By Christopher M. Holman, Ph.D., J.D., Associate Professor at UMKC Law School
Professor Mark Lemley recently filed an amici curiae brief on behalf of himself and a cohort of prominent professors of law, economics, and business in support of a petition for certiorari in Arkansas Carpenter's Health and Welfare Fund v. Bayer (the "Professors’ Brief"). Joining the professors as amici on the brief are the American Antitrust Institute, the Public Patent Foundation, and AARP. These professors and organizations are asking the Supreme Court to review and reverse the Federal Circuit's decision in In re Ciprofloxacin Hydrochloride Antitrust Litigation. Arkansas Carpenter's is the latest in a string of certiorari petitions that have been filed in cases involving an unsuccessful antitrust challenge to a so-called “reverse payments settlement” between a drug patent owner and a potential generic competitor. So far the Supreme Court has denied all of the petitions.
The defining characteristic of a reverse payments settlement is the transfer of some form of consideration, often but not always cash, from the patent owner to the alleged infringer. In most settlements of patent infringement suits any payment typically flows from the alleged infringer to the patent owner, i.e., in the "forward" direction. Reverse payment settlements of challenges brought against prescription drug patents under the Hatch-Waxman Act have been controversial for years. The FTC and others charge that these agreements are anti-competitive and result in substantially higher prescription drug prices for consumers (and ultimately third-party payers such as the government). The atypical direction of the payment is considered suspect by many who view it as evidence that the merits of the patent case must be weak, and argue that the branded drug company is in effect paying the generic company to stay off the market and using the patent as a mere pretense to skirt antitrust liability. Clearly, absent the patent a naked agreement by a generic drug company to stay off the market in exchange for cash would constitute an antitrust violation.
Nonetheless, courts who have considered the legality of reverse payment settlements have repeatedly concluded that, in view of the incentives and dynamics created by the unique structure of a patent infringement suits brought under the Hatch-Waxman Act, it is neither surprising nor particularly suspicious to find payments flowing from the patent owner to the alleged infringer in the settlement of these suits. In fact, even the FTC has acknowledged that at least some reverse payment settlements are legitimate and even pro-competitive. In most patent infringement litigations, the alleged infringer faces the prospect of potentially large money damages based on its past infringement, so there is often an incentive to pay the patent owner to settle the lawsuit and avoid this risk. In contrast, Hatch-Waxman litigation generally occurs before the potentially infringing generic drug goes on the market. The generic drug company typically faces no risk of money damages for past infringement. At the same time, the drug patent owner faces huge potential financial losses if even one court finds its patent invalid or not infringed, and given the uncertainty patent litigation, particularly at the district court level, it is not surprising that some patent owners would be willing to pay to settle the lawsuit and resolve the uncertainty.
The Professor's Brief is essentially an updated version of a brief Professor Lemley filed in 2006 in support of a petition for certiorari in In re Tamoxifen, a reverse payment settlement antitrust challenge arising out of the Second Circuit. In 2006, I seriously considered signing on to his Tamoxifen amici brief; without having delved into the issue, the notion of reverse payments settlements as characterized by Professor Lemley and others struck me as suspicious and anti-competitive . After all, why would a patent owner pay an alleged infringer to settle a lawsuit unless the merits of the patent case were weak? Under these circumstances, is it not logical to infer that the parties are using the patent lawsuit as a mere pretense to provide cover for what is in actuality an agreement between potential competitors not to compete? However, before I signed on to the brief I decided to read the Second Circuit'sTamoxifen decision, as well as the reverse payments settlement decisions that had already been issued by the Sixth and Eleventh circuits. In his brief, Professor Lemley argued that the decisions from these other circuits were in conflict with the Second Circuit's decision in Tamoxifen. After reading the cases, I found that I disagreed with Professor Lemley's interpretation of the decisions, and concluded that in fact there is no split between the circuits. In fact, the decisions by the Second, Sixth and Eleventh circuits (and now the Federal Circuit) are all quite consistent, taking into account that each case involves its own unique settlement agreements and other surrounding facts, and that the decisions necessarily reflect the facts of the individual case being decided.
Reading these decisions sparked my curiosity, particularly since my interpretation of the case law diverged substantially from that of Lemley and many other academic commentators. I decided to research the topic, and in 2007 I published an article entitled “Do Reverse Payments Settlements Violate the Antitrust Laws?” In the article, I survey the diverse array of patent settlements that have been lumped together under the imprecise label "reverse payment settlement,” and explain the factors that motivate the structure of these settlements. After reviewing the facts surrounding specific settlement agreements, and considering the well reasoned explanations of various judges who have rejected the notion that the mere presence of a reverse payment can render an otherwise legitimate patent settlement illegal, I came to disagree with the position propagated by the FTC and academics such as Professor Lemley, i.e., that the mere inclusion of a reverse payment in an otherwise legal patent litigation settlement renders the agreement per se or presumptively in violation of the antitrust laws. Moreover, my view is aligned with that of the vast majority of courts that have addressed the issue. After a close reading of the decisions, it is clear to me that the purported split between the circuits has so far failed to materialize, although the situation could change if and when other circuits weigh in on the issue.
In this short article penned for Patently-O, I will challenge some of the specific assertions made in the Professors’ Brief. For simplicity, many of the citations in this article are to my law review article. Those interested in a more expansive treatment of the subject are encouraged to consult the law review article, which includes primary cites to the cases and other authorities.