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MSBA Antitrust Law Section. May 7, 2008. Reverse Payments. Courts have developed different standards for evaluating the legality of “reverse payment” settlements (RPSs) of pharmaceutical patent infringement litigation filed in accordance with the Hatch-Waxman Act

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reverse payments
Reverse Payments
  • Courts have developed different standards for evaluating the legality of “reverse payment” settlements (RPSs) of pharmaceutical patent infringement litigation filed in accordance with the Hatch-Waxman Act
  • Supreme Court thus far has not taken up this issue; will it?
hatch waxman
  • Pioneer drug company files patent application with USPTO
  • Pioneer files NDA with FDA
  • USPTO issues patent
  • FDA approves drug for marketing
  • Pioneer lists relevant patents in Orange Book
hatch waxman continued
Hatch-Waxman, continued
  • Generic company wants to market generic version of drug
  • Can file ANDA
    • Rely upon pioneer’s testing to establish safety and efficacy
    • Must establish bioequivalence
    • Must certify that generic drug will not infringe any valid patent
    • Paragraph IV certification: Generic company certifies that the listed patent is invalid or will not be infringed
hatch waxman continued1
Hatch-Waxman, continued
  • If FDA grants ANDA, generic company will have exclusive marketing rights for 180 days
  • Pioneer, however, may file suit for infringement within 45 days of generic company’s filing of Paragraph IV certification
  • Upon filing suit, automatic stay of FDA approval of ANDA for 30 months or until there is a settlement or final judgment of noninfringement or invalidity
typical patent infringement suit incentives to settle
Typical patent infringement suit: incentives to settle
  • P sues D for infringement; D has already been making/selling/using allegedly infringing products
  • Assume both parties foresee a 60% probability that P will win, D will be enjoined, and P will be awarded $10M in damages
  • P’s expected payoff from going to trial is $6M – attorney’s fees; D’s expected payoff from going to trial is - $6M – attorney’s fees
  • Rational settlement: D will agree to cease infringing and pay P $6M
typical hatch waxman suit incentives to settle
Typical Hatch-Waxman suit: incentives to settle
  • At the time P commences the action, D has no earned no profit from sale of the generic drug
  • Once the 30-month stay is lifted, D can expect to earn smaller profits from the sale of the generic drug than P is earning, at the time P commences the action, from sales of the branded drug.
  • I.e., P stands to lose much more than D stands to gain
  • P can preserve its market exclusivity, avoid paying attorney’s fees associated with going to trial, and avoid any risk of D’s future inability to pay a large judgment, by settling early on
  • Counterintuitively, the incentive will often be for P to pay D
  • Can be consistent with high probability that P would prevail at trial
  • Risk aversion and asymmetric information may provide further incentives for RPSs.
should rpss be illegal
Should RPSs be illegal?
  • On the one hand
    • May be consistent with high probability of patent validity and infringement
    • May be no more anticompetitive than some other settlements that are unlikely to attract scrutiny
    • May enable parties to avoid litigation costs and risk of D’s future insolvency
    • P may agree to earlier generic entry than would occur if P obtained a favorable judgment at trial
  • On the other hand
    • P is paying to exclude a potential competitor from the market
    • D’s 180-day exclusivity may create a bottleneck for other generic competitors; Medicare Modernization Act of 2004 reduces but may not eliminate all such problems
different possible rules
Different possible rules
  • Cardizem (6th Cir.): per se illegal
  • Valley Drug and Schering Plough (11th Cir.): apply an intermediate approach which purports to take into account “the extent to which antitrust liability might undermine the encouragement of innovation and disclosure, or the extent to which the patent laws prevent antitrust liability for such exclusionary effects.”
  • Tamoxifen (2d Cir.): RPSs are illegal only if the patentee is extending the scope of its patents or is engaging in fraud or sham; no inquiry into underlying validity of patent
  • Ciproflaxin: currently before CAFC
  • Cephalon: newly filed FTC action
different possible rules continued
Different possible rules, continued
  • Some commentators argue for per se illegality, others for the ROR
  • Others argue that RPSs should be legal unless the patentee’s infringement suit was a sham
  • Other argue that RPSs should be illegal if the amount the patentee pays exceeds its avoided litigation costs
  • Yet others would subject RPSs to a rebuttable presumption of illegality
patent holdup in the context of sdos
Patent Holdup in the Context of SDOs
  • Members of a standards determining organization (SDO) may agree to adopt common technological standards, for example to enable interoperability among different manufacturers’ products.
  • What if a member fails to disclose, ex ante, its ownership of a patent or pending patent application that reads on the standard that the SDO winds up adopting?
  • What if the member/patent owner seeks to renegotiate the terms of the license after the standard is adopted?
patent holdup continued
Patent Holdup, continued
  • Ex ante precautions may avoid these problems
    • SDO may require members to disclose existing patents or patent applications
    • SDO may require members to commit to licensing on RAND terms
    • SDO may require members to state the maximum terms they would seek
    • SDO may collectively negotiate the maximum price or other terms to which SDO members will agree
    • Violations would be actionable as breach of contract
  • But do such precautions expose the SDO to antitrust liability?
    • DOJ, FTC, AMC, numerous commentators argue for ROR scrutiny only
    • A few district court decisions nevertheless give pause
  • Are such precautions effective? Worthwhile?
patent holdup continued1
Patent holdup, continued
  • Ex post remedies for patent holdup
    • Actions for breach of contract, equitable estoppel, may be applicable in some cases
    • Antitrust?
  • Monopolization requires proof of (1) possession of monopoly power within a relevant market, and (2) willful acquisition or maintenance
  • Attempted monopolization = (1) specific intent, (2) predatory conduct, and (3) a dangerous probability of success
  • Section 5 of FTC Act
    • Unfair methods of competition?
    • Unfair acts or practices?
patent holdup continued2
Patent holdup, continued
  • At least four FTC actions (Dell, Unocal, Rambus, and Negotiated Data Solutions) have been premised on patent holdup.
  • In Broadcom Corp. v. Qualcomm Inc., 501 F.3d 297, 314 (3d Cir. 2007),the court reversed a judgment granting a motion to dismiss a § 2 claim, stating that
    • (1) in a consensus-oriented private standard-setting environment
    • (2) a patent holder’s intentionally false promise to license essential proprietary technology on FRAND terms
    • (3) coupled with an SDO’s reliance on that promise when including the technology in a standard, and
    • (4) the patent holder’s subsequent breach of that promise, is actionable anticompetitive conduct.
patent holdup continued3
Patent holdup, continued
  • Others are more skeptical of imposing antitrust liability under these circumstances. See Rambus, Inc. v. FTC, No. 07-1086 (D.C. Cir. Apr. 22, 2008) (reversing FTC); Townshend v. Rockwell Int’l Corp., 55 U.S.P.Q.2d 1011 (N.D. Cal. 2000).
  • In Rambus, the D.C. Circuit suggested that a § 2 claim might be appropriate when the plaintiff can prove that the SDO would have adopted a different, non-proprietary technology absent the deception. But:
    • If the SDO would have adopted the same standard, or a different proprietary standard, absent the deception, is there antitrust injury?
    • Antitrust law does not provide a remedy for the mere extraction of monopoly power by an otherwise lawful monopolist?
price squeezes
Price Squeezes
  • In linkLine Communications, Inc. v. SBC Cal., Inc., 503 F.3d 876 (9th Cir.), cert. filed, 76 U.S.L.W. 3226 (Oct. 17, 2007), the court, citing the famous Alcoa decision, affirmed the continued viability of § 2 claims premised on a “price squeeze” theory.
  • Price squeeze:
    • D participates, and has substantial market power, in an “upstream” market for the manufacture of input X
    • D also participates in the “downstream” market for the sale of output Y, which is made from input X
    • D sells some units of input X to competitors in the downstream market for output Y
    • Allegedly, D sells input X at a sufficiently high price, and sells output Y at a sufficiently low price, to put competitors in the market for output Y at a competitive disadvantage
    • In this manner, D threatens to acquire or maintain substantial monopoly power in the downstream market for output Y
possible problems with the linkline court s analysis
Possible problems with the linkLine court’s analysis
  • Consumers in the downstream market for output Y are no worse off than if D simply refused to deal with competitors in that market; and according to Trinko, unilateral refusals to deal rarely violate § 2
  • D might be engaging in predatory behavior of some sort, but if so P should have to prove such a theory under the standards articulated in cases such as Brooke Group
  • Liability might require courts to determine what prices D should charge for input X and output Y
  • Antitrust should protect consumers, not competitors
on the other hand
On the other hand
  • The Supreme Court has never explicitly overruled or repudiated Alcoa
  • Consumers may be worse off than they otherwise would be, if D were not exploiting its market power by charging a supracompetitive price for input X; but is charging a high price an antitrust violation?

Quantity discounts by supplier conditioned on buyer/customer’s combined purchases of two or more products

  • Not tying, nor exclusive dealing, nor predatory pricing (but shares genes)
  • Can provide some efficiencies, as well as price competition, benefit to consumers
  • Also can reduce potential competition and reinforce barriers to entry
the law
The Law

Challenges are: restraint under Sherman §1, monopoly or attempt under §2, or improper discount under Clayton §3

  • Most decisions focus on §2 factors
    • SmithKline Corp. v. Eli Lilly & Co., 575 F.2d 1056 (3rd Cir. 1976) is oft-cited for the proposition that a bundled discount can = monopolization when discount provider has monopoly power in some but not all of the bundled products
LePage’s, Inc. v. 3M, 324 F.3d 141 (3rd Cir. 2003)
  • Bundling by supplier with monopoly power without a valid business justification may be illegal under §2 (3M’s furtherance of its economic interests does not fly)
    • a bundled discount not required to result in sales below cost to be condemned
    • here, LePage’s as competitor could not make a comparable offer to 3M’s offer, and 3M’s exclusionary conduct substantially foreclosed portions of the scotch tape market to LePage’s
    • jury verdict for plaintiff on §2 claims of bundling (and exclusive dealing) affirmed
Cascade Health Solutions v. PeaceHealth, 515 F.3d 883 (9th Cir. (Or.) Feb 01, 2008)
  • Amends 502 F.3d 895 to reflect pending resolution of a question of Oregon antitrust law (re price discrimination) certified to OR Supreme Court

Plaintiff is McKenzie-Willamette Hospital, Defendant is PeaceHealth (3 hosp) – only hospitals in Lane County Oregon

    • McKenzie: primary & secondary care PeaceHealth: primary, secondary & tertiary
    • Issue: Defendant’s discounts to insurers of 35%-40% if insurer made PeaceHealth the only preferred provider for primary, secondary & tertiary care
  • Trial court charged jury under LePage’s standard – Plaintiff can win if the PeaceHealth discounts “substantially foreclose portions of the market to a competitor who does not provide an equally diverse set of services and who therefore cannot make a comparable offer.”
    • Jury verdict for Plaintiff: $16.2 million (after trebling)
on appeal
On appeal
  • Should we follow LePage’s?
    • Sought amicus briefs
  • Ultimately rejected LePage’s
  • Also rejected “full” Brooke Group approach
    • (bundled pricing legal without proof that total price for all products in bundle is below incremental cost of all products - as suggested by the telecoms as amici)
  • Looked to collective wisdom of AMC, Professor Hovenkamp and Judge Posner and came up with…
the discount attribution test
The Discount Attribution Test

1) Allocate all discounts and rebates attributable to the entire bundle to the competitive product:

- Is competitive product being sold below its incremental cost? (if no, you’re OK)

2) If yes, is there antitrust injury?

- if yes, we have a violation

amc s three part test
AMC’s Three-Part Test
  • After allocating all discounts and rebates attributable to the entire bundle to the competitive product, is competitive product being sold below its incremental cost?
  • Is the defendant likely to recoup these short-term losses?
  • Is the bundled discount or rebate program likely to have an adverse effect on competition, or has it already?
meijer inc et al v abbott laboratories et al 2008 wl 1734867 n d cal april 11 2008
Meijer, Inc. et al v. Abbott Laboratories et al, 2008 WL 1734867 (N.D. Cal. April 11, 2008)
  • Court decides the issue “whether Cascade’s rule applies…such that Plaintiffs must show that the imputed price of lopinavir…is below Abbott’s average variable cost” in the negative.
  • “present cases fall within the exception contemplated by Cascade”
  • “Because Abbott does not sell lopinavir separately, the price of unbundled lopinavir cannot be used as a starting point for the calculation”
    • the pharmaceutical industry is different, as market prices typically are well above marginal costs; there is great disparity between fixed and variable costs
motion to dismiss denied
Motion to Dismiss Denied

12(b)(6) dismissal “appropriate only when the complaint does not give the defendant fair notice of a legally cognizable claim and the ground on which it rests”

  • Twombly, of course
what do your clients do with all this they might
What do your clients do with all this? They might…
  • Calculate defendant’s attributed discount with the handy Cascade/PeaceHealth guide
  • Prove presence or absence of antitrust injury/harm to competition
  • And…outside the 9th circuit, wait and see what happens
    • You can always try to argue the 3rd Circuit’s LePage’s standard of substantial foreclosure of portions of the market to a competitor who cannot meet the defendant’s offer
    • Or that you are dealing with pharma or another “atypical” case where some something other than below-cost pricing will have an adverse effect on competition
exclusive dealing
Exclusive Dealing
  • Requires a buyer to purchase products or services for a period of time exclusively from one supplier
    • Economic benefits such as interbrand competition could result from exclusive dealing
    • Alternative channels might exist for competitors not party to agreement
    • But foreclosure of rival suppliers and potential new entrants can be AT concerns
the law1
The Law

(As with bundling claims) challenges generally are: restraint under Sherman §1, monopoly or attempt under §2, or improper discount under Clayton §3

  • Again, most decisions focus on §2 factors
  • LePage’s; United States v. Dentsply International, Inc., 399 F.3d 181 (3d Cir. 2005); and United States v. Microsoft Corp 253 F.3d 34 (D.C. Cir. 2001) discuss exclusive dealing as exclusionary conduct that can violate Sherman §2
NicSand, Inc., v. 3M Co., 507 F.2d 442 (6th Cir. 2007)
  • NicSand and 3M were only suppliers of do-it-yourself automotive sandpaper (nationwide)
    • competed for business of 6 large retailers that controlled 80% of the market
    • NicSand had 67% of the DIY sandpaper market by 1997 but lost most of its market by 2001 due to 3M’s offer of large up-front discounts and longer exclusive agreements
    • Chapter 11 in 2001
    • claimed consumers’ price of DIY sandpaper rose by as much as 70%

Below: Dist Ct dismissed complaint for lack of AT standing and lack of AT injury

Competitors exclusive agreements with retailers for supply of automotive sandpaper did not result in antitrust injury when the following were true:
  • all but one of the large retailers made exclusivity a condition for doing business with a new supplier
  • exclusivity requirement did not create entry barriers for supplier who was already inside the market as a leader
  • supplier could have competed for the same exclusive agreements
  • one exclusive dealer was replaced by another
rule 12
Rule 12

“we must reject claims under Rule 12(b)(6) when antitrust standing is missing.”

  • An antitrust claimant must do more than make allegations of consequential harm resulting from a violation of the antitrust laws, even when the claim is supported by an allegation of intent to harm the claimant and that claimant’s injury is causally related to an antitrust violation
naked is not enough
Naked is not enough

AT claimant must put forth factual allegations plausibly –not just possibly- suggesting antitrust injury, not simply a “naked assertion”

  • 3M’s up-front payments and multi-year exclusive arrangements, while injuring and damaging claimants, actually reflect the kind of competition that AT laws were designed to foster
AT laws protect competition, not competitors

(AT laws used to protect competition, says a gloomy dissent)


Microsoft in the EU

  • In 2004, the European Commission held that MS abused its dominant position under Article 82(b) of the EU Treaty re: compatibility of work group server OS + tying Windows Media Player to Windows OS
  • Result:
    • €497 million + in fines in 2006
    • CFI upheld EC’s decision in September 2007
    • In February of 2008, the EC fined Microsoft Corporation €uro 899 million / US$ 1.34 billion for failing to comply with its obligations under the EC’s March 2004 Decision.
      • The fine is the largest ever against a single company in an EU antitrust case and brings total fines leveled against Microsoft to nearly 1.7 billion €uros/$2.5 billion
the abuses of dominance
The abuses of dominance

1. Refusal to disclose and authorize the use of interoperability information

  • CFI’s Standard is that an abusive refusal:
    • Relates to indispensable input - other undertakings require it to compete downstream
    • Excludes effective competition
    • Prevents appearance of new product for which there is a demand
    • Is not objectively justified
2. TyingStandard for tying under Article 82 of EC Treaty:
  • Dominance in tying market
  • Two separate products
  • Tying practice must have market-distorting foreclosure effect
  • Conduct is not objectively justified
And in January 2008, the European Commission launched two new formal Article 82 EC Treaty investigations against Microsoft…
  • The Commission will investigate “as a matter of priority” allegations that Microsoft has abused its dominant position in a range of product markets, including its Office suite. Apparently, the Commission’s investigation will examine whether Microsoft's new file format Office Open XML, as implemented in Office, is sufficiently interoperable with competitors' products
  • The second investigation relates to Internet Explorer, a product, among others, that is alleged by several complaints received in Brussels to have been illegally tied to Windows
the discussion paper
The Discussion Paper
  • In December 2005, the EC Directorate-General for Competition formally began work on a policy review of Article 82 as it applies to discretionary abuses with publication of “The Discussion Paper”
  • EC postponed work on the Article 82 policy review until after the MS decision
  • Will it happen soon?
what are we to make of twombly
What are we to make of Twombly?

“We are not alone in finding the opinion confusing. … The issues raised by Twombly are not easily resolved and likely will be a source of controversy for years to come.” Phillips v. County of Allegheny, 515 F.3d 224, 234 (3d Cir. 2008).

recollect that in twombly
Recollect that in Twombly …
  • Plaintiff alleged ILECs (a/k/a former “Baby Bells”) conspired:
    • To make life miserable for CLECs
    • To stay out of each others’ territory
general problem what facts does the complaint need
General problem – what “facts” does the complaint need?
  • FRCP intentionally punted on the fact-law distinction – “short statement of the claim showing the pleader is entitled to relief”
    • Avoids nonsense re: ultimate facts, evidentiary facts, etc.
  • Every so often, the S Ct rules that notice-pleading means notice-pleading – not fact-pleading
conley v gibson
Conley v. Gibson
  • “a complaint should not be dismissed for failure to state a claim unless it appears beyond doubt that the plaintiff can prove no set of facts in support of his claim which would entitle him to relief”
  • Cf. Appendix of Forms – don’t need a lot of detail
but the supreme court
But the Supreme Court …
  • Rules, 7-2, that Twombly Complaint failed 12(b)(6);
  • Tells us all to quit citing Conley v. Gibson.
rule 8 a 2
Rule 8(a)(2) …
  • “short, plain statement of the claim showing pleader is entitled to relief”
  • Doesn’t need “detailed factual allegations”;
  • But, according to Twombly--
    • “[R]equires more than labels and conclusions”
    • “Factual allegations must be enough to raise a right to relief above the speculative level …, on the assumption that all the allegations in the complaint are true ….”
in section 1 context
In section 1 context …
  • “[W]e hold that stating such a claim requires a complaint with enough factual matter (taken as true) to suggest that an agreement was made.” (Emphasis added.)
  • “Asking for plausible grounds to infer an agreement does not impose a probability requirement at the pleading stage; it simply calls for enough fact to raise a reasonable expectation that discovery will reveal evidence of an illegal agreement.” (Emphasis added.)
cross currents
  • Not bringing back “fact” pleading. Cf. Erickson v. Pardus, 127 S. Ct. 2197 (2007) (per curiam).
  • But demanding “plausibility”—based on fact allegations, no?
  • In Allfeds, “Twombly & da(aft 2006)” picks up 5709 docs (as of May 6, 2008).
  • So, let’s just talk about a couple of very interesting circuit court cases.
judge posner takes a crack
Judge Posner takes a crack …

Limestone Development Corp. v. Village of Lemont, Ill., 520 F.3d 797 (7th Cir. 2008).

limestone development
Limestone Development
  • It never did develop—all due to nefarious RICOish scheming of village, officials, and adjoining landowner.
  • The 2003 predicate act—publishing a map in the Village News announcing a new park that included most of plaintiff’s property—which “impaired and thwarted [plaintiff’s] efforts to market its property.”
the fraud claim gets twomblied
The fraud claim gets Twomblied

Twombly teaches “that a defendant should not be forced to undergo costly discovery unless the complaint contains enough detail, factual or argumentative, to indicate that the plaintiff has a substantial case.”

more nice stuff if you are the movant
More nice stuff (if you are the movant)

“[t]he Supreme Court ha[s] warned against permitting a plaintiff ‘with a largely groundless claim to simply take up the time of a number of other people, with the right to do so representing an in terrorem increment of the settlement value, rather than a reasonably founded hope that the [discovery] process will reveal relevant evidence.” (emphasis added)

big case more facts
Big case=more facts

“In a complex antitrust or RICO case a fuller set of factual allegations than found in the sample complaints in the civil rules' Appendix of Forms may be necessary to show that the plaintiff's claim is not ‘largely groundless.’ If discovery is likely to be more than usually costly, the complaint must include as much factual detail and argument as may be required to show that the plaintiff has a plausible claim.” (Citations omitted.)

a pro movant opinion from the ninth circuit
A pro-movant opinion from the Ninth Circuit

Kendall v. VISA U.S.A., Inc., 518 F.3d 1042 (2008).

the story
The story …
  • Plaintiff merchants sued credit card co.’s and banks that are members of the associations that own the credit card co.’s.
  • Claimed the defendants had conspired to fix “merchant discount fees” and “interchange fees.”
the result
The result …

“We hold that Appellant’s First Amended Complaint failed to plead evidentiary facts [!] sufficient to establish a conspiracy, and we affirm [dismissal without leave to amend under Rule 12(b)(6)].

a narrow take on twombly
A Narrow Take on Twombly?
  • Stressed Twombly’s roots in the problem that “discovery in antitrust cases frequently causes substantial expenditures and gives the plaintiff the opportunity to extort large settlements even where he does not have much of a case.”
just an a t rule
Just an A/T rule?

At least for the purposes of adequate pleading in antitrust cases, the Court specifically abrogated the usual “notice pleading” rule, found in Federal Rule of Civil Procedure 8(a)(2) and Conley v. Gibson, which requires only “a short and plain statement of the claim showing that the pleader is entitled to relief,” to “give the defendant fair notice of what the ... claim is and the grounds upon which it rests.” Bell Atlantic, 127 S.Ct. at 1964, 1968.

but kendall cuts pretty deep
But Kendall cuts pretty deep

“The Court also suggested that to allege an agreement between antitrust co-conspirators, the complaint must allege facts such as a ‘specific time, place, or person involved in the alleged conspiracies’ to give a defendant seeking to respond to allegations of a conspiracy an idea of where to begin. Id. at 1970 n. 10.”

details details
Details, details …

“Appellants do not allege any facts to support their theory that the Banks conspired or agreed with each other or with the Consortiums to restrain trade. Although appellants allege the Banks ‘knowingly, intentionally and actively participated in an individual capacity in the alleged scheme’ to fix the interchange fee or the merchant discount fee, this allegation is nothing more than a conclusory statement. There are no facts alleged to support such a conclusion. Even after the depositions taken, the complaint does not answer the basic questions: who, did what, to whom (or with whom), where, and when?” (Emphasis added.)