ABA Antitrust Section

ABA Antitrust Section

Intellectual Property Committee E-Bulletin

Issue 5

June 19, 2006

Solicitor General Urges Denial of FTC's Petition for Certiorari in Patent Settlement Litigation and FTC Responds with Supplemental Brief Supporting Petition

In August 2005, the FTC filed a petition for a writ of certiorari asking the Supreme Court to review the Eleventh Circuit's opinion in Schering-Plough Corp. v. FTC, 402 F.3d 1056 (11th Cir. 2005). The FTC's petition was not joined by the Department of Justice. The Supreme Court had invited the Solicitor General to file a brief on behalf of the United States in October, which it did in May in which it argued that the petition should be denied.

The Schering case involved settlements of patent infringement litigation between brand-name manufacturer Schering-Plough Corp. ("Schering") and two generic manufacturers, Upsher-Smith Laboratories, Inc. ("Upsher") and ESI Lederle, Inc. ("ESI") concerning Schering's blood pressure and heart disease drug, K-Dur 20. Both settlement agreements involved payments from Schering to the generics. After an extensive administrative proceeding, an Administrative Law Judge issued an Initial Decision dismissing the complaint in June 2002. The FTC Complaint Counsel appealed and the full Commission issued a ruling in December

2003 finding that the settlement agreements illegally restrained trade.

That opinion was appealed to the Eleventh Circuit, which reversed the FTC.

In the brief of the United States, the Solicitor General ("SG") asserted that the petition should be denied, offering the view that "[t]he decision below does not conflict with any decisions of [the Supreme Court] or the courts of appeals, and the only important unsettled issues of federal law that are raised by the petition are not well presented in this case."

The SG acknowledged that patent litigation settlements that include reverse payments implicate important and complex issues at the intersection of patent and antitrust law, which are further complicated by the Hatch-Waxman Act. The SG argued that the appropriate legal standard for evaluating a reverse-payment settlement in the Hatch-Waxman context, "should take into account the relative likelihood of success of the parties' claims, viewed ex ante." The SG explained that "[a] court would not need to conduct a full trial on the merits of the patent claims to make a determination regarding the likelihood of a patent owner's litigation success," but "[r]ather, a court could conduct a limited examination into the relative merits of the patent claims and other relevant factors surrounding the parties' negotiations."

The SG noted that the FTC's approach "apparently rejects any direct effort to evaluate the likelihood that the patent holder would prevail on its claim" and instead "asses[es] the 'expected value' of the patent holder's lawsuit against the generic and then uses that as part of its evaluation of the settlement." The SG criticized the FTC's approach for both (a) "plac[ing] undue weight on the parties' subject views of the strength of the claims as reflected in the settlement agreement" and (b) "reflect[ing] a high degree of suspicion of any reverse payment."

Ultimately, however, the SG argued that, whatever the correct standards is for evaluating patent settlements involving reverse payments, the Schering case did not present an appropriate opportunity for deciding these complex issues. First, the SG argued that, with respect to the Schering-Upsher settlement, the Eleventh Circuit's determination that the payment to Upsher was a bona fide royalty foreclosed the FTC's antitrust challenge, even under the FTC's theory, unless that determination is overturned. On this point, the SG asserted that the Eleventh Circuit had applied the correct and well-established "substantial evidence" standard to the agency fact finding and that the issue was in the Eleventh Circuit's application of that standard. The SG further explained that it is the Supreme Court's normal practice to leave the task for applying the substantial evidence standard to the courts of appeals and the complexity of this case, with its voluminous evidentiary records, made it a poor candidate for an exception to that practice.

Second, with regard to the Schering-ESI settlement, the SG argued that "[t]he unusual circumstances surrounding the ESI payment suggest that it is unlikely to provide a factual setting conducive to the Court's identification and application of the appropriate legal standard to govern reverse-payment settlements generally." Among circumstances noted were the fact that there was little evidence concerning the ESI settlement and the fact that it was negotiated through a process involving the active participation of a magistrate.

Third, the SG argued that there was a disconnect between the Eleventh Circuit's interpretation of the FTC's position and the FTC's own understanding of its rationale. According to the petition, the Eleventh Circuit did not view the FTC's methodology as assessing the "expected value" of the patent holder's lawsuit against the generic in the evaluation of the settlement, but rather as requiring a conclusion (which the Eleventh Circuit found unsupported by the record) that, but for the payments, the parties would have crafted different settlement with earlier entry dates. The SG noted the prospect that the Second Circuit, in reviewing In re Ciprofloxacin Hydrochloride Antitrust Litigation, 363 F. Supp. 2d 514 (E.D.N.Y. 2005), appeal docketed, No.

05-2851 (2d Cir.), may address the validity of the "expected value"

theory advanced by the FTC in its petition, which the SG argued, further counseled against review at this time.

Finally, the SG argued that there was no circuit split justifying Supreme Court review. First, the SG argued that there was no split with the Sixth Circuit's opinion in In re Cardizem CD Antitrust Litigation,

332 F.3d 896 (2003), cert. denied, 543 U.S. 939 (2004), because, as set forth in the amicus brief submitted by both the United States and the FTC, the Cardizem opinion "involved payments to exclude drugs that did not fall within the scope of the patent alleged to be infringed." The SG rejected the FTC's contention that the Schering decision has sharpened the tension between the Sixth and Eleventh Circuits. The SG also noted that while the Second Circuit had decided In re Tamoxifen Citrate Antitrust Litigation, 429 F.3d 370 (2d Cir. 2005), subsequent to the FTC's petition, to the extent the Second Circuit's approach differed from the Eleventh Circuit's approach, it did not present an opportunity for review because the FTC would not prevail under either approach.

After the SG's brief on behalf of the United States, the FTC filed a supplemental brief in further support of its petition. The FTC argues that the SG's brief failed to fully consider the urgent impact that the Eleventh Circuit's ruling had on consumers. Citing to its report on settlement agreements filed in April 2006, the FTC argues that while there had been a lull in settlements containing exclusionary payments, such payments are beginning to reemerge.

In regard to the SG's contention that the appropriate standard should involve an evaluation on the patent merits, the FTC argues that this "conflicts with rule of reason principles, and only adds to the array of conflicting positions on the issue presented." The FTC contends that a key drawback is that this standard would place "parties contemplating settlement in the predicament of not knowing, at the time of settlement, whether particular settlement terms will appear unreasonable to a future antitrust tribunal." In contrast, the FTC asserts that the contemporaneous actions of the parties, particularly a generic's unwillingness to delay entry absent reverse payments, provides a better indication of the patent's strength.

The FTC challenges the SG's suggestion that reverse payments are the natural by product of the Hatch-Waxman scheme given the disparities in the litigants' respective risks resulting from the generic's ability to force the brand manufacturer into litigation prior to actual infringement. The FTC argues that it is the prerogative of Congress to determine what constitutes an act of infringement giving rise litigation, to promote early litigation of weak patent claims, and to decide how to facilitate generic entry. The FTC contends that the Eleventh Circuit decision reflects its own view of policy rather than that of Congress.

The FTC also takes issue with the SG's suggestion that factual complexity or unusual circumstances make this case less than ideal for the adjudication of the difficult issues involved. The FTC argues that the Eleventh Circuit's articulation of the correct legal standard should not immunize its incorrect application of that standard from review.

The FTC further argues that none of the unique circumstances cited by the SG (e.g., the fact that the ESI settlement resulted from the involvement of a Magistrate), should militate against review.

Finally, the FTC contends that "there is substantial tension in the approaches adopted by the lower courts to date." The FTC suggest that while "certain aspects of the Cardizem ruling made it unsuitable for review," there is a real divide between the Sixth Circuit approach and the approach of the Eleventh Circuit (as well as of the approach of the Second Circuit as reflected in Tamoxifen, which the FTC claims is unlikely to change absent en banc reconsideration).

Links:

FTC's Supplemental Brief:

http://www.ftc.gov/os/adjpro/d9297/060612certiorarisupplementalbrief.pdf

http://www.ftc.gov/os/adjpro/d9297/060612certiorarisupplementalbrief.pd

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Brief of the United States:

http://www.usdoj.gov/osg/briefs/2005/2pet/6invit/2005-0273.pet.ami.inv.p

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http://www.usdoj.gov/osg/briefs/2005/2pet/6invit/2005-0273.pet.ami.inv.

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FTC's Original Petition:

http://www.ftc.gov/os/2005/08/050829scheringploughpet.pdf

http://www.ftc.gov/os/2005/08/050829scheringploughpet.pdf>