Antitrust: Court Should Not Consider Potential Patent Validity in Sherman Act Analysis

In re Ciprofloxacin Hydrochloride Antitrust Litigation (E.D.N.Y. March 31, 2005)

Bayer produces Cipro® (ciprofloxacin hydrochloride) and is assignee of U.S. Patent No. 4,670,444, which claims the active ingredient and its generic equivalents.

Hoping to produce a generic version, Barr Labs filed an ANDA requesting permission to produce the drug before the expiration of the patent — arguing that the patent was invalid and unenforceable. (Paragraph IV certification). Bayer then sued Barr for infringement. The two companies eventually settled. Under the settlement agreement Bayer paid Barr $398 million and Barr agreed to amend its ANDA to a Paragraph III certification, which would permit it to market the drug only after the patent expires. The settlement agreement included an “out” for Barr in the case that the patent was subsequently declared invalid or unenforceable.

In the wake of the settlement, a class of buyers sued Bayer and Barr for antitrust violations under the Sherman Act, arguing that the exclusion-payment scheme is a form of anti-competitive conduct falling under Section 1 of the Act using a rule of reason analysis. The district court, however, sided with Bayer, finding that there was no impermissible anticompetitive effect because the agreement did not extend beyond the “zone of exclusion” of the patent.

Here, plaintiffs have failed to demonstrate anticompetitive effects in the market for ciprofloxacin because, although the Agreements undoubtedly restrained competition, they did not do so beyond the scope of the claims of the ‘444 Patent. The ‘444 Patent allows a zone of exclusion within the bounds of its claims.

Further, the court held that the “potential invalidity of the claims” could not be used to diminish the protection that the patent offers against Sherman Act claims.

This result is compelled by the presumption of validity Congress accorded patents and the destabilizing effect on patent law that a contrary decision would work. Any readjustment of the competing interests affected by exclusion payments is a matter better addressed by Congress than the courts.

Because the plaintiffs were unable to prove the first element in the rule of reason analysis (anticompetitive effect), defendants cannot be liable for the alleged antitrust violations.

Calvert Crary, a litigation analyst who writes the highly informative LitigationNotes sees this decision as falling in line with the March 8, 2005 11th Circuit decision in Schering-Plough v. FTC, but predicts that these decisions may result in a complete undermining of Hatch-Waxman.

[T]hese decisions, if broadly adopted, will decimate the statutory mechanisms of the Hatch-Waxman Act that remove barriers to price competition arising from invalid or inapplicable drug patents. (From Crary’s report on Kos Pharma v. Barr Labs).

< ?xml:namespace prefix ="" o />Mark Lemley is a law professor at Stanford, but he has also been quite involved with a number of patent appeals over the past several years. In an e-mail, Professor Lemley argues that the Cipro court is “entirely wrong-headed” in this case. In his view, this decision essentially creates a rule that allows obvious cartels regardless of the strength of the patent.

[The court] cites the 6th Circuit and [Schering-Plough v. FTC] for the proposition that we don’t want to enquire into patent validity in an antitrust case. That’s true enough. But those courts found the exclusion payment illegal without having to inquire into patent validity. By rejecting the per se approach, and also rejecting any inquiry into the merits, the court has essentially created a rule of per se legality for a pretty obvious cartel. No matter how weak the patent claim is, or how obviously the payment is a means of artificially maintaining a monopoly, under the court’s reasoning it will be permissible. This is an abdication of antitrust responsibility.

In a recent paper, Lemley, along with Professors Herbert Hovenkamp and Mark Janis argue that “exclusion payments that exceed litigation costs should be deemed illegal per se.” According to their analysis, there is “no legitimate reason for such payments, and the most likely reason . . . is anticompetitive.” The three professors book, entitled IP and Antitrust: An Analysis of Antitrust Principles Applied to Intellectual Property Law is available at Amazon.com.

Links: