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The Federal Trade Commission is holding hearings on the legal and economic policy implications of antitrust law as it relates to patent, trademark and copyright laws. In our knowledge-based economy, which values intellectual property as a spur to innovation and commercialization, those issues are of great importance. However, the FTC is a newcomer. Its lawyers have yet to prove that they can try a patent case that has alleged anti-competitive effects. Last month’s stunning loss in a closely watched trial is a case on point. In March 2001, the FTC filed an administrative complaint that charged Schering-Plough Corp. and Upsher-Smith Laboratories Inc. with violating antitrust law. The agency said the two pharmaceutical companies entered into back-scratching deals that protected K-Dur 20, a popular Schering-Plough medicine for patients with coronary heart disease. K-Dur 20 is a salt tablet with a patented time-released coating developed by one of its divisions, Key Pharmaceuticals, a firm founded in Miami by biotech entrepreneur Dr. Phillip Frost. Upsher-Smith was the first manufacturer to seek Food and Drug Administration approval to market a generic version of K-Dur 20. Schering-Plough learned about the application in 1995 and within several months sued Upsher-Smith for infringement of the time-release patent, which does not expire until 2006. Upsher-Smith vigorously fought the suit. It countered that Schering’s suit was intended to delay FDA approval and price competition from Upsher-Smith’s generic drug. The cost of the patent litigation was staggering for Upsher-Smith, which had its cash tied up in new product development and needed to settle quickly. During negotiations, Schering-Plough told Upsher-Smith that if the case settled, Upsher-Smith could market a competing product starting in September 2001, five years before the coating patent expired. To get the deal done, Upsher-Smith offered Schering-Plough a license to sell Upsher-Smith’s unrelated, sustained-release niacin product outside the United States, as well as other Upsher-Smith products. Schering-Plough’s global marketing cardiovascular unit concluded that by licensing Upsher-Smith’s niacin product, it could sell more than $350 million in the first four years. It seemed like a good settlement. In the end, there were two deals: Schering-Plough agreed to pay $60 million in royalties for the niacin license, plus milestone bonuses. Upsher-Smith agreed not to market any time-release, potassium chloride tablets in the United States prior to September 2001, after which it would receive from Schering-Plough a nonexclusive, royalty-free license to sell its competing tablets in the U.S. When the ink dried on both agreements, Upsher-Smith immediately received $28 million, its first of three up-front royalty payments. That should have been the end of the matter, but for a federal law known as the Hatch-Waxman Act, pursuant to which Upsher-Smith was entitled to exclude other generic versions of K-Dur from the market for a period of 180 days after launching its product. Thus, all other generic manufacturers would be delayed until March 2002 — 180 days after Upsher was permitted to launch its product under the settlement agreement. The FTC assumed that the settlement agreement with Schering-Plough induced Upsher-Smith to delay its launching a generic version of K-Dur 20, and effectively protected Schering-Plough from competition from other generic drug manufacturers. Like a testosterone-charged teen-ager, the FTC’s antitrust muscles got pumped. However, the law is unclear concerning whether a settling first filer forfeits its exclusivity rights, and at trial the FTC offered no proof of a concerted agreement to manipulate the 180-day exclusivity provision of the Hatch-Waxman Act. Using a fast-track procedure, the FTC conducted an administrative trial on its complaint. Last month, the FTC announced that its own administrative law judge had ruled against the FTC and dismissed all allegations. Where did FTC lawyers go wrong? First, the judge determined that the FTC failed to properly define the relevant market. FTC lawyers confused distinctiveness with dominance. While K-Dur 20 had 40 percent of all prescriptions for potassium chloride tablets, other pharmaceuticals competed with K-Dur 20 by convincing doctors to prescribe twice as many of their half-strength pills instead of Schering-Plough’s time-released potassium chloride. Accordingly, the judge concluded that Schering-Plough lacked market power in a properly defined market, which included all potassium chloride tablets. Second, the FTC failed to show that the two deals between Schering-Plough and Upsher-Smith were intended to harm competition. The FTC’s lawyers had charged that the niacin-royalty payments were intended to restrict competition and exclude other generic manufacturers from the potassium chloride market, which reduced output and raised prices to consumers. FTC lawyers also claimed that the settlement undermined the purposes of the patent laws and frustrated the intent of the Hatch-Waxman Act. In effect, the FTC contended that some or all of the payment was for the potassium chloride settlement and not for the royalty license of the niacin product. What the FTC staff failed to do was prove that Schering-Plough’s time-released coating patent was invalid. Only after that determination could the settlement and the reverse payments be shown to be a sham. The FTC’s lack of trial skill in patent infringement rendered it incapable of proving the licensing agreement delayed the entry of generic competition. If the FTC had been able to prove that the cross-licensing agreements were a sham, its theory that the payments depicted in the settlement with Upsher-Smith were intended to keep Upsher-Smith’s (and — thanks to the Hatch-Waxman Act — all other) generic sustained release potassium chloride tablets off the market, would have been plausible. Everyone now knows that the emperor wears no clothes. The FTC staff tried to avoid revealing its weakness by asserting that the parties engaged in anti-competitive behavior when — according to the FTC judge — their conduct merely was a sequel to a prosaic patent dispute. The FTC staff’s loss in this case has uncovered a wide gap between antitrust theory and the FTC’s enforcement muscle when it comes to patent law. The FTC simply lacks credibility as an antitrust enforcement agency in a market where patents are king. The solution? Learn from the U.S. Department of Justice, whose offices are three blocks away on Pennsylvania Avenue in Washington, D.C. When it went after Microsoft, it hired David Boies and kept its own lawyers in a support role. If the FTC is serious about exerting its might over a patent dispute with anti-competitive overtones, it should consider outsourcing for top patent trial talent. Stephen Nagin of Nagin Gallop & Figueredo ( www.ngf-law.com) is chair of the Florida Bar’s Antitrust and Trade Regulation Law Certification Committee.

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