Kevin McDonald and Larry Rosenberg of Jones Day contributed this guest post, for which we thank them. As always, since it’s a guest post, blame them, not us! (Yeah, yeah — they get the credit, too.) The views expressed in this post, as you would expect, reflect only the views of the authors, and not necessarily the views of their clients or firm:

On October 15, 2008, the Federal Circuit joined the growing list of federal courts to hold that the use of cash payments to settle Hatch-Waxman patent litigation does not violate the antitrust laws as long as (1) the settlement excludes no more competition than would the patent itself and (2) the claim for patent infringement and/or validity is not a “sham,” that is, not “objectively baseless.” In In re Ciprofloxacin Hydrochloride Antitrust Litigation, No. 08-1097, 2008 WL 4570669 (Fed. Cir. Oct. 15, 2008), a unanimous panel of the United States Court of Appeals for the Federal Circuit affirmed the summary judgment granted to Bayer by the United States District Court for the Eastern District of New York, holding that Bayer’s settlement of patent litigation with a generic pharmaceutical manufacturer did not violate the antitrust laws.

The Federal Circuit’s decision is another defeat for those in the FTC and plaintiffs’ bar who have attacked patent settlements in cases brought under the Hatch-Waxman Act that contain so-called “reverse payments,” that is, payments made by the patent holder to the generic challenger. The Federal Circuit now joins the Second and Eleventh Circuits, as well as other notables such as Judge Richard Posner, in emphatically rejecting the plaintiffs’ theories that such settlements are anticompetitive.

These cases arise, in the words of the In re Ciprofloxacin District Judge, as a “natural byproduct” of the FDA’s Hatch-Waxman procedures, which govern FDA approval of generic versions of branded drugs. In this case, Barr Laboratories sought permission to market a generic version of Cipro before the expiration of Bayer’s patent on Cipro’s active ingredient. To get around the patent listed for Cipro, Barr certified that Bayer’s patent was invalid. Bayer then filed a patent infringement suit against Barr, which by statute stayed the FDA approval of Barr’s generic drug for 30 months. The parties later settled the patent suit. Bayer made cash payments to Barr and granted it a license to enter the market with a generic version six months before the patent expired, while Barr dropped its challenge to the validity of Bayer’s patent.

After the settlement with Barr, Bayer had the Cipro patent successfully reexamined by the PTO, and then litigated the validity of the patent against three other generic challengers, winning each time. Nonetheless, private plaintiffs later brought over 40 separate class action complaints against Bayer and Barr, asserting that the use of “reverse payments” from patent holder to challenger in the settlement was illegal under the antitrust laws. Based on two early enforcement actions by the FTC, similar cases were brought against other Hatch-Waxman litigants around the country.

In March 2005, Judge David Trager ruled that the settlement did not violate the antitrust laws because the settlement excluded no competition beyond the exclusionary scope of the patent. See In re Ciprofloxacin Hydrochloride Antitrust Litig., 363 F. Supp. 2d 514 (E.D.N.Y. 2005). As to reverse payments, Judge Trager pointed out that the Hatch-Waxman procedures create a scenario in which the generic challenger can potentially invalidate a valuable patent without even entering the market. The generic thus has everything to gain (free entry) and the patent holder everything to lose (the patent). As a result, the consideration required to settle such a case, whether in the form of cash, a license, or something else, necessarily flows from the patent holder to the generic challenger. The real question for antitrust purposes is whether the settlement keeps out any lawful (that is, non-infringing) competition. Because the antitrust laws do not protect competition that infringes a patent, the court concluded that the settlement of a patent claim brought in good faith (i.e., not a “sham”) that is no broader than the exclusionary scope of the patent itself cannot harm competition.

The Federal Circuit affirmed in all respects. Judge Prost wrote for the panel that, whether a patent settlement is analyzed under the antitrust laws or the patent laws, the same principle guides the inquiry: In the absence of evidence of fraud before the PTO or sham litigation, the question is “whether the agreements restrict competition beyond the exclusionary zone of the patent.” 2008 WL 4570669, at *9. The court held that because any anticompetitive effects of the settlement agreement were within the scope of the Cipro patent, the agreements could not violate the antitrust laws. The court also rejected plaintiffs’ argument that other generic challenges had been precluded by the settlement from entering the market, noting that the Cipro patent had been subsequently challenged multiple times and held to be valid by district courts and the Federal Circuit.

The FTC has taken the position that all of the court decisions ruling in favor of antitrust defendants on this issue are wrong, and has sought Congressional legislation to overturn them. The plaintiffs in In re Ciprofloxacin may ask the Supreme Court to review the case, although the Court has denied certiorari in all four of the federal appellate cases previously decided on this issue. In one of those cases, Schering-Plough Corp. v. FTC, 402 F.3d 1056 (11th Cir. 2005), the FTC filed its own cert. petition after losing in the 11th Circuit, whereupon the Solicitor General and the DOJ, when asked by the Supreme Court for their views, opposed the FTC’s petition.