What s Inside. Gus Chiarello, FTC Washington, D.C. Leigh Oliver, Hogan Lovells Washington, D.C.

A Publication of the Health Care and Pharmaceuticals Committee of the Antitrust Section of the American Bar Association Co-Chairs: Seth Silber Wilson Sonsini Washington, DC Christi Braun Mintz Levin Washington, DC Editors: Jeff White Weil Gotshal Washington, DC Gus Chiarello Fed. Trade Comm n Washington, DC Leigh Oliver Hogan Lovells Washington, DC March 2013 Vol. 26 / No. 4 Special Report: The Supreme Court Reverse- Payment Settlement Issue Reverse-payment settlement agreements in the pharmaceutical industry (also referred to as pay-for-delay agreements in many corners) have been a heated antitrust issue for more than a decade. With the U.S. Supreme Court set to hear oral arguments in FTC v. Actavis on March 25, 2013 and eventually opine on the lawfulness of these agreements, we the editors of the Chronicle thought it was important to publish a special issue outlining the key questions before the Court and providing a roundtable discussion to gain the insights of members of the antitrust community with knowledge or expertise in the area. To that end, this issue begins with an article by Dan Antalics of Weil Gotshal that analyzes the issues presented to the Court and provides a summary of the cases leading up to the FTC s cert petition. Following that article is a roundtable discussion of panelists, who graciously accepted our invitation to participate, including: Kent Bernard an adjunct professor at Fordham; Karen Bokat an antitrust counsel at Wiley Rein; Michael Carrier a law professor at Rutgers; Howard Morse a partner at Cooley LLP; and Eric Stock a partner at Hogan Lovells. We would like to thank the contributors and panelists for their time and effort in putting together this edition of the Chronicle. We are always interested in hearing from our committee members. If there is a topic that you would like to see covered in a committee program, please contact Seth Silber (ssilber@wsgr.com) or Christi Braun (cjbraun@mintz.com). If you are interested in writing an article for the Chronicle, please contact Jeff White (jeff.white@weil.com), Gus Chiarello (gchiarello@ftc.gov), or Leigh Oliver (leigh.oliver@hoganlovells.com). Jeff White, Weil Gotshal Washington, D.C. What s Inside Leigh Oliver, Hogan Lovells Washington, D.C. Gus Chiarello, FTC Washington, D.C. FTC v. Actavis: Supreme Court to Address Reverse-Payment Settlement Agreements...2 Reverse-Payment Settlement Agreements Roundtable...11

Reverse-Payment Settlement Agreements Roundtable A Panel Discussion Reverse-payment settlements between brand name and generic drug companies have remained a staple hot-button issue in the antitrust community for more than a decade. In some antitrust circles, simply mentioning the term elicits passionate views and leads to heated debate from both sides of the table. Now, with the Supreme Court s grant of certiorari in FTC v. Actavis and oral argument scheduled for March 25th, the antitrust community will soon have the answers that it s been waiting for. Or will we? In advance of oral argument and an eventual ruling from the high court, we the editors of The Chronicle wanted to solicit the views and predictions of scholars, experts, and practitioners that have given much thought to the reverse-payment issue. The end result is the Q&A discussion below. We wish to thank the panelists for their time and thoughtful responses, and we are grateful for their willingness to participate. And we hope that you, the reader, find this issue to be interesting and informative. So without further ado, here are the panelists: Kent Bernard is an adjunct professor at the Fordham University School of Law where he focuses on antitrust and healthcare law. Mr. Bernard started his career in private practice and then moved in-house. From 1980 to 2008, he served in various positions within the legal department of Pfizer, Inc., ultimately retiring as Vice President & Assistant General Counsel and Deputy Managing Partner of the Pfizer Legal Division. Karen Bokat is as an antitrust counsel at the Washington, D.C. office of Wiley Rein LLP. Prior to moving to Wiley, Ms. Bokat served as staff attorney and senior litigator at the FTC for nearly 30 years. There, she was the lead attorney for numerous investigations and 11

litigation matters involving the pharmaceuticals industry, including as lead attorney for trial and appellate teams challenging reverse-payment settlements. Michael Carrier is a professor at the Rutgers School of Law with expertise in antitrust, copyright, patent, and innovation law. Before entering academia, Mr. Carrier clerked for Judge Butzner on the Fourth Circuit and was a litigator at Covington & Burling in Washington, D.C. He has written extensively on reverse-payment settlements and other antitrust and IP issues relating to the pharmaceuticals industry. Howard Morse is a partner in the antitrust practice group at Cooley LLP. He has extensive experience with antitrust and IP issues relating to the pharmaceutical and high-tech industries. Previously, Mr. Morse served for 10 years at the FTC as the Deputy Assistant Director for Policy and Assistant Director of the FTC s Bureau of Competition and had responsibility for dozens of FTC enforcement actions, including in the health care and pharmaceuticals industry. Eric Stock is a partner in the New York office of Hogan Lovells where he focuses on antitrust and complex commercial litigation matters. Mr. Stock has particular expertise in the pharmaceuticals industry, where he has represented and advised companies on a variety of antitrust and IP issues, including reverse-payment settlements. Questions 1. The issue of reverse-payment settlements under the Hatch-Waxman law has been emerging and has been litigated for about 15 years. Looking back at some of the first challenges of reverse-payment settlements (e.g., Hoechst (F.T.C. April 2, 2001) and Cardizem CD Antitrust Litig., 332 F. 3d 896 (6th Cir. 2003); Abbott Labs. (F.T.C. May 22, 2000) and Valley Drug Co. v. Geneva Pharms., Inc., 344 F.3d 1294), do you think the issues presented today address the same concerns originally raised by the FTC, or are they embarking into new areas of market regulation? How so? Karen Bokat: With the passage of 15 years and issuance of opinions in numerous government and private lawsuits in different circuits, the fact patterns and legal issues have evolved. Some of the earlier cases had simpler, cleaner fact patterns. For example, in Abbott Labs., there were no side agreements as part of the patent settlement with value going from the generic manufacturer to the brand manufacturer. The settlement merely provided for a payment from the brand to the generic and a commitment by the generic to delay entry. Also in Abbott Labs, one product at issue had FDA approval because Abbott had not filed suit in time to benefit from the 30-month stay so the generic clearly could have entered absent the agreement. Once the early FTC cases became public, manufacturers negotiated more complicated agreements with provisions for the generic manufacturer to provide something of value to the brand manufacturer, such as a license of intellectual property, supply of a product, or marketing on behalf of the brand product, in exchange for payment from the brand manufacturer. With these additional provisions, it is less clear that the compensation given by the brand manufacturer is in exchange for 12

delayed entry of the generic. The issue for litigation tends to focus on whether the compensation paid by the brand was in exchange for the generic s commitment to defer the entry of its product. There has been even greater change in the legal and economic arguments related to the patents at issue in these cases. In early litigation, arguments focused on whether payments were necessary to achieve settlement; on the public interest in conserving resources of courts and corporations; and on whether the plaintiff had to retry the patent case to prove that the generic would have won the patent litigation and entered before patent expiry. Subsequently the Second and Eleventh Circuit decisions have shifted the focus of analysis to the scope of the patent. The court, the plaintiffs, nor the defendants in an antitrust case want to try the patent case within the antitrust case. Now the determinative issue is whether the settlement permits entry within the patent period and reaches only products covered by the patent. The recent Third Circuit decision, In re K-Dur Antitrust Litigation, 686 F.3d 197 (2012), refocused the argument, at least in that circuit. The court rejected the scope-of-the patent test because it creates an almost unrebuttable presumption of patent validity. Id. at 214. The court reasoned that such a presumption is particularly inappropriate in cases in which infringement is at issue. The court held that instead a quick look rule of reason analysis should be used, under which any payment from a patent holder to a generic patent challenger who agrees to delay entry into the market [is] prima facie evidence of an unreasonable restraint of trade. Id. at 218. The decision is closer to proposed legislation introduced this session and advocated by the FTC to recent Congresses. Kent Bernard: The early cases had distinguishing facts which took them out of the normal settlement context. For example, in Cardizem the generic company agreed to restrictions on products not covered by the patent on its face. The FTC didn t need to say anything about reverse payments in such a case, which exceeded the scope of the patent at issue. Since those cases, however, the FTC has moved further and further down a strange road. First, it decided that any express payment from an innovator was suspect, even given the peculiar nature of Hatch-Waxman litigation, which makes such payments more the norm than in contexts where the infringer is at risk for actual damages (which can then be compromised in settlement). Then, when express payments became rarer, the FTC decided that anything of value was really a disguised express payment, and then broadened even that to include things such as an exclusive license as part of a settlement. To the FTC, any settlement that involves more than reducing the patent protection is bad. It is solely focused on short term price impact, and ignores long term effects. Michael Carrier: The general concern with reverse-payment settlements is the same as it has been from the time the FTC first started paying attention to the issue: a brand-name drug company pays a generic firm to block a challenge to its patent and delay entering the market. But while the broad outlines of the settlements are similar, the details have changed. The earlier generation of agreements (such as Tamoxifen and Cipro) involved cash payments for the generic to stay out of the market for all (or nearly all) of the remaining patent term. In contrast, today s settlements are more nuanced. The value often takes the form not of cash but of (1) payments for unrelated products (that the 13

brand would not normally buy from a generic) or (2) agreements not to enter the 180-day exclusivity period with an authorized generic. Another difference is that the brand allows the generic to enter a few years before the end of the patent term (though, perhaps see A Real- World Analysis of Pharmaceutical Settlements: The Missing Dimension of Product-Hopping after the brand has switched the market to a new version, so a generic on the old is less valuable). Howard Morse: To appreciate the arguments on both sides of the debate today, it is important to understand how the FTC s theories have evolved. The reverse payments term was coined to refer to agreements by which a pioneer pharmaceutical company, which the FTC often calls a brand-name drug manufacturer, paid a firm that filed an Abbreviated New Drug Application, or ANDA, in settling patent litigation brought against the generic drug, which was alleged to infringe the pioneer s patents. The payment was said to flow in the wrong direction because normally alleged infringers pay patent owners to settle patent litigation. The FTC s early cases also challenged so-called interim agreements that did not resolve the underlying patent litigation and agreements that imposed restraints that went beyond what the pioneer could obtain even if it prevailed in the infringement litigation. More recent FTC challenges have been to settlement agreements that split the remaining patent life, allowing entry before expiration of the patent. The FTC has said that settlements that merely split the remaining patent life are okay, but asserts that any payment to the alleged infringer is a payment for delay. It is, however, not clear that there would be any settlement without a payment. The alternative to such a settlement might be that the pioneer firm would prevail in the litigation and the generic kept off the market even longer. Since the Medicare Modernization Act of 2003 required settlement agreements to be notified to the government, the FTC has only challenged two agreements. While the FTC still characterizes these cases as involving reverse payments, I am not aware of any firm that has settled patent litigation with a naked cash payment in recent years. In Actavis, the FTC is challenging side deals to co-promote and for back-up supply. The FTC alleges that the consideration paid for these side deals far exceed[s] the value of the services provided and that the agreement s terms depart from industry standards. This evolution of the FTC theory and types of agreements challenged is critical to understanding the debate about reverse payment settlements. While I agree with my colleagues that the FTC s underlying concern continues to be with agreements that restrict generic entry, the issues have morphed significantly. Eric Stock: I think the issue raised in Actavis, at its core, is the same key issue that has confronted the FTC from the beginning of its analysis of so-called reverse payment patent settlements: how does one assess whether compensation from the brand name manufacturer to the generic manufacturer as part of a patent settlement has harmed competition without knowing whether the generic is a lawful (i.e., non-infringing) competitor? In some of the early cases (e.g., Cardizem), the settlement at issue was an interim settlement, involved allegations that the settlement placed a bottleneck on future generic entry (because the first-filer agreed not to transfer its 180-day exclusivity), or involved restrictions on noninfringing products. These types of settlements 14

tended to make relatively stronger cases for enforcement, but the statute (and the industry) have evolved since then. Today, the key unresolved issue which is squarely before the Court in Actavis is how to analyze whether a reverse payment patent settlement violates the antitrust laws where there is uncertainty over which party would have prevailed in the underlying infringement action. Reactions to Initial Responses Michael Carrier: The only strange road taken here is the one pursued by the drug companies that have engaged in an everevolving journey to stash payments in new corners. The FTC has concluded that side deals... were observed in settlements that restrained generic entry, but virtually never in settlements that did not. To similar effect, Professor Scott Hemphill s review of securities filings found that [o]utside of settlement, brand-name firms seldom contract with generic firms for help with the activities that form the basis of side deals. In this case, the FTC alleged that the copromotion deals raised concern because Solvay had not been looking for a co-promotion partner ; its business plan assumed no copromotion during the plan period ; it had canceled two prior co-promotion efforts because they had no significant impact on sales; and a consulting firm s analysis concluded that copromotion offered little revenue upside. In addition, Solvay projected that it would pay Watson more than $300 per sales call, far in excess of the $30-$45 per call it had paid in its previous co-promotion deal, and double the $150 rate that a senior executive deemed ridiculous. Finally, the back-up manufacturing deal guaranteed Paddock millions of dollars even though Solvay conducted no diligence and even if Paddock never manufactured AndroGel. In short, the FTC did not create such a strange road, but instead is riding shotgun down the ever-winding road being forged by industry. Karen Bokat: The FTC has not moved down a strange road. It has consistently challenged patent settlements in which companies agreed not to compete. The terms of the settlements the agency has challenged have changed due largely to two factors, one within the FTC s control and another controlled by the manufacturers but the agency s approach has been consistent albeit evolving. The factor within the FTC s control is that it started with the easier cases, which is a reasonable strategy. The factor controlled by the manufacturers is that over time they have settled on different terms -- they now structure their settlements so the generic provided something of value to the brand company, ostensibly in exchange for compensation, and argue that the compensation was not for delayed entry. This makes it more difficult to prove the anticompetitive effect under the antitrust laws. Arguments that payment of compensation from the brand company to the generic company are necessary to achieve settlements and otherwise parties will have to litigate patent suits to the disadvantage of consumers are undermined by facts and have the potential to produce anticompetitive results. The argument has been made for years that litigants in patent lawsuits sometimes are so far apart in negotiations and in their perceptions of the strength of the patents at issue that they need to be able to exchange compensation in order to bridge the gap and achieve a settlement. The facts do not support the argument, however. In the period after the FTC s enforcement activity in reverse payment cases became public, parties were able to negotiate settlements without transfer of value from the brand manufacturer to the generic. Even after the Second and Eleventh Circuits ruled that such payments are legal under the 15

antitrust laws absent sham litigation or fraud on the patent office, although settlements with payments increased, other patent litigation was settled with no payment. Therefore prohibiting reverse payments does not oblige litigants to litigate to the death. Arguing that prohibiting reverse payments may harm consumers seems to respect consumers interest but could produce anticompetitive results. The argument is that a settlement with a reverse payment may allow the generic to enter before patent expiration, whereas if a settlement cannot be reached, the parties litigate to conclusion of the case and the generic loses, its entry will be later than it would have been under a settlement and consumers lose the benefit of earlier generic entry. If the patent at issue is valid and the generic product would infringe it, the patent holder should be permitted to exclude the generic until patent expiry, however. Early generic entry in that situation is not what the patent system intends and, as supporters of brand manufacturers have asserted, is a disincentive to innovation, so it may harm consumers in the long run even if it produces short run savings. It is inconsistent to argue that patent settlements that allow early infringing entry help consumers but that infringing entry reduces innovation. The proper solution is to permit settlements that may divide the remaining life of the patent but without compensation to the generic so the division of patent life reflects the parties perceptions of the strength of their arguments in the patent litigation. That solution may not track exactly the outcome of the patent litigation, which we will never know in any event, but it better serves consumers long-term interests. 2. From a policy perspective, is this the right, best, or only question to ask? What other issues will need to be considered after the court decides this case? Howard Morse: The FTC appears to have posed the question presented whether reversepayment agreements are per se lawful unless the underlying patent litigation was a sham or the patent was obtained by fraud, or instead are presumptively anticompetitive in an effort to highlight the conflict between the Third Circuit standard in K-Dur and the Eleventh Circuit standard in FTC v. Actavis, to convince the Court to grant cert. The question presented does not distinguish between agreements that restrain competition within and outside of the scope of the patent, however, which strikes me as a significant omission. Even if the Court agrees with the FTC and holds that the settlement agreements containing reverse payments are presumptively anticompetitive and unlawful, lower courts will need to decide what evidence would rebut the presumption to ensure that the presumption does not become de facto per se illegality. And even before getting to that issue, lower courts will need to define the reach of the rebuttable presumption, if the Supreme Court does articulate a standard. Will it be limited to naked cash reverse payments, or side deals that are a sham as the FTC alleges in Actavis? As a concrete example of the question of scope, the FTC has filed several amicus briefs in the Third Circuit since K-Dur arguing that a commitment not to launch an authorized generic should be considered a reverse payment and analyzed under the Third Circuit standard as presumptively anticompetitive and unlawful. So far, the only court to decide the issue, the district court in the Lamictal Direct Purchaser Antitrust Litig., rejected that position. 16

Karen Bokat: The current focus of the Second, Eleventh and Federal Circuits on the scope-ofthe patent test grants undue deference to patent rights and diminishes the value of competition in our economy. These courts assume too readily that the patents at issue are valid and infringed. They lose sight of the fact that the patent holder bears the burden of proving infringement and that, while there is an assumption of validity, a large percentage of cases, more than half, are won by generic companies challenging the validity of patents. The scope-of-the-patent test also upsets the careful balance that Congress struck in passing the Hatch-Waxman Act, Drug Price Competition and Patent Term Restoration Act of 1984, Pub. L. No. 98-417, 98 Stat. 1585. Congress wanted to foster innovation in pharmaceuticals by protecting patent holders intellectual property rights but also promote introduction of generic pharmaceuticals with their potential to create large cost savings by encouraging generic manufacturers to challenge weak patents. The decisions of these three circuits encourage generic manufacturers to settle patent suits, abandon their challenges to patents and instead share the brand manufacturers profits. The FTC is urging the Supreme Court to hold that a patent settlement agreement in which the brand manufacturer offers value to the generic in exchange for a commitment to delay generic entry should be presumptively unlawful. Such agreements are agreements between potential competitors not to compete, which in other industries are treated as per se illegal. Given that such agreements among pharmaceutical manufacturers can have precompetitive effects, a per se rule would be unwise. The FTC s approach would allow the court to consider procompetitive effects and justifications and has the virtue of taking consumers interests into consideration. The FTC s approach is consistent with the balance struck by Congress in the Hatch-Waxman Act and is preferable to the scope-of-the-patent test. Eric Stock: The issue before the Supreme Court in Actavis is the right one, but as framed by the FTC in its appellate brief, the question is too narrow. The FTC asks the Supreme Court to determine whether reverse payment patent settlements are presumptively unlawful or, instead, per se lawful unless the underlying patent litigation was a sham or the patent was obtained by fraud. This is an unnecessarily binary analysis, which assumes that the Supreme Court will agree that litigating (or at least more deeply considering) the merits of the underlying patent litigation in the antitrust case is not a viable solution. That may be a correct assumption, and several of my fellow panelists have expressed similar views, but I m not as confident that is the case. Patent validity and infringement are issues that are decided by courts regularly. It seems to me that it is at least possible that the Court will conclude that the proper standard depends on a deeper analysis of the merits of the patent litigation. For example, the Court could conclude that a defendant cannot be liable for entering into a reverse payment patent settlement if the defendant can show that it was likely to prevail in the underlying patent litigation. The FTC and the defendants may assume that such a standard is impractical and could not be administered by a court (and that may be correct) but I think that the Supreme Court is likely to consider this issue and not simply accept the FTC s binary choice as the only options available to it. Michael Carrier: The question the Court will decide is at the heart of the brand/generic settlement issue that courts have analyzed for the past decade. If the Court decides that this conduct is essentially per se legal, then there 17

will no longer be any meaningful judicial oversight over this concerning category of business behavior. On the other hand, if the Court applies presumptive illegality, then future issues will arise based on the test the Court adopts. For example, under the Third Circuit s version of the test in K-Dur, courts would consider whether a payment (1) was for a purpose other than delayed entry or (2) offers a pro-competitive benefit. Kent Bernard: Settlements are the oil that lets the litigation system function. The vast majority of all patent cases are resolved by settlement. There is not, and rationally cannot be, any requirement that every case needs to be litigated to the death. But this basic fact highlights the problem with the FTC position. Every settlement of a patent case (other than a complete abdication by one side) could easily and properly be characterized as a reverse payment from the patent owner to the alleged infringer. If I have a damage claim for $100, and we settle by having the infringer pay me $75 and agreeing to not infringe (i.e. stay off the market with that product) until a year before the patent expires, I would consider that a good result. But on the FTC s theory, it could be called a reverse payment of $25 from me to the infringer, since I gave up something that I valued at $25, and a payment for delay since the infringer agreed to respect the patent for a certain length of time exactly the kind of thing that the FTC would have the Court condemn here. The Hatch-Waxman Act did not change the way patent cases could be settled, nor did it change the burdens of proof in patent litigation. See H.R. Rep 98-857, pt.1, at 28 (1984). The Act was not designed to undercut protection of the innovator s exclusive right. See 130 Cong. Rec. 24,427 (September 6, 1984) (Congressman Waxman). The majority approach allowing settlements within the scope of the patent that are not the result of sham litigation is the only workable standard. It also is the standard that applies to every other patent case. If the patent right would have excluded the challenged product from the market in any event, there can be no antitrust liability. The unavoidable question in an antitrust case arising from any settlement, Hatch-Waxman or otherwise, is simple - no matter who paid what to whom, what lawful competition has been excluded or reduced by the settlement? That, in turn, requires more than proof that the generic challenger might have prevailed had the patent case been tried. No one can be certain that he will prevail in a patent suit. Every settlement reflects uncertainty, on both sides. The only way that an antitrust court could conclude with certainty, after the fact, that the generic product would not have infringed the patent is if it is clear that the patent was so weak that it could not have prevailed in any patent case. And that is the standard upholding the settlement so long as it is within the scope of the patent and the case is not sham - that the majority of courts have applied not only in Hatch Waxman cases, but in general. It is the standard that the Court should endorse here. Reactions to Initial Responses Michael Carrier: Two responses to Mr. Bernard. First, any general policy in favor of settlements must take into account the unique setting of the Hatch-Waxman Act, where reverse-payment settlements dispose of the validity and infringement challenges central to the regulatory scheme. Unlike general patent settlements, which do not prevent other competitors from entering the market, the Hatch-Waxman Act blocks alleged infringers from entering the market until the first Paragraph-IV filer enjoys 180 days of marketing 18

exclusivity, a period that does not even begin until the first filer enters the market, potentially years down the road. Second, the scope-of-the-patent test is not appropriate. Just because a settlement reaching a product outside the scope of the patent may violate the antitrust laws does not mean that one falling within the facial scope of the patent is automatically valid. As I have previously explained, the scope test assumes validity issues central to the determination of antitrust analysis and ignores the issue of infringement on which the patentee bears the burden of proof. Howard Morse: Under the DOJ/FTC Antitrust Guidelines for the Licensing of Intellectual Property, the critical question is whether an agreement restricts competition among firms that would have been actual or likely potential competitors in the absence of the agreement. That is, does the agreement diminish competition compared to what would have happen if there were no agreement. Both the FTC and defendants are struggling to come up with a workable alternative in these cases, so as to avoid having to retry the underlying patent litigation. Some examination of the merits of the patent case, however, may be appropriate whether it is to show that the patent litigation was a sham, as Kent Bernard suggests, or to show that that plaintiff or defendant was likely to prevail, as Eric Stock suggests. Indeed, the IP Guidelines establish a standard: a firm will be treated as a likely potential competitor if its entry is reasonably probable. 3. Proposed legislation has been introduced over the years to ban certain reverse-payment agreements, and a group of senators reintroduced such a bill in February. Are we likely to see legislation in our future? In what form and how would it compare to the agreements at issue in FTC v. Actavis? Karen Bokat: The Preserve Access to Affordable Generics Act, S. 214, was proposed by Senator Klobuchar and co-sponsored by Senators Grassley, Durbin, Franken and Johnson in February 2012. The bill would create a rebuttable presumption of illegality in an FTC enforcement proceeding against a patent settlement agreement in connection with sale of a drug product if the ANDA filer receives anything of value and the ANDA filer agrees to limit or forego research, development, manufacturing, marketing or sales of the ANDA product for any period of time. To rebut the presumption, defendants would have to show by clear and convincing evidence that the procompetitive benefits of the agreement outweigh the anticompetitive effects. The factors the fact finder should consider include: 1) the length of time remaining until expiration of the patent compared with the agreed-upon entry date for the generic; 2) the value to consumers of competition from the generic; 3) the form and amount of consideration received by the ANDA filer; 4) the revenue the ANDA filer would have received by winning the patent litigation; 5) the reduction of the NDA holder s revenues if it had lost the patent litigation; 6) the time period between the date of the agreement conveying value to the ANDA filer and the date of the settlement of the patent infringement claim; and 7) any other factor the fact finder deems relevant. The statute would not prohibit a patent settlement in which the consideration granted to the ANDA filer is limited to the right to market the generic prior to patent expiration, payment for reasonable litigation expenses not to exceed 19

$7,500,000, or a covenant not to sue on any claim that the ANDA product infringes a U.S. patent. The bipartisan support for S. 214 may not suffice for enactment. Similar legislation has failed to emerge from recent Congresses. Furthermore, the current Congress remains badly divided and has many pressing issues, such as the federal budget, the federal debt, immigration, and gun safety, among others, that will take up a significant portion of its time. Also there is opposition from branded and generic manufacturers to such legislation because both branded and generic manufacturers profit from agreements that delay entry -- the manufacturer preserves its sales volume and profits while sharing a portion of those profits with the generic company and the generic is paid more by the brand company than it would make by selling its product, which would be priced well below the brand price. So it is unlikely that the legislation will be enacted this year. If it ever passes, it will probably be several years in the future and part of a larger legislative package. The Affordable Care Act, Public Law No. 111-148, 124 Stat. 119-124, dealt with insurance coverage but did not tackle the cost of health care. If Congress addresses seriously health care costs, perhaps as an effort to control federal spending because the federal government pays a significant and increasing percentage of the nation s pharmaceutical costs through Medicare and Medicaid, a provision such as the pending legislation might be included as part of a larger legislative package. Kent Bernard: The proposed legislation represents a tacit acknowledgment that current law allows the settlements that FTC wants to ban. Congress has looked at the issue, and has declined to act. The bills all cite and rely on the FTC positions and arguments, without really considering the broader context, examining the alleged factual underpinnings of the arguments, or considering the long term impact on innovation that the proposed legislation would have. Almost as a sidelight, they also effectively destroy the presumption of validity as to all drug patents. The result would be to gut patent rights in an area where patents are vital. Whether the bills gain any traction if the Court upholds the majority standard will depend on how well the Court articulates the rationale for the decision. Michael Carrier: Legislation addressing reverse-payment settlements has been introduced in each of the past several Congresses. Right now, the ball is in the court of the Supreme Court, and any legislation likely would be considered after the Court rules in the Actavis case. In showing the benefits, the parties could introduce evidence including the time remaining in the patent term, the value of generic competition, the amount received by the generic, and the revenues the generic would have received by winning and the brand would have given up by losing the litigation. Legislation like the Fair and Immediate Release of Generic Drugs Act, introduced by Senator Bingaman in 2011, could be even more effective by targeting the 180-day bottleneck, opening up the period so that it covers not just the firstfiling generic but also generics that (1) are not sued or (2) win patent challenges in court. Howard Morse: If the FTC prevails in Actavis, even if the decision is narrow, I would expect efforts to pass legislation would stop, at least for a few years, in order to see how the decision plays out in practice. If the FTC loses, however, the FTC may well renew its efforts to convince Congress to pass legislation. Of course, opponents would also renew their lobbying efforts, and both generic and pioneer 20

pharmaceutical companies have opposed past legislative efforts. Under the proposed legislation which Karen has described in detail an agreement would be presumed to be anticompetitive if a generic company receives anything of value and the generic company agrees to limit or forego research, development, manufacturing, marketing, or sales of the generic company s product for any time. To overcome that presumption, the parties to the agreement must show by clear and convincing evidence that the procompetitive benefits of the agreement outweigh anticompetitive effects. That is a high standard, and adoption of the legislation could make settlements much more difficult. Eric Stock: Efforts to legislate this issue will undoubtedly continue. From the perspective of someone who cares about antitrust law, if a ban is to be imposed on reverse payment patent settlements, it would be preferable to see that happen via legislation than a Supreme Court decision. A decision upholding the FTC s view on reverse payments (along the lines of the Third Circuit s K-Dur decision) would raise some real issues in antitrust jurisprudence. For example, under current law outside of the Hatch-Waxman context, it would be surprising for a company to be found liable for violating the antitrust laws by taking actions to exclude a competing product that it reasonably believes infringes its intellectual property rights, especially where the company can show that it had strong patents that the competitor likely infringed. Reactions to Initial Responses Howard Morse: While Karen characterizes the legislation as bi-partisan, the bill has little Republican support, and as long as Republicans control the House, it seems unlikely that the current proposed bill would move forward, though a narrower version aimed at stopping naked cash payments which Orin Hatch has indicated he could support would have a greater chance of success. That said, the antitrust laws, which have been described as the Magna Carta of free enterprise, have been successful because they are flexible enough to address new business practices. Tinkering around the edges because the courts do not find a particular type of agreement to be a restraint of trade may be a mistake. Karen Bokat: Our antitrust laws are written broadly enough to apply to all industries and to conduct that changes over time and therefore it is inadvisable to write exceptions for certain industries or to create special rules for certain conduct or industries. I fear, however, that we are already past that point with the pharmaceutical industry. Enactment of Hatch- Waxman created special provisions for the pharmaceutical industry and companies have taken advantage of them to create results that Congress never intended. As a consequence, we either need a judicial or legislative fix to protect competition from reverse payment settlements. 4. How will the outcome impact the FTC s future enforcement activities in the pharma area? Where do you see the next battleground(s)? Kent Bernard: The FTC has been fixated on reverse payment for some time now and seems to regard the research based drug industry as it punching bag - whether in terms of requiring HSR filings on licenses, or investigating mergers. It is unclear where they will go next, but a guess would be a continuation of the war on patents likely phrased in terms of abuse of patents or patent thickets (otherwise known as protecting your property ). Karen Bokat: Should the Supreme Court decide in the FTC s favor, future enforcement 21

activities may not change appreciably. If the Court decided in Actavis/Watson s favor, future FTC enforcement activities may be reduced significantly. The FTC is urging the Supreme Court to hold that reverse payment agreements are presumptively unlawful. Even if the FTC wins, in future cases there will be an issue of whether the compensation given by the brand company was in exchange for the generic s agreement to delay entry, although the burden of proof will be on the defendants. The FTC has been very selective in its litigation because it has born the burden of proof on this issue. Even with a shift in burden of proof, the FTC will have to confront the issue because the defense is likely to raise it in rebutting the presumption. Pharmaceutical manufacturers are already careful to write agreements so the generics appear to be providing something of value to the brand in exchange for the payment or other compensation. In the future, manufacturers may become more thorough in creating a record on the value provided by the generic but they will continue to enter into patent settlement agreements that delay generic entry. These cases are fact-specific, murky and difficult to prove so even a victory for the agency at the Supreme Court is unlikely to produce many more cases. An issue that remains to be litigated in the future if the FTC wins is whether a commitment by a brand manufacturer not to introduce a generic of its product, an authorized generic, is something of value. Authorized generics have been the subject of study by the FTC and there is a lawsuit pending in federal court in New Jersey that raised the issue. At the request of Congress, the FTC performed a study of the competitive implications of patent settlements with a promise of no authorized generic and the study showed that prices are lower when there is an authorized generic on the market in addition to one generic, compared to having no authorized generic on the market. Authorized Generics: Short-Term Effects and Long-Term Impact: A Report of the Federal Trade Commission, August 2011. The study also found that the authorized generic reduces the first filer s revenues. The FTC s recent annual report on patent settlement agreements filed with the agency indicates that the number of patent settlements with a no authorized generic provision increased from 15 in fiscal year 2010 to 19 in fiscal year 2012. Agreements Filed with the Federal Trade Commission under the Medicare Prescription Drug, Improvement, and Modernization Act of 2003: Overview of Agreements Filed in FY 2012, A Report by the Bureau of Competition, January 2012. The agency also filed an amicus brief in the federal district court for the District of New Jersey in Lamictal Direct Purchaser Antitrust Litigation arguing that a no-authorized-generic promise is something of value. The FTC may bring its own cases in the future challenging patent settlements with a promise of no authorized generic. This issue will have to be resolved unless Actavis/Watson wins. If Actavis/Watson wins and the Supreme Court adopts the scope-of-the-patent test, FTC enforcement in reverse payment cases may be reduced. The agency may shift focus to other strategies the brand companies use to extend the life of their patents, such as filing citizen s petitions with the FDA, and making improvements in their products and then removing the older product from the market (referred to as product hopping). These types of cases are not easy for the plaintiff. Consequently the number of FTC cases goingforward would not be large, but pharmaceuticals make up too great a part of our nation s economy for the agency to abandon the field entirely. 22

Michael Carrier: If the FTC loses and the Court applies a version of essentially-per-se legality, it is hard to see the agency prosecuting a reverse-payments case. Congressional legislation, of course, could resuscitate these efforts. And one long-shot possibility that was floated by Commissioner Rosch in 2011 was to explore the use of the agency s rulemaking authority under Section 6(g) of the FTC Act, which allows the Commission to make rules and regulations for the purpose of carrying out the Act, and which could conceivably be used to issue a rule treating the agreements as inherently suspect. If the FTC challenges fewer settlements, it could shift its efforts to other activity in the industry, including product hopping, citizen petitions, authorized generics, and mergers and acquisitions. For example, in November, the agency intervened in the Mylan producthopping case, filing an amicus brief that highlighted allegations that Warner Chilcott (1) effectuated three successive product reformulations to impede generic substitution ; (2) effectively converted the market to the reformulated version by discontinuing the sale of the prior version and asking its major customers to return inventory of the prior version ; (3) offered reformulated products that provided little or no benefit other than to exclude generic competition from the market ; and (4) precluded and/or reduced, rather than expanded consumer choice. Eric Stock: In the event of a defense victory in AndroGel, the battle will continue in Congress. This issue is not likely to fade away. In the event of an FTC victory, the next battleground may be damages. In footnote 11 of the FTC s brief on appeal, the government acknowledges that in a case for damages, it is impossible to ignore how the underlying patent litigation would have turned out, because it is necessary to consider what would have happened but for the challenged conduct. The FTC has therefore apparently conceded that even if it wins and the Court finds reverse payment patent settlements to be presumptively unlawful, that only results in a finding of liability and an award of injunctive relief. It would not allow private plaintiffs to obtain damages. Another battleground in the event of an ambiguous decision, or FTC victory, will be the legality of a patent settlement including a commitment by a brand name manufacturer not to launch an authorized generic. The FTC considers this type of commitment to be (essentially) a reverse payment, but the FTC s data shows that these provisions are common. But, as noted by my co-panelists, the court in Lamictal found such a promise to be lawful (disagreeing with the FTC) -- although that decision is being appealed. Howard Morse: A decision no matter which side prevails should provide guidance to industry and limit the need for future enforcement actions. To the extent that the decision leaves issues up in the air, we will continue to see some companies test the boundaries of what is acceptable and can expect future enforcement actions. I already mentioned that the FTC has filed amicus briefs in courts in the Third Circuit suggesting that no authorized generics clauses should be presumptively unlawful under K-Dur. The FTC s 2011 Authorized Generic Drugs report made clear that the introduction of authorized generic drugs are procompetitive, and that the FTC views agreements not to introduce such drugs as anticompetitive, and so we can expect the agency to attack such agreements. 23

Looking more broadly, it is clear that no matter what happens in Actavis, the FTC will continue to devote substantial attention to the pharmaceutical industry. The FTC has several initiatives underway, including proposed changes to the HSR rules that would require pharmaceutical companies to file in circumstances where other industries are not required to do so. The agency is likely to focus attention on other conduct that limits generic competition. It is already examining so-called product hopping. The Commission filed an amicus brief in November 2012 in Mylan v. Warner Chilcott, arguing that minor, non-therapeutic changes to a drug that harms generic competition can constitute exclusionary conduct and violate antitrust law. Such practices raise difficult issues, however, as courts are understandably reluctant to question the innovative value of new products. Very recently, on March 11, the FTC filed an amicus brief in another case arguing that a pioneer drug company s refusing to sell samples to a potential generic rival may constitute exclusionary conduct. 5. How will the outcome impact the EC and other foreign competition authorities? To what extent will this have global reach in the law or business behavior? Kent Bernard: The FTC has been trying to get the EC on board the anti-settlement crusade for some time. Back in 2008 the EC launched a sector inquiry, with a flock of Dawn Raids. Nothing much came of it. The Commission is starting to bring cases, but they are moving slowly, targeting situations where they feel they have a case of actual (rather than presumptively) bad conduct on the facts. The U.S., because of its unique system of mandatory generic substitution and the six month generic exclusivity which lets the first filer profit by pricing just under the brand price (with none of the brand expenses that created the product), means that the litigation and settlement issues will continue to be hotter here than elsewhere. There is more money to be made by the generic first filer here, and the riskless patent challenge created by Hatch- Waxman is unique to the United States. Eric Stock: I expect the EC to be active in this area regardless of what the Court does in Actavis. A decision for the defendants may spur the EC to seek to achieve what the FTC failed to do. A decision for the FTC would likely result in an EC effort to ensure that EU law is applied similarly. Karen Bokat: The outcome of the Supreme Court decision will have little impact beyond our borders. The FTC began prosecuting reverse payment cases ahead of the EC but currently enforcement in the two jurisdictions is similar. Decisions of the Second, Eleventh and Federal Circuits in this country have not deterred, or even influenced, EC enforcement. The EC enforcers seem committed to pursuing these matters to save money for their governments, which largely fund health care, and they are unlikely to abandon their efforts regardless of the outcome of the Actavis case. Further, the Supreme Court s decision in Actavis is unlikely to affect business behavior abroad. Pharmaceuticals are sold in national markets because of drug approval requirements and government payment of health care costs in other countries. Pharmaceutical manufacturers business will be affected by laws and decisions in individual jurisdictions, not by American jurisprudence. Michael Carrier: The trend in the EC is in the opposite direction of the U.S. The EC began focusing on reverse-payment settlements in its 2009 pharmaceutical sector inquiry. The report found that 22% of settlements from 2000 to 24

mid-2008 involved brand payments of more than 200 million to generics to restrict the generics ability to market drugs. A monitoring exercise from mid-2008 to 2009 found that only 10% of settlements (totaling less than 1 million) involved payments for delay. A second monitoring exercise, one year later, traced an even more significant decline, with only 3 of 89 settlements including payments for delay. Reasons for the decline included increased awareness of scrutiny, continued monitoring of settlements, and the opening of investigations. Regardless of the U.S. Supreme Court s decision, then, continued attention will be the rule in the EC. Finally, the different regulatory regimes will also limit the extent of the decision, with the EU lacking a Hatch-Waxman Act or 180-day exclusive marketing period. Howard Morse: I am sure that foreign competition officials, in the EU and elsewhere, will read the Supreme Court decision in FTC v. Actavis with interest, and as my fellow panelists have noted, the EC has been looking at settlements of patent litigation in the pharmaceutical industry in Europe. We should remember, though, that the concern with reverse payments is driven in part by the unique regulatory regime of the Hatch-Waxman Act applicable to the pharmaceutical industry in the U.S. As such, even within the U.S. the implications for other industries are not clear. 6. How will the outcome and the expected agency reactions affect market behaviors? Do you think the outcome could have a chilling effect on pharmaceutical patent settlements? To what extent has the FTC s enforcement position already curbed settlements that involve reverse payments? Eric Stock: I expect that the outcome of this case will affect how companies settle in the real world. A victory for the defendants will result in increased use of patent settlements with compensation to the generic company. The financial incentives of the parties (i.e., because the brand name manufacturer has so much more to lose than the generic manufacturer has to gain) makes such settlements hard to resist for the litigants. A decision in favor of the FTC will likely significantly reduce the use of reverse payments in patent settlements. I m not sure a decision for the FTC would make settlements overall less common, but it would definitely make them more difficult to negotiate. The FTC s view that all settlements should simply reflect the parties view of the merits of the patent litigation is more challenging in practice because the parties often have very different views of the merits. It is always useful in settlement discussions to have something to bridge that difference by creating value for both sides. Reducing the options available to serve this bridging purpose makes it harder to settle (whether you think this is a good or bad thing, is another question). If a payment cannot be used, or a side deal, then the parties may look for other mechanisms (e.g., the noauthorized generic commitment, if permitted) to bridge these gaps. Kent Bernard: If the FTC wins at the Court, we likely will see more cases litigated to the death, increasing transaction costs on both sides and increasing the possibility of infringing entry which will result in tremendous value destruction (even if the decision is later reversed on appeal). The only alternative would be for innovators to give up part of their patent rights. In effect the Court would be rewriting the patent code to provide less protection for drug patents than for any others even though these patents are actually used by their owners to create lifesaving products. That will skew the incentives for research, but it is difficult to predict the degree. If the Innovators win, and the Court 25

adopts the majority standard, the FTC will likely push the issue in Congress. It is unlikely to be as high a priority there as is it at the FTC. What is missing from the debate now, and will be wholly absent if the FTC wins, is that if a settlement prevents infringing entry, such prevention is itself a pro-competitive effect. Infringing entry is theft of the innovator s intellectual property. Patent litigators will tell you that even a rock solid patent wins at trial only 70-80% of the time. So if settlements are restricted, we will have more infringing entry. The rate of innovation likely will slow. Yes, we will have a short term burst of lower prices from the infringing goods. But as Judge Easterbrook pointedly noted, a policy that reduced prices today, even by a substantial amount, at the expense of a small annual reduction in the rate at which innovation occurs, would be a calamity. Howard Morse: The outcome could make it more difficult to settle patent litigation. If the only available settlement is to split the patent life, we are more likely to see cases where the pioneer and generic challenger cannot agree, and patent cases therefore will more likely be litigated to final judgment. That seems particularly likely where the pioneer believes it has a strong patent case, and the generic which has little to lose other than the cost of litigation is willing to roll the dice. The end result in those cases may well be later generic entry to the disadvantage of consumers. Karen Bokat: Even if the Court sides with the FTC and holds that reverse-payment agreements are presumptively unlawful, the decision will not chill pharmaceutical patent settlements. Pharmaceutical manufacturers will continue to be able to settle their patent lawsuits without having to litigate to a court decision. In the future, manufacturers will settle patent cases with payment to generic manufacturers in exchange for delayed entry. Pharmaceutical manufacturers will be careful to document why their settlement is procompetitive or justified. They will create a paper record of the value of what the brand manufacturer receives from the generic company, such as patent license, marketing efforts to support the brand product, or supply of active ingredient or finished product, to persuade the fact finder that the payment was not for delay. Business people and their counsel will have to be creative and careful so there may be slightly fewer settlements and some provisions may change but market behavior will not change substantially. The FTC s enforcement efforts have not diminished settlements. In the years after the FTC s enforcement efforts became public and prior to the Second and Eleventh Circuit decisions, settlements continued, usually without payments from the brands to the generics. As the statistics published in FTC annual reports show, subsequent to the Second and Eleventh Circuit decisions, the number of settlements has increased, as has the number that include payment that may be for delay. If the FTC loses, there may be more settlements as some companies have avoided reversepayment settlements under the current law. In addition, the provisions of settlement agreements may change; settlement agreements may have fewer provisions for the generic company to provide something of value to the brand company. Settlements may simply provide for payment of cash from the brand manufacturer to the generic manufacturer in exchange for delayed generic entry. Michael Carrier: In fiscal year 2012, the FTC reported a record 40 settlements in which brands paid generics to delay entering the market. If the FTC loses this case and the Court applies a version of essentially-per-se legality, brands 26

could pay generics any amount of money they wish to block generic entry for the entire patent term. In contrast, if the FTC wins, brands and generics would still settle cases but on the strength of the patent rather than the size of the payment. Empirical evidence makes clear that abolishing reverse payments does not prevent settlement. In 2000, the FTC announced that it would challenge reverse-payment settlements. In the succeeding four years, between 2000 and 2004, not one of twenty reported agreements involved a brand paying a generic to delay entering the market. During this period, parties continued settling their disputes, but in ways less restrictive of competition, such as through licenses allowing early generic entry. In 2005, however, following the Schering and Tamoxifen cases, the number of reverse-payment settlements began to steadily increase, rising in the past seven years from 3 to 14, 14, 16, 19, 31, 28, and 40 settlements. Reactions to Initial Responses Michael Carrier: Litigation to death, theft, and rewriting the patent code are colorful phrases, but have little to do with the state of affairs if the Court were unremarkably to find that payments to prevent challenges to even the weakest patents do not promote the policies of patent law, antitrust law, and the Hatch-Waxman Act. The conclusion that a settlement prevent[ing] infringing entry is a pro-competitive effect, of course, assumes the validity and infringement at issue in these cases. If a settlement does not prevent infringing entry because the patent is invalid or the generic does not infringe, then there is no such pro-competitive effect but rather activity that could resemble market division under guise of an invalid or notinfringed patent. Regarding the argument that settlements would not occur without reverse payments, any such settlements would overwhelmingly not be in the public interest. For example, one model predicted that 92 percent of cases in which reverse payments were necessary to reach settlement were likely to reduce consumer welfare. Among the cases in which reverse payments were needed, the surplus loss from inefficient settlements was nearly thirty times the surplus gain from efficient settlements. And given the infrequent need for reverse payments to attain settlement, the model's authors concluded that less than one-half of 1 percent of efficient settlements would occur only because of reverse payments. Karen Bokat: Asserting that if the FTC wins at the Supreme Court there will be a lot of entry by infringing generics is not a reason that reverse payments should continue to be per se legal. The argument is really that our existing system of patent enforcement does not work properly because the holders of valid patents that would be infringed by the generic lose patent lawsuits even if by all rights they should win. If there is a problem with our patent system, making reverse payments per se legal is not the solution and instead we should improve the patent system. If the Supreme Court does not adopt the approach urged by the FTC or the pharmaceutical manufacturers and instead requires that antitrust plaintiffs prove that the patent was invalid or not infringed and that the generic could have entered earlier than the settlement permits, the standard will be unworkable. Trying the merits of the patent litigation in the antitrust suit is virtually impossible. First, in the antitrust suit, the brand and generic companies are no longer opponents and instead their interests are congruent. They control the evidence necessary to prove the 27

patent case and have no incentive to cooperate with the antitrust plaintiffs to provide that evidence. So it is extremely difficult for the antitrust plaintiff to prove the patent case. Second, we cannot know how the court handling the patent lawsuit would have ruled if the case had been fully litigated before it. In practice, such a ruling from the Supreme Court could make reverse payment settlements per se legal even if the Court does not uphold the Eleventh Circuit s decision. Howard Morse: Of course, some cases will still settle. But I am not convinced that the statistics Karen and Michael cite support their claims. The data, for instance, does not tell us how many patent infringement cases were filed or litigated to decision each year. I have had pioneer pharmaceutical company clients walk away from proposed settlements, to avoid possible antitrust litigation, only to prevail in the underlying patent litigation. The recent FTC data also lacks the detail of earlier reports. The newer reports lump all side deals as reverse payments, whether or not the side deal is for fair value and efficient, or a sham, and regardless of the size of the deal relative to the annual sales of the pioneer drug. This makes it harder to parse the data, and in my opinion, to rely on it. 7. Give us your best prediction(s) about the case. Kent Bernard: My hope is that the Court will reject the FTC attempt to create a set of rules that would only apply to innovator drug company patents, rules that Congress has not seen fit to apply. My hope is that the Court will not engage in judicial legislation that would strip away patent protection from a field where patents are critical to life-saving research. A patent can be challenged, of course. But, at bottom, these cases are not about challenges to patents. They are about third parties claiming that the settlement of a patent challenge deprived them of some legally protected interest. The argument seeks to lift itself up by its own bootstraps the interest that they claim is the one that they want the Court to create. That is judicial legislation of the most blatant sort. Karen Bokat: Predicting the outcome on an antitrust case in the Supreme Court is challenging, if not impossible. The justices do not line up in antitrust cases along conservative/liberal lines, which contributes to the challenge. Justice Breyer, for example, frequently sides with businesses, although he is one of the more liberal members of the Court. The Supreme Court is likely to weigh the importance of competition to our economy against the rights of patent holders and the importance of intellectual property rights to innovation. I expect the vote of the justices will be close, nothing like the unanimous decision in FTC v. Phoebe Putney. The FTC has a chance of winning but so do Actavis/Watson, Par and Paddock. At least, the Court s decision will give us more clarity and a resolution of the split among the circuits. Michael Carrier: I wrote an amicus brief in this case (with Stanford s Mark Lemley) on behalf of 118 professors and the American Antitrust Institute to urge the Court to reverse the Eleventh Circuit s decision. Based on several factors, I believe there is a significant chance the Court will do so. First, the settlements are not consistent with the Hatch-Waxman Act, which encouraged generics to challenge patents. Second, the settlements are anticompetitive, serving as a form of market division, which is the practical result when 28

brands pay generics to drop challenges to weak patents and delay entering the market instead. Third, the mere fact of a patent cannot justify the payments. The Patent Office frequently issues invalid patents, and the patents at the heart of these settlements present concern, often covering not the drug s active ingredient but narrower aspects like the formulation or method of use that are less innovative and bear more potential for anticompetitive mischief. I believe that a careful analysis of patent law, antitrust law, and the Hatch-Waxman Act makes clear that these agreements violate the policies of all three. For that reason, I am hopeful that the Court will reverse the Eleventh Circuit s decision. Howard Morse: There are strong arguments on both sides here, making a prediction difficult. Instead, I will highlight two of the issues that I will be looking for in the Court s decision when it is issued. First, I will be looking to see how the decision addresses not only naked cash payments, but also sham side deals or side deals for fair value, and on whom the burden of proof falls. The FTC s brief suggests that courts should consider the totality of the circumstances surrounding the agreement, including, among other things, whether the payment reflected bona fide fair consideration for the property or services. Whether the burden of proof falls on the FTC or private plaintiffs challenging settlement agreements or on the parties to the agreement to prove that a side deal was bona fide could ultimately be outcome determinative. Second, I will be looking to see if the decision addresses how to analyze issues at the intersection of antitrust and intellectual property law, which would have implications beyond the settlement of patent litigation in the pharmaceutical industry. Older Supreme Court decisions viewed patent law as granting patent owners a temporary monopoly and as a narrow exception to the antitrust laws. Modern jurisprudence treats the two bodies of law as complementary, both aimed at promoting innovation and competition, rather than as in tension. It will be interesting to see whether the Court endorses that view. Eric Stock: It is hard to read the tea leaves on this one, but I think that regardless of what you believe is the right outcome, it is hard to believe that the current Supreme Court will promulgate a rule finding all patent settlements with reverse payments presumptively unlawful, regardless of the merits of the underlying patent litigation. With that said, the FTC s recent statement that such a rule would apply only to liability, and not result in a finding of damages, makes such a result potentially more palatable for the more conservative Justices. I think that endorsement of the sham/fraud standard of Cipro/Tamoxifen is more likely than a result that adopts the K- Dur standard, but I also think that many of the Justices will be reluctant to adopt either standard presented by the parties. This is why I think that a decision in the middle is a real possibility, and by that I mean a decision that allows the court hearing the antitrust case to take into account a deeper consideration of the merits of the patent litigation. Reactions to Initial Responses Michael Carrier: As a reminder, sitting atop the framework for analysis is the Supreme Court s instruction in Trinko that antitrust analysis must always be attuned to the particular structure and circumstances of the industry at issue. The Hatch-Waxman Act is unique in the advantages it bestows on the first generic to challenge a brand firm s patent. That is not an FTC attempt to create a set of rules that would only apply to innovator drug company patents. It is the result of a regulatory 29

framework that has had (as its drafters have made evidently clear) unanticipated anticompetitive consequences. Creative arguments to the contrary, of course these cases are... about challenges to patents. Generics filing the first Paragraph-IV certification certify that the patent is invalid or will not be infringed by the generic drug. 21 U.S.C. 355(j)(2)(A)(vii). But when those generics are bought out by brand firms that have more to gain by perpetuating monopoly profits, the patent challenges fall by the wayside. Not every nuance presented by the evolving agreements needs to be addressed in this case. What must be made clear, however, is that these agreements are not essentially per se legal. Nor, given the unique setting of the Hatch-Waxman Act, need the Court opine on antitrust and intellectual property generally. 8. Is there anything that has not been discussed that you would like to say? Kent Bernard: The whole debate has been skewed by the FTC s wonderful use of PR and creative use of the facts. The FTC reports talk of how much settlements cost consumers. But if the settlements are legal, then the cost is simply a function of having patents. All patents cost consumers, if you mean that prices would be lower if we could steal the invention and copy it for free. Also, there is a strong suggestion that the drug patents at issue are somehow weak, and the settlements prop up illegitimate patents. In reports and testimony the FTC keeps repeating its allegation that generics prevailed in 73% of the patent litigation ultimately resolved by a court decision. But that is simply a twisting of the actual data, which data can be found in the FTC 2002 report. That report stated that lawsuits were initiated against a first filer as to 75 separate drug products, and that the generic prevailed in a final decision as to 22. That percentage is 29%, not 73%. To get that 73% figure, the FTC had to drastically manipulate the data. The full explanation of what the FTC did to the data is for another day. But the evidence is that drug patents are like any other kind. There is no epidemic of weak patents that fall when a generic litigates. The FTC has been very clever in managing the PR debate, but the facts are still what are important. The FTC proposal is a solution in search of a problem. Karen Bokat: I have nothing further to add. Michael Carrier: This is a crucial issue that is complicated, lying at the intersection of patent law, antitrust law, and the Hatch-Waxman Act. It is no surprise, then, that several courts have resolved this issue by relying on simplistic assertions in upholding the agreements: Settlements are good ; Patents are presumed valid ; Reverse-payment settlements fall within the scope of the patent. Such platitudes do not provide an appropriate analysis for the settlements. The question confronting the Court in Actavis is simple: when a brand pays a generic to drop its patent challenge and delay entering the market, are we to assume that the patent is valid and the brand can pay the only generic that realistically will enter the market to refrain from challenging the patent? Or will courts have the opportunity to play an appropriate role in applying antitrust law, while effectuating the goals of patent law and the Hatch-Waxman Act? The choice facing the Court is stark. Howard Morse: It will be interesting to see how President Obama s appointment of Edith Ramirez to chair the FTC will impact the agency. There is no doubt that FTC will continue to face focus on healthcare costs generally and the pharmaceutical industry in 30

particular, as I mentioned earlier. But attacking reverse payments was Jon Leibowitz s top priority, and with this case soon in the rear view mirror, Chairman Ramirez will be able to chart her own path. Eric Stock: Nothing more, thank you. Reactions to Initial Responses Michael Carrier: Regarding the FTC s wonderful use of PR and creative use of the facts, the only creativity here is displayed by the drug companies, which have engaged in an ever more nuanced quest to stash payments in places that seem legitimate only by abandoning common sense. Drug companies don t have to hide behind weak patents by paying the only generic in a position to challenge the patent to abandon the challenge and get paid for not entering the market. If the patents really are not that weak, then a simple settlement without payment as was common between 2000 and 2004 often will be more than possible. Finally, the assertion that settlements are legal assumes the issues of validity and infringement that are in dispute. 31

Antitrust Health Care Care Chronicle September March 2013 2010 EXECUTIVE EDITOR Jeff L. White Weil Gotshal 202.682.7059 jeff.white@weil.com Antitrust Health Care Chronicle Editorial Board EDITOR Megan Olsen Kelley Drye molsen@kelleydrye.com EXECUTIVE EDITOR Gus Chiarello Federal Trade Commission 202.326.2633 gchiarello@ftc.gov EXECUTIVE EDITOR Leigh Oliver Hogan Lovells 202.637.3648 leigh.oliver@hoganlovells.com EDITOR Nicole L. Castle McDermott Will & Emery ncastle@mwe.com Please contact the Executive Editors if you have any comments or suggestions regarding the Chronicle. For past issues, visit: http://apps.americanbar.org/dch/committee.cfm?com=at301000 Health Care and Pharmaceuticals Committee Leadership CO-CHAIR Seth C. Silber Wilson Sonsini 202.973.8824 ssilber@wsgr.com COUNCIL LIAISON Kevin J. O Connor Godfrey & Kahn 608.284.2600 koconnor@gklaw.com VICE CHAIR Michael Knight Jones Day mhknight@jonesday.com VICE CHAIR Paul Saint-Antoine Drinker Biddle paul.saint-antoine@dbr.com VICE CHAIR Eric Grannon White & Case egrannon@whitecase.com VICE CHAIR Philip Nelson Economists, Inc. nelson.p@ei.com VICE CHAIR Jeff L. White Weil Gotshal jeff.white@weil.com CO-CHAIR Christi J. Braun Mintz Levin 202.434.7479 cjbraun@mintz.com VICE CHAIR Elinor Hoffmann Office of the New York State Attorney General elinor.hoffmann@ag.ny.gov VICE CHAIR Leigh Oliver Hogan Lovells LLP leigh.oliver@hoganlovells.com YOUNG LAWYER REPRESENTATIVE Lauren Rackow Cahill Gordon lrackow@cahill.com DISCLAIMER STATEMENT The Antitrust Health Care Chronicle is published approximately four times a year by the American Bar Association Section of Antitrust Law Health Care and Pharmaceuticals Committee. The views expressed in this publication are the authors only and not necessarily those of the American Bar Association, the Section of Antitrust Law or the Health Care and Pharmaceuticals Committee. If you wish to comment on the contents of this publication, please write to the American Bar Association, Section of Antitrust Law, 321 North Clark Street, Chicago, IL 60654. COPYRIGHT NOTICE Copyright 2013 American Bar Association. All rights reserved. No part of this publication may be reproduced, stored in a retrieval system, or transmitted in any form or by any means, electronic, mechanical, photocopying, recording, or otherwise, without the prior written permission of the publisher. To request permission, contact the ABA s Department of Copyrights and Contracts via www.americanbar.org/utility/reprint.