Background

The Hatch-Waxman Act governs pharmaceutical drug patents.  The act is aimed at balancing innovation and competition; it attempts to protect strong patents and invalidate weak patents.  One particularly controversial section grants a 180-day exclusivity period to the first generic company to file for FDA approval.  At first glance, such a provision appears logical, as it should incentivize generics to challenge weak or invalid drug patents and thereby increase the number of generic drugs available to consumers.  Unfortunately, as Prof. Scott Hemphill of Columbia Law School explains, the first-to-file receives the exclusivity period regardless of whether or not they ultimately invalidate the branded company’s patent or successfully avoid infringement.  Thus, such a scheme instead encourages the branded company to simply buy-off the only generic eligible for the lucrative exclusivity period, rather than risk facing the unpredictability of a lay judge or jury in court with a potentially limited science background.

Such pay-for-delay settlements have been routinely challenged over the past decade in numerous circuit courts but have not yet been addressed by the Supreme Court of the United States.  Despite heavy lobbying from the Federal Trade Commission (FTC), the Supreme Court denied certiorari in a pay-for-delay case as recently as March 2011, presumably because the three most recent circuits to weigh in on the issue – In re Ciprofloxacin Hydrochloride Antitrust Litigation (Fed. Cir. 2008), In re Tamoxifen Citrate Antitrust Litigation (2nd Cir. 2006), and Schering-Plough Corp. v. FTC (11th Cir. 2005) – all held such settlements as per se lawful absent fraud.  Thus, a crucial circuit split demanding immediate attention did not exist.  On July 16, 2012, however, the landscape drastically changed.  In a surprising decision, the Third Circuit disagreed with the other circuits and held that pay-for-delay settlements are presumably unlawful and anticompetitive.

In Re K-dur Antitrust Litigation

The case at issue is In Re K-dur Antitrust Litigation (hereinafter K-dur).  K-dur, a drug manufactured by Schering-Plough Corporation, is a sustained-release potassium chloride supplement used to treat potassium deficiencies.  Generic company Upsher-Smith Laboratories decided to produce a generic version of the drug, and Schering-Plough sued for infringement of its patent on K-dur’s outer coating allowing for the drug’s sustained-release.  Rather than resolving the issue in court, Schering-Plough agreed to pay Upsher-Smith a minimum of $60 million over three years in exchange for Upsher-Smith agreeing to refrain from producing its generic for slightly over four years.  A class of wholesalers and retailers, including CVS Pharmacy and Rite Aid Corporation, then filed suit against the two pharmaceutical companies, alleging the pay-for-delay agreement was a violation of antitrust regulations.

Following the shocking ruling by the Third Circuit that such a settlement is presumably unlawful, Merck, who recently acquired Schering-Plough, immediately filed a petition for certiorari to the Supreme Court on August 24, 2012.  Given the circuit split, it appears the likelihood of the Court granting certiorari in K-dur is a slam-dunk, right?  Not so fast.

FTC v. Watson Pharmaceuticals, Inc.

Earlier this month, the FTC appealed the Eleventh Circuit’s Androgel® pay-for-delay case FTC v. Watson Pharmaceuticals, Inc. (hereinafter Watson) to the High Court.  The FTC, while agreeing with Merck that the Supreme Court must address the pay-for-delay issue, argued in its petition for certiorari that Watson and not K-dur is the preferable case for the Court to review.  The FTC cited the following four reasons: (1) Watson is a petition by an experienced federal agency while K-dur involves private class-action litigation; (2) Watson involves a motion to dismiss while K-dur concerns a motion for summary judgment; (3) the patent in Watson remains valid until 2015 while the patent in K-dur already expired and thus K-dur only concerns retroactive damages; (4) the FTC in Watson relies on an argument of patent invalidity while the plaintiffs in K-dur do not (see pages 29-32 of the cert. petition).

Conclusion

The Supreme Court now has four choices to mull over:  grant certiorari in K-dur, grant certiorari in Watson, grant certiorari in both cases and consolidate, or decline to hear either case.  The latter appears unlikely, as all parties involved – pharmaceutical companies, the FTC, pharmacy retailers, drug wholesalers, the public – want the Court to stop beating around the bush and address the pay-for-delay issue head on.  And after the recent Third Circuit decision, there is a crystal-clear circuit split.   Hopefully, after over a decade of high-profile settlements and litigation, the Court will finally provide some closure to this issue.

AT&T presented three main points designed to show that the cases by Sprint and
Cellular South should be dismissed. First AT&T argues that because Sprint and Cellular South are competitors—not consumers—in this market, both lack standing to bring an antitrust suit. The economic justification behind enjoining a horizontal merger among competitors, such as AT&T and T-Mobile, is based on the theory that the merger will lead to a more concentrated and less competitive market which will, in turn, lead to higher prices and reduced innovation. AT&T argues that even if the merger were to result in less competition and higher prices—a result AT&T says would not occur—any losses would be felt by consumers not competitors. AT&T goes on to argue that what Sprint and Cellular South are actually concerned about is increased competition from a more efficient unified AT&T/T-Mobile. AT&T argues that antitrust law does not provide any recourse for a competitor’s concern about losses resulting from a rival’s increased efficiency and competitiveness. AT&T also submitted a very powerful piece of evidence against Cellular South in this case. In their motion to dismiss the case, AT&T included an email it received from Hu Meena, CEO of Cellular South. Mr. Meena wrote that if the companies came to an agreement through which Cellular South would build a next generation LTE network in Mississippi which AT&T would use for roaming, and AT&T guaranteed reasonably priced access to its networks for Cellular South’s roaming needs for the next 10 years, Cellular South’s antitrust concerns would be alleviated. AT&T used the email to suggest that Cellular South was exploiting the lawsuit as a way of advancing its own strategic interests.

AT&T’s second point is a response to claims by Sprint and Cellular South that an AT&T/T-Mobile merger will reduce Sprint’s and Cellular South’s access to new wireless devices. Sprint and Cellular South argue that after the merger AT&T will be able to “coerce exclusionary handset deals” from device manufacturers effectively freezing competitors out of the market. AT&T responds that it is well recognized that exclusive handset deals are generally pro-competitive and encourage company differentiation. The only way that exclusive deals hurt competition is when they allow one party to unreasonably deprive another of access to goods. AT&T argues that such an outcome is extremely unlikely in this market as there are a great variety of handset manufacturers who produce many different handset models. Between 2006 and 2010 the number of handset manufacturers that distribute their products in the U.S. market increased from 8 to 21 and these manufacturers produced 302 different models. Therefore, AT&T contends that Sprint and Cellular South failed to provide any factual allegations which indicate they would be frozen out of the handset market.

AT&T’s final point was in response to claims by Sprint and Cellular South that the merger would have an effect on the market for roaming services. AT&T argues that Sprint fails to point to any effect on a market for roaming services in which Sprint is a participant. Sprint does not currently purchase roaming services from either AT&T or T-Mobile, nor would it be possible for them to do so. Sprint’s cell phone network uses CDMA technology which is incompatible with the GSM technology used by AT&T and T-Mobile. Cellular South uses GSM service for less than 3 percent of its customers and fails to show that it would be affected. AT&T goes on to argue that any claims by Sprint or Cellular South which state that the merger would increase the price they pay for Verizon roaming services lack any factual basis. AT&T argues that both Sprint and Cellular South are ignoring the fact that FCC regulations require all mobile wireless carriers to provide roaming on a just, reasonable and non-discriminatory basis.

Regardless of how one feels about the competitive effects of an AT&T/T-Mobile merger on the wireless industry, whether there is anything to gain by allowing Sprint and Cellular South to sue on the back of the DOJ is a separate question. The DOJ and the seven state attorneys general which have joined in the suit (New York, Washington, California, Illinois, Massachusetts, Ohio and Pennsylvania) seem well positioned to represent the welfare of wireless consumers and it is difficult to see what additional benefits would be provided by allowing wireless companies, primarily concerned with the merger’s effects on their own bottom lines, to sue as well. It is now up to Sprint and Cellular South to show why their suits should be allowed.  Oral arguments in the case are schedule for October 24^th.

• The FCC has filed its finalized net neutrality rules, set to take effect on November 20. The rules will almost certainly face legal challenges from Verizon and MetroPCS over the extent of the FCC’s jurisdiction.
• David Ignatius writes on legal uncertainty and difficult questions facing the future “rules of war” for drone strikes. The debate has gotten fresh attention over last week’s report that the Obama administration’s legal team is split on the extent of our ability to use lethal force in countries like Yemen and Somalia.
• In contrast to Sprint’s approach to AT&T’s proposed acquisition of T-Mobile, Verizon’s CEO has stepped up and defended the deal as a necessary outcome – “like gravity”.
• Samsung is seeking to ban iPhone 5 sales in South Korea for violating Samsung’s wireless technology related patents. The move comes on the heels of Apple’s latest success in banning Samsung’s Galaxy Tab 10.1 from Germany and an escalating international patent battle between the two tech giants.
• With an eye toward stock market volatility, the troubled GroupOn IPO is back on track with a late October-early November goal for going public.
• Three Boston University researchers have estimated that patent litigation by non-practicing entities, aka “patent trolls”, have cost publicly-traded defendants half a trillion dollars since 1990.

• Last week, the Justice Department filed suit in DC District court to block AT&T’s $39 billion acquisition of T-Mobile, arguing that the merger violates antitrust laws. Sprint has since filed its own lawsuit in DC District court to block the proposed deal.
• The Senate debates the America Invents Act on Patent Reform (H.R.1249). These proposed reforms to the patent system are expected to be passed and signed by President Obama within the next two weeks. Many argue that the new laws will harm small inventors and venture capital funded companies.
• TechCrunch reports on Google CEO Eric Schmidt’s own take on improving the quality of issued patents through crowdsourcing.
• Groupon is considering delaying its initial public offering due to recent public market uncertainty.
• The Electronic Frontier Foundation provides analysis on the recent Capitol Records v. MP3Tunes opinion issued by the New York Southern District.  The court held that file de-duplication on cloud-based music services falls within the safe harbor provisions of the DMCA.  The decision will lead to reduced costs for online music locker service providers.

• Patent Docs reviews Senator Patrick Leahy’s proposals for patent reform.

• Third Circuit gives “Spam filter ate my filing notice” excuse a second chance, from the Technology & Marketing Blog.

• EFF sues to find out how the government spies on us using social networks; Indiana University students makes a Freedom of Information request to find out much the big telcos charge the government to spy on their networks, says Wired.

• The New York Times opines in favor of the Empire State’s decision to collect sales tax on online purchases from out-of-state retailers delivered in New York.

• Lazy IP enforcement leads to prosecution of the wrong guy, who makes a big deal out of it, says Ars Technica.

• FTC isn’t done with Intel yet, now looking into anticompetitive behavior with regard to Nvidia, reports BusinessWeek.

• Google to end free access to subscription news, blogs Gizmodo.

• And for an international perspective: BioTechBlog reports on IP and the biotech industry in India.

Oracle Corp.’s $7.4 billion acquisition of Sun Microsystems Inc. has hit the IT headlines again this week with the issue of the European Commission’s formal statement of objections, presaging an uphill battle for Oracle to secure antitrust clearance in the EU. STLR brings you this cheat sheet on the issues, explaining what’s at stake, the latest ins and outs of the deal, and the reactions of various commentators.

• Following a failed bid by IBM, on April 20, 2009, Sun Microsystems and Oracle announced that agreement had been reached on Oracle acquiring Sun.

• On August 20, Oracle announced that the US Department of Justice had approved the acquisition without conditions and terminated the waiting period under the Hart-Scott-Rodino Act (during which regulatory authorities may request further information).

• On September 3, the European Commission announced that it was opening an in-depth investigation into the proposed takeover, which would last until January 19, 2010. European Commissioner for Competition Neelie Kroes stated that “[t]he Commission has to examine very carefully the effects on competition in Europe when the world’s leading proprietary database company proposes to take over the world’s leading open source database company. In particular, the Commission has an obligation to ensure that customers would not face reduced choice or higher prices as a result of this takeover.” She further noted that “[t]he proposed transaction would bring together two major competitors in the market for databases. The database market is highly concentrated with the three main competitors of proprietary databases – Oracle, IBM and Microsoft – controlling approximately 85% of the market in terms of revenue.”

• During a meeting on October 21 between Commissioner Neelie Kroes and Oracle President Safra Catz, Ms. Kroes expressed “her disappointment that Oracle had failed to produce, despite repeated requests, either hard evidence that there were no competition problems or a proposal for a remedy to the competition problems identified by the commission.”

• On November 9, Sun disclosed in a regulatory filing with the SEC that European Commission had issued its formal statement of objections, which “sets out the Commission’s preliminary assessment regarding, and is limited to, the combination of Sun’s open source MySQL database product with Oracle’s enterprise database products and its potential negative effects on competition in the market for database products.” The text of the statement of objections has not been made available to the public.

• In its statement of the same day, Oracle stated that “[t]he Commission’s Statement of Objections reveals a profound misunderstanding of both database competition and open source dynamics. It is well understood by those knowledgeable about open source software that because MySQL is open source, it cannot be controlled by anyone. That is the whole point of open source.”

• On the same day, the US Department of Justice issued a statement responding to the news of the European Commission’s statement of objections, noting that: “[a]fter conducting a careful investigation of the proposed transaction between Oracle and Sun, the Department’s Antitrust Division concluded that the merger is unlikely to be anticompetitive.” There were many open source and proprietary database competitors safeguarding customer choice, as well as a community of developers and users of Sun’s open source database who could support a derivative version of it. The Department of Justice expressed the hope that “the parties and the EC will reach a speedy resolution that benefits consumers in the Commission’s jurisdiction.”

• On Tuesday, November 10, Neelie Kroes was reported to have responded to Oracle’s statement, dismissing its arguments as “facile and superficial.”

• Steve Lohr and James Kanter of the New York Times argue that Oracle’s battle with the European Commission “boils down to a conflict about the importance of free software and the government’s role in protecting it” and notes that the “sharp exchanges fit a familiar pattern in antitrust disputes between Brussels and American technology companies” such as Microsoft and Intel. They quote Prof. Michael A. Cusumano’s opinion that “[i]t makes sense that the Europeans come to the defense of open-source companies because the big proprietary companies are nearly all American” (though blogger Dennis Byron notes that the big open sources companies are all American too).

• In a Reuters analysis piece, Jim Finkle ponders Oracle’s reasons for fighting for MySQL. He notes that MySQL’s customer base is made up of mostly small- and medium-sized companies who use it to run websites and store business data, whereas Oracle has traditionally focused on larger corporations. MySQL is available for free, but Sun has generated revenue by charging for enhanced versions. Acquiring MySQL would enable Oracle to offer a “one-stop-shop for data customers”, with MySQL competing with Microsoft’s SQL Server at the low end of the market, while Oracle’s existing products would continue to compete in the mid-to-high range.

• The Economist opines that few observers believe that MySQL and Oracle really compete, though there are merits to the argument that Oracle would acquire control over commercial use of MySQL. Though MySQL is available for free, the open source license requires any code built around the product to also be made open source. For this reason, most firms prefer to obtain a commercial license which does not impose this obligation. After the acquisition, the licensor would be Oracle. This “dual-licensing” may help prevent the emergence of a strong alternative to MySQL.

• Steven Davidoff, the NYT’s Deal Professor, believes that Sun should have pushed the negotiation on regulatory covenants much harder: the relevant clause in the acquisition agreement clause amounts to a “flat-out bar on Sun being able to force Oracle to dispose of, or run differently, MySQL or any other asset that might offend the European Union antitrust authority.” Furthermore, Oracle is under no obligation to complete the transaction if EU antitrust approval is not granted.

• In October, free software activist Richard Stallman was reported to have addressed a letter to Neelie Kroes urging the Commission to demand the divestment of MySQL in return for approval of the acquisition, stating that the acquisition “will predictably limit the development of the functionality and performance of the MySQL software platform, leading to profound harm to those who use MySQL software to power applications.”  He was unconvinced by Oracle’s contention that if it did not act as a good host for MySQL, the software could easily be “forked” to create a new platform, because MySQL is  provided subject to the open source GNU General Public License (GPL). Stallman countered that the current migration from version 2 of the GPL to version 3 raised a number of “fundamental and unavoidable legal obstacles” to combining code under the different versions to achieve this “forking”.

Oracle’s acquisition of Sun Microsystems raises important issues regarding the different approaches to antitrust on either side of the Atlantic, in particular in the IT sector, and regarding the future of open source software. All of the indicators point to a tough battle ahead for Oracle.

As Oracle fights to consummate its deal, follow us for updates.

By Brian Harley and Jane Wu