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Since the late 1990s, U.S. antitrust enforcement authorities have greatly increased their scrutiny of the potential anti-competitive effects of patent settlements. In 1997, then-Department of Justice Antitrust Division chief Joel Klein warned of increased DOJ scrutiny and called for legislation subjecting patent settlement agreements to a reporting regime akin to Hart-Scott-Rodino premerger notification. The FTC since has taken the lead in charting the course between permissible and unlawful patent settlement agreements in a series of enforcement actions involving pharmaceuticals. The FTC’s consent decrees in In the Matter of Abbott Labs., 65 Fed. Reg. 17502 (April 3, 2000); In the Matter of Hoechst Marion Roussel Inc., 66 Fed. Reg. 18636 (April 10, 2001); and In the Matter of Biovail Corp., 67 Fed. Reg. 44606 (July 3, 2002), provide examples of settlements that allegedly breach basic antitrust principles. The FTC staff’s failed litigation against Schering-Plough Corp. and Upsher-Smith Laboratories, however, has reinforced the original notion that genuine settlements that do not extend the reach of the patent should not be condemned as anti-competitive. See In the Matter of Schering-Plough Corp., 2002 FTC Lexis 40 (June 27, 2002). The FTC cases involve alleged abuses of the Hatch-Waxman Act, 21 U.S.C. 355, which was passed to accelerate the entry of generic drug competition into brand-name prescription drug markets. The act allows generic manufacturers to “piggy-back” on the new drug application of an existing brand-name drug. To receive Food and Drug Administration (FDA) approval, a generic manufacturer must provide an abbreviated new drug application (ANDA) establishing bioequivalency between the generic drug and a brand-name drug listed in the FDA’s Orange Book. Ironically, the FTC alleges that abuses of Hatch-Waxman procedures have provided mechanisms for delay of generic drug entry. TWO POTENTIAL PATHS TO ABUSE Recent critiques — by the FTC, Congress and the president — focus on two aspects of the act that provide possible avenues for anti-competitive conduct. The first is the 30-month stay provision. Under the act, a generic manufacturer can include in its ANDA a “paragraph IV certification” that the patent for a drug listed in the Orange Book is invalid or will not be infringed. Once provided with a paragraph IV certification, the patent holder has 45 days in which to sue for patent infringement, triggering an automatic 30-month stay of FDA approval for the generic drug. The FTC recently identified this stay as one potential means for brand-name drug manufacturers to delay entry of generic competition. SeeGeneric Drug Entry Prior to Patent Expiration: An FTC Study, Federal Trade Commission (July 2002), www.ftc.gov. Currently, there is no limit to the number of 30-month stays a patent holder can obtain. If a patent holder files new patents after an ANDA is filed, the generic manufacturer may be required to reissue its paragraph IV certification with respect to the new patent. This triggers a new 45-day window for the patent holder to bring an infringement suit, invoking another 30-month stay of FDA approval for the generic drug. As an extreme example, the FTC report identified the brand-name drug Paxil, for which the patent holder received five stays totaling 65 months. The second potential for abuse is by means of the act’s 180-day exclusivity period. To encourage generic entry, the act provides a 180-day exclusive marketing period for the first ANDA filed. The period begins either with the first commercial marketing of the generic drug under the ANDA or a court ruling of patent invalidity or noninfringement. The 180-day exclusivity is available to the first ANDA filer regardless of whether it is sued by the patent holder or the parties settle. When the parties settle, the only event that can trigger the 180-day exclusivity period is the first commercial marketing of the generic drug. As the FDA has noted, if the gains to the brand-name manufacturer from delaying generic entry exceed the potential gains to the generic entrant from 180-days of exclusivity, the parties will have incentives to share that incremental gain by postponing the 180-day period. For example, a settlement under which the generic company agrees not to market its products would extend the 180-day period indefinitely. See64 Fed. Reg. 42873, 42883 (Aug. 6, 1999). PRIOR CONSENT DECREES Three FTC cases involve agreements between brand-name and/or generic drug manufacturers that the agency viewed as naked agreements not to compete. In Abbott, the FTC alleged that Abbott and Geneva, the potential generic entrant, entered into an agreement keeping Geneva’s tablet and capsule forms of generic Hytrin off the market until final resolution of pending patent litigation regarding the tablet form, including all appeals. Abbott agreed to pay Geneva $4.5 million per month until a district court entered a judgment. These monthly payments, the FTC alleged, essentially split the monopoly profits since, according to documents, Abbott stood to lose about $185 million and Geneva to earn only between $1 million and $1.5 million per month within the first six months of Geneva’s entry. The FTC alleged two primary effects on competition. First, the agreement to keep Geneva’s capsule product off the market until resolution of the tablet litigation was characterized by the FTC simply as an agreement not to compete. Because of Abbott’s failure to sue on the capsule product within the 45-day window, Geneva received approval in March 1998 and could have marketed it at that time — albeit at the risk of a patent suit by Abbott — but chose to receive Abbott’s $4.5 million per month payments instead. The second effect came as a result of the 180-day exclusivity period under the Hatch-Waxman Act. By holding the capsule product off the market, the exclusivity period never began to run, preventing other generic manufacturers from entering the market. Hoechstinvolved a similar agreement. Despite its intention to enter upon FDA approval, Andrx, the generic manufacturer of Hoechst’s Cardizem CD, agreed with Hoechst to keep its generic off the market until the patent litigation was resolved; Andrx exercised an option for a license from Hoechst; or Hoechst allowed entry of another generic. In exchange, Hoechst paid Andrx $10 million per quarter. Because of a reformulation in Andrx’s product that no longer infringed Hoechst’s patent, Andrx entered the market two months after it received approval from the FDA. The FTC admitted that the agreement did not actually cause substantial delay in the entry of a generic competitor. Nevertheless, it obtained a consent decree similar to that obtained in Abbott. More than Abbottor Hoechst, Biovailcan be characterized as a blatant agreement not to compete. In Biovail, Elan agreed to grant an exclusive license of its generic products to Biovail, thereby eliminating competition between the two. Unlike Abbottand Hoechst, Biovailinvolved an anti-competitive agreement between two generic manufacturers. (The FTC also recently settled a case against Biovail charging that it had illegally acquired an exclusive patent and wrongfully listed it in the Orange Book for purposes of blocking generic competition for its brand-name drug Tiazac. Biovail Corp., No. C-4060 (Oct. 2, 2002)). THE ‘SCHERING-PLOUGH’ CASE Schering-Ploughdiffers materially from the prior cases in that the parties entered into actual settlement agreements. In August 1995, Upsher filed an ANDA to market Klor Con M20, a generic version of Schering’s potassium chloride supplement K-Dur 20, scheduled to come off patent in September 2006. In December 1995, ESI also filed an ANDA for a generic version of K-Dur 20. Schering promptly sued both for patent infringement. In June 1997, Schering and Upsher executed a settlement preventing Upsher from marketing its Klor Con M20, or any other generic version of K-Dur 20, before September 2001. Upsher also agreed to license five unrelated drugs to Schering, for which Schering would pay Upsher a total of $60 million. Likewise, Schering and ESI settled in June 1998, agreeing to keep ESI’s product off the market until January 2004, allowing only one ESI product on the market between that time and September 2006, and providing for total payments by Schering to ESI of $15 million. The FTC alleged that Schering’s agreements with Upsher and ESI were nothing more than agreements not to compete. From the FTC’s perspective, Schering delayed generic entry and split the monopoly profits with Upsher and ESI in return. The FTC alleged that the $60 million payments to Usher exceeded the value of the five licenses, and therefore, constituted payments to stay off the market rather than licensing fees. ESI settled with the FTC while Schering and Upsher pressed the case in administrative court. After a two-month trial, the administrative law judge (ALJ) found for Schering and Upsher, rejecting the FTC staff’s claims of monopolization, conspiracy to monopolize and restraints of trade. The FTC staff had alleged that the relevant market was limited to “20 milliequivalent potassium chloride tablets and capsules.” The ALJ rejected this definition in favor of “all oral potassium supplements that can be prescribed by a physician for a patient in need of a potassium supplement.” A market defined this broadly included more than 25 firms and reduced Schering’s market share to between 30 percent and 40 percent. Without a proper product market, and a market share as low as 30 percent, the FTC staff was unable to prove the necessary market power and anti-competitive effects to establish its claims. Nevertheless, the ALJ proceeded to analyze each. In doing so, the Schering-Ploughdecision provides useful insight into the boundaries between the antitrust laws and the settlement interests of patent litigants. Perhaps the most significant finding was that the settlement ensured generic entry before the expiration of the K-Dur 20 patent. Upsher received FDA approval in 1998, but arguably could not prudently enter so long as the patent dispute continued. The settlement enabled Upsher to enter the market in 2001 — five years before expiration of Schering’s patent. While the FTC staff characterized the agreement as an attempt to delay generic entry and a per se market division, the ALJ held that this was a legitimate splitting of the remaining patent life. The ALJ found that “[s]ettlements of intellectual property lawsuits are not in a class of per se agreements that, in the words of the Supreme Court … ‘lack … any redeeming value.’ All settlements have redeeming virtue, providing important procompetitive benefits that must be taken into consideration in any antitrust analysis.” 2002 FTC Lexis 40, at *226-27. The FTC staff also failed to prove that Upsher could have entered the market before September 2001. Focusing on Upsher’s present competition with Schering, five years before the expiration of the patent, the ALJ required the FTC staff to prove that Upsher could have gained entry earlier, i.e., upon FDA approval after the 30-month stay. By admission of FTC trial counsel, the complaint was not challenging a legitimate settlement that set a date for entry, but challenged the settlement to the extent that Schering had paid Upsher to delay its entry. The ALJ refused the invitation to presume that Upsher would have succeeded in its patent litigation. Moreover, the FTC staff could not prove that the payments made by Schering for the five licenses were a sham and intended as payments to keep Upsher off the market. The ALJ found that the licenses had significant value and the FTC staff failed to prove that the side agreements were not legitimate. Finally, the FTC staff could not prove that entry of any other generic manufacturers was blocked. All these factors suggested to the ALJ that the settlement did not result in anti-competitive effects, but was pro-competitive insofar as it ensured generic competition prior to the expiration of the K-Dur 20 patent. The FTC’s actions in the area of patent-litigation settlements have provided considerable insight into what constitutes a legitimate settlement and what is merely an agreement not to compete. In recent testimony before Congress, FTC Chairman Timothy J. Muris identified three provisions of agreements that are likely to draw antitrust scrutiny: reverse payments — i.e., payments from patent holders to generic entrants; restrictions on the ability of the generic manufacturer to enter with noninfringing products; and restrictions on the ability of the generic manufacturer to assign or waive its 180-day exclusivity period. Timothy J. Muris, Prepared Statement of the FTC Before the Committee on Energy and Commerce, Subcommittee on Health, U.S. House of Representatives (Oct. 9, 2002). Schering-Plough, however, reinforces the notion that traditional antitrust analysis will be used when evaluating the competitive effects of patent-litigation settlement agreements. In particular, any evaluation of a patent settlement must consider its pro-competitive benefits based on factors such as the likelihood the generic company would have succeeded in its patent litigation, and whether the settlement allows the generic drug to be marketed sooner than if the generic company had lost the case. In any event, recent developments show that these issues are likely to continue to be at the forefront of defining the appropriate relationship between antitrust and IP concerns. Also, the abuses alleged in the FTC cases have spurred both Congress and the president to take action. In 2001, Senator Patrick Leahy, D-Vt., introduced, and the Senate approved, the Drug Competition Act, S. 754, 107th Cong. (2001), which would limit to one the number of 30-month stays a brand-name company can receive under the Hatch-Waxman Act. It also would implement Klein’s proposal that settlement agreements be submitted to the DOJ and FTC for review. President Bush recently made his own proposal that would limit the ability of brand-name drug companies to file additional patents on “incidental features” of a drug. This too would limit the ability of brand-name drug companies to use the Hatch-Waxman Act to delay generic entry, albeit to a lesser extent than the Senate bill. Whichever version finally becomes law, it is clear that the issue of patent-litigation settlements will continue to receive considerable scrutiny for the foreseeable future. Scott P. Perlman is a partner, and Jay S. Brown is an associate, in the Washington, D.C., office of Mayer, Brown, Rowe & Maw ( www.mayerbrownrowe.com), where they both practice in the areas of antitrust counseling, litigation and Hart-Scott-Rodino compliance. If you are interested in submitting an article to law.com, please click herefor our submission guidelines.

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