Saturday, September 16, 2023

New FTC initiative and very recent D.C. Circuit dismissal of FTC antitrust case relate to use of patents in connection with Abbreviated New Drug Applications

On Tuesday (September 19), the Munich Local Division of the Unified Patent Court (UPC) intends to adjudge a preliminary injunction request in a life sciences case. I will do my best to share the news quickly. A preliminary injunction looms large according to what various observers (including specialized newsletters) say. We will see, but only one thing would really surprise me: if the antitrust-based affirmative defense in that case succeeded. While the UPC is a European court, defendant NanoString's lawyers argue that their client may prevail on a U.S. antitrust claim against patent holder 10x Genomics. Under U.S. law, those seeking to enforce antitrust law against patent holders exercising their monopoly rights face a very high hurdle to say the least.

From the West Coast (Qualcomm v. FTC, 9th Cir., 2020) to Texas (Continental v. Avanci et al., 5th Cir., 2022) to the East Coast (FTC v. Endo Pharmaceuticals, D.C. Cir., 2023), federal appeals courts have been rather clear in recent years that antitrust law does not trump patent law. Patents are monopolies, but there is a strong presumption that they are lawful monopolies. It is not 100% inconceivable that a patent holder may run afoul of U.S. competition rules. That, however, hasn't been the outcome in any recent case. It wasn't even a close call in any of those recent cases.

In this post I want to be nonjudgmental and simply analyze the state of affairs, which some may consider desirable while others may have different policy views. What some may deem judgmental (but is not intended as such) is my take that on the bottom line U.S. appeals courts effectively put patent law above antitrust law. They say things that suggest both are on equal footing. But in practice, if the monopoly rights conferred by patents on their holders are treated with enormous deference so that traditional anti-monopoly rules hardly ever apply, there isn't much of an opportunity for public or private antitrust enforcement. Whether for better or for worse is in the eye of the beholder.

Let's take a quick look at two very recent developments, both of which happen to involve the concept of Abbreviated New Drug Applications (ANDA), a fast-track approval process for generic drugs.

August 25, 2023 decision by the United States Court of Appeals for the District of Columbia Circuit in FTC v. Endo (appeal no. 22-5137)

The D.C. Circuit affirmed the D.C. District Court's dismissal of an FTC case over an exclusive license agreement between Endo Pharmaceuticals (represented by a Dechert team led by George Gordon) and Impax Laboratories (represented by a Kirkland & Ellis team led by Jay Lefkowitz).

The FTC had brought the case based on the observation that prices for a certain category of drugs (and I'm not going to take a position on opioids here as the focus is on the intersection of patent and antitrust law) increased after a patent holder (Endo) exited the market and granted someone (Impax) an exclusive patent license. Price hikes like that are often indicative of consumer harm. But in this case, both the district court and the appeals courts determined that a single patentee (as opposed to a research consortium) is free to grant an exclusive license to a licensee, even if it means that there will be only one market actor left.

There had been a patent infringement dispute between the two companies, provoked by an ANDA that disputed that the relevant Endo patents were valid and infringed. That one was settled in 2017 in the way that gave rise to the FTC's enforcement action.

The FTC tried to describe the Endo-Impax deal as very similar to an exclusive license agreement that the Supreme Court deemed an illegal noncompete contract in Palmer v. BRG of Georgia (1990). In footnote 1, the D.C. Circuit explains why the two cases are distinguishable:

"[In Palmer] an exclusive licensing agreement was a pretext for a noncompete agreement between two competitors, because the parties in Palmer did not require one another’s intellectual property to participate in the market for bar preparation courses. Here, by contrast, Impax’s ability to compete was completely contingent on the clarity of its license to use Endo’s patents, and the complaint itself alleges that Endo surrendered the right to press its suit against Impax through the 2017 Agreement."

Palmer was not about patents. The material in question was presumably protected by copyright, but copyright law is narrow and the Supreme Court took issue with the fact that the net effect was horizontal geographic market division.

Therefore, Palmer is of limited help if we want to find out where patent license agreements might run afoul of the antitrust laws. There could be a hypothetical case where company A licenses to company B a patent (or patent portfolio) P that it doesn't really need to license to make a certain product or offer a service, but the license agreement contains clauses that amount to geographic market division.

The FTC couldn't make that showing. The closest argument to the license being pretextual was that the settlement precluded the licensee from challenging the patents in question, which is, however, a standard term of patent license agreements as the licensing practitioners among you can confirm. Only because a party is contractually precluded from challenging certain patents doesn't mean such challenges would necessarily have succeeded. Even without such a contractual clause, someone who has taken a license often doesn't even want to challenge the licensed patents as the main (or only) beneficiaries would be unlicensed competitors. And it doesn't prevent any third party from challenging those patent rights in an effort to compete in the relevant market.

The D.C. Circuit provides some high-level guidance:

"In a future case, the Commission is free to plead that a licensing agreement results in unjustifiable competitive harms, so long as it explains how those harms exceed what the Patent Act and settled precedent permit, which it has failed to do here."

So the starting point of any U.S. antitrust analysis of an exclusive license agreement will be that "both the Supreme Court and the Patent Act have blessed [such contracts] as lawful," and there must be something more--in fact, something egregious--than exclusivity to establish an antitrust violation. A pretextual license such as in Palmer (where the relevant price, by the way, increased from $150 to $400 as a result of horizontal geographic market division) is presumably not the only such scenario, but for now there's no other example of an exclusive IP license being anticompetitive. It would take "allegations establishing that [an agreement] created anticompetitive effects greater than that authorized by settled law and precedent" that is favorable to exclusive IP licenses.

September 14 policy statement by the FTC on brand pharmaceutical manufacturers' improper listing of patents in the Food and Drug Administration's (FDA) 'Orange Book'

On Thursday, the FTC issued a policy statement (PDF), press release, and an additional statement by Chair Lina Khan (PDF) concerning "improper" patent listings in the FDA's Orange Book.

The idea of the fast-track approval process called ANDA is that generic drugs should be approved quickly, but not so quickly that a patent holder cannot enforce its rights. That's why there is an automatic 30-month stay of approval in the event of patent litigation by the manufacturer of the original product. I find the term "brand drug manufacturer" a bit misleading as there are generics companies with fairly well-known brands, too.

The FTC believes to have identified a rampant form of abuse in the form of drug makers including patents in the FDA's Orange Book that aren't really needed. This is somewhat comparable to an overdeclaration of allegedly essential patents in connection with industry standards, but with the effect that the approval of competing products can be delayed (while standard-essential patent owners can only sue after an implementer has released an unlicensed product).

What lends the FTC initiative significant credence is that the FDA supports the new statement, effectively making it an inter-agency initiative.

Unlike in FTC v. Endo, which involved Sherman Act Section 1 and 2 claims, the FTC intends to tackle such improper listings as unfair methods of competition under Section 5 of the FTC Act. In any event, the D.C. Circuit's FTC v. Endo decision does say that anticompetitive behavior that goes beyond what is lawful under patent law can be an antitrust violation.

Where I see a practical challenge for the FTC is that any overdeclarations would have to be shown to have been made in bad faith. However, patent law is sufficiently subjective (for example, a fairly high percentage of claim constructions are overturned on appeal) that drug makers will often be able to argue that even though their position on the inevitability of an infringement of a certain patent by a type of drug may have been wrong, it wasn't wholly unreasonable in the first place. That is, for example, what defendants sometimes argue in order to escape willfulness enhancements of damages verdicts. The FTC says that patents are sometimes listed in the FDA's Orange Book even though their claims just don't read on the drug in question--but what will the courts of law say in a given case?

The FTC's policy statement may now dissuade drug makers from adding patents to the FDA's Orange Book that they'd have listed before. In that case, the FTC may achieve a positive effect without having to litigate. But if it does have to go to court, those cases threaten to become rather difficult to decide--and possibly even more difficult to win.