SCOTUS Oral Arguments in FTC v. Actavis; Court to Decide Legality of Pay-For-Delay (Reverse Payment) Settlement Agreements

On Monday, 25 March 2013, the Supreme Court of the United States heard oral arguments in the case, Federal Trade Commission v. Actavis, Inc., et. al. This case had previously been captioned as Federal Trade Commission v. Watson Pharmaceuticals, et. al., but was recaptioned after the combination of Actavis and Watson. KEI filed an amicus brief in support of the FTC which is available here (along with additional background to the case). The transcript from oral arguments is available here. It should be noted that only eight justices heard the case, with Justice Alito recusing himself.

The case involves a circuit split regarding the legality of "pay-for-delay" settlement agreements, also known as "reverse payments," where a branded pharmaceutical will pay a generic that has filed an ANDA application (challenging that their product will not infringe the branded pharmaceutical's patent or that the patent-at-issue is invalid) under the Hatch-Waxman Act in return for the generic firm's agreement to delay entry into the market for a certain period of time.

Solvay Pharmaceuticals, an Abbott company, sells a testosterone gel known as AndroGel to treat patients with low testosterone. Testosterone is off patent and the patent on AndroGel relates to the particular gel formulation. Two generic pharmaceutical companies filed applications with the FDA for approval of their generic products under the "Paragraph IV" certification of the Hatch-Waxman Act and asserted their products did not infringe on Solvay's product and that Solvay's patent on AndroGel was invalid. Under Paragraph IV of the Hatch-Waxman Act, the first generic filer can receive a 180-day marketing exclusivity where the FDA will not approve other generic versions during that time period. Solvay Pharmaceuticals brought patent infringement litigation against the generic filers, Watson Pharmaceuticals and Paddock Holding/Par Pharmaceuticals. Ultimately, the parties settled the case with Solvay agreeing to pay Watson Pharmaceuticals between $19 million and $30 million annually (based on the profits of AndroGel), and to pay Paddock Holdings $10 million a year and Par Pharmaceuticals (a Paddock affiliate) $2 million per year. The generic firms agreed to delay generic entry until 2015, five years before the end of AndroGel's patent, a date which the FTC alleges that Solvay had already planned to switch from marketing of AndroGel to a new product. The deal was portrayed as payment for marketing work and backup manufacturing capacity of Watson and Par, though the FTC alleges that Solvay had no need for such assistance and did not intend to utilize these provisions. The FTC brought suit against the parties to the pay-for-delay agreement, alleging that the settlement was anticompetitive and violated antitrust laws. The court below (the Eleventh Circuit) applied the "scope-of-the-patent" test which immunizes pay-for-delay agreements from antitrust scrutiny. The Third Circuit, by contrast, has held that reverse payment agreements are presumptively anticompetitive.

Oral Arguments of the Federal Trade Commission
Malcolm L. Stewart, Deputy Solicitor General from the Department of Justice argued on behalf of the Petitioner (the FTC). Mr. Stewart opened his argument by calling a payment from one business to another in exchange for an agreement not to compete "a paradigmatic antitrust violation." He then called into question whether these types of payments should be seen as lawful when conducted within the settlement of a patent infringement suit. He was quickly interrupted by Justice Scalia who asked how reverse payment settlements differ from simply dividing of the market. Mr. Stewart responded that providing an exclusive license in a divided market does not give the defendant in the case anything it couldn't achieve if it prevailed in a lawsuit, thus making it different than a reverse payment settlement. Turning the question to the specifics of pay-for delay:

JUSTICE SCALIA: So instead of giving them a license to compete -- you know, we'll short-circuit the whole thing, here's the money. Go away.

MR. STEWART: But the point here is that the money is being given as a substitute for earning profits in a competitive marketplace. That is, in -- in the Hatch-Waxman settlement context, by definition, we have a disagreement by parties as to the relative merits of the infringement and -- and/or invalidity questions as to the patent infringement suit.

The brand name is saying its patent is valid and infringed. The generic is saying either that the patent is invalid or that its own conduct won't be infringing or both. And if the generic wins, it will be able to enter the market immediately. If the brand name wins, it will be able to keep the generic off until the patent expires.

And so in that circumstance, a logical subject of compromise would be to agree upon an entry date in between those two end points, just as the parties to a damages action would be expected to settle the case by the defendant agreeing to pay a portion of the money it would have to pay if it lost. That's an actual subject of compromise and we don't have a problem with that.

Justice Scalia then asked whether there is caselaw where the patentee was acting within the scope of the patent but still found to be violating antitrust laws. Mr. Stewart responded that there have been cases, including in Masonite and New Wrinkle Inline Material if the question refers to a situation where "scope-of-the-patent" refers to the Respondent's definition of the term. In those cases, Mr. Stewart argued, the patent holders were acting within the "scope-of-the-patent" but found to violate antitrust rules because of, for example, attempts to control resale or retail prices.

Justice Ginsburg then asked whether the position being argued today represented a change from the Government's position, such as the Government's position in Schering-Plough. Mr. Stewart noted that the FTC has consistently taken its present position, but that the DOJ (while not endorsing the scope-of-the-patent test) up until 2009 advocated a test "that would focus on the strength and scope of the patent. That is, the likelihood that the brand name would ultimately have prevailed if the suit had been litigated to judgment." In 2009, however, the DOJ in an amicus filing before the Second Circuit, took its current position recommending that reverse payment agreements be treated as presumptively unlawful.

Noting that the Government's test does not take into account the validity or strength of the infringement, Justice Kennedy noted his concerns:

JUSTICE KENNEDY: That's my concern, is your test is the same for a very weak patent as a very strong patent. That doesn't make a lot of sense.

MR. STEWART: Well, the test is whether there has been a payment that would tend to skew the parties' choice of an entry date, that would tend to provide an incentive for the parties to -- for the generic to agree to an entry date later than the one that it would otherwise insist on. Now, it probably is the case that our test would have greater practical import in cases where the parties perceive the patent to be -­

JUSTICE KENNEDY: Why wouldn't that determination itself reflect the strength or weakness of the patent so that the market forces take that into account?

MR. STEWART: Well, I think in the kind of settlement that we would regard as legitimate, where the parties simply agree to a compromise date of generic entry, then the parties would certainly take into account their own assessment of what would likely happen at the end of the suit. And so if the parties believe that the brand name was likely to prevail, then if the brand name agreed to early generic entry at all, it would presumably be for a fairly small amount of time.

Conversely, if the parties collectively believe that the generic -- that the brand name had a weak case and the generic was likely to prevail, then they would negotiate for an earlier date. And the problem with the reverse payment is that it gives the generic an incentive to accept something other than competition as a means of earning money.

Justice Scalia called the incentive to accept reverse payments a "mistake" created by the Hatch-Waxman Act and calls into question why the Court should address the "mistake" through antitrust law:

JUSTICE SCALIA: This -- this was not a problem, I gather, until the Hatch-Waxman amendments?

MR. STEWART: These suits -- these types of payments appear to be essentially unknown in other lawsuits and other patent infringement cases.

JUSTICE SCALIA: Yes, and so -- and so do suits against this kind of payment. And I have -- I have the feeling that what happened is that Hatch-Waxman made a mistake. It did not foresee that it would produce this kind of -- this kind of payment. And in order to rectify the mistake the FTC comes in and brings in a new interpretation of antitrust law that did not exist before, just to make up for the mistake that Hatch-Waxman made, even though Congress has tried to cover its tracks in later amendments, right, which -­which deter these, these -- these payments?

MR. STEWART: Congress has tried to reduce the incentives for these payments to be made.

JUSTICE SCALIA: So, why should we overturn understood antitrust laws just to -- just to patch up a mistake that Hatch-Waxman made?

MR. STEWART: Well, a couple things I would say. First, I don't think we're -- we're not asking you to overturn established antitrust laws. To take along analogy, for example, if Watson instead of developing a generic equivalent to AndroGel, had developed an entirely new drug that it believed would be better than AndroGel for the same conditions and if Solvay had paid Watson not to seek FDA approval and not to seek to market the drug, I think everyone would agree that that was a per se antitrust violation, even though Watson's ultimate ability to market the new drug would depend on FDA approval that might or might not be granted.

And so when we say it's unlawful to buy off uncertain competition, it's unlawful to buy out competition even when the competition might have been prevented by other means, we are just enforcing standard antitrust principles. To focus on the distinction between Hatch-Waxman and other patent litigation, Professor Hovenkamp's conclusion is that the reason that you don't see payments like this in the normal patent infringement suit is that in the typical market if a patentholder were known to have paid a large sum of money to a competitor who had been making a challenge to the patent, if other competitors knew that that had happened, then they would perceive that to be a sign that the patent was weak and that they would leap in.

But he says Hatch-Waxman makes it more difficult for that to be done, because Hatch-Waxman gives unique incentives to the first paragraph 4 filer.

Justice Kennedy brought up the 180-day exclusivity period given to the first generic to challenge the patent and Mr. Stewart pointed out "that the exclusivity period is not good in and of itself for consumers" because the duopoly only drops the price of the drug a small amount. However, Mr. Stewart notes that this period is designed to give generics "ample incentives" to challenge weak patents and that "if the first filer is able essentially to be bought off, is able to settle for something other than early entry into the marketplace, then other potential competitors face barriers to entry that they--similarly situated competitors wouldn't face in other industries."

Justice Breyer brought up concerns about "rigid -- a whole set of complex per se burden of proof rules that I have never seen in other antitrust cases" being advocated for by the government in the present case. Mr. Stewart pointed to the case, NCAA v. Regenets of the University of Oklahoma as an example where similar rules, that is rules somewhere between the per se rule and rule of reason under antitrust law exist but could not come up with any others. Justice Breyer and Mr. Stewart then have an exchange regarding whether the judge should determine whether anticompetitive effects occur or whether a presumption is the better outcome; Mr. Stewart analogizes the reverse payment settlement to circumvention of government ethics rules.

JUSTICE BREYER: Well, if there are few or none, then I would say why isn't the government satisfied with an opinion of this Court that says, yes, there can be serious anticompetitive effects; yes, sometimes there are business justifications; so, Judge, keep that in mind. Ask him why he has this agreement; ask him what his justification is, and see if there's a less restrictive alternative.

In other words, it's up to the district court, as in many complex cases, to structure their case with advice from the attorneys.

MR. STEWART: I think that would leave courts without guidance as to -­

JUSTICE BREYER: It's got guidance.

MR. STEWART: -- without guidance as to what factors would be appropriate -­

JUSTICE BREYER: The same thing is appropriate as is appropriate in any antitrust case. Are there anticompetitive effects? I have 32 briefs here that explain very clearly what you said in a sentence. It may be that they're simply dividing the monopoly profit. I understand that -- you know, I can take that in and so can every judge in the country. And what's complicated about that?

And then I have some very nice dark green briefs that clearly say, four instances, maybe five, where there would be offsetting justifications. I think they can get that, too.

MR. STEWART: Well, certainly our proposed approach accounts for that. It provides -- it provides really two different forms of rebuttal. First our approach says, this is on its face an agreement not to compete, the generic has agreed to stay out of the market for a defined period of time, and the payment gives rise to an inference that the agree -- that the delay that the generic has agreed to is longer than the period that would otherwise reflect its best assessment of its likelihood of -- of success in the lawsuit.

But then we say, there are basically two different types of ways in which the presumption could be rebutted. First, the parties can show that the payment was not in consideration for delay, that there was some other commensurate value transferred, and the payment -- and that arrangement would have been entered into even without the larger settlement.

And then second, we're at least accepting the possibility that brand names and generics could come in and say, even though our payment was for delay, even though we can't identify anything else that the payment could have been consideration for, it's still, quote, "competitive" under -
­
JUSTICE BREYER: And they mention at least two others. The first one they mention is because the person's already in the market thinks that the next year or two or three years is worth $100 million a year, and the person who's suing thinks it's worth 30 million a year. And so he says, hey, I have a great idea, I'll give him the 30 million and keep the 70. And -- and that, I don't see why that's anticompetitive if that's what's going on.

And the second instance they bring up is that it's very hard to break into a market. So for the new generic to come in, he's thinking, giving me two years isn't worth much, because I'll spend a lot of money, it's very hard for me to do it. But the
defendant -- the defendant who wants this patent kept intact says, I will not only let -- I'll let you in a year earlier and I'll give you enough money so that you can start up a distribution system. The second seems procompetitive; the first, neutral.

The problem of deciding whether other matters are or are not really payments for something else, a true nightmare when you start talking about five drugs and different distribution systems, and the matter of whether you're paying for litigation costs, a matter of great debate for the judge. Okay. That's the arguments that they make. Go ahead.

MR. STEWART: Let me say a couple of things about the administrative nightmare. The first is that to the extent that these inquiries are difficult, they're difficult only by -- because the brand names and the generics have made them difficult by tacking on additional transactions to their settlement proposal.

And to take an analogy, there are government ethics rules that say that -- what are called prohibited sources. Basically, people who have business before the department can't give me gifts as a government employee. Now, obviously, it would be absurd to have a rule that said a prohibited source couldn't give me a Rolex watch, but could sell me a Rolex watch for a dollar. And so the ethics rules treat as a gift an exchange for value in which fair market value is not paid.

And everybody understands that once you go down that route, occasionally, you will have hard cases in which people could legitimately agree, was this a legitimate arm's length exchange or was it a concealed gift? But the prospect of those difficult cases doesn't mean that we get rid of a gift ban altogether. And certainly, Federal employees couldn't bring the -- the ethics office to its knees by engaging in such a proliferation of these side deals that the ethics office decided it's not worth it.

The second thing is that Respondent's approach would apply even when there are no hard questions. Respondents would say that even if the agreement provides for delayed generic entry until the date the patent expires, and even if the only other term of the agreement is the brand name pays the generic a lot of money, that that would be a legitimate agreement, because the restriction would apply to arguably patented drugs and it wouldn't extend beyond the date of patent expiration.

I guess the -- the other thing I would say about the way in which these payments can facilitate settlement really shows their anticompetitive potential. That is, suppose the parties were negotiating for a compromise date of entry, but they couldn't agree; the -- the brand name said beginning of 2017 is the earliest we'll let you in and the generic said beginning of 2015 is the latest date that we would accept. Now, the Respondents use the term "bridge the gap," but there's obviously no way that a payment from the brand name to the generic could enable the parties to agree on an entry date between 2015 and 2017. The brand name is never going to say, well, I would insist on holding out until 2017, but if I'm going to pay you a whole lot of money, then I'll let you earlier and accept a -- a diminution of your profits. The brand name is going to say, if I pay you money, I'm going to insist on deferring entry even later than the 2017 date that would otherwise be my preferred compromise. So the natural effect of these payments is not to facilitate a -- a bridging the gap in the sense of a picking of a point between the dates that the parties would otherwise insist on. It is going -- it is very likely to cause the parties to agree to an entry date that's even later than the one the brand name would otherwise find acceptable.

Justice Sotomayor also noted her concerns with the proposed government test, stating "It's rare that we find a per se antitrust violation. Most situations we put it into rule of reason. You seem to be arguing that this is price fixing, a reverse payment like price fixing so that it has to fall into something greater than the rule of reason." She also wanted to know "why is the rule of reason so bad? . . . and that's really my bottom line . . . I think that's what Justice Breyer was saying," noting her concerns with flipping the burden of proof from the plaintiffs (FTC) to the parties engaged in the reverse payment settlement. Justice Breyer added more concerns with creating an "administrative monster." Mr. Stewart responded by citing again to NCAA v. Regents of the University of Oklahoma:

MR. STEWART: It's not atypical -- I mean -­and the Court did this in NCAA, for example, where it said that the agreement it was looking at, which dealt with the allocation of -- of -- allocation of rights to televised football games -- was essentially a limitation on output, and the Court said those are presumptively unlawful. Long experience in the market has shown that they are suspect.

The Court didn't say there was long experience in the market for television rights to football. It just said output limitations have been established as disfavored.

Nevertheless, because competitive sports by nature require a degree of cooperation between the people who compete against each other -- to establish the rules of the game and so forth -- we will look to see whether the parties have identified -- whether the defendants have identified anything about their specific industry that would justify our decision not to apply the usual presumption, and it concluded that there was nothing there.

And we're really asking the Court to take the same approach here. We're saying payments not to compete are generally disfavored. The parties can -­ when you have a Hatch-Waxman settlement in which money is passing from the brand name to the generic, it's an unusual settlement to begin with, because there's no way that the suit could have culminated in the generic receiving a money judgment.

Oral Arguments of Actavis, et. al.
Jeffrey I. Weinberger argued on behalf of the Respondents. Mr. Weinberger opened by addressing Justice Scalia's opening question and asserted that the Court has never "found a restraint outside the scope of the patent to be unlawful." He asserts that attempts to control downstream resale prices fall outside the exercise of the patent. He noted, in response to a question by Justice Sotomayor that "I think our patent system depends upon the notion that you don't evaluate from the perspective of the antitrust laws a patent restraint based upon whether you could have proved in a litigation that the patent -- that the patent was infringed." Justice Sotomayor and Mr. Weinberger then had an exchange over whether the parties to reverse payment settlement agreements are just sharing profits, with Justice Breyer noting that the Government is proposing a rule somewhere in between a per se rule and rule of reason:

JUSTICE SOTOMAYOR: A reverse payment suggests something different, that they're sharing profits.

I don't know what else you can conclude.

MR. WEINBERGER: Many license -- I don't think that's correct, and that's because many license disputes are in fact resolved by the -- the alleged infringer exiting the market for a period of time, or agreeing to stay off until a certain time. And then the license -­

JUSTICE SOTOMAYOR: But not many for reverse payments.

MR. WEINBERGER: Yes, they are, because -­because, for example, it could be a license agreement where the infringer agrees to stay off the market for X number of years, and when it comes on it pays a certain royalty. Now, anybody could argue that that royalty, if it were higher, could result in an earlier entry. There's always an argument to be made with any delayed entry situation that monopoly profits are shared. That's just -- just inherent in the nature of it.

And if you take the FTC's argument to its full force, it would mean that any situation where anyone is agreeing to a delayed entry, and there's any other value that's being exchanged in that situation, that in effect in economic terms is a payment for delayed entry. There's no difference.

JUSTICE BREYER: Yes. But there, it's not -- their point is not it's per se unlawful. What they want is they want to cut some kind of line between a per se rule and the kitchen sink. And if you look at the brief supporting you, it is the kitchen sink. You have economists attacking the patent system or praising it, da, da, da, and here and there and the other. They don't want the kitchen sink.

Now, suppose I don't want the kitchen sink, but I have a hard time saying what the per se rule is. So what's your argument?

MR. WEINBERGER: I -- I've obviously given a lot of thought to whether there is any kind of an intermediary test that works, and I don't believe there is. Let me explain why.

First, you can't really measure whether there were any anticompetitive effects from such a settlement agreement without determining what would have happened if the case hadn't settled and it would have been litigated. And if the patentee had won the litigation, then there would be no anticompetitive
effects.

That's what the Second Circuit and the Federal Circuit concluded in applying the rule of reason test, and saying the first condition of such a test has not been met, because there's no demonstration of anticompetitive effects.

And the cases -- both of those cases are very good illustrations of what I'm talking about. Those were the Tamoxifen and Cipro cases, where the parties agreed to so-called reverse payment settlements that FTC would say are basically per se lawful.

Justice Kennedy appeared very interested in the idea of setting caps or limits as to what pay-for-delay settlements could be made, suggesting that caps could be made on the basis of what the generic company would lose, rather than what the branded company stood to gain from settling.

Justice Kagan then presented a hypothetical to Mr. Weinberger asking, essentially, whether the same agreement made outside the course of litigation would be lawful. She noted her concerns with regard to the harm to consumers in these reverse payment agreements:

JUSTICE KAGAN: Suppose you had a -- a lawsuit and the generic sends the brand name manufacturer an e-mail and the e-mail says, we have this lawsuit, I think I have about a 50 percent chance of winning.

If I win, I take your -- your monopoly profits down from 100 million to $10 million. Wouldn't it be a good thing if you just gave me 25 million? All right? And then the brand name sends an e-mail back, says -- you know, that seems like a pretty good idea, so I'll give you 25 million.

Now, as I understand it, your argument is, I mean, that's just fine. That's hunky dory. [. . .] Is that fine?

MR. WEINBERGER: I -- I think that if the - ­if it's a single situation and the evidence is that there's a reasonable basis to assert that patent and in truth, the patent has, which you say, has a 50/50 chance of prevailing, then I think that there could be a settlement like that, if it's in good faith.

JUSTICE KAGAN: Even though -- but what if it isn't in good faith? It's clear what's going on here is that they're splitting monopoly profits and the person who's going to be injured are all the consumers out there.

MR. WEINBERGER: Any -- any situation in which there's any -- in any patent dispute in which there's a tradeoff, like the examples I mentioned before, time for value, could -- that argument could be made. And, in fact, if that was true, if it was true that the natural inference and the motivations of the people were simply to divide these profits with no other consideration, then what you'd expect to see is that every single patent dispute, especially in Hatch-Waxman would result in a settlement that just pays the generic until the end of the patent, because after all, the market would be -­

JUSTICE KAGAN: Well, Mr. Weinberger, I think if we give you the rule that you're suggesting we give you, that is going to be the outcome, because this is going to be the incentive of both the generic and the brand name manufacturer in every single case is to split monopoly profits in this way to the detriment of all consumers.

MR. WEINBERGER: Let me address that, Your Honor. I don't think that's realistic at all, because -- and let's take this industry specifically. That the ability to challenge a patent in this industry is lower than any industry that I can think of, and that's because a generic is given the right to certify against the patent and then basically challenge the patent without having actually developed the product, gotten a marketing force, gotten a factory, putting the product on sale and taking the risk that everyone else who challenges a patent has to take. All they have to do is -- is file an NDA, which is roughly 300,000 to $1 million for these size drugs, that's not a lot, and certify it.

And the FTC's own studies have shown that it takes a very small chance of winning, something like 4 percent for a drug over $130 billion to justify a generic suing a brand name company. And what -- so what happens in these cases -­

JUSTICE SOTOMAYOR: Is that in all cases or just Hatch-Waxman cases?

MR. WEINBERGER: It's Hatch-Waxman cases. It's because of -­

JUSTICE SOTOMAYOR: Because it does skew the dynamics a lot.

MR. WEINBERGER: Yes.

JUSTICE SOTOMAYOR: You know, the Second Circuit recognized, even though it accepted your scope of the patent, that there was a troubling dynamic in what you're arguing, which is that the less sound the patent, the more you're going to hurt consumers, because those are the cases where the payoff, the sharing of profits is the greatest inducement for the patentholder.

MR. WEINBERGER: The Second Circuit recognized that, but then they said further -- upon further reflection, further consideration of this, we are not troubled by it. One of the reasons they were not troubled, it's what I was trying to answer Justice Kagan about, is because the reality of the situation is with so many potential challengers to the patent, all they have to do is file an NDA, there are 200 generic companies in this industry, that if you try to adopt that strategy of paying the profits of a generic, there's going to be a long line of -­

[...]

JUSTICE KAGAN: Well, I don't think that that's true, Mr. Weinberger, and it's because of something that Justice Scalia suggested, that there's a kind of glitch in Hatch-Waxman, and the glitch is that the 180 days goes to the first filer. And once the 180-day first filer is bought off, nobody else has the incentive to do this.

MR. WEINBERGER: That's clearly not correct either by logic or by reference to actual experience. It's true that the first filer is given a greater incentive, but these products can last for 20 or 25 years.

JUSTICE KAGAN: But the -- the huge percentage of the profits is done in the exclusivity period. I mean, it's true that it can go on for a long time, but you're making dribs and drabs of money for a long time. Where you're really making your money is in the 180 days.

MR. WEINBERGER: Experience doesn't show that, because if you look at Hatch-Waxman litigation, we've cited in -- in the red brief and it's been discussed by the antitrust economists and the Generic Pharmaceutical Association in their amicus brief, that many of these Hatch-Waxman cases involve multiple filers.

You have five, 10, as many as 16 companies challenging these patents, all of -- one of whom are not the first filer. So there -- there must be an incentive for them to do this, and -- and they are. So I think experience says that that kind of extreme view of incentives is not really true.

Justice Kennedy noted that the 180-day exclusivity period is "crucial," providing a "big advantage" and noted that Mr. Weinberger seemed to suggest that this wasn't so. Mr. Weinberger conceded that the 180-day exclusivity granted to the first generic was indeed a big advantage but notes that "after that, the market opens up."

Justice Breyer then provided a list of things that a judge could consider, essentially providing a structure for determining the legality of reverse payment settlement agreements and asked Mr. Weinberger what was wrong with such a structure that would "keep the kitchen sink out." Mr. Weinberger suggested that such a structure would result in unpredictability and that clearer guidance would be necessary.

Justice Scalia then asked whether it could not be figured out without assessing the strength of the patent. Mr. Weinberger agreed that the strength of the patent is highly important:

MR. WEINBERGER: I agree with that, Justice Scalia. I don't think that an alternative test -- the only alternative test that could be fashioned that would -- that would make sense is one based on strength of the patent. But there are so many reasons that that is an undesirable result that I -- I don't think it's the way this Court should go.

JUSTICE SOTOMAYOR: For whom? And -- and -­you know, the government is basically saying, we really don't want reverse payments, period. We want people to settle this the way they should settle it, which is on the strength of the patent. And that means settling it simply by either paying a royalty for use or settling as most cases do, on an early entry alone, so there's no sharing of -- of -- of profits. What's so bad about that? I mean, it doesn't deprive either side of the ability to finish the litigation if they want to.

MR. WEINBERGER: Let's say -- I wouldn't concede that most cases settle like that. But let's -­ let's accept that and take the case of a -- of a strong patent or a patent with a long term. Let's say it has -- you evaluate the strength of the patent and you conclude that it has 10 or 15 good years remaining.

Now, you have a generic who is -- or many generics who have sued with no risk or minimal risk in Hatch-Waxman, and their response is, why would I -- why would I drop this lawsuit to get an entry date in 2025 or 2028? That doesn't meet my business needs, I have shareholders, I have investors, I have to run a business, and I'm going to keep on litigating unless you give me something of value. So that's what these agreements are about. They're saying, well, what other -- remember, this is not just a cash payment. There are all -­

JUSTICE SOTOMAYOR: Well, in the normal course, if the patent's really strong, if you get a year or two earlier entry, that has an inherent value, and that's what you'll pay for is what the government is saying. That will be the determination the two parties will make, which is at what point is earlier entry worth it [. . .] for the very strong patentholder.

[. . .]

JUSTICE SOTOMAYOR: Well, we do know that these reverse payments, except for recent times when people figured out they were so valuable, were the exception, not the rule.

MR. WEINBERGER: Actually, we have ten years of experience since the circuit courts first began applying scope-of-the-patent tests to these settlements since 2003. So we have a pretty good window as to what would happen.

JUSTICE SOTOMAYOR: They have been increasing in number, not decreasing.

MR. WEINBERGER: No, I think they have been actually very steady. They are roughly between 25 and 30 percent, pretty much constant and you don't really see any huge blips depending on what a particular court is ruling.

If the FTC's kind of the-sky-is-going-to-fall approach is right, that everybody's going to run out and do this, you would have
thought that after the first Eleventh Circuit ruling, after the Federal Circuit ruling, after the Second Circuit ruling, after second Eleventh Circuit ruling, that there would be huge increases in this, but we haven't seen that.

Some of the numbers increased last year, but as a percentage of the total settlements they are very steady. They are pretty much the same.

JUSTICE GINSBURG: What about the consideration that seems to be driving the government? That is, the generic is getting an offer that they would never get on the street. I mean, they have been paid much more than they would get if they won the patent infringement suit. If they won the patent infringement suit then they can sell their generic in competition with the brand, but under this agreement they get more than they would get by winning the lawsuit.

MR. WEINBERGER: Justice Ginsburg, first of all, every settlement agreement involving one of these cases must be filed with the FTC. They have hundreds of them. And they haven't pointed to a single example where that's the case.

[. . .]

JUSTICE KENNEDY: Well, suppose -- suppose that hypothetical is correct. That was my concerns, too. What the brand company can lose is much greater than what the generic can make. So why don't you just put a cap on what the generic can make and then we won't have a real concern with the restraint of trade, or we'll have a lesser concern. I think that's the thrust of Justice Ginsburg's question and it's my concern as well.

MR. WEINBERGER: Yes, and I want to make clear that I don't think that could happen, because if a brand name company adopted that as a strategy to protect its patent, it would --it would be held up. It would be held up by the many generic companies that could easily challenge these patents without actually having a manufactured product, without putting it on sale, etcetera.

So I think that the antitrust rule should not be fashioned to deal with a case on the extreme, which hasn't been shown to happen, which logically from an economic point of view is highly unlikely to happen. And if for some reason that starts happening empirically, then Congress -- and it is a loophole in Hatch-Waxman that is causing that, and there is really no evidence that that extreme example has happened -­then Congress can deal with it, just as it dealt with the exclusivity provision.

JUSTICE GINSBURG: I thought the government was telling us that that's this case, that the -- what the generic is being offered in the way of sharing the monopoly profits is more than it could ever make if it wanted to and sold its drug.

MR. WEINBERGER: Well, I don't see any examples of that cited in their brief. It's a theory, it's a hypothetical theory, but there is no data. We have had years of experience with this case.

JUSTICE KENNEDY: Well, but it's not hypothetical that if the generic wins everybody -- the brand companies profits are going to go way, way down right away and generic profits are not going to be that great.

­

Mr. Weinberger and Justice Sotomayor then had an exchange over the purpose of Hatch-Waxman:

JUSTICE SOTOMAYOR: I see that as an argument that there is an economic reality in Hatch-Waxman that would require us not to apply any rule we choose or accept here to other situations; only here. That's the argument that you're creating for me, that there's a different economic reality here that requires a different rule.

MR. WEINBERGER: Justice Sotomayor, I think the economic reality cuts the other way. It doesn't cut in favor of making a rule that makes these more difficult. What I'm saying is that -­

JUSTICE SOTOMAYOR: Oh, but it does, because in Hatch-Waxman Congress decided that there was a benefit for generics entering without suffering a potential loss to enter the market more quickly.

MR. WEINBERGER: Justice Sotomayor, I don't think the legislation -­

JUSTICE SOTOMAYOR: And any settlement in these cases deprives consumers of the potential of having the benefit of an earlier entry.

MR. WEINBERGER: I don't think there is anything in Hatch-Waxman that supports the idea that the
purpose was to provide for generic entry prior to patent expiration. What the structure is designed to do is encourage challenges -­

JUSTICE SOTOMAYOR: Exactly, and what you are doing with permitting settlements of this kind is not permitting the process to go to conclusion.

MR. WEINBERGER: I don't think there is anything in Hatch-Waxman that suggests in any way that settlements or -- should be discouraged or that cases should be mandated to proceed to judgment or that all have to be litigated.

JUSTICE SOTOMAYOR: It's encouraging infringement suits.

MR. WEINBERGER: It's encouraging challenges and it has produced many challenges. And can I say that with 10 years of the application of the scope-of-the-patent rule, there is no particular problem with Hatch-Waxman. It's working very well. The amount -- the number of drugs that have now gone generic from just 10 years ago to today has increased enormously

Justice Kennedy noted that often arguments are made regarding the costs to develop a new drug. He questioned whether there was anything in the record regarding the specific development costs of the drug at issue:

JUSTICE KENNEDY: I think it's correct that to develop a new drug sometimes you need not just scientists and attorneys, you need investment bankers. And you then need marketers, because the cost of these drugs can be hundreds of millions. Is there anything in the record that shows the development cost of this drug?

MR. WEINBERGER: This particular drug, I don't know. I mean, there are lots of studies of how much average drugs cost, and that figure is over a billion dollars.

JUSTICE KENNEDY: It can be a billion.

MR. WEINBERGER: Easily a billion dollars.

JUSTICE KENNEDY: Anything in this case?

MR. WEINBERGER: This particular drug -­

JUSTICE KENNEDY: Anything in the record?

MR. WEINBERGER: No, because we are on a 12(b)(6) motion on a motion to dismiss, so none of that was ever developed, but -­ [. . .] of course, any given drug development cost doesn't even begin to tell the picture, because for every drug that succeeds, there are at least 10 that fail, and all the costs that are involved in the drugs that fail have to be covered with the one drug that succeeds.

Rebuttal by the Federal Trade Commission/DOJ
During rebuttal, Mr. Stewart noted that "perhaps the most fundamental principle of antitrust law that particular conduct can be legal or illegal, depending on the deliberative process that led up to it." He noted that it would not be anomalous to find reverse payment agreements anticompetitive.

Mr. Stewart also challenged Mr. Weinberger's assertion that there are instances where successive filers will attempt to challenge the branded firm after the first filer was bought off. He said that it may happen occasionally, but even then, "the fact that particular anticompetitive conduct doesn't always work doesn't make it lawful.

Responding to a question from Justice Kagan, Mr. Stewart noted that the "great majority" of profits comes from the 180-day exclusivity period where the generic generally charges 80-85% of what the branded price is during this period. .

Supreme Court Orders in Other Intellectual Property Cases
In addition to the oral arguments held this morning, the Supreme Court also released its list of orders as it does every Monday. This morning, several intellectual property cases were disposed of. Two cases involving parallel importation were granted, vacated and remanded (GVR) to the Second Circuit to be re-decided in light of the Supreme Court's recently released opinion in Kirtsaeng v. John Wiley & Sons. The Court denied certiorari in the Ninestar case, which involved a dispute over whether patent exhaustion applies to foreign made patented goods.