in the supreme court of the united states · modernization act of 2003: overview of agreements...

No. 12-416

IN THE

Supreme Court of the United States

FEDERAL TRADE COMMISSION,Petitioner,

—v.—

ACTAVIS, INC., ET AL.,Respondents.

ON WRIT OF CERTIORARI TO THE UNITED STATESCOURT OF APPEALS FOR THE ELEVENTH CIRCUIT

BRIEF OF ANTITRUST ECONOMISTS

AS AMICI CURIAE IN SUPPORT OF RESPONDENTS

d

LESLIE E. JOHN

JASON A. LECKERMAN

BALLARD SPAHR LLP1735 Market StreetPhiladelphia, Pennsylvania 19103(215) 864-8500

WILLIAM F. CAVANAUGH

Counsel of Record

SCOTT B. HOWARD

VIVIAN R.M. STORM

PATTERSON BELKNAP WEBB

& TYLER LLP1133 Avenue of the AmericasNew York, New York 10036(212) [email protected]

February 28, 2013

Attorneys for Amici Curiae Antitrust Economists

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TABLE OF CONTENTS

Page

INTEREST OF THE AMICI CURIAE .................... 1

SUMMARY OF ARGUMENT.................................. 1

ARGUMENT ............................................................ 5

A. Pharmaceutical Innovation DrivesConsumer Well-Being.................................... 5

B. The Hatch-Waxman Act CarefullyBalances Access to Generic Drugsand Innovation............................................... 9

1. Quantifying the Impact of Hatch-Waxman on Access to Generics ............. 11

2. The Use of Reverse Payments inthe Context of theHatch-Waxman Act................................ 14

C. Settlements with Reverse PaymentsOccur for Reasons Other than Delay andAre Not Presumptively Anticompetitive .... 19

D. Petitioner's Data Are Insufficient toJustify Adopting a PresumptiveIllegality Standard ...................................... 22

1. Petitioner's Overly BroadDefinition of Reverse PaymentSettlements Taints Its EconomicAnalysis .................................................. 22

2. Petitioner's Calculation of GenericLitigation Victories Is Not aMeaningful Figure.................................. 26

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TABLE OF CONTENTS(Continued)

Page

3. Petitioner's Calculation of theCosts Associated with ReversePayment Settlements Is Not aReliable Measure of Harmto Consumers.......................................... 28

CONCLUSION ....................................................... 36

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TABLE OF AUTHORITIES

Page(s)CASES

AbbVie Inc. v. Watson Labs. Inc.,No. 12-cv-324 (D. Del.) ...................................... 16

Avanir Pharm. Inc. v. Actavis South Atl. LLC,No. 11-cv-704 (D. Del.) ...................................... 16

Dey Pharma, LP v. Sunovion Pharms., Inc.,677 F.3d 1158 (Fed. Cir. 2012) ......................... 15

Eli Lilly & Co. v. Wockhardt Ltd.,No. 08-cv-1547 (S.D. Ind.)................................. 16

In re Gabapentin Patent Litig.,214 F.R.D. 178 (D.N.J. 2003)............................ 16

In re Rosuvastatin Calcium Patent Litig.,2008 WL 5046424 (D. Del. Nov. 24, 2008) ....... 16

Pfizer Inc. v. Apotex Inc.,No. 12-cv-808 (D. Del.) ...................................... 16

Pfizer, Inc. v. Teva Pharms. U.S.A., Inc.,882 F. Supp. 2d 643 (D. Del. 2012)................... 16

SmithKline Beecham Corp. v. Geneva Pharm.,Inc., 2001 WL 1249694(E.D. Pa. Sept. 26, 2001)................................... 16

Valley Drug Co. v. Geneva Pharms., Inc.,344 F.3d 1294 (11th Cir. 2003)......................... 34

STATUTES AND AMENDMENTS

21 U.S.C. § 355 ................................................. 10, 12

35 U.S.C. § 156 ....................................................... 11

35 U.S.C. § 271(e) ............................................. 10, 12

iv

TABLE OF AUTHORITIES(Continued)

Page(s)STATUTES AND AMENDMENTS (CON.)

Drug Price Competition and Patent TermRestoration Act of 1984, Pub. L. No. 98-417,98 Stat. 1585 (1984) (the "Hatch-WaxmanAct") ............................................................passim

Medicare Prescription Drug, Improvement,and Modernization Act of 2003, Pub. L. No.108-173, 117 Stat. 2066 ("MMA")..................... 15

Patient Protection and Affordable Care Act,Pub. L. 111-148, 124 Stat. 119 (2010) .............. 14

REGULATORY AND ADMINISTRATIVE

Requirements for Submission of In VivoBioequivalence Data; Proposed Rule, 68Fed. Reg. 61,640, 61,645 (Oct. 29, 2003)............ 7

Dep't Health & Human Servs., Office of theInspector General, Concerns with Rebatesin the Medicare Part D Program (March2011) .................................................................. 31

FDA, Guidance for Industry: 180-DayExclusivity When Multiple ANDAs AreSubmitted on the Same Day,http://www.fda.gov/downloads/Drugs/GuidanceComplianceRegulatoryInformation/Guidances/UCM072851.pdf........................... 13

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Page(s)REGULATORY AND ADMINISTRATIVE (CON.)

FTC:

Agreements Filed with the Federal TradeCommission under the MedicarePrescription Drug, Improvement, andModernization Act of 2003: Overview ofAgreements Filed in FY 2012 A Report bythe Bureau of Competition,http://www.ftc.gov/os/2013/01/130117mmareport.pdf................... 18, 23

Agreements Filed with the FTC (2006),http://www.ftc.gov/reports/mmact/MMAreport2006.pdf ................ 24

Agreements Filed with the FTC(2009),http://www.ftc.gov/reports/mmact/MMAreport2009.pdf............................................. 23

Generic Drug Entry Prior to PatentExpiration (July 2002),http://www.ftc.gov/os/2002/07/genericdrugstudy.pdf ............................. 11-12, 17

Pay-for-Delay: How Drug Company Pay-OffsCost Consumers Billions (2010),http://www.ftc.gov/os/2010/01/100112payfordelayrpt.pdf ........................................... 28, 29, 32

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Page(s)OTHER AUTHORITIES

Adam Greene & D. Dewey Steadman,Pharmaceuticals: Analyzing LitigationSuccess Rates, RBC Capital Markets, (Jan.15, 2010) http://www.aipla.org/committees/committee_pages/FDA/Committee%20Documents/Meeting%20Materials/2010%20Spring%20Meeting/AnalyzingLitigationSuccessRates.pdf.............. 27

Bret Dickey, Jonathan Orszag &Laura Tyson, An Economic Assessment ofPatent Settlements in thePharmaceutical Industry,19 Annals Health L. 368 (2010) ........... 20, 31, 35

Bret Dickey, Jonathan Orszag & RobertWillig, A Preliminary Economic Analysis ofthe Budgetary Effects of ProposedRestrictions on "Reverse Payment"Settlements (Aug. 10, 2010),http://www.compasslexecon.com/highlights/Documents/Dickey%20Orszag%20Willig%20CBO.pdf .......................................... 30

C. Scott Hemphill & Bhaven N. Sampat,Evergreening, Patent Challenges, andEffective Market Life in Pharmaceuticals,31 J. Health Econ. 327 (2012) .............. 13, 17, 27

C. Scott Hemphill & Bhaven N. Sampat, WhenDo Generics Challenge Drug Patents, 8 J.Empirical Legal Stud. 613 (2011)......... 13, 17, 20

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Page(s)OTHER AUTHORITIES (CON.)

David C. Grabowski, et al., The Large SocialValue Resulting From Use Of StatinsWarrants Steps To Improve Adherence AndBroaden Treatment 31 Health Aff. 2276(2012)................................................................... 6

Ernst R. Berndt, et al., Do Authorized GenericDrugs Deter Paragraph IV Certifications?Recent Evidence (Working Paper, at12–13, Apr. 2007),http://www.analysisgroup.com/ .................. 15, 16

Ernst R. Berndt & Murray L. Aitken, BrandLoyalty, Generic Entry and PriceCompetition in Pharmaceuticals in theQuarter Century after the 1984 Waxman-Hatch Legislation, 18 Int'l J. Econ.Bus. 177 (2011).................................................. 11

Ernst R. Berndt, Pharmaceuticals in U.S.Health Care: Determinants of Quantity andPrice, 16 J. Econ. Persp. No. 4, 45 (2002) ........ 11

Frank H. Easterbrook, Ignorance andAntitrust, in Antitrust, Innovation andCompetitiveness 119 (Thomas M. Jorde &David J. Teece eds., 1992) ................................ 19

Frank R. Lichtenberg, Are the Benefits ofNewer Drugs Worth Their Cost? Evidencefrom the 1996 MEPS, 20 Health Aff. 241(Sept./Oct. 2001).................................................. 7

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Frank R. Lichtenberg, The Impact of NewDrugs on US Longevity and MedicalExpenditure, 1990-2003: Evidence fromLongitudinal, Disease-Level Data, 97 Am.Econ. Rev. 438 (May 2007) ................................. 5

Frank R. Lichtenberg, Sources of the U.S.Longevity Increase, 1960-2001, 44 Q. Rev.Econ. & Fin. 369 (2004) .................................. 5, 6

Gregory K. Leonard & Rika Onishi Mortimer,Antitrust Implications of PharmaceuticalPatent Litigation Settlements, in EconomicApproaches to Intellectual Property Policy,Litigation and Management 251 (NERAEcon. Consulting 2005)............................... 20, 31

Henry A. Waxman, Speech: Rep. WaxmanDelivered a Speech to the GenericPharmaceutical Association (Jan. 28, 2003),available at http://waxman.house.gov/speech-rep-waxman-delivered-speech-generic-pharmaceutical-association................. 10

Henry G. Grabowski & Margaret Kyle, GenericCompetition and Market ExclusivityPeriods in Pharmaceuticals, 28 Managerial& Decision Econ. 491 (2007)....................... 13, 16

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Henry Grabowski, Tracy Lewis, Rahul Guha,Zoya Ivanova, Maria Salgado & SallyWoodhouse, Does Generic Entry AlwaysIncrease Consumer Welfare?, 36th Ann.Proc. Fordham Competition L. Inst.,Ch. 12 (2010) ..................................................... 31

Henry G. Grabowski, et al., Evolving Brand-Name and Generic Drug Competition MayWarrant a Revision of the Hatch-WaxmanAct, 30 Health Affairs 2157, 2157–2166(2011)................................................................. 17

IMS Institute for Healthcare Informatics, TheUse of Medicines in the United States:Review of 2010 (Apr. 2011),http://www.imshealth.com/ims/Global/Content/Insights/IMS%20Institute%20for%20Healthcare%20Informatics/IHII_Medicines_in_U.S_Report_2011.pdf.............................. 12

James W. Hughes, Michael J. Moore &Edward A. Snyder, NapsterizingPharmaceuticals: Access, Innovation, andWelfare (Working Paper, Jan. 2011) .................. 9

Joseph A. DiMasi & Henry G. Grabowski, TheCosts of Biopharmaceutical R&D: IsBiotech Different? 28 Managerial &Decision Econ. 469 (2007)................................... 7

Kaiser Family Foundation, Prescription DrugTrends (May 2010), http://www.kff.org/rxdrugs/upload/3057-08.pdf.............................. 14

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Kelly Smith & Jonathan Gleklen, GenericDrugmakers Will Challenge Patents EvenWhen They Have a 97% Chance of Losing:The FTC Report that K-Dur Ignored, CPIAntitrust Chron. (Sept. 2012 (2)) ..................... 13

Kevin M. Murphy & Robert H. Topel, TheValue of Health and Longevity, 114 J. Pol.Econ. 871 (2006).................................................. 7

Kyle Musgrove & Richard Ripley, ReversePayment Settlements: Presumptively Bad orUsually Acceptable, CPI Antitrust Chron.(June 2012 (2)) .................................................. 31

Laura E. Panattoni, The Effect of ParagraphIV Decisions and Generic Entry beforePatent Expiration on BrandPharmaceutical Firms, 30 J. Health Econ.126 (2011) ..................................................... 27-28

Marc G. Schildkraut, Patent-SplittingSettlements and Reverse Payment Fallacy,71 Antitrust L.J. 1033 (2003-04) ...................... 25

Mark A. Lemley, Industry-Specific AntitrustPolicy for Innovation, 2011 Colum. Bus. L.Rev. 637 (2011)............................................ 5, 7, 8

Martin A. Voet, The Generic Challenge:Understanding Patents, FDA andPharmaceutical Life-Cycle Management(2005)................................................................. 13

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Martin S. Lipsky & Lisa K. Sharp, From Ideato Market: The Drug Approval Process, 14J. Am. Board Fam. Med. 362 (2001)................... 8

Pierre-Yves Crémieux, et al., PharmaceuticalSpending and Health Outcomes in theUnited States, in Investing in Health: TheSocial and Economic Benefits of HealthCare Innovation, 59 (I. Farquar, K.Summers & A. Sorkin eds., 2001) ...................... 6

Protecting Consumer Access to Generic DrugsAct of 2009: Hearing on H.R. 1706 BeforeHouse Subcomm. on Commerce, Trade andConsumer Prot., 111th Cong. 25 (Mar. 31,2009) (prepared statement of C. ScottHemphill, Assoc. Prof. of Law, ColumbiaUniv.) ................................................................. 24

Richard G. Frank, The Ongoing Regulation ofGeneric Drugs, 357 New Eng. J. Med. 1993(2007)........................................................... 11, 12

Robert D. Willig & John P. Bigelow, AntitrustPolicy Toward Agreements That SettlePatent Litigation, Antitrust Bull., 655–698(Fall 2004) ................................................... 20, 31

Stephanie Greene, A Prescription for Change:How the Medicare Act Revises Hatch-Waxman to Speed Market Entry of GenericDrugs, 30 J. Corp. L. 309 (2005)................. 12, 15

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Stephen P. Swinton & Adam A. Welland,Patent Injunction Reform and theOverlooked Problem of 'False Positives'70Pat., Trademark & Copyright J. 337 (July2005). ........................................................... 28, 33

Tomas Philipson & Anupam B. Jena, WhoBenefits from New Medical Technologies?Estimates of Consumer and ProducerSurpluses for HIV/AIDS Drugs (Nat'lBureau Econ. Research, Working Paper No.11810, 2005) ........................................................ 6

William D. Nordhaus, Irving Fisher and theContribution of Improved Longevity toLiving Standards, 64 Am. J. Econ. & Soc.367 (Jan. 2005).................................................... 7

William M. Landes, An Economic Analysis ofthe Courts, 14 J.L. & Econ. 61 (Apr. 1971) ...... 35

1

INTEREST OF THE AMICI CURIAEAmici curiae are economists who teach at leading

colleges and universities throughout the UnitedStates and consultants who specialize in theeconomics of the pharmaceutical industry. (A list ofthe amici curiae is attached as Appendix A.) Amicihave written extensively in the field of economics,including industrial organization, competition, andantitrust economics and policy. They write to bringto the Court's attention economic analysis relevant todetermining the appropriate antitrust standard forevaluating patent dispute settlement agreements inwhich a pharmaceutical patent owner makes apayment to a potential generic competitor.

Amici believe that the available economicevidence does not adequately support Petitioner'scontention that "reverse payment" settlementagreements must be presumptively illegal, and thatPetitioner's approach threatens to disrupt acompetitive market that serves both consumers'short and long term interests. For these reasons,amici believe that this Court should rejectPetitioner's request to treat "reverse payment"settlements as presumptively illegal.1

SUMMARY OF ARGUMENTCiting harm to consumer welfare, Petitioner

contends that this Court should adopt a standard bywhich "reverse payment" patent settlements will be

1 The parties have consented to the filing of this brief.

Amici and their counsel have authored the entirety of this brief,and no person or entity has made a monetary contribution to itspreparation or submission.

2

presumptively unlawful, notwithstanding whetherthe patent holder had a good faith basis to petition acourt to protect its presumptively lawful patentexclusivity rights and subsequently entered into anarm's length settlement with the challenger.Economic evidence does not support this Court'sadoption of the approach Petitioner proposes.

Ample economic evidence documents thatpharmaceutical innovation produces significantconsumer benefits. Pharmaceutical innovationprovides major improvements in the standard ofliving, and acts as an important driver of economicgrowth. The patent system provides economicincentives that reward the high-risk, capital-intensive investments necessary to produceinnovations in this market. Through existingregulations, policymakers have addressed the need toencourage and protect innovation and the dynamicefficiencies it produces while simultaneouslypromoting utilization of generic drugs and the staticefficiencies they produce.

For example, the Hatch-Waxman Act reflectsCongress's effort to balance incentives forresearching and developing new pharmaceuticalproducts with consumers' interest in accessing theexisting stock of drugs. It provides additionalprotections for drug patents, while providingincentives for generic companies to challenge brandpatents. Contrary to Petitioner's contention, reversepayments have not altered the balance policymakerssought to achieve. Generic drug utilization—drivenin part by challenges to pharmaceutical patents andsettlements resolving those challenges—is at ahistorically high level. Moreover, reverse paymentsettlements account for only a fraction of all

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pharmaceutical patent settlements and typicallyallow for generic entry many years prior to patentexpiration. Reverse payments have not led to anincrease in the length of market exclusivity forbrand-name drugs, as would be expected if suchsettlements altered the balance between dynamicand static efficiencies. Thus, Petitioner's suggestionthat the Hatch-Waxman Act and current marketdynamics are not sufficiently promoting genericutilization does not withstand scrutiny.

Reverse payments in patent settlements can occurfor a variety of reasons having nothing to do withpayment for delaying entry. For example, reversepayments may be necessary for the parties to reach asettlement in cases where a generic company's highdiscount rate makes it unwilling to settle with a longwait until entry. They may also be necessary forbrand companies to overcome bargainingdisadvantages caused by risk aversion. Brandcompanies are likely to be more risk averse thantheir generic challengers because they usually havesignificantly more to lose from a negative trialoutcome. In contrast, generic companies aregenerally not at risk for damages and risk onlylitigation costs. A settlement with a reverse paymenttherefore cannot necessarily be replaced with adifferent settlement enabling earlier generic entry asopposed to continuing litigation.

The data and analysis on which Petitioner reliesto show that reverse payment settlements harmconsumers do not provide support for a standard ofpresumptive illegality. Petitioner's failure to identifya defensible definition of "reverse payment"settlements undermines its analysis. For thepurposes of its economic analysis, Petitioner defines

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a "reverse payment" settlement as any settlementthat involves a component other than a negotiatedentry date. This definition sweeps in manyagreements that do not have any net payment from apatent holder to a generic challenger. Moreover,because settlements that actually involve netpayments from the brand to the generic are noteconomically different from many patent settlementsseen outside the pharmaceutical industry, applying apresumptive illegality standard to even thisnarrower universe of settlements could have farreaching effects well beyond pharmaceutical industrypatent cases.

Petitioner's analyses of (1) the percentage ofpatent cases that generics won, and (2) the exclusionperiod associated with "reverse payment" patentsettlements are inaccurate and misleading. Forexample, contrary to Petitioner's assumption, theoutcome of litigation is not sufficiently predictablethat the presence of a reverse paymentpresumptively demonstrates harm. Neithereconomists nor litigants possess such predictivepowers, and certainly not to a degree that wouldjustify imposing added costs on litigants and shiftingthe current balance between dynamic and staticefficiencies.

Petitioner's economic evidence does not supportits contention that this Court's adoption of astandard by which "reverse payment" patentsettlements will be presumptively unlawful wouldbenefit consumer welfare. In fact, the economicevidence weighs against the adoption of such astandard.

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ARGUMENTA. Pharmaceutical Innovation Drives

Consumer Well-Being

Consumers benefit both from efforts to developnew products—dynamic efficiency—and fromimproved access to lower priced versions of existingproducts—static efficiency.2 Dynamic efficienciesattributable to innovation in health andpharmaceuticals are a major cause of improvedstandards of living over the last century. See MarkA. Lemley, Industry-Specific Antitrust Policy forInnovation, 2011 Colum. Bus. L. Rev. 637, 638–39(2011) [Lemley, Antitrust Policy for Innovation]("Think for a moment about whether static ordynamic efficiency is a more important driver of oureconomy, and the answer will be obvious. We benefitfrom market competition between existing products,but we benefit far more from the development of newproducts.") Economic analysis shows that innovativepharmaceuticals have been responsible for much ofthe increase in U.S. life expectancy3 and thereduction in infant mortality over the past decades.4

2 Static efficiency concerns the optimal use of current

resources (e.g., drugs already developed) to maximize short-runwelfare, while dynamic efficiency balances static efficiency withincentives to develop new resources (e.g., new drugdevelopment) over the long run.

3 See Frank R. Lichtenberg, Sources of the U.S. Longevity

Increase, 1960-2001, 44 Q. Rev. Econ. & Fin. 369, 369 (2004);Frank R. Lichtenberg, The Impact of New Drugs on USLongevity and Medical Expenditure, 1990-2003: Evidence fromLongitudinal, Disease-Level Data, 97 Am. Econ. Rev. 438, 442(May 2007).

4 Pierre-Yves Crémieux, et al., Pharmaceutical Spending

and Health Outcomes in the United States, in Investing in

6

Economic studies of particular drug classesindicate that societal returns to pharmaceuticaldevelopment are large. For example, a study ofHIV/AIDS drugs showed that every dollar spentpaying for such drugs benefited society byapproximately $19 dollars. Tomas Philipson &Anupam B. Jena, Who Benefits from New MedicalTechnologies? Estimates of Consumer and ProducerSurpluses for HIV/AIDS Drugs (Nat'l Bureau Econ.Research, Working Paper No. 11810 at 3–4, 2005)(published in Forum for Health Economics andPolicy: Biomedical Research and the Economy(2005)). Another study of statins found that thebenefits of statin use in terms of reducedhospitalizations and increased life expectancy werefour times the costs. See David C. Grabowski, et al.,The Large Social Value Resulting From Use OfStatins Warrants Steps To Improve Adherence AndBroaden Treatment, 31 Health Aff. 2276, 2280(2012).

Pharmaceutical research has also been found tobe more effective in delivering benefits to consumersthan other medical expenditures. For example, onestudy's results indicate that, while approximately$9,640 in medical expenditures is required to gainone life-year, only $926 in pharmaceutical researchand development is needed to yield the same benefit.Frank Lichtenberg, Sources of the U.S. LongevityIncrease, 1960–2001, 44 Q. Rev. Econ. & Fin. 369,369 (2004). Results from another study also showthat substituting new drugs for older drugs leads tosignificant improvements in patient health. Frank

Health: The Social and Economic Benefits of Health CareInnovation 59, 68 (I. Farquar, K. Summers & A. Sorkin eds.,2001)

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R. Lichtenberg, Are the Benefits of Newer DrugsWorth Their Cost? Evidence from the 1996 MEPS, 20Health Aff. 241, 241–245 (Sept./Oct. 2001).

Economic research has found that increased lifeexpectancy and health have produced gains inAmericans' well-being as important as those fromincreases in material abundance. See Kevin M.Murphy & Robert H. Topel, The Value of Health andLongevity, 114 J. Pol. Econ. 871, 872, 902 (2006);William D. Nordhaus, Irving Fisher and theContribution of Improved Longevity to LivingStandards, 64 Am. J. Econ. & Soc. 367, 367–68, 382-90 (Jan. 2005). An economic study found that theincrease in life expectancy over the past century hasprovided a representative American the equivalent ofover $1.2 million in value. Murphy & Topel, TheValue of Health and Longevity, 114 J. Pol. Econ. at871-72.

The average cost to develop and bring to market asingle FDA-approved prescription drug (includingthe cost of development failures) was estimated atover $1.3 billion in 2007. See Joseph A. DiMasi &Henry G. Grabowski, The Costs of BiopharmaceuticalR&D: Is Biotech Different?, 28 Managerial &Decision Econ. 469, 469 (2007). By contrast, FDAestimates that it costs a generic firm between$300,000 and one million dollars to prepare andsubmit an abbreviated new drug application("ANDA"). Requirements for Submission of In VivoBioequivalence Data; Proposed Rule, 68 Fed. Reg.61,640, 61,645 (Oct. 29, 2003). Even amici writing insupport of Petitioner have recognized thesedisparities. See Lemley, Antitrust Policy forInnovation, 2011 Colum. Bus. L. Rev. at 641–43("Pharmaceutical innovation is notoriously expensive

8

and time-consuming. . . . Although imitation of adrug is reasonably costly in absolute terms, a genericmanufacturer that can prove bioequivalency canavoid almost all of the R&D cost and can get FDAapproval much more quickly than the originalmanufacturer.").

The economic risks associated withpharmaceutical research and development are widelyrecognized. FDA ultimately approves for sale as fewas one in ten thousand compounds that enterpreclinical testing.5 Patent protection allows brandcompanies to recoup these high-risk investments andthereby provides incentives to make such largeinvestments. See Lemley, Antitrust Policy forInnovation, 2011 Colum. Bus. L. Rev. at 643 ("[I]t islikely that innovation would drop substantially inthe pharmaceutical industry in the absence ofeffective patent protection. Indeed, a wealth ofempirical evidence finds that patents are extremelyimportant to innovation in pharmaceuticals.").

If patent protection were removed or lessened, orif settlement restrictions reduced patent value,decreases in dynamic efficiency (innovation) wouldlikely more than offset the supposed short-term gainsfrom access to generic drugs on which Petitionerfocuses. Indeed, one economic study analyzed theeffects of eliminating drug patents and found thatthe reduced flow of new therapies would causeconsumer losses three times the short-term gains

5 Martin S. Lipsky, & Lisa K. Sharp, From Idea to Market:

The Drug Approval Process, 14 J. Am. Board Fam. Pract. 362,364 (2001) ("For approximately every 5,000 to 10,000compounds that enter preclinical testing, only one is approvedfor marketing.").

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from immediate generic competition on all drugs.James W. Hughes, Michael J. Moore & Edward A.Snyder, Napsterizing Pharmaceuticals: Access,Innovation, and Welfare (Working Paper at 3, 15–16,Jan. 2011).

Petitioner's analysis of consumer welfare largelyignores the value of innovation and the potentialadverse impact Petitioner's presumptive illegalitystandard would have on the dynamic efficienciesinnovation provides to consumers.

B. The Hatch-Waxman Act CarefullyBalances Access to Generic Drugs andInnovation

Policymakers recognize that promotinginnovation with the potential for a period ofexclusivity is inherently at odds with the competingbenefits of allowing the largest number of entities tocompete in a given market. Congress has addressedthis trade-off in the pharmaceutical sector, mostnotably through the Drug Price Competition andPatent Term Restoration Act of 1984, Pub. L. No. 98-417, 98 Stat. 1585 (1984) (the "Hatch-Waxman Act").

The Hatch-Waxman Act balances incentives forinnovative efforts that result in new pharmaceuticalproducts against enhanced access to existingproducts through generic drugs.

In economic terms, the Hatch-Waxman Actaddresses the tradeoff between dynamic efficiencyand static efficiency. As Congressman HenryWaxman stated: "The law that became known asHatch-Waxman represented a careful balancebetween access and innovation. Because both arevitally necessary to our nation's health." Henry A.Waxman, Speech: Rep. Waxman Delivered a Speech

10

to the Generic Pharmaceutical Association (Jan. 28,2003), available at http://waxman.house.gov/speech-rep-waxman-delivered-speech-generic-pharmaceutical-association. The Hatch-Waxman Act(i) reduced the cost of generic entry by relievinggeneric manufacturers of the burden of proving thattheir drugs are safe and effective as opposed tobiologically equivalent to the related brandpharmaceutical, see 21 U.S.C. § 355(j); (ii) effectivelygranted generic manufacturers royalty-free licensesto use patented drugs to perform bioequivalencytesting, see 35 U.S.C. § 271(e)(1); and (iii) provided aframework to encourage and facilitate challenges topatents covering brand pharmaceuticals, see 21U.S.C. § 355(b), (j). In addition, as discussed below,the Hatch-Waxman Act allows genericmanufacturers to challenge a patent withoutentering the market and risking damage exposure.

To achieve a socially desirable balance, theHatch-Waxman Act included measures to lengthenthe effective patent life of innovativepharmaceuticals and thereby increase thedevelopment of new drugs. For example, the Actextends the life of one patent for each drug by up tofive years to take into account some of the patent lifelost during the lengthy drug testing and approvalprocess. See 35 U.S.C. § 156. The Act also providesan automatic 30-month stay of generic approvalwhen a brand company sues a generic challenger,permitting the patent holder time to enforce itsintellectual property rights. See 21 U.S.C. §355(j)(5)(B)(iii)(II). If the patent holder prevails inthe patent litigation, the Act provides for anautomatic injunction barring approval of the genericchallenger. See 35 U.S.C. § 271(e)(4)(A) (2000).

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Thus, while encouraging generic access, the Act alsoprotects innovation and the companies engaged inhigh-stakes investments in pharmaceutical researchand development.

1. Quantifying the Impact of Hatch-Waxman on Access to Generics

Petitioner's suggestion that the Hatch-WaxmanAct and current market dynamics are not sufficientlypromoting generic utilization does not withstandscrutiny. Under the Hatch-Waxman regime, use ofgeneric drugs is at an all-time high. The Hatch-Waxman Act has been extremely successful atfacilitating generic entry, thereby achieving lowerdrug prices for consumers. See Ernst R. Berndt &Murray L. Aitken, Brand Loyalty, Generic Entry andPrice Competition in Pharmaceuticals in the QuarterCentury after the 1984 Waxman-Hatch Legislation,18 Int'l J. Econ. Bus. 177, 177–78, 181–198 (2011).6

Over time, the share of generics in the marketplacehas increased dramatically. See Richard G. Frank,The Ongoing Regulation of Generic Drugs, 357 NewEng. J. Med. 1993, 1993–6 (2007). When Hatch-Waxman was enacted in 1984, generic drugsaccounted for 19 percent of all U.S. prescriptions; by2001 generic usage rose to 47 percent. FTC, GenericDrug Entry Prior to Patent Expiration at 3

6 See also Ernst R. Berndt, Pharmaceuticals in U.S. HealthCare: Determinants of Quantity and Price, 16 J. Econ. Persp.No. 4, 45, 62–63 (2002).

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(July 2002), http://www.ftc.gov/os/2002/07/genericdrugstudy.pdf. The increase has been morerapid in recent years. As of 2011, generic usagestood at 80 percent, a fourfold increase since Hatch-Waxman was enacted. IMS Institute for HealthcareInformatics, The Use of Medicines in the UnitedStates: Review of 2011 at 26 (Apr. 2012)http://www.imshealth.com/ims/Global/Content/Insights/IMS%20Institute%20for%20Healthcare%20Informatics/IHII_Medicines_in_U.S_Report_2011.pdf.

Legislative efforts to increase the incentives forgeneric companies to challenge brand-name drugpatents have contributed to this increase. Unlikeother industries, generic manufacturers can developa generic pharmaceutical and pursue FDA approvalwithout the patent holder having the ability tochallenge that conduct as violating its intellectualproperty rights. See 35 U.S.C. § 271(e)(1). Thegeneric company can then challenge the validity ofthe patent just by applying for FDA approval. Thus,generic challengers do not have to enter the marketand expose themselves to damages.7 See 21 U.S.C. §355(j); Stephanie Greene, A Prescription for Change:How the Medicare Act Revises Hatch-Waxman toSpeed Market Entry of Generic Drugs, 30 J. Corp. L.309, 316–17 (2005) [Greene, A Prescription forChange]. Generic companies rarely risk exposure topatent damages by attempting to launch productsprior to resolving the underlying patent litigation.Further, the first generic challenger (or in some cases

7 In other industries, many potential patent infringers may

never choose to challenge a patent because of the risk ofdamages.

13

challengers) may obtain a 180-day period of genericmarket exclusivity. FDA, Guidance for Industry:180-Day Exclusivity When Multiple ANDAs AreSubmitted on the Same Day,http://www.fda.gov/downloads/Drugs/GuidanceComplianceRegulatoryInformation/Guidances/UCM072851.pdf.

Consistent with Congress's policy objective, inrecent years there has been an overall increase inpharmaceutical patent challenges, as well as asharper increase in challenges soon after initialapproval of the brand-name drug. See, e.g., C. ScottHemphill & Bhaven N. Sampat, Evergreening, PatentChallenges, and Effective Market Life inPharmaceuticals, 31 J. Health Econ. 327, 327–28(2012); Henry G. Grabowski & Margaret Kyle,Generic Competition and Market Exclusivity Periodsin Pharmaceuticals, 28 Managerial & Decision Econ.491, 492, 495-96, 501 (2007) [Grabowski & Kyle,Generic Competition and Market Exclusivity Periods].The low costs and large incentives to challengepatents, combined with the unpredictable andimperfect nature of litigation and the lack of damageexposure, encourage generic firms to challengepatents without regard to the likelihood ofprevailing. See generally Grabowski & Kyle, GenericCompetition and Market Exclusivity Periods.8

8 See also Kelly Smith & Jonathan Gleklen, Generic

Drugmakers Will Challenge Patents Even When They Have a97% Chance of Losing: The FTC Report that K-Dur Ignored, CPIAntitrust Chron. (Sept. 2012 (2)); C. Scott Hemphill & BhavenN. Sampat, When Do Generics Challenge Drug Patents, 8 J.Empirical Legal Stud. 613, 624, 626 (2011) (showing a rise inthe rate of challenges to "new chemical entity," drugs with novelactive ingredients); Martin A. Voet, The Generic Challenge:

14

While generic competition lowers drug prices, theprevalence of prescription benefit plans wherebyconsumers pay a "co-payment" for their prescriptiondrugs diminishes any concerns aboutunderutilization of drugs that do not have genericequivalents. See Kaiser Family Foundation,Prescription Drug Trends at 5 (May 2010),http://www.kff.org/rxdrugs/upload/3057-08.pdf. Thevast majority of consumers can access brand-namedrugs for amounts substantially below list prices(generally below $50 per prescription). With thepassage of the Patient Protection and AffordableCare Act, Pub. L. 111-148, 124 Stat. 119 (2010), thepercentage of U.S. citizens with prescription drugbenefits will increase yet further. Id. at 5–6.

2. The Use of Reverse Payments in theContext of the Hatch-Waxman Act

Petitioner contends that "reverse payment"settlements must be treated as presumptively illegalto protect consumers. However, the availableeconomic evidence does not support Petitioner'stheory that use of "reverse payments" has altered thebalance between dynamic and static efficiencies thatpolicymakers sought to achieve. A large portion ofthe increase in the availability and use of genericdrugs, as demonstrated above, has occurredalongside the use of "reverse payments."

Indeed, the use of reverse payments has notdisplaced the incentive for multiple generics tosubmit Paragraph IV challenges, as some amicisuggest. See, e.g., Br. of Apotex, Inc. as AmicusCuriae Supporting Pet'r at p. 7. The amendments to

Understanding Patents, FDA and Pharmaceutical Life-CycleManagement (2005).

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the Hatch-Waxman Act in the Medicare PrescriptionDrug, Improvement, and Modernization Act of 2003,Pub. L. No. 108-173, 117 Stat. 2066 ("MMA"), containincentives for multiple Paragraph IV challenges byallowing the first-filer exclusivity period to beshared, and providing methods by which subsequentgeneric challengers may enter the market despite theterms of any settlement between the patent holderand the first-filer. See e.g., Dey Pharma, LP v.Sunovion Pharms., Inc., 677 F.3d 1158, 1160 (Fed.Cir. 2012) (describing use of declaratory judgment bya subsequent filer to accelerate its ability to market ageneric pharmaceutical); Greene, A Prescription forChange, 30 J. Corp. L. at 349-50. These amendmentsincentivize multiple and subsequent generics topursue Paragraph IV patent challenges.

In addition, the profits available to genericchallengers who gain the ability to enter the marketcan be substantial even without the benefit of the180-day exclusivity period. Contrary to what someamici suggest, evidence shows that it is common tohave multiple Paragraph IV challenges after the firstchallenge has been filed. An economic study foundthat the average number of generic manufacturersfiling a Paragraph IV certification within six monthsof the first filing increased from approximately 1.5 tonearly two in recent years. Ernst R. Berndt, et al.,Do Authorized Generic Drugs Deter Paragraph IVCertifications? Recent Evidence, (Working Paper at12–13, Apr. 2007), http://www.analysisgroup.com/uploadedFiles/Publishing/Articles/PhRMA_Authorized_Generic_Entry.pdf. The same study shows that,not surprisingly, high revenue brand drugs are themost likely targets for Paragraph IV certificationsfrom multiple generic manufacturers. Id. at 15.

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Indeed, it is not uncommon to find six or moregeneric challengers in Hatch-Waxman patent cases,with new challengers surfacing throughout thelitigation.9 There is no evidence that the use ofreverse payments has diminished the averagenumber of generic manufacturers filing ParagraphIV challenges per drug.

Underlying the argument that reverse paymentsettlements should be presumptively illegal is the

9 See, e.g., Eli Lilly & Co. v. Wockhardt Ltd., No. 08-cv-1547(S.D. Ind.) (docket sheet for Hatch-Waxman litigation involvingnine ANDAs for Cymbalta); Pfizer, Inc. v. Teva Pharms. U.S.A.,Inc., 882 F. Supp. 2d 643 (D. Del. 2012) (describing eightlawsuits arising from ANDAs for Lyrica); Avanir Pharm. Inc. v.Actavis South Atl. LLC, No. 11-cv-704 (D. Del.) (docket sheet forHatch-Waxman litigation involving five ANDAs for Nuedexta);Bristol-Myers Squibb Co., Annual Report (Form 10-K), at 101(Feb. 17, 2012) (describing Hatch-Waxman litigation againstseven generic companies regarding Abilify); SmithKlineBeecham Corp. v. Geneva Pharm., Inc., 2001 WL 1249694, at *2-4 (E.D. Pa. Sept. 26, 2001) (describing Hatch-Waxman litigationagainst six groups of generic companies regarding Paxil); In reGabapentin Patent Litig., 214 F.R.D. 178, 180 (D.N.J. 2003)(noting that Warner Lambert "sued seven generic companies"for filing ANDAs for gapabentin (Neurontin)); In reRosuvastatin Calcium Patent Litig., 2008 WL 5046424, at *1–3,*7 (D. Del. Nov. 24, 2008) (describing eight ANDAs for Crestor);Sanofi, Annual Report (Form 20-F), at 188 (Mar. 6, 2012)(reporting that generic companies filed "over a dozen ANDAcertifications" regarding Eloxatin and that "[e]ach of the genericmanufacturers was sued for infringement"); AbbVie Inc. v.Watson Labs. Inc., No. 12-cv-324 (D. Del.) (docket sheet forHatch-Waxman litigation involving five ANDAs for Niaspan);Pfizer Inc. v. Apotex Inc., No. 12-cv-808 (D. Del.) (docket sheetfor Hatch-Waxman litigation involving more than ten ANDAsfor Pristiq); Shire plc, Annual Report (Form 10-K), at F-40 (Feb.23, 2012) (describing six ANDAs for Vyvanse); Abbott Labs.,Annual Report (Form 10-K), at 16 (Feb. 23, 2007) (describingsix lawsuits arising from ANDAs for Depakote).

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mistaken premise that they systematically extendthe market exclusivity of brand-name drugs. To thecontrary, the average effective length of marketexclusivity of brand-name pharmaceuticals hasremained constant, if not decreased. See Grabowski& Kyle, Generic Competition and Market ExclusivityPeriods, 28 Managerial & Decision Econ. at 491, 495-96, 501; C. Scott Hemphill & Bhaven N. Sampat,When Do Generics Challenge Drug Patents, 8 J.Empirical Legal Stud. 613, 640–44. The averagelength of market exclusivity for drugs experiencingfirst generic entry in 1995 to 1996 was 13.5 years.During this time period, reverse paymentsettlements were much less common.10 For drugsexperiencing first generic entry in 2007–2008, theperiod was reduced by just over one year. See HenryG. Grabowski, et al., Evolving Brand-Name andGeneric Drug Competition May Warrant a Revision ofthe Hatch-Waxman Act, 30 Health Affairs 2157,2157–2166 (2011). Thus, the prevailing equilibriumestablished by Congress has not been disturbed inrecent years. See Hemphill & Sampat, Evergreening,Patent Challenges, and Effective Market Life inPharmaceuticals, 31 J. Health Econ. at 327–339.

Similarly, if use of reverse payment settlementsguaranteed extended exclusivity, one would expectwidespread adoption of such settlements. Yet,reverse payments are still only modestly used as acomponent of patent settlements. With the increase

10 According to an FTC study of branded drugs receiving a

Paragraph IV challenge between January 1, 1992 and January1, 2001, only 9 final settlements contained agreements for thebrand-name company to pay the generic applicant. See FTC,Generic Drug Entry Prior to Patent Expiration (July 2002) at 10,25.

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in patent challenges there has been an accompanyingincrease in the number of settlements. According toPetitioner, settlements have increased tenfold, from14 in federal fiscal year ("FY") 2004 to 140 in FY2012. Yet, according to Petitioner only 26 percent offinal settlements have included a potential reversepayment since 2004, and this percentage has notincreased over time. FTC, Agreements Filed with theFederal Trade Commission under the MedicarePrescription Drug, Improvement, and ModernizationAct of 2003: Overview of Agreements Filed in FY 2012A Report by the Bureau of Competition, [AgreementsFiled with the FTC (2012)], http://www.ftc.gov/os/2013/01/130117mmareport.pdf. Moreover, asexplained in more detail below, even this figuremarkedly overstates the number of settlements thatinclude a net payment from a brand to a generic. Seeinfra at § D.1.

Nor have settlements with a reverse paymentcomponent typically sought to extract all possibleprofits associated with market exclusivity bydelaying entry for the full remaining length of thepatent. Instead, settlements—including thosePetitioner characterizes as containing reversepayments—typically result in a negotiated patentsplit that often shortens the effective life of thepatent by multiple years, as observed in the currentcase.

In sum, the available economic evidence does notshow that the use of reverse payment settlementshas undermined the balance between incentivizinginnovation and accelerating the entry of lower-pricedgenerics. The adoption of a standard that threatensto degrade the value of patents in the pharmaceuticalindustry, thereby diluting the incentive for

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investment in innovation, should occur only in theface of strong economic evidence of a clear need toprotect consumers. Here, instead, there is clearlydangerous potential for such a standard to, itself,significantly harm consumers. Put differently,

An antitrust policy that reduced prices by 5percent today at the expense of reducing by 1percent the annual rate at which innovationlowers the costs of production would be acalamity. In the long run a continuous rate ofchange, compounded, swamps static losses.

Frank H. Easterbrook, Ignorance and Antitrust, inAntitrust, Innovation and Competitiveness 119, 122-23 (Thomas M. Jorde & David J. Teece eds., 1992).

C. Settlements with Reverse PaymentsOccur for Reasons Other than Delay andAre Not Presumptively Anticompetitive

Reverse payments in patent settlements can occurfor a variety of reasons having nothing to do withpayment for delaying entry and therefore should notbe treated as presumptively anticompetitive. Real-world complexities such as asymmetric information,differing beliefs regarding the likelihood of prevailingin litigation, differing discount rates, and riskaversion could all lead the parties to negotiate patentsettlements that involve reverse payments.

Many of the above complexities result insituations where the parties would be unable toreach a settlement agreement without a reversepayment.11 For example, efforts to arrive at an

11 Robert D. Willig & John P. Bigelow, Antitrust Policy

Toward Agreements That Settle Patent Litigation, AntitrustBull., 655–698 (Fall 2004); Dickey, et al., An Economic

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agreement on splitting the remaining patent termmay require a generic company to consider entry inthe distant future. Indeed, with patent challengescoming earlier in the life of branded drugs, thepatent terms at issue can often run more than adecade. Hemphill & Sampat, When Do GenericsChallenge Drug Patents, 8 J. Empirical Legal. Stud.at 626. A generic company with a high discount rateor uncertainty regarding the future size of themarket may be unable to accept a split of the patentterm that involves a lengthy wait for the generic toenter as compared to "rolling the dice" on theoutcome of litigation. In other words, the genericcompany may only be willing to accept an entry datethat is unacceptable to the brand company, given thebrand company's expectations of the likelihood ofprevailing in litigation. The parties can use areverse payment in this situation to bridge the gapand arrive at a settlement where otherwise nosettlement would be reached.

Reverse payments can also be used to offsetbargaining disadvantages that arise from differencesin risk aversion. To avoid a potential loss, a riskaverse party is willing to accept unfavorablesettlement terms. Brand companies are likely to bemore risk averse than their generic challengersbecause they usually have significantly more to losefrom a negative trial outcome. In particular, only alimited number of drugs (sometimes only one)

Assessment of Patent Settlements in the PharmaceuticalIndustry, 19 Annals Health L. at 368–400; Gregory K. Leonard& Rika Onishi Mortimer, Antitrust Implications ofPharmaceutical Patent Litigation Settlements, in EconomicApproaches to Intellectual Property Policy, Litigation andManagement 251, 261–264 (NERA Econ. Consulting 2005).

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account for the bulk of a brand company's revenue.In contrast, generic companies face virtually no riskother than legal costs. They do not risk damages andtend to be highly diversified such that losing anysingle patent dispute is unlikely to have significantfinancial consequences.

Petitioner's efforts to rely on the size of a reversepayment to suggest that the payment has ananticompetitive effect are also misplaced because itsapproach ignores the role of asymmetric riskaversion. Risk aversion is difficult to measure and toconvert into a dollar equivalent. Yet, the relevantcosts of litigation are not just the pecuniary outlaysand the costs of business disruption, but also includethe significant costs of the resulting uncertainty torisk averse parties. For this reason, it is difficult, ifnot impossible, to determine whether the size of thereverse payment is consistent with the presence ofrisk aversion amidst the other costs of litigation, andconsequently whether the negotiated entry date isconsistent with the brand company's assessment ofthe probability of success, even assuming suchassessment were possible. As a result, the size of areverse payment generally does not provide a reliablebenchmark to determine whether the payment isanticompetitive.

Because there are many reasons why reversepayment settlements maintain the balance betweenstatic and dynamic efficiencies, and enable pro-competitive settlements, such settlements should notbe considered presumptively illegal.

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D. Petitioner's Data Are Insufficient toJustify Adopting a Presumptive IllegalityStandard.

Petitioner acknowledges that there are twopossible outcomes if reverse payments are notallowed: (1) Parties reach settlement without reversepayments; or (2) Parties are unable to settle andlitigate instead. Petitioner bases its argument forthe presumptive illegality standard and its critiqueof the scope of the patent test on the claim thatconsumers, on average, would be better off undereither outcome. However, Petitioner uses flawedreasoning and unreliable evidence to support itsclaim.

1. Petitioner's Overly BroadDefinition of Reverse PaymentSettlements Taints Its EconomicAnalysis.

Any analysis of the economic consequences ofreverse payment settlements requires a reasonabledefinition of "reverse payments" as a starting point.Yet all of Petitioner's economic analysis turns on anoverly broad definition of what constitutes a "reversepayment" settlement.

Essentially, Petitioner treats any form ofconsideration from the patent holder to a genericchallenger as a "reverse payment." For example, abrand company's agreement in a patent settlementnot to introduce a generic version of its brand drug tocompete against its licensee's generic (whilecontinuing to sell its branded drug) would, inPetitioner's view, qualify as a "reverse payment."Last year, agreements of this kind accounted foralmost half of the supposed "reverse payment"

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settlements. Agreements Filed with the FTC(2012) at 1, http://www.ftc.gov/os/2013/01/130117mmareport.pdf. Yet, this is just a watered-down version of an exclusive licensing arrangementfrequently found in license agreements. Petitioner'sstatistics provide no information about whether thegeneric paid a royalty to obtain such an exclusivelicense. If settlements where an agreement not tointroduce an authorized generic is the only form of"reverse payment" are excluded, then between 2010and 2012 only about 13 percent of settlementsincluded a potential reverse payment. Id. at 2.

In addition, even settlements that include afinancial transfer from a brand to a generic may nottruly be "reverse payment" settlements. Forexample, a settlement of a patent dispute between abrand and a generic that involves some form of apatent split and a contemporaneous businesstransaction is characterized by Petitioner as a“reverse payment” settlement. 12 The magnitude ofthe brand company's payment to the genericcompany in such transactions would have to beevaluated against the value the generic conferred onthe brand to determine whether there has been atrue "reverse payment."

There is typically significant ambiguity aroundthe value of such agreements because they ofteninclude the purchase of intellectual property, realoptions (through joint ventures), supply agreements,

12 Agreements Filed with the FTC (2009) at p. 2,

http://www.ftc.gov/reports/mmact/MMAreport2009.pdf (notingthat almost half of potential reverse payment settlements filedin 2009 involved side deals in which the compensation did notrelate directly to the elements of the patent dispute).

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risk sharing, and the settlement of other litigation.Determining the value of such one-of-a-kind businessagreements can be very difficult. See ProtectingConsumer Access to Generic Drugs Act of 2009:Hearing on H.R. 1706 Before House Subcomm. onCommerce, Trade and Consumer Prot., 111th Cong.25 (Mar. 31, 2009) (prepared statement of C. ScottHemphill, Assoc. Prof. of Law, Columbia Univ., at 47)("In some cases, the generic firm has plausibleexpertise in the subject of the side deal. It can bedifficult to be certain that a deal is collusive withouta deep and complex inquiry into the businessjudgment of the two drug makers."). Thisunderscores the weakness of Petitioner's argumentthat the parties to such a transaction will be able todeconstruct a complicated business arrangement torebut a presumption of illegality.

Further, even Petitioner concedes that paymentsthat are commensurate with the patent holder'sexpected litigation costs do not indicate anunreasonable delay in generic entry and should notbe treated as illegal. Pet'r Br. at 38. However,Petitioner's calculation of the number of reversepayment settlements apparently includessettlements with net payments lower than the brandfirm's expected litigation costs. See, e.g., AgreementsFiled with the FTC (2006) at p. 3, http://www.ftc.gov/reports/mmact/MMAreport2006.pdf. Moreover, asexplained above, the true costs of litigation includethe hard-to-measure costs of the resulting businessuncertainty to the risk averse parties, in addition tothe outlays for legal fees.

In total, between fiscal years 2004 and 2009, 88percent of the settlements Petitioner characterized as"reverse payment" settlements were categorized as

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such because of contemporaneous businesstransactions (44 percent), agreements not to launchbrand-authorized generics (38 percent), or both(three percent), or a payment that was less thantangible saved litigation expenses (three percent).See Agreements Filed with the FTC (2004–2009). Ifthese settlements had not been categorized asreverse payment settlements, only four percent of allsettlements over this six year period, eightsettlements in total, would have been categorized asreverse payment settlements.

Petitioner's difficulty in establishing a rationaldefinition of reverse payment settlements may stemfrom the fact that there is no economically soundbasis to distinguish these settlements from otherpatent settlements. Through the Hatch-WaxmanAct, Congress has created a form of theoreticalinfringement on the part of the generic firm withoutactual entry into the market, and thus without anypotential damage exposure on the part of the allegedinfringer. This feature of the Hatch-Waxman Actencourages generic challenges but also implies thatcompensation flowing from the patent holder to theinfringer cannot take the form of forgiveness ofdamages. In contrast, in patent cases where entryhas occurred, a settlement by the patent holder oftenincludes reducing all or a portion of its damagesclaims against the alleged infringer. That is a formof compensation flowing from the patent holder tothe alleged infringer and is no different in aneconomic sense from reverse payments seen inpharmaceutical patent settlements. See Marc G.Schildkraut, Patent-Splitting Settlements andReverse Payment Fallacy, 71 Antitrust L.J. 1033,1048, 1055-56, 1067 (2003-04). For example, suppose

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an incumbent company alleges that its patent wasinfringed when another company entered the marketand claims lost profits of one million dollars.Because the incumbent may not be fully confidentthat its patent will be found valid and infringed, itmay settle by agreeing that if the infringer exits themarket for some or all of the remaining life of thepatent, it will forgo some or all compensation for itslost profits. In such scenarios, the incumbent isforgoing payment from the infringer, which iseconomically no different from actually paying theinfringer. Indeed, a ruling that reverse paymentsettlements are presumptively unlawful could resultin patent settlements outside of the pharmaceuticalindustry being subjected to antitrust scrutiny. Sucha ruling would thus have far-reaching effects on theability of litigants to settle patent litigation.

Petitioner's overly broad definition renders itseconomic analysis of the prevalence and impact of"reverse payment" settlements meaningless. Thedifficulty in identifying "reverse payment"settlements also highlights an additional problemwith Petitioner's approach. Because identifying"reverse payment" settlements requires a complexanalysis of contemporaneous business transactions,litigation costs, and risk aversion, the presumptiveillegality standard would be difficult to apply andwould create substantial uncertainty for partiesattempting to settle patent disputes.

2. Petitioner's Calculation of GenericLitigation Victories Is Not aMeaningful Figure

Petitioner also relies on the calculation that, as ofJune 2002, generic companies had won 73 percent ofpatent cases that were fully litigated. See Pet'r Br.

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at 6 (citing FTC, Generic Drug Entry Prior to PatentExpiration (July 2002) at 19–20). However, thisstatistic provides no information about the expectedoutcome of any specific patent dispute or theproportion of patents in dispute today that would befound invalid or infringed were they to be fullylitigated.

The percentage Petitioner relies on cannot servethat purpose for two primary reasons. First, thestatistic is based on early patent challenges (fullylitigated by June 2002). Early patent challengesfocused on products with narrower patents, whichlikely contributed to the high success rate for genericcompanies when patents were fully litigated duringthat period. See Hemphill & Sampat, Evergreening,Patent Challenges, and Effective Market Life inPharmaceuticals, 31 J. Health Econ. at 327–28(describing trends in patent challenges). But thatsuccess rate applies only to the pre-2002 period andnot to the more recent period when almost everypatent is challenged, particularly for drugs withlarge sales. A more recent study of pharmaceuticalpatent litigation by RBC Capital Markets analyzed370 final court decisions during the period from 2000to 2009 and found that brand firms prevailed in 52percent of the cases that went to trial. Adam Greene& D. Dewey Steadman, Pharmaceuticals: AnalyzingLitigation Success Rates, RBC Capital Markets, at 1(Jan. 15, 2010), http://www.aipla.org/committees/committee_pages/FDA/Committee%20Documents/Meeting%20Materials/2010%20Spring%20Meeting/AnalyzingLitigationSuccessRates.pdf.13 Any

13 See also Laura E. Panattoni, The Effect of Paragraph IVDecisions and Generic Entry before Patent Expiration on BrandPharmaceutical Firms, 30 J. Health Econ. 126, 127, 137 (2011)

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reliance on studies of outcomes of patent litigationmust also account for the high rates of reversal inpatent litigation, which Petitioner does not do. SeeStephen P. Swinton & Adam A. Welland, PatentInjunction Reform and the Overlooked Problem of'False Positives', 70 Pat., Trademark & Copyright J.337 (July 2005) (noting the "disturbing" rate ofreversals after patent trials).

Second, this statistic provides no informationabout any net benefit to consumers since anunsuccessful challenge to patents providing ten yearsof market exclusivity and billions of dollars in saleshas a far greater impact on short-term consumerwelfare than successful challenges to patents withfive years of exclusivity for drugs with relativelymodest sales.

3. Petitioner's Calculation of the CostsAssociated with Reverse PaymentSettlements Is Not a ReliableMeasure of Harm to Consumers

Petitioner and other amici rely heavily onPetitioner's calculation that, on average, patentsettlements with potential reverse payments have anexclusion period 17 months longer than patentsettlements without reverse payments, and thatreverse payment settlements therefore costconsumers $3.5 billion annually.14 FTC, Pay-for-Delay: How Drug Company Pay-Offs Cost Consumers

(showing that brand companies won 34 out of 72 challengesbetween 1988 and 2007, and 24 out of 41 challenges between2003 and 2007, the last five years of the sample).

14 See, e.g., Br. for the State of New York et al. as Amici

Curiae at p. 3; Pet’r Br. at 31; Br. for AARP, et al., as AmiciCuriae at 4–5, 10.

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Billions at p. 4 (2010), http://www.ftc.gov/os/2010/01/100112payfordelayrpt.pdf. The data Petitioner citesare of questionable validity and the conclusionsPetitioner draws from them are unsupported by solideconomic evidence.

Petitioner defines the exclusion period as the timebetween settlement execution and the agreed-upongeneric entry date. Petitioner calculates that thesales-weighted exclusion period for settlements withreverse payments is 17 months longer, on average,than for settlements without reverse payments, andclaims that this implies that reverse payments causegeneric entry to be later than it otherwise would be.FTC, Pay-for-Delay: How Drug Company Pay-OffsCost Consumers Billions (2010). In turn, Petitioner'scost estimate is based on multiplying (1) thesupposed period of delay by (2) Petitioner's estimateof the reduction in price that exists in a maturegeneric market by (3) the volume of sales it estimatesreverse payment settlements impact each year.Petitioner's inference that patent litigation wouldresult in earlier generic entry but for reversepayment settlements, and that these settlementstherefore impose high costs on consumers, isincorrect for a number of reasons.

As an initial matter, the data underlyingPetitioner's calculation are not available to anyoneother than Petitioner. As a result, it is impossible toaudit Petitioner's calculations or to correct the flawsin Petitioner's methodology. In addition, as weexplained above, see § D.1, an important flaw inPetitioner's estimate of the supposed period of delayis its use of an overly broad definition of potentialreverse payments to categorize settlements. We arenot aware of any analysis concerning differences in

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the exclusion periods that employs a more reasonabledefinition of settlements with net payments from abrand to a generic challenger. Petitioner's overlybroad definition of reverse payments also greatlyinflates Petitioner's estimate of the volume of salesaffected by reverse payment settlements.

Moreover, even if Petitioner's categorization ofsettlements were correct, correlation does not provecausation. There may be other reasons whysettlements with reverse payments have longerexclusion periods that have nothing to do withpayment for delay. For example, reverse paymentsettlements may differ from other settlements interms of average patent life remaining, or the pointin the drug's life cycle when settlement is reached.See Bret Dickey, Jonathan Orszag & Robert Willig, APreliminary Economic Analysis of the BudgetaryEffects of Proposed Restrictions on "Reverse Payment"Settlements at p. 3 (Aug. 10, 2010),http://www.compasslexecon.com/highlights/Documents/Dickey%20Orszag%20Willig%20CBO.pdf. To our knowledge, Petitioner hasreported no analysis to rule out alternativeexplanations. In particular, Petitioner apparentlyhas done no analysis to show that the patent lengthsat issue in settlements with and without a reversepayment are comparable.

Other concerns with the study have been raisedas well. For instance, the 17-month figure is likely tobe overstated because it assumes that the genericcompany was capable of entering the market by theentry date the parties supposedly would havenegotiated absent a reverse payment, which is notnecessarily the case. See Kyle Musgrove & RichardRipley, Reverse Payment Settlements: Presumptively

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Bad or Usually Acceptable, CPI Antitrust Chron.(June 2012 (2)). The appropriate measure wouldtake into account when the generic company couldhave gone to market, an analysis that requires adetermination both of when FDA would have givenfinal approval and the entry date that the partieswould have negotiated absent a reverse payment.

The reduction in price is also likely to beoverstated because Petitioner does not take intoaccount price discounts such as rebates and freesamples that brand companies provide and genericcompanies generally do not.15

Lastly, Petitioner's study provides no reason tobelieve that a reverse payment settlement wouldotherwise be a settlement without a reversepayment. Absent use of a reverse payment theparties may not reach settlement at all, and thelitigation may continue to trial.16 See supra C.However, Petitioner's study does not consider howgeneric entry dates under reverse payment

15 See Henry Grabowski, Tracy Lewis, Rahul Guha, Zoya

Ivanova, Maria Salgado & Sally Woodhouse, Does Generic EntryAlways Increase Consumer Welfare?, 36th Ann. Proc. FordhamCompetition L. Inst., Ch. 12 (2010); Dep't Health & HumanServs., Office of the Inspector General, Concerns with Rebatesin the Medicare Part D Program (March 2011).

16 Robert D. Willig & John P. Bigelow, Antitrust Policy

Toward Agreements that Settle Patent Litigation, AntitrustBull., 655–698 (Fall 2004); Dickey, et al., An EconomicAssessment of Patent Settlements in the PharmaceuticalIndustry, 19 Annals Health L., at 368–400; Gregory K. Leonard& Rika Onishi Mortimer, Antitrust Implications ofPharmaceutical Patent Litigation Settlements, in EconomicApproaches to Intellectual Property Policy, Litigation andManagement 251, 261–264 (NERA Econ. Consulting 2005).

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settlements would compare to generic entry datesunder litigation. Petitioner's study also fails toaccount for the costs associated with increasedlitigation.

Petitioner assumes that the entry dates agreed toin settlements without reverse payments reflect thelikely outcome of litigation and therefore provide a"benchmark for the consumer impact of eitheralternative."17 This assumption is unfounded. For avariety of reasons, including risk aversion and theparties having only a vague sense of their likelihoodof prevailing in litigation, settlement agreementswithout reverse payments may not reflect whatwould occur, on average, were the patent cases to befully litigated.

Indeed, determining whether a settlement reflectsthe likely outcome of litigation is, in general, achallenging task. Doing so would require a means ofassessing the merits of the underlying patent casefrom which one could calculate the expected genericentry date based on the probability that the patentwould be found valid and infringed if it were fullylitigated. For example, if the patent holder has aprobability of prevailing in litigation of 75 percentand a probability of failing of 25 percent, then anyagreement that leaves the patent holder with morethan 75 percent of its remaining patent life would beconsidered anticompetitive under this standard,whether or not it includes a reverse payment.

The problems with this approach in the real worldare both substantial and obvious. Not all the

17 FTC, Pay-for-Delay: How Drug Company Pay-Offs Cost

Consumers Billions at p. 9 (2010).

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information relevant to the litigation and trial isavailable at the time of settlement, thus there isinherent uncertainty regarding the outcome of thetrial. Even if all the information were available, itwould still not be straightforward to assignprobabilities to the possible litigationoutcomes. Patent litigation is notoriouslyunpredictable, with high rates of reversal. Thesereversals include both false positives (i.e., incorrectlyfinding patents valid and infringed) and falsenegatives (i.e., incorrectly finding patents invalid ornot infringed) at rates so high that somecommentators have referred to it as"disturbing." Stephen P. Swinton & Adam A.Welland, Patent Injunction Reform and theOverlooked Problem of 'False Positives', 70 Pat.,Trademark & Copyright J. 337 (July 2005).

Moreover, brand companies must assess morethan just the ultimate resolution of acase. Prevailing in the Federal Circuit on appealdoes little for a brand company that loses in thedistrict court and is unable to stave off genericentry. In the interim, the brand loses its marketexclusivity, and experiences a rapid erosion ofmarket share and a decline in price.

Determining the probability that the brandcompany will win a patent case is, of course, differentfrom, and much harder than, actually trying thepatent case to verdict. Trying the patent case onceyields a discrete outcome, which itself could beinfluenced by specific factors such as the particularfact finder and the effectiveness of counsel, theexperts, and other witnesses. The discrete outcomefrom this litigation would not provide a reliableestimate of the ex-ante probability that the patent

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would be found valid and infringed.18 To obtain suchan estimate would require the impracticable, tryingthe case a large number of times. Of course,litigating the patent case is precisely what theparties seek to avoid by settling in the first place.

Thus neither past settlements nor past litigationoutcomes can be used to assess reliably when entry islikely to occur under litigation. All that is known isthat, through litigation, the generic would win somefraction of cases, with entry generally occurring atthe end of a potentially lengthy litigation process,and the brand would win the remainder, with entrydelayed until patent expiration. Without knowingwhich cases would fall into each category, it isproblematic to determine whether litigation, onaverage, benefits consumers. Reaching such anunderstanding would require assessing the patentholder's likelihood of success in the infringementsuit, a task Petitioner states is "inappropriate andcumbersome." Pet'r Br. at 54–55.

Further, to the extent that reverse payments arenecessary to achieve settlement, Petitioner'sestimate of the costs associated with reversepayment settlements must be offset by the impact ofincreased litigation. Less litigation throughsettlements eases the burden on the court system,and can provide economic efficiencies by reducing

18 Courts that have rejected Petitioner's presumptive

illegality rule have recognized this concern. See, e.g., ValleyDrug Co. v. Geneva Pharms., Inc., 344 F.3d 1294, 1308 (11thCir. 2003) ("Patent litigation is too complex and the results toouncertain for parties to accurately forecast whether enforcingthe exclusionary right through settlement will expose them totreble damages if the patent immunity were destroyed by themere invalidity of the patent.").

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costs associated with court delay and hastyconsiderations when cases reach trial.19 Settlementis also generally less expensive since litigants avoidfees for lawyers and experts, costs associated withthe time and effort of firm employees and managers,both of which may be passed on to consumers in theform of higher prices, and the costs to risk averseparties of bearing substantial business uncertainties.See, e.g., Bret Dickey, Jonathan Orszag & LauraTyson, An Economic Assessment of PatentSettlements in the Pharmaceutical Industry, 19Annals Health L. 368, 375–76 (2010).

Petitioner has thus done nothing to show thateliminating reverse payments would result in loweraverage costs to consumers. It is just as plausiblethat increased litigation would lead to averageoutcomes that increase costs to consumers.20

Petitioner has thus come forward with inadequateeconomic evidence to justify adopting a new standardthat would presumptively bar reverse paymentsettlements.

19 See, e.g., William M. Landes, An Economic Analysis of the

Courts, 14 J.L. & Econ. 61, 74 (Apr. 1971) ("It is widelyrecognized that the courts are burdened with a larger volume ofcases than they can efficiently handle. The results are oftenlong delays prior to trial, and hasty consideration when casesreach trial." citing U.S. Pres. Comm'n on Law Enforcement andAdmin. of Justice, Task Force on the Admin. of Justice, TaskForce Report: The Courts, at 38–40 (1967)).

20 Petitioner's calculation also fails to consider any

corresponding impact on innovation, if the Court were to adopta standard that undermined the value of patents in encouragingpharmaceutical research and development.

36

CONCLUSIONThe available economic evidence does not support

Petitioner's effort to impose a standard ofpresumptive illegality on certain forms of patentsettlements. At present:

Most patented drugs are challenged.

Most settlements assure generic entrybefore patent expiration.

Generics account for a huge andincreasing percentage of prescriptiondrug volumes.

Market exclusivity periods have notincreased.

For these reasons, the standard Petitioneradvances should not be adopted by this Court.

37

LESLIE E. JOHN

JASON A. LECKERMAN

BALLARD SPAHR LLP1735 Market StreetPhiladelphia, PA 19103(215) 864-8500

Respectfully submitted,

WILLIAM F. CAVANAUGH

Counsel of RecordSCOTT B. HOWARD

VIVIAN R.M. STORM

PATTERSON BELKNAP WEBB

& TYLER LLP1133 Avenue of theAmericasNew York, NY 10036(212) 336-2000

Attorneys for Amici CuriaeAntitrust Economists

February 28, 2013

1aAPPENDIX A

LIST OF SIGNATORIES21

John P. BigelowPrinceton Economics Group, Inc.

Professor W. David BradfordUniversity of Georgia

Margaret E. Guerin-CalvertCompass Lexecon, LLC

Professor Iain CockburnBoston University

Pierre-Yves CremieuxAnalysis Group Inc.

Professor Henry G. GrabowskiDuke University

Paul E. GreenbergAnalysis Group Inc.

Rahul GuhaCornerstone Research

Professor R. Glenn HubbardColumbia Business School

Professor James W. HughesBates College

Professor Daniel P. KesslerStanford Law School

21 This brief presents the views of the individual signers.Their institutional affiliations are listed for identificationpurposes only.

2aProfessor Tracy R. LewisDuke University

Professor Sean NicholsonCornell University

Professor Janusz A. OrdoverNew York University

Jonathan OrszagCompass Lexecon, LLC

Professor Edward A. SnyderYale School of Management

Bruce StangleAnalysis Group Inc.

Professor Robert D. WilligPrinceton University

Sally D. WoodhouseCornerstone Research