Anticompetitive behavior in the pharmaceutical sector (Fraud, Vexatious litigation & Settlements)

1. Anticompetitive behavior in the pharmaceutical sector(Fraud, Vexatious litigation & Settlements) Read Chapter 12 “AstraZeneca I” « AstraZeneca II » “NOBELPHARMA” “ACTAVIS” “Lundbeck” Switching in the Pharmaceutical Sector - an abuse or legitimate commercial consideration? by Jacob Westin (HHL) It is an important discussion. Should perhaps be Walker Process, but NP is a nice summary of WP and PRE. Compares well to AstraZeneca.

2. Intro • Justin, Gambro? and Björn • What was Björn’s point? • We have covered Article 101 and fundamental 102 • We are now at the edge • Pharma and IT/telecom • Trying to tie it together in the paper discussion • We are looking for a balanced theory • Can you do the 13 rather than 14 January • Let´s just say some words about trade secrets

3. Introduction • The European tendency has been to make a clear distinction between the existence of the IPR and its exercise; • The US view has rather been to grant antitrust immunity for matters that come within the scope of the relevant IPR also as they relate to the exercise of that IPR. • On the other hand US IPR is complemented by a “misuse doctrine” which gives a similar result as the EU competition – exercise theory; • Are these valid distinctions or are there situations where competition/antitrust should be used to correct unreasonable outcome in the IPR process – which even affect the existence of the IPR? • Are there other laws, which allow or mandate certain activities and competent authorities, which deal with these matters. The question today is if competition law be a “Mädchen fur Alles”:

4. The EU pharma sector investigation • IPR legislation is the obvious example, where PTOs carefully control the subsistence of the right; • The Telecom industry is carefully regulated and supervised by competent authorities; • Pharmaceutical legislation provides detailed rules on every aspect of the handling of medicines which are monitored by governmental agencies; • The question is if in addition to these specific rules also antitrust should apply and if so will antitrust considerations supersede conflicting specific rules? • The result of the EU Pharma Sector Investigation has made the discussion transparent.

5. (a) Fraud (i) Existence/exercise distinction, (ii) fraud on the patent office, (iii) misuse of laws.

6. (a) Existence/exercise distinction • Historically, the CJEU has made a distinction between the existence and the exercise of IPRs. Competition law would only impact the latter. With the (2012) AstraZeneca, Case C-457/10this distinction is called into question; • The case concerns AstraZeneca’s conduct in front of the national IPR authorities when trying to obtain an extension of its patent for the block buster Losec. Losec patent was subject of extension during the transition period and different introductory periods applied in different countries. It was therefore of essence when AstraZeneca had obtained its first approval in the Union to market the product. It made a difference if it was when the technical approval was obtained or when final price agreement had been reached with national authorities. AstraZeneca opted for the latter, but did not disclose its underlying assumption to the national authorities. • Is such misleading conduct a question to be addressed under IPR legislation, with the consequence that the granted extension is withdrawn – or is it also an antitrust abuse with possible antitrust remedies? • Relying on the US approach in Trinko, it could be argued that the national IPR authorities are competent to handle such issues (as some did). This was, however, not the European view:

7. First abuse – misleading representations • Background: AstraZeneca developed LOSEC (Omeprazol), which became the worlds most sold pharmaceutical, replacing its predecessor Zantac. According to the Commission Zantac and Losec operated on different markets – severe and lighter gastrointestinal problems. AZ used different methods to keep generics and parallel trade off the market. • Legal issues: Was AZ dominant in a relevant market; did AZ abuse its special responsibility by making misleading representations to national patent offices. • Held (by the Commission, the GC & the CJEU): AZ dominant on a narrowly defined relevant market. Misleading representation to the PTO is in itself an competition law abuse: A dominant undertaking cannot use any means, including highly misleading representation to the PTOs, to obtain an IPR. It is manifestly not consistent with competition on the merits and the specific responsibility on such an undertaking not to prejudice, by its conduct, effective and undistorted competition (98); An effect does not necessarily have to be concrete, it is sufficient to demonstrate that there is a potential anti-competitive effect (112).

8. (b) Vexatious litigation(i) Walker process, (ii) sham litigation, (iii) …

9. Willful misrepresentation & sham litigation • AstraZeneca entered into licensing agreements (at the time the underlying patent was still valid), threatened generic companies with litigation and actually filed infringement suits in Norway and Germany based on its patent extension. This conduct was not addressed as a specific antitrust offence. • In the US to different approaches have developed to vexatious conduct: - Walker process:To strip a patentee of its exemption from the antitrust laws an alleged infringer must prove that the patent was obtained by knowingly and willfully misrepresenting facts to the PTO. To reconcile patent and antitrust laws, a distinction is maintained between patents procured by “deliberate fraud" and those rendered invalid for "inequitable conduct“, which is a less offensive concept. Inequitable conduct serves as a shield invalidating the patent, while fraud serves as a sword and exposes a patentee to antitrust liability. Fraudulent omission is as reprehensible as a misrepresentation. (Walker Process, 382 U. S. 172 (1965)) - Sham litigation: Irrespective of the patentee’s conduct before the PTO, an antitrust claim can be based on a baseless suit. An antitrust plaintiff must prove that the suit was (i) objectively baseless as no reasonable litigant could realistically expect success on the merits and (ii) subjectively motivated by a desire to impose anti-competitive injury (iii) rather than to obtain a justifiable legal remedy. (PRE v. Columbia Pictures, 508 U. S. 49 (1993).

10. NOBELPHARMA v. IAB (Fed.Cir. 1998) • Background (1977) Branemark publishes book - this is prior art (not disclosed to patent authorities); (1979) Branemark applies for Swedish patent; and (1980) U.S. patent. (1980) Branemark licenses technology to Nobelpharma. (1982) patent issued. (1991) Nobelpharma (as licensee) sues 3I for infringement of patent. 3I asserts invalidity, antitrust violation. • Legal issue Patent invalid, but is it also antitrust infringement? Discussion Fraud on patent office strips patentee of antitrust immunity (Walker Process) or infringement suit is a “mere” sham (Noerr and PRE). Shield – sword. Conduct is an equitable defense in patent infringement action. Showing of sham not required to impose antitrust liability. • Held ‘891 patent invalid for failure to disclose best mode. Finding of antitrust liability for Nobelpharma’s knowledge of Branemark’s fraud when filing infringement suit.

11. AstraZeneca - Antitrust and other conflicting laws • The second offence AstraZeneca was accused of was withdrawing its marketing authorization in the Nordic countries in the for Losec Tabs and replacing it with a new galenic form (mups); • The procedure was performed in accordance with relevant medicinal laws, but had as a consequence that it would be more burdensome for competitors to register generic versions of Losec; • The real issue is again if antitrust legislation shall be used to offset shortcomings in other legislation; • It also raises the question of predictability for the dominant actors, who have a special responsibility to compete on the merits; • Finally, the standard of review in these complex procedures must be scrutinized.

12. Second abuse - withdrawal of Marketing authorization • Legal issue: The second accusation was that AZ abused its special responsibility by withdrawing its marketing authorization for one galenic form (LOSEC capsules) and replacing it with another (MUPS tablets), thereby creating obstacles for generic competitors. • Held (by the Commission, the GC & the CJEU): - A dominant company is entitled to deal with competition from generics; Legitimate and a part of the normal competitive process. - Deregistration, without objective justification, to hinder generics and parallel imports, does not come within the scope of competition on the merits. - The Marketing Authorization is not an IPR and the submitted documents are held in confidence by the authorities only during a limited time frame. Thereafter they should be available to generics (even if there have alternative routes of registration). - Not a compulsory license, nor an expropriation (129). - The illegality of abusive conduct under Article 102 TFEU is unrelated to its compliance or non-compliance with other legal rules. Abuses consist of behavior which is otherwise lawful under branches of law other than competition law (132).

13. Per se – rule of reason • US …* • EU - agreements • Hard core provisions in the TTR • Rule of reason hardly applicable to these provisions • Otherwise Article 101 balancing • EU – dominance • Special responsibility to compete on the merits

14. Special responsibility to compete on the merits • AstraZeneca is another case regarding abuse of dominance providing a victory to the Commission. In fact, the Commission has not lost any case regarding the dominant company’s special responsibility to compete on the merits; • Good for the Commission, but is it also a proof of the fact that the notions are unclear, lack predictability and accordingly legal certainty is not provided to dominant actors? • Special responsibility in EU law is an undefined term which allows a wide discretion to the authorities; • Likewise the more recently introduced competition on the merits adds a broad undefined, discretionary element which can encompass much; • There is a clear need to establish clarifying languages, which makes the notions operable for industrial actors.

15. Standard of review • In the US the antitrust procedure is adversarial either as a private action, but also when suits are initiated by the authorities; • On appeal the court has a far-reaching discretion to deal with the case de novo or limit the exercise to …* • The situation in the EU is radically different: • The Commission serves as lawmaker, investigator, prosecutor and decision maker in antitrust matters and controls the entire procedure; • On appeal, the General Court is limited to a administrative review and will verify that the Commission has not committed a …*. The Commission is allowed a wide discretion in complex economical and technical matters; • The appeal to the CJEU can only be on a legal issue and the court will verify that the General Court has not ….*. • The review process adds to the inequality of arms in the process and underscores the legal uncertainty in the EU competition process.

16. (c) “Pay-for-delay” SettlementsA harmful activity or a reasonable business practice?

17. Pay-for-delay settlements, patent settlements or reverse payments • Settlements (often involving cross-licensing of IPRs) an efficient means to avoid litigation. US courts have until recently favored settlements.; • Settlements prevent litigation costs; creates certainty. However, often reduced competitive pressure, higher prices, consumer harm. Removes generics’ incentives to compete and to challenge bad patents; • In cross-licensing between horizontal competitors, USG 5.5 questions if a settlement diminishes competition been actual or potential competitors. Such settlements may be challenged as unlawful restraints of trade; • In pharmaceuticals settlements often occur between originators and generic rivals. Originator pays and generic delays; • 1984 Hatch-Waxman Act introduced special procedures: Prospective generic must assure FDA of non-infringement under the “paragraph IV” route*;Incentives for generic to sue ”bad patents” to becomefirst mover.

18. Initiatives on either side of the Atlantic • The US authorities have long questioned the practice of pharma companies delaying generic entry by compensating the competitors – often as a settlement of a patent invalidation case; • The EU sector investigation generally pointed at different methods of delaying generic entry and especially the Pay-for –delay settlements; • The matter has been highly controversial with split US Circuits and protracted EU investigations; • With two days difference the US Supreme Court took positions in the matter and EU Commission promtlyfollowed suit:

19. US treatment of pay for delay • US courts have in the past adopted a “scope of the patent test*” when evaluating settlements. Under that test, reverse payments are permitted as long as • the exclusion does not exceed the patent’s scope, • the patent holder’s claim of infringement was not objectively baseless, and the patent was not procured by fraud on the U.S. Patent and Trademark Office (PTO). • 3rd Cir applied a "Quick Look Test” in K-dur * holding that a reverse payment agreement was prima facie evidence of an unreasonable restraint of trade." The presumption could (rarely) be overcome by showing: • There was no reverse payment because any payment was "for something other than delay of market entry." • The reverse payment offered a competitive benefit, i.e., it somehow increased competition. • The matter was adjudicated in 2013 by the Supreme Court in Actavis v. FTC:

20. (US) FTC v. ACTAVIS, 17/6 2013 • Background: (2003) Solvay receives NDA (2000) and patent; (2003) Actavis files ANDA for generic and claims Solvay’s patent is invalid; Solvay begins paragraph IV litigation against Actavis; (2006) Parties settle, Solvay to pay $19-30 million annually to Actavis (and one-time payment to three others), provided that Actavis delays entry to market to 2015; (2009) FTC files suit against settlement.   • Legal issues: Is pay-to-delay settlements an unlawful ‘reverse’ license agreement? • Discussion: Not certainif patent is valid or not (recall presumption of validity); Antitrust immunity; Patent and antitrust policy; Do patent settlements violate antitrust law; Limitations on activities in which patent owners may lawfully engage; General policy favoring settlements of disputes; Patent policy of eliminating unwarranted patent grants; Hatch-Waxman - legislative history condemning pay-for-delay. • Held: Settlement possible antitrust violation; Parties may settle on permissible terms; No ‘quick look’ review - ‘rule of reason’ applies. 

21. Dissenting opinionsCHIEF JUSTICE ROBERTS, with whom JUSTICE SCALIA and JUSTICE THOMAS • A patent holder acting within the scope of its patent does not engage in any unlawful anticompetitive behavior; it is simply exercising the monopoly rights granted to it by the Government. Its behavior would be unlawful only if its patent were invalid or not infringed. The scope of the patent should be determined by reference to patent law. • The majority points to no case where a patent settlement was subject to antitrust scrutiny merely because the validity of the patent was uncertain. Not one. It is remarkable, and surely worth something, that in the 123 years since the Sherman Act was passed, we have never let antitrust law cross that Rubicon. • The majority departs from the settled approach separating patent and antitrust law, weakens the protections afforded to innovators by patents, frustrates the public policy in favor of settling, and likely undermines the very policy it seeks to promote by forcing generics who step into the litigation ring to do so without the prospect of cash settlements. I would keep things as they were and not subject basic questions of patent law to an unbounded inquiry under antitrust law, with its treble damages and famously burdensome discovery.

22. Number of patent Settlements in the EU

23. ThirdCommissionReport, 25/7 2012

24. (EU) Lundbeck 19/06 2013 Commission fines Lundbeck for delaying market entry of generic medicines, IP/13/563 • In addition to its inquiry into the pharmaceutical sector and 2012/2013 statements of objections in the context of two other investigations (perindopril, a cardio-vascular medicine and fentanyl, a pain-killer), the Commission has monitored patent settlements which limit generic entry against a value transfer. The vast majority of patent settlements are unproblematic but the persistence of potentially problematic settlements shows that the Commission should remain vigilant. • Citalopram is a blockbuster antidepressant medicine and Lundbeck's best-selling product. After the basic patent for the citalopram expired, Lundbeck only held process patents with limited protection. In 2002, Lundbeck agreed with generic companies to delay the market entry of cheaper versions in return for substantial payments and other inducements. • Internal documents refer to a "club" being formed and "a pile of $$$" to be shared among the participants. Lundbeck paid significant lump sums, purchased generics' stock for the sole purpose of destroying it, and offered guaranteed profits in a distribution agreement. The agreements gave Lundbeck the certainty that the generics producers would stay out of the market for the duration of the agreements without giving the generic producers any guarantee of market entry thereafter. These agreements are very different from other settlements of patent disputes where generic companies are not simply paid off to stay out of the market. • The agreements violated EU antitrust rules that prohibit anticompetitive agreements. The Commission imposed a fine of € 93,8 million on Lundbeck and fines totaling € 52,2 million on the generic producers.

25. Questions: • Is pay-for-delay settlement welfare enhancing? • Does pay-for-delay settlement allow parties to plan and invest into new products? • How is society in general affected by pay-for-delay settlement? • Will originator company removes generic companies' incentives to compete - or to challenge the patent - by transferring money to generic producer? • Will elimination or delay of cheaper generics through payments or other benefits lead to consumer harm and result in bad patents artificially alive? • Is pay-for-delay settlement prohibited • IPR or competition law infringement? • Possible IPR remedies? • Does it replace competition with collusion. • Will it reduce competitive pressure from generics?

26. Exhibits Exhibits

27. ShieldHeart Licensing Provisions

28. Article 6 - Indemnifications • (a) ShieldHeart shall indemnify and save Licensee harmless from all losses, costs including attorneys fees, or damages which Licensee may be held liable to pay as a result of claims or suits arising out of any injuries to persons and/or damage to property due to defects of the Product due to warranties or negligence on ShieldHeart's part or written directions given to Licensee by ShieldHeart for manufacture and use of the same. • (b) Licensee in turn shall indemnify and save ShieldHeart harmless from all losses, costs, or damages which ShieldHeart may be held liable to pay as a result of claims or suits arising out of any injuries to persons and/or damage to property arising from Licensee's manufacture and distribution of the Product. • (c) The parties shall provide each other with certificates indicating that they themselves or through their respective affiliates are covered by sufficient product liability insurance. • (d) The parties shall promptly notify each other of any claims or suit which come to their attention and shall allow the other to participate in the defence of any such suit or claims. • (e) Licensee retains the right to settle any "nuisance claims" up to a maximum amount of 5.000 € in an amicable way provided that any such settlement shall in no way admit or impute any liability whatsoever on the part of ShieldHeart. At the request of Licensee, ShieldHeart will cover fifty percent (50%) of such settlement costs. • (f) The parties agrees to immediately inform each other of any adverse side effects caused by Product inside the Territory which comes to their attention hereafter. ShieldHeart shall remain free, on the basis of objective scientific evidence, to decide that it is in the interest of the patients that the Product is withdrawn from the market, either in isolated lots (e.g. in case of product defects) or on a permanent basis (e.g. in case of undesirable side-effects should be discovered). Licensee will provide such assistance as may be reasonably required to promptly enforce such product withdrawal. • (g) The indemnification provisions of this Article shall survive the termination of this Agreement.

29. Exhibits (“Timo”)

30. Settlement categories

31. FTC V. Actavis – proceduralhistory • Solvay Pharmaceuticals obtained patent and MA for AndroGel (exp. 2020). • Watson (now Actavis) and another generic producer filed applications for generic drugs modeled after AndroGel & certified under para IV that Solvay’s patent invalid and not infringed by their drugs. • Solvay sued i.a. Actavis under 35 U. S. C. §271(e)(2)(A), claiming patent infringement. • FDA eventually approved Actavis’ generic product. • Instead marketing its drug, Actavis entered into a “reverse payment” settlement with Solvay 2006, agreeing not to market its generic for number of years and to promote AndroGel in exchange for millions of dollars. • Other generic manufacturers aligned in the patent litigation made a similar agreement with Solvay.

32. FTC V. Actavis – proceduralhistory • FTC filed suit • Feb. 2010: District Court dismissed complaint. • April 2012: Eleventh Circuit concluded that as long as the anticompetitive effects of a settlement fall within the scope of the patent’s exclusionary potential, the settlement is immune from antitrust attack. • Court affirmed the complaint’s dismissal noting that the FTC had neither alleged nor shown that challenged agreement excluded competition to greater extent than would the patent, if valid. • Recognized that if no settlement, a court might hold patent invalid. But since public policy favors settlement of disputes, courts could not require parties to continue litigating in order to avoid antitrust liability.

33. Questionsreferred to the SupremeCourt • The FTC sought certiorari • Question:Whether reverse-payment agreements are per se lawful unless the underlying patent litigation was a sham or the patent was obtained by fraud (as the court below held), or instead are presumptively anticompetitive and unlawful (as the Third Circuit has held). • US Supreme Court granted the FTC’s petition, since different courts have reached different conclusions about the application of the antitrust laws to Hatch-Waxman-related patent settlements,. • Compare, e.g., id., at 1312 (case below) (settlements generally “immunefrom antitrust attack”); In re Ciprofloxacin Hydrochloride Antitrust Litigation, 544 F. 3d 1323, 1332–1337 (CA Fed. 2008) (similar); In re Tamoxifen Citrate Antitrust Litigation, 466 F. 3d 187, 212–213 (CA2 2006) (similar), with In re K-Dur Antitrust Litigation, 686 F. 3d 97, 214–218 (CA3 2012) (settlements presumptively unlawful). • Decision wasrendered 17 June 2013

34. Abstract of the outcome • 5-3 opinion delivered by Justice Breyer (joined in by Justices Kennedy, Ginsburg, Sotomayor, and Kagan) • In a three-part holding the Court declined to hold that reverse payment settlement agreements are presumptively unlawful, and that “Courts should apply a “rule of reason”, rather than a “quick look” approach.”  • Yet, the Court also held that the FTC should have been allowed to prove its antitrust claims and that the exclusionary potential of a patent does not immunize drug patent settlement agreements from antitrust attack.  • The FTC almost immediately issued a press release hailing the decision as a “significant victory.”

35. FTC v. Actaviscntd. • A) Although the anticompetitive effects of the reverse settlement agreement might fall within the scope of the exclusionary potential of Solvay’s patent, this does not immunize the agreement from antitrust attack.  • B) 5 considerations lead to conclusion that the (partially acknowledged) concerns by the 11th Circuit should not determine the result here and that FTC should have been given the opportunity to prove its antitrust claim. • the specific restraint at issue has the “potential for genuine adverse effects on competition”. • these anticompetitive consequences will at least sometimes prove unjustified.  • where a reverse payment threatens to work unjustified anticompetitive harm, the patentee likely has the power to bring about that harm in practice. The size of the payment from a branded drug manufacturer to a generic challenger is a strong indicator of such power. • an antitrust action might be more feasible administratively than the Eleventh Circuit believed. • the fact that a large, unjustified reverse payment risks antitrust liability does not prevent litigating parties from settling their lawsuits.  • C) Court declines to hold that reverse payment settlement agreements are presumptively unlawful.  Courts reviewing such agreements should proceed by applying the “rule of reason”, rather than under a “quick look” approach. 

36. Dissent by C.J. Roberts (joined by J. Scalia & JThomas (J. Alito recused) • “settling a patent claim cannot possibly impose unlawful anticompetitive harm if the patent holder is acting within the scope of a valid patent and therefore permitted to do precisely what the antitrust suit claims is unlawful“ • "Good luck to the district courts that must, when faced with a patent settlement, weigh the 'likely anticompetitive effects, redeeming virtues, market power, and potentially offsetting legal considerations present in the circumstances.'“ • ” decision may very well discourage generics from challenging pharmaceutical patents in the first place”

37. FTC v. Actavis-Implications & reactions • More legal uncertainty/ambiguity in the name of utilitariangoals • As pointed out in the dissent: district-courtsface a tough job • In turn: brand and generic companies will have to determine on a case-by-case basis whether and how to structure drug patent settlement arrangements. Any agreement might be reviewed……. • Analyst Ronny Gal (Sanford Bernstein): "If I were a patent attorney in the drug world, I would be opening a bottle of Champagne right now. It's basically a 'full-employment of patent attorneys' decision." • The five factors identified by the court require particular caution 

38. Reactions • FDA: ”The Supreme Court’s decision is a significant victory for American consumers, American taxpayers, and free markets. The Court has made it clear that pay-for-delay agreements between brand and generic drug companies are subject to antitrust scrutiny,…” • PhRMA: Glad that FTC’s “presumption of invalidity” attempt was unanimously rejected, BUT the “Court’s decision creates a degree of uncertainty that will make it less likely that innovator pharmaceutical and generic companies will be able to settle these disputes in the future.” • GPhA: “the Court’s ruling will require generic companies to take on a greater administrative burden to pursue a patent challenge, potentially lowering the number of challenges.  As a result, consumers may have access to fewer generic options.”   • Actavis: “althought it “does place an additional and unnecessary administrative burden on our industry”, it “continues to provide for a lawful and legitimate pathway for resolving patent challenge litigation in a manner that is pro-competitive and beneficial to American consumers.”

39. Conclusions, Comments & Discussion • The Supreme Court refused to give the FTC what it wanted: a complete ban on patent settlements. But also gave the agency the right to continue pursuing legal challenges to individual settlements. • Majority failed to provide clear and unambiguous guidance as to how patent settlements could be structured to avoid antitrust exposure short of litigating a patent dispute to the end. • In practical terms, we will see a lot of continued litigation as FTC will continue to challenge these agreements • More class-action lawsuits filed to challenge patent settlements because of the Supreme Court ruling. • Does the evolving EU approach resemble the US ”rule of reason” approach? (3rd PS report, Commisson’sobjections and pending Lundbeck decision).

40. Next class • Reading assignment Chapter 2 • Gr. 1 * • Gr. 2 * • Gr. 3 * • Gr. 4 * • Preparations for next week according to assignment.   • Individual assignment. Licensing seminar next Monday. Be sure to get a firm grip on your subject. Identify initial sources and consider your exact purpose – preferably presented in a problematical way. • [Group assignment. Meet and discuss how you intend to approach the negotiation. Group 1 and 3 Swedish Licensor and 2 and 4 French licensee. 1/3 and 2/4 shall decide on a schedule for negotiations, drafting and review of the agreement leading to an agreement before winter brake. ]