a limitation on the use of a patented invention does not represent an antitrust violation where the limitation is within the scope of the patent). In view of this Court s ruling in Valley Drug, in view of the deliberately monopolistic character of the rights created by Congress for patent-holders, and in view of the general policy of the law in favor of settlement of litigation, 5 parties to a patent settlement such as this one should not be subject to antitrust liability if the settlement is within the scope of the patent and if the pioneer has not asserted the claim with knowledge of the patent's infirmity within the meaning of Walker Process Equipment, Inc. v. Food Machinery & Chemical Corp., 382 U.S. 172, 175, 4 The study by the Commission s staff found that in the absence of a settlement, a generic firm facing a patent infringement suit rarely risks entering the market prior to a district court ruling that the patent is either invalid or not infringed. See FTC Study, supra, at 22. 5 Asahi Glass Co. v. Pentech Pharmaceuticals, 289 F. Supp. 2d 986, 991 (N.D. Ill. 2003) (Posner, J.) and sources cited therein. 8

86 S. Ct. 347, 349 (1965) (antitrust liability grounded on knowing assertion of baseless patent claim). 6 II. THE COMMISSION ERRED BY REFUSING TO ASSESS THE VALIDITY AND SCOPE OF THE PATENT RIGHTS AT ISSUE The Commission s ruling holds that it need not consider the strength of the pioneer s patent infringement claim neither the subjective strength of the claim as perceived by the parties at the time they entered into the settlement nor the claim s objective strength. See Opinion at 29-35. This is puzzling since the gist of the supposed wrongdoing in this case is that the pioneer gave the generic firm excessive consideration to settle the claim in return for a more favorable entry date of the generic product. Assuming that this argument represents an antitrust claim at all which amicus believes it does not, for the reasons set out in part I above it is anyone s guess how the Commission or a court could apply it to a particular settlement without looking at the underlying dispute. 6 It should be noted that the settlement agreement in this case did not forbid the generic firm, Upsher-Smith Laboratories, to waive its 180-day period of exclusivity under the Hatch-Waxman Act. Rather, Upsher-Smith was free to waive, transfer, or license its 180-day marketing exclusivity. This case is thus distinct from the situation presented in Cardizem CD Antitrust Litigation, 332 F.3d 896, 907-8 (6th Cir. 2003). See also Crane, supra, 54 Fla. L. Rev. at 794. 9

The Justice Department s Assistant Attorney General for Antitrust has made the same point: If a patent is valid and infringed, then any competitive entry allowed by a settlement is up to the patent holder. If a patent is invalid or not infringed, then there should be no impediment to competitive entry whatsoever. The problem is that we have no way definitively to know which situation applies without evaluating the underlying IP rights, a task that is outside our core expertise as antitrust enforcers. 7 While assessing those rights may be outside the core expertise of antitrust enforcers, it is a necessary step where enforcers are asserting claims based on excessive consideration and unlawful motive embedded in a facially legitimate patent settlement. III. THE COMMISSION S APPROACH, IF UPHELD, WOULD DETER SETTLEMENTS OF PATENT DISPUTES, THUS BRINGING ANTICOMPETITIVE CONSEQUENCES The Commission states that it is theoretically possible that settlement agreements with pioneer payments can foster competition in limited circumstances. The Commission allows that such an agreement could be procompetitive if it involved payments to a cash-starved generic. Opinion at 13. But 7 Address by R. Hewitt Pate, Assistant Attorney General, Antitrust Division, U.S. Dept. of Justice, before the American Intellectual Property Association, Jan. 24, 2003, at 13. Available for download at http://www.usdoj.gov/atr/public/speeches/200701.htm. Mr. Pate was Acting Assistant Attorney General at the time, and has since received Senate confirmation. 10

the Commission s view of competition in the context of patent protection and, derivatively, settlements of patent disputes is untenably narrow in two respects. First, by erecting a new doctrinal barrier to out-of-court settlements of patent disputes, the Commission s approach will force more such disputes to be fully litigated a process that tends to facilitate anticompetitive exchanges of information, as one commentator has noted: [A]ntitrust law generally disfavors information exchange by competitors on the theory that it may facilitate price-fixing or conscious parallelism. The mere exchange of pricing information by competitors may violate the antitrust laws. In patent litigation, all of the patentee s and alleged infringer s pricing, cost, and output level information may be relevant to the calculation of damages, and therefore discoverable in litigation. Thus, a rule curtailing early settlements out of antitrust fears may unwittingly facilitate the very sort of information exchange among competitors that would otherwise be illegal.... [P]rotective orders are often porous and difficult to enforce. Crane, supra, 54 Fla. L. Rev. at 758-59. Second, vigorous enforcement of patent rights, including the settlement of patent disputes, is itself procompetitive. The Constitution grants Congress the power to secure for limited Times to Authors and Inventors the exclusive Right to their respective Writings and Discoveries based on the Framers view that this protection would promote the Progress of Science and useful Arts. U.S. Const., art. I, 8 cl. 8. This exclusionary right is designed to allow the patentee to exploit whatever degree of market power it might gain thereby as an incentive to induce 11

investment in innovation and the public disclosure of inventions. Valley Drug, 344 F.3d at 1304. This incentive for investment is especially procompetitive in the pharmaceutical field, which depends on substantial investments by firms for a flow of new medicines to compete with existing medicines in terms of effectiveness, convenience of administration, reduced side effects, and other factors affecting the patient s quality of life, as well as price. In addition, these new medicines ultimately become part of the stream of competing generic products upon the expiration of their patents (or earlier, if licensed by the pioneer). This Court has recognized the effect of potential antitrust liability on patent enforcement. To hold that an ostensibly reasonable settlement of patent litigation gives rise to per se antitrust liability if it involves any payment by the patentee would obviously chill such settlements, thereby increasing the cost of patent enforcement and decreasing the value of patent protection generally. Valley Drug, 344 F.3d at 1309. While the Court in Valley Drug was addressing the question of whether to apply per se analysis to patent settlements with pioneer payments, its observation is equally applicable to the approach of the Commission here, which places a significant burden of proof on the parties to the settlement while eschewing per se analysis in name. Judge Posner of the Seventh Circuit, sitting as a district judge, has likewise noted, If... there is nothing suspicious about the 12

circumstances of a patent settlement, then to prevent a cloud from being cast over the settlement process a third party should not be permitted to haul the parties to the settlement over the hot coals of antitrust litigation. Asahi Glass Co., 289 F. Supp. 2d at 992. The effect of potential antitrust litigation in chilling good-faith settlement of patent disputes will be greatly magnified by the Commission s fly-specking and second-guessing of the terms of the agreements. Here, the pioneer payment represented a payment for rights to other products that Upsher-Smith was licensing to Schering-Plough. The parties to the settlement presented evidence which the Administrative Law Judge found persuasive that the amount of the payment simply reflected the value of the rights that the pioneer company was acquiring. The Commission nonetheless undertook its own independent evaluation of the pharmaceutical licenses and the parties deliberations and negotiations. Not only did the Commission overrule the Administrative Law Judge, it even hinted that its Complaint Counsel had gone too far by conceding that a value-for-value exchange would absolve the parties of antitrust liability. See Opinion at 39-40. In the shadow of such uncertainty as to how the Commission or the courts will view a settlement agreement after the fact, it will take nerve for pioneer and generic companies to enter into settlement agreements on any terms. 13

CONCLUSION For the foregoing reasons, amicus respectfully urges the Court to reverse and vacate the Commission s order below. Respectfully submitted, Daniel J. Popeo David Price WASHINGTON LEGAL FOUNDATION 2009 Massachusetts Ave., N.W. Washington, D.C. 20036 (202) 588-0302 Counsel for amicus curiae June 9, 2004 14

CERTIFICATE OF COMPLIANCE WITH RULE 32(a) This brief complies with the type-volume limitation of Fed. R. App. P. 32(a)(7)(B) because it contains 3,119 words, excluding the parts of the brief exempted by the Rule. This brief complies with the typeface requirement of Fed. R. App. P. 32(a)(5) and the type style requirements of Fed. R. App. 32(a)(6) because it has been prepared in a proportionally spaced typeface using Microsoft Word 2002 with Times New Roman in 14 point. David Price

CERTIFICATE OF SERVICE I HEREBY CERTIFY that on this 9th day of June, 2004, I caused the original and six copies of the foregoing brief to be deposited in the U.S. Mail, firstclass postage pre-paid, addressed to the Clerk of the Court, and I caused two copies to be deposited in the U.S. Mail, first-class postage pre-paid, addressed to each of the following: John D. Graubert Federal Trade Commission 600 Pennsylvania Ave., N.W. Washington, D.C. 20580 John W. Nields Howrey Simon Arnold & White, LLP 1299 Pennsylvania Ave., N.W. Washington, D.C. 20004 Robert D. Paul White & Case LLP 601 Thirteenth St., N.W. Washington, D.C. 20005 I further certify that all parties required to be served have been served. David Price