Pharma Looks to Limit Activis-Style Antitrust Liability to Only Reverse Payments

by Dennis Crouch

As part of a litigation settlement agreement, GlaxoSmithKline LLC (“GSK”) granted an exclusive generic marketing license to the challenger Teva for sales of lamotrigine and also agreed not to introduce its own competitive ‘authorized generic’ version. The question in the case, now pending before the U.S. Supreme Court is whether that license structure can raise a plausible antitrust claim under F.T.C. v. Actavis, Inc., 133 S. Ct. 2223 (2013).

Following the settlement a set of direct purchasers (including King Drug) filed a class action lawsuit alleging that the exclusive license settlement was anticompetitive and in violated Sections One and Two of the Sherman Act.  The N.J. Federal District Court sided with GSK/Teva and dismissed the case after interpreting the Actavis rule-of-reason approach to apply only to actual monetary reverse payments.  On appeal, however, the Third Circuit reversed – finding that the exclusivity (including the authorized-generic restriction) should be subjected to a full rule-of-reason analysis to consider the harm done to consumers.[1]  The court wrote: “we think that a no-AG agreement, when it represents an unexplained large transfer of value from the patent holder to the alleged infringer, may be subject to antitrust scrutiny.”

In its petition for writ of certiorari, GSK asks the following question:

Whether the Third Circuit’s sweeping holding that a patentee’s grant of an exclusive license must undergo antitrust scrutiny by courts and juries – even though such a license is specifically permitted under the patent laws – is inconsistent with this Court’s decision in Actavis and decades of this Court’s earlier precedents.[2]

Here, the contracting parties argue that the right to exclusively license a patent is a fundamental aspect of the bundle-of-rights associated with a patent and guaranteed by the Constitution, federal common law, and by statute.[3]  Further, GSK argues that these rights should be seen as “exceptions” to the monopoly laws even if they might restrict competition in the short-term and are simply “not subject to antitrust challenge.”

This will be an interesting case to follow. Kirkland & Ellis Supreme Court lawyer Jay Lefkowitz filed the petition with Bruce Gerstein on the other side. At the petition stage, briefs have also been filed by the Generic Pharmaceutical Association PhRMA, WLF, and the Nat’l Assn of Manufacturers.

= = = = =

[1] King Drug Co. of Florence, Inc. v. SmithKline Beecham Corp., 791 F.3d 388 (3d Cir. 2015).

[2] Supreme Court Docket No. 15-1055.

[3] 35 U.S.C. § 261 (patent holder “may … grant and convey an exclusive right under his application for patent, or patents, to the whole or any specified part of the United States”).

36 thoughts on “Pharma Looks to Limit Activis-Style Antitrust Liability to Only Reverse Payments

  1. In order to prove an antitrust violation, the government should have to prove that the patents are invalid.

    United States v. Glaxo Group Ltd., 410 US 52 – Supreme Court 1973

    link to scholar.google.com

    In United States v. Bell Telephone Co., 167 U. S. 224 (1897), acknowledged prior decisions permitting the United States to sue to set aside a patent for fraud or deceit associated with its issuance, but held that the federal courts should not entertain suits by the Government “to set aside a patent for an invention on the mere ground of error of judgment on the part of the patent officials,” at least where the United States “has no proprietary or pecuniary [interest] in the setting aside of the patent [and] is not seeking to discharge its obligations to the public . . . .” 167 U. S., at 269, 265. Subsequently, United States v. United States Gypsum Co., 333 U. S. 364 (1948), referred to Bell Telephone as holding that the United States was “without standing to bring a suit in equity to cancel a patent on the ground of invalidity,” id., at 387, but went on to declare that, to vindicate the public interest in enjoining violations of the Sherman Act, the United States is entitled to attack the validity of patents relied upon to justify anticompetitive conduct otherwise violative of the law. The Court noted that, because of the public interest in free competition, it had repeatedly held that the private licensee-plaintiff in an antitrust suit may attack the validity of the patent under which he is licensed even though he has agreed not to do so in his license. The authorities for this proposition were Sola Electric Co. v. Jefferson Electric
    58
    *58 Co., 317 U. S. 173 (1942); Edward Katzinger Co. v. Chicago Metallic Mfg. Co., 329 U. S. 394 (1947); and MacGregor v. Westinghouse Electric & Mfg. Co., 329 U. S. 402 (1947). The essence of those cases is best revealed in Katzinger where the Court held that, although a patent licensee (under the then-controlling law) was normally foreclosed from questioning the validity of a patent he is privileged to use, the bar is removed when he alleges conduct by the patentee that would be illegal under the antitrust laws, absent the patent. The licensee was free to challenge the patent in these circumstances because the “federal courts must, in the public interest, keep the way open for the challenge of patents which are utilized for price-fixing . . . .” Id., at 399. Katzinger and Gypsum were much in the tradition of Pope Mfg. Co. v. Gormully, 144 U. S. 224, 234 (1892): “It is as important to the public that competition should not be repressed by worthless patents, as that the patentee of a really valuable invention should be protected in his monopoly . . . ,” a view most recently echoed in Lear, Inc. v. Adkins, 395 U. S. 653, 670 (1969).

    Id. at 57-58.

    1. Why invalid?

      Do you think that having a valid patent means that one cannot possibly be engaged in any anti-trust activity?

  2. While it is an interesting case, aren’t they creating a false dichotomy? It isn’t the right to exclusively license versus antitrust laws. It is precisely how they leveraged their exclusive license that triggers antitrust laws.

    For example: if GSK, without any threat of litigation, decided to license their drug to a generic – I don’t see an antitrust violation (pure execution of the patent right) [market allocation is per se illegal but subject to rule of reason if ancillary restraints doctrine shows pro-competitive effect]. In general, I would argue that introducing a generic into the market is pro-competitive. (Creates new product otherwise not available, see BMI).

    Now, if GSK was under threat of litigation (to invalidate or whatevs under Hatch-Waxman), then grants the exclusive generic license for the generic to go away – I think the ancillary restraints doctrine goes bye-bye –> section 1 violation resurfaces because market allocation is per se illegal. I also think a section two violation occurs (if as everyone might agree, GSK has market power in the branded drug market) by predatory or exclusionary actions [give exclusive generic license excludes other generics that could enter after Hatch-Waxman].

    That said, it very might be true dichotomy if the first above hypo actually does not satisfy ancillary restraints doctrine in any fact pattern in the drug context. Therefore, it is also a naked market allocation and per se illegal whenever a branded drug maker grants an exclusive generic license.

    I think it’s worth GSK’s time and money to figure that out.

  3. @ Paul

    “Of the thousands of patent infringement suits settled before trial every year, almost all involve some settlement payment from the accused infringer to the patent owner, even if just to avoid further litigation costs”

    I’ve been working with the Pharma industry for more than a decade. I have yet to see a “payment”. I have posted many times before that the Actavis case was predicated on facts that occurred in 2006. The industry have moved along since then.

    What really concerns me, as you oddly state,is that there is the opinion that one should be allowed to consider as a form of a reverse payment from the “savings” one gets from not having to continue to pay litigation costs as a result of settlement. Truly scary.

    Isn’t the logical conclusion to the pressure by the FTC to force the brand/generic to litigate to completion? If so, statistically speaking, when the brand is asserting a composition of matter patent, the brand has a 93% chance of litigation success. This success being defined as a court holding that the composition of matter patent is both valid and infringed, thereby keeping the generic off the market for the full term of the composition of matter patent.

    Welcome to the law of unintended consequences.

    1. xtian: What really concerns me … is that there is the opinion that one should be allowed to consider as a form of a reverse payment from the “savings” one gets from not having to continue to pay litigation costs as a result of settlement. Truly scary.

      Could you re-state your position here, xtian? I”m having trouble parsing the sentence. What exactly is “scary” to you?

      1. What is scary is that some consider a “reverse payment” the “savings” from avoiding future litigation costs. In other words, the brand is “paying” the generic because the generic no longer has to litigate (and spend money on outside counsel) the patents at issue in the Hatch-Waxman case.

        1. What is scary is that some consider a “reverse payment” the “savings” from avoiding future litigation costs.

          Why is “savings” in quotes when you are the only one using the term?

          1. If you want something to ra il about, try big pharma. They do not publish contrary results (i.e., funded studies), they manipulate data to make everything look good from their perspective, they pay for people to be on boards that tell doctors what drugs should be used (the AHA is owned by big pharma), they pay for doctors to use their drugs (through many different means), they squelch dissent, they completely control studies now (including drafting the papers that are submitted), they minimize side effects, set up studies to reduce side effects, etc. In short, big pharma is the lowest of the low. Much lower than the “ju nk” patents, and those that file and prosecute them, you compla in about.

    2. XTIAN – I don’t really understand what you are getting at with this post.

      In ordinary patent infringement litigation, the patentee receives a payment of some sort in order to agree to settle the litigation. In ANDA cases we get this odd result that (as here) generic company receives a benefit from the patentee in order to stop the case. Regulators then begin to question these odd agreements between competitors that does not match usual open-competition market incentives.

      1. Dennis – What is the alleged benefit in this case? If I understand it correctly, the “benefit” is that Brand and 1st generic settled the ANDA litigation, the terms of which include license terms where the brand will not license the patents to another generic company, aka “no authorized generic.” (I note, as you state in a comment below, that the Brand will still sell the Brand, so its not really an exclusive license. One may call it exclusive license to sell a generic version of the drug.)

        My “truly scary” comment was in response to Paul Morgan’s comment at 1.2 where his statement could be interpreted mean that a form of a reverse payment could be in the “savings” by the generic which resulted from not having further litigation costs as a result of the brand and generic company settling the ANDA case.

        Paul’s quote: “Of the thousands of patent infringement suits settled before trial every year, almost all involve some settlement payment from the accused infringer to the patent owner, even if just to avoid further litigation costs.”

    3. Isn’t the logical conclusion to the pressure by the FTC to force the brand/generic to litigate to completion? If so, statistically speaking, when the brand is asserting a composition of matter patent, the brand has a 93% chance of litigation success. This success being defined as a court holding that the composition of matter patent is both valid and infringed…

      You’re assuming that when the brand is “forced” to litigate to completion all those cases that they’re now anxious to settle that their success rate will stand at 93%? My guess is that the success rate would drop a bit…

    4. xtian, I think the FTC would like to intervene and continue the lawsuit so that all generic can enter the market.

      Historically, the Government had no standing to sue. But that was then, this is now, after Patlex->MCM where patents are public rights, and the government can sue for invalidity anywhere it chooses, in the courts, or in its own administrative reviews.

      Hint, FTC, simply file and IPR.

      1. Ned – Interesting thought. Can the FTC file IPRs on pharma patents? Actually, from a policy perspective – SHOULD the FTC be allowed to file IPRs?

  4. “The contracting parties argue that the right to exclusively license film stock and projectors is a fundamental aspect of the bundle-of-rights associated with both film stock and projectors and guaranteed by the Constitution, federal common law, and by statute. Further, the Motion Picture Patents Company argues that these rights should be seen as “exceptions” to the monopoly laws even if they might restrict competition in the short-term and are simply “not subject to antitrust challenge.”

    The “argument” strikes me as a tad conclusory.

  5. Why isn’t the FTC’s logic and attention also applied outside of Pharm, say in the electrical arts? Aren’t consumer’s being harmed by the fact that Nokia, Samsung, Apple, Cisco, etc., aren’t made to license their patents to all types of competing companies?

    “Will someone please think of the children?” ~the late Maude Flanders

    1. To the extent that the patents of those companies are in a standard, they are made to license them under FRAND terms. If the patents are not in a standard, then they can do with them what they will. Let’s face it, there’s too much money to be made in smartphones and similar technology, and everyone wants a bite at the apple.

      Are consumers being harmed because there’s Apple v. Samsung (and vice versa), Google v. others (and vice versa), Nokia v. others (and vice versa)? It’s hard to say.

        1. Need. The people “need” medicine. The rich smart big man of Pharma can make it, and it’s his “duty” to provide it because the people “need” it and he has the “ability” to produce it. Charging what the market can bear (or more) as would happen in a truly free market is “wrong” because “need” itself confers entitlement or a right to “access”. This is why antitrust laws are needed, to “encourage” competition to reduce prices for the “consumers” who have a “right” to “reasonably priced” medicine because they “need” it. If not for antitrust laws encouraging such competition government would have to take over the businesses and redistribute the fruits of the producers labor directly which, although not “wrong” “today” would be very difficult to do.

          This is the New America after all…

            1. Welcome to the world of rich entitled patent attorneys!

              The world must look very strange indeed when peering out from their shiny money-scented bubble.

              1. MM – what does the world of patent attorneys have to do with the FTC asserting antitrust allegations against a brand and generic company for settling a Hatch-Waxman case?

                I could except your comment if you replaced “patent attorneys” with “pharma executives,” but patent attorneys is a stretch. You can do better.

                1. I’m not commenting on the FTC’s actions. I’m commenting on the strange response that the FTC’s actions elicited from a couple commenters here.

                  My advice to patent attorneys generally is to try to get out of the office and off the golf course occasionally and really get to know some of the impoverished people you share the earth with. They’re real human beings! Just not as lucky as some of us.

                2. The fields of eye are full of “G-g-g-g-grifting” patent attorneys.

                  Thank goodness Malcolm is on watch!

                3. “Just not as lucky as some of us.”

                  I’m not sure that I’m in patents because of “luck”. Nor would I be a patent attorney because of “luck”. I would be a patent attorney because of hard work and competence.

    2. Patents in the electrical arts rarely have true product monopolies, with no alternatives, much less de facto monopolies provided by mandatory FDA approvals required to market the product. [An even stronger reason that the industry standards triggering FRAND licenses noted by PatentBob.]

      Furthermore, not all exclusive licenses contain a contractual agreement not to complete in a market, as reported here. It is just as, or far more, typical for a licensor to retain a right to use for itself. Nor was it ever normal [before a few of these drug patent disputes] for a patent owner to give something of value to a patent challenger to end a patent infringement suit [even a non-exclusive license] without payment from the defendant to the patent owner, not vice versa. Of the thousands of patent infringement suits settled before trial every year, almost all involve some settlement payment from the accused infringer to the patent owner, even if just to avoid further litigation costs.

      There were ample public warnings from the FTC [even a strong FTC staff speech at an AIPLA annual meeting I heard at least 12 years ago] right from the time some drug companies started using various forms of so-called “pay for delay” settlement agreements, that they would be challenged on antitrust grounds as agreements in restraint of trade or monopolization drug price maintenance. AT attorneys know that FTC suit caries with it the considerable added risk of treble damages civil actions by customers for consequent higher prices. Some drug companies took the risk anyway, encouraged by a couple of Circuit court decisions refusing to get into it, but not the Sup. Ct. Now comes the deluge.

    3. When Nokia, Samsung, Apple, Cisco begin granting exclusive licenses where they explicitly agree to not compete with the licensee, I expect that they’ll start getting antitrust scrutiny as well. Especially when they start making such agreements to prevent those patents from being invalidated. I’m pretty sure that hasn’t happened yet.

      1. @Danh “When Nokia, Samsung, Apple, Cisco begin granting exclusive licenses where they explicitly agree to not compete with the licensee”

        What is an exclusive license that does allow the licensor to compete with the licensee? Oh, I know. a non-exclusive license.

          1. Hence they’ve agreed to divvy up (i.e., allocate) the markets for branded and “generic” versions of the drug, to settle a lawsuit that could have resulted in GSK operating in the branded and generic markets, in the latter instance directly competing with Teva. This is not something that makes the remotest bit of sense in the world that Nokia, Samsung, Apple, and Cisco operate in – thus answering xtian’s original question, where he claimed to be unable to see a difference between pharma and the electrical arts.

            I don’t have any axe to grind with respect to this case, although a situation where paying cash to settle one of these lawsuits is illegal while granting an apparently valuable “exclusive” license is not seems untenable to me. But it’s silly to pretend that pharma is not a special situation, especially when there are provisions of the patent law specifically targeted at pharma.

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