The opinion of the court was delivered by: Trager, District Judge
This action involves agreements between the brand-name manufacturer of the widely used antibiotic ciprofloxacin hydrochloride ("Cipro") and potential generic manufacturers of Cipro. The brand-name manufacturer, Bayer AG, a German company, and its American subsidiary, Bayer Corporation (collectively, "Bayer") and the generics, Barr Laboratories, Inc. ("Barr"); The Rugby Group, Inc. ("Rugby"); Hoechst Marion Roussel, Inc. ("HMR"); and Watson Pharmaceuticals, Inc. ("Watson") (collectively, "generic defendants") *fn1 entered into agreements that Direct Purchaser Plaintiffs ("direct plaintiffs") and Indirect Purchaser Class Plaintiffs ("indirect plaintiffs") allege prevented competition in the market for Cipro in violation of federal and state antitrust laws. *fn2 Plaintiffs previously filed motions for partial summary judgment seeking a determination that these agreements were per se unlawful under Section 1 of the Sherman Act, 15 U.S.C. section 1 (and various state antitrust and consumer protection laws), which were denied. Subsequently, indirect plaintiffs amended their complaint to add a new count, Count V, alleging Walker Process-type *fn3 and sham litigation antitrust violations under state law.
Bayer and generic defendants have now each filed motions for summary judgment asserting that these agreements do not violate Section 1 of the Sherman Act because they had no anti-competitive effects beyond the scope of Bayer's patent on ciprofloxacin, while direct plaintiffs have filed a motion for partial summary judgment arguing that the agreements meet the "anti-competitive conduct" requirement of Section 1 of the Sherman Act and the "antitrust injury" requirement of the Section 4 of the Clayton Act. Bayer has also filed two motions relating to Count V of indirect plaintiffs' second amended complaint ("Count V"). The first, a motion to dismiss Count V, is made on the grounds that indirect plaintiffs' state law Walker Process-type claim is preempted by federal patent law and is barred by the statute of limitations. The second, filed in the event Count V is not dismissed, is a motion for summary judgment on Count V on the grounds that indirect plaintiffs have failed to demonstrate that any misrepresentations or omissions made by Bayer in prosecuting its patent were so highly material that the patent would not have issued but for the alleged deceptions and that plaintiffs' sham litigation claim fails as a matter of law. Finally, HMR and Rugby have filed a motion for summary judgment that indirect plaintiffs' claims against them are barred by the doctrine of Illinois Brick *fn4 and that any rights assigned to indirect plaintiffs do not include claims against HMR.
The statutory and regulatory background, as well as the circumstances of this case, were fully described in the court's initial opinion, In re Ciprofloxacin Hydrochloride Antitrust Litig., 166 F.Supp.2d 740 (E.D.N.Y.2001) ("Cipro I ") (granting certain plaintiffs' motions to remand to state court). The developments in the case were further discussed and analyzed in a second opinion, In re Ciprofloxacin Hydrochloride Antitrust Litig., 261 F.Supp.2d 188 (E.D.N.Y.2003) ("Cipro II ") (granting in part and denying in part defendants' motions to dismiss, and denying plaintiffs' motion for partial summary judgment asserting that the agreements constituted per se violations of the antitrust laws). Familiarity with those decisions is presumed, and what follows is a summary of only those facts necessary for the resolution of the pending motions.
Bayer is the assignee of U.S. Patent No. 4,670,444 ("the '444 Patent"), a compound patent which claims the chemical entity that is the active ingredient in Cipro--ciprofloxacin hydrochloride--and all its generic equivalents. See Cipro II, 261 F.Supp.2d at 249 ("A patent on a compound that is the only active ingredient in a drug covers all generic versions of that drug .... regardless of how formulated, processed or delivered ...."). The '444 Patent issued on June 2, 1987 from patent application Ser. No. 614,923 ("the '923 application"), which was filed on May 29, 1984. The '923 application was filed as a continuation-in-part *fn5 of Ser. No. 292,560 ("the '560 application"), which was filed on August 13, 1981, and Ser. No. 436,112 ("the '112 application"), which was filed on October 22, 1982. See App. to Aff. of Paul J. Skiermont in Support of Bayer's Mot. for Partial Summ. J. on Count V of the Indir. Pls.' Proposed Second Am. Consol. Class Action Compl. ("Bayer Count V App."), Ex. 1.
In October 1987, Bayer's predecessor, Miles, Inc., obtained FDA approval to market Cipro in the United States. Cipro II, 261 F.Supp.2d at 194. From 1987 until 2004, Bayer was the only producer of Cipro in the United States. Id. On October 22, 1991, Barr filed Abbreviated New Drug Application ("ANDA") 74-124 for permission to market a generic version of Cipro, and included a Paragraph IV certification, seeking permission to market its generic drug before expiration of the '444 Patent on the grounds that the patent was invalid and unenforceable. Id. Because the '444 Patent claims the active ingredient in Cipro and because Barr was required in its ANDA to certify that its generic version of Cipro was bioequivalent to Bayer's Cipro, there is no dispute that Barr's product would have infringed Bayer's patent. Cipro II, at 249; see also App. to Aff. of Paul J. Skiermont in Support of Bayer's Mot. for Partial Summ. J. on Pls. Claims Under the Sherman Act and Corr. State Law Claims ("Bayer Sherman Act App."), Tab 5 (Stipulation and Order (Barr's stipulation that it infringed the '444 Patent)).
Pursuant to the Hatch-Waxman Amendments to the Federal Food, Drug and Cosmetic Act, 21 U.S.C. section 355, on December 6, 1991, Barr notified Bayer of its ANDA IV filing, and on January 16, 1992, Bayer sued Barr for patent infringement in the Southern District of New York, where the case was assigned to Judge Whitman Knapp. Cipro II, 261 F.Supp.2d at 194. In January 1996, Bayer and Barr filed cross-motions for partial summary judgment, which Judge Knapp denied in an order and opinion dated June 5, 1996. Id. at 195.
In March 1996, while these cross-motions were sub judice, Barr agreed to share equally any profits from the eventual marketing and/or distribution of Cipro with Rugby, which was then a subsidiary of HMR, and, in return, Rugby agreed to finance a portion of the costs and expenses of the patent litigation against Bayer. Id.
On January 8, 1997, just weeks before trial was scheduled to begin, Bayer and Barr reached a settlement of the patent litigation, with Bayer entering into three separate agreements with Barr, HMR and Rugby, and Bernard Sherman and Apotex, Inc. (collectively, the "Settlement Agreements") and a supply agreement with Barr and HMR (the "Supply Agreement") (collectively with the Settlement Agreements, the "Agreements"), the terms of which give rise to the plaintiffs' claims of Sherman Act violations. Id. at 195-96. Under the Barr Settlement Agreement, Bayer paid Barr $49.1 million and, in return, required Barr to amend its ANDA from a Paragraph IV certification to a Paragraph III certification, which would permit it to market a generic form of Cipro only upon the expiration of the '444 Patent. Id. at 196. However, the Barr Settlement Agreement preserved the option for Barr to re-amend to a Paragraph IV certification (for the purpose of reclaiming the 180-day exclusivity period that is awarded to a first-filer of an ANDA IV) in the event the '444 Patent were subsequently declared invalid or unenforceable by a court of competent jurisdiction. Bayer Sherman Act App., Ex. 16 p 5(a); see Cipro II, 261 F.Supp.2d at 243-47.
Under the terms of the Supply Agreement, Barr and HMR agreed not to manufacture or have manufactured a generic form of Cipro in the United States. Cipro II, 261 F.Supp.2d at 196. The Supply Agreement further provides that Bayer will either supply Bayer-manufactured Cipro to Barr, HMR and Rugby for distribution in the United States, or make quarterly payments to Barr from January 1998 through December 2003, at which time the '444 Patent was due to expire. Id. Bayer opted to make the payments, which, by December 2003, when added to the initial $49.1 million payment, totaled approximately $398 million. Id.
Bayer and Barr also entered into a Consent Judgment, terminating the litigation, in which Barr affirmed the validity and enforceability of the '444 Patent and admitted infringement. Id. at 196; Bayer Sherman Act App., Ex. 18. The Consent Judgment was signed by Judge Knapp, but made no mention of any payments from Bayer to Barr. Id.
Six months after settling with Barr, in July 1997, Bayer submitted the '444 Patent to the Patent and Trademark Office ("PTO") for reexamination. During the reexamination, Bayer amended certain of the claims of the '444 Patent and cancelled others, after which the PTO reaffirmed the patent's validity, including the validity of claim 12, which was not substantively amended and which all parties agree covers ciprofloxacin hydrochloride. Id. at 197; Bayer's Reply Mem. in Supp. of Its Mot. for Partial Summ. J. on Count V of the Indirect Purchaser Class Pls.' Proposed Second Am. Consolidated Class Action Compl. ("Bayer's Count V Reply Mem.") at 19; Bayer Sherman Act App., Ex. 5; App. to Aff. of Paul J. Skiermont in Support of Bayer's Mot. for Partial Summ. J. on Count V of the Indir. Pls.' Proposed Second Am. Consol. Class Action Compl. ("Bayer Count V S.J.App."), Ex. 9. Thereafter, four other generic companies--Schein, Mylan, Carlsbad and Ranbaxy--each challenged the reexamined '444 Patent by filing ANDA IVs for Cipro. Cipro II, 261 F.Supp.2d at 197. Bayer defeated Schein and Mylan's validity challenges on summary judgment, and those decisions were upheld by the Court of Appeals for the Federal Circuit. Id. at 201. The Carlsbad case proceeded to a nine-day bench trial, after which the judge rejected Carlsbad's invalidity argument and upheld the validity of the '444 Patent. See Bayer Count v.App., Exs. 15 and 16 (Bayer AG v. Carlsbad Tech., Inc., No. 01-cv-0867-B, slip op. at 5-13 (S.D. Cal. June 7, 2002 and Aug. 7, 2002)). Ranbaxy's challenge was dismissed as moot after Ranbaxy withdrew its Paragraph IV certification. Cipro II, 261 F.Supp.2d at 197.
Sherman Act Motions for Summary Judgment
The Cipro II decision made clear that Barr's agreement with Bayer not to sell ciprofloxacin in exchange for the exclusion payments, also commonly known as reverse or exit payments, *fn6 did not constitute a per se violation of the Sherman Act because the exclusionary effect of the Agreements was within the scope of the '444 Patent. Direct plaintiffs now move for summary judgment that the exclusion-payment scheme meets the "anti-competitive conduct" requirement of Section 1 of the Sherman Act under a rule of reason analysis, while both Bayer and generic defendants move for summary judgment that the Agreements had no anti-competitive effects that are actionable under the Sherman Act because they were within the scope of the '444 Patent. Resolution of this issue requires a close look at the intersection of patent and antitrust laws.
The rule of reason analysis involves a three-step process. First, the plaintiff must prove that "the challenged action has had an actual adverse effect on competition as a whole in the relevant market." K.M.B. Warehouse Distributors, Inc. v. Walker Mfg. Co., 61 F.3d 123, 127 (2d Cir.1995) (emphasis in original) (quoting Capital Imaging Assocs. v. Mohawk Valley Med. Assocs., 996 F.2d 537, 543 (2d Cir.), cert. denied, 510 U.S. 947, 114 S.Ct. 388, 126 L.Ed.2d 337 (1993)). Next, "the burden shifts to the defendant to establish the 'pro-competitive redeeming virtues' of the action." Id. If the defendant succeeds, the burden shifts back to the plaintiff to "show that the same pro-competitive effect could be achieved through an alternative means that is less restrictive of competition." Id. *fn7, *fn8
Taking these steps one at a time, the first question is whether plaintiffs have shown that the Agreements had an actual adverse effect on competition in the relevant market. Traditionally, the starting point of an antitrust inquiry is the definition of the relevant market. See, e.g., Geneva Pharma. Tech. Corp. v. Barr Labs. Inc., 386 F.3d 485, 496 (2d Cir.2004) ("Evaluating market power begins with defining the relevant market."). The purpose of this inquiry is to determine whether defendants possess market power, i.e., the ability to lessen or destroy competition, which, while not the sine qua non of a violation of Section 1 of the Sherman Act, is "a highly relevant factor in rule of reason analysis because market power bears a particularly strong relationship to a party's ability to injure competition." Capital Imaging, 996 F.2d at 546. The parties dispute whether the relevant market comprises only ciprofloxacin, as plaintiffs have asserted in their complaint, see Indir. Pls.' Second Am. Consol. Class Action Compl. p 34, or includes other drugs in the same molecular family as ciprofloxacin (flouroquinolones), which Bayer contends compete with ciprofloxacin in the U.S. antibiotic market, see Bayer Defs.' Mem. of Law in Opp'n to Direct Purchaser Pls.' Mot. for Partial Summ. J. ("Bayer's Opp. Mem."), at 26-29.
Plaintiffs assert that it is unnecessary to show a relevant market in this case because there exists direct evidence of anti-competitive effects. Mem. in Support of Direct Purchaser Pls.' Mot. for Partial Summ. J. ("Dir. Pls.' Mem."), at 25. In general, to sidestep the traditional relevant market analysis, a plaintiff must show by direct evidence "an actual adverse effect on competition, such as reduced output." Geneva v. Barr, 386 F.3d at 509 ("If plaintiff can demonstrate an actual adverse effect on competition, such as reduced output, ... there is no need to show market power in addition.") (citing FTC v. Indiana Fed'n of Dentists, 476 U.S. 447, 460-61, 106 S.Ct. 2009, 2019, 90 L.Ed.2d 445 (1986); K.M.B. Warehouse, 61 F.3d at 128-29). The reason for permitting this alternative showing is simply that the purpose of an inquiry into market power "is to determine whether an arrangement has the potential for genuine adverse effects on competition." FTC v. Indiana Fed'n of Dentists, 476 U.S. at 460, 106 S.Ct. at 2019, 90 L.Ed.2d 445. In effect, market power is "but a 'surrogate for detrimental effects.' " Id., 476 U.S. at 461, 106 S.Ct. at 2019 (quoting 7 P. Areeda, Antitrust Law p 1511, p. 429 (1986)).
For their direct evidence showing, direct plaintiffs point to government and academic studies concluding that purchasers derive substantial savings from the availability of generic drugs; internal analyses by the brand name and generic manufacturers themselves forecasting significant price reductions once generic drugs become available; and sales data showing the actual effects of competition once generic Cipro was introduced into the market. Dir. Pls.' Mem. at 25-31. In particular, direct plaintiffs rely on a 1998 study by the Congressional Budget Office comparing brand-name and generic prices for twenty-one different drugs that faced generic competition between 1991 and 1993, which found that the average retail price of a prescription for a generic drug in 1994 was less than half the average brand-name drug price. App. in Support of Decl. of Monica L. Rebuck for Dir. Pls.' Mot. for Partial Summ. J. (Dir. Pls.' Summ. J.App.), Tab 5 (Congressional Budget Office, How Increased Competition from Generic Drugs Has Affected Prices and Returns in the Pharmaceutical Industry, at 28-31 (July 1998) ("CBO Study")). Another study cited by direct plaintiffs found that by 2000, the average brand-name prescription cost 340 percent more than its generic equivalent ($65.29 versus $19.33). Dir. Pls.' Summ. J.App., Tab 20 (Kirkling et al., Economics and Structure of the Generic Pharmaceutical Industry, 41 J. Amer. Pharm. Assoc. 578, 579 (2001)).
These studies notwithstanding, the significant price differences actually suggest a finding contrary to the one implied by plaintiffs. Namely, brand-name pharmaceuticals and their generic counterparts might not always compete in the same markets at all because, based on the higher prices of the brand-name drugs, there is less cross-elasticity of demand than one might expect. (If there were, the prices for brand-name drug prices should fall and be closer to that of generics). Indeed, the CBO Study cited by plaintiffs indicates that prices for brand-name drugs continue to rise faster than inflation even after generic competition begins.
CBO Study at 30-31. The Second Circuit recently relied on similar price differential data to reach a particularly narrow market definition in Geneva v. Barr, 386 F.3d at 496-500. In that case, the court, relying on the factors set forth in Brown Shoe Co. v. United States, 370 U.S. 294, 325, 82 S.Ct. 1502, 1524, 8 L.Ed. 1264 (1962), defined the market as limited to generic warfarin sodium. Id.; see also Asahi Glass Co., Ltd. v. Pentech Pharma., Inc., 289 F.Supp.2d 986, 995-96 (N.D.Ill.2003) (Posner, J., sitting by designation) (noting that paroxetine, the active ingredient in Paxil, competes with molecules that are the basis for other antidepressant drugs such as Prozac and Zoloft, but reserving the possibility that paroxetine might still warrant treatment as a separate market).
Despite the fact that brand-name pharmaceuticals are apparently able to maintain significantly higher prices even after generic entry, the parties' internal analyses prepared at the time the Agreements were entered into confirm that both Bayer and Barr expected Bayer to lose significant sales once generic competition began, with Bayer estimating losses of between $510 million and $826 million in Cipro sales during the first two years of generic competition, depending on the number of generic manufacturers entering the market. Dir. Pls.' Summ. J.App., Tab 47A, at BCP4630078. Another contemporaneous internal Bayer document estimated Bayer's losses due to a potential adverse judgment in the '444 Patent litigation at $1.679 billion net present value. Dir. Pls.' Summ. J.App., Tab 47D at BCP-P-0001572-004(2). Barr, similarly, projected that it and other generic manufacturers would capture a large percentage of the market for ciprofloxacin within the first two years of generic competition, and would enter the market at a 30 percent discount off Bayer's price. Dir. Pls.' Summ. J.App., Tab 36A at BLI-003560.
Finally, direct plaintiffs point to post-generic entry data showing that Barr in fact did capture more than 50 percent of Bayer's Cipro sales soon after entering the market, and that it initially priced its generic ciprofloxacin at only 8 percent below Bayer's Cipro product. Dir. Pls.' Summ. J.App., Tab 35 (Expert Report of Jeffrey J. Leitzinger, Ph.D., at 38 n. 93). Direct plaintiffs also note that the Amended and Restated Supply Agreement between Bayer and Barr, dated August 28, 2003, which provides for Bayer to continue supplying ciprofloxacin to Barr for resale after expiration of the pediatric marketing exclusivity extension that Bayer obtained pursuant to 21 U.S.C. section 355a, sets drastically reduced prices for Cipro after the commencement of open generic competition. Dir. Pls.' Summ. J.App., Tab 43A at BCP4660023. For example, a 100-pill bottle of oral, 500-mg ciprofloxacin that cost Barr $321.96 before the beginning of open generic competition would cost only $14.30 after the expiration of Bayer's pediatric exclusivity, a 95 percent difference in price. Id. Bayer has admitted that the purpose of the price drop was to allow Barr to compete with additional generic manufacturers who would then be entering the market. Dir. Pls.' Summ. J.App., Tab 80 at 112.
Bayer discounts the import of these facts, insisting instead that Cipro competes in the larger market of flouroquinolones, which includes other drugs such as Levaquin, Floxin and Noroxin, within which Cipro has been losing market share, from 75 percent in 1996 to 43 percent in 2001. Bayer's Opp. Mem. at 28- 29. Bayer maintains that a properly defined market must include all quinolone antibiotics and that defendants did not possess enough market power to control prices or exclude competition within that larger market. Id. at 29.
Although evidence that Bayer charged high prices for Cipro "may of course be indicative of monopoly power," it is not necessarily conclusive in the absence of any analysis of Bayer's costs. See, e.g., Geneva Pharm. v. Barr, 386 F.3d at 500. Plaintiffs have provided neither evidence of Bayer's costs nor any direct evidence that defendants restricted output. However, the pricing strategy encompassed in the Amended and Restated Supply Agreement compels an inference that Bayer was reaping an abnormally high price-cost margin, given the 95 percent price drop that was to occur almost a full year in the future for an identical quantity of an identical strength of the identical drug. Dir. Pls.' Summ. J.App., Tab 43A at BCP4660023. Given Bayer's obvious ability to control prices, and its admission that it did not anticipate a commensurate drop in its own production costs for Cipro, *fn9 it is reasonable to accept plaintiffs' contention and conclude both that the relevant market is for ciprofloxacin and that Bayer had market power within that market.
b. Adverse effect on competition
The ultimate question--and this is the crux of the matter--is not whether Bayer and Barr had the power to adversely affect competition for ciprofloxacin as a whole, but whether any adverse effects on competition stemming from the Agreements were outside the exclusionary zone of the '444 Patent. It goes without saying that patents have adverse effects on competition. See Precision Instrument Mfg. Co. v. Automotive Maintenance Mach. Co., 324 U.S. 806, 816, 65 S.Ct. 993, 998, 89 L.Ed. 1381 (1945) (A patent "is an exception to the general rule against monopolies and to the right to access to a free and open market."); Schering-Plough, 402 F.3d 1056, 1065-1066, 2005 WL 528439, at *7 ("By their nature, patents create an environment of exclusion, and consequently, cripple competition. The anticompetitive effect is already present."). However, any adverse effects within the scope of a patent cannot be redressed by antitrust law. See United States v. Studiengesellschaft Kohle, m.b.H., 670 F.2d 1122, 1127 (D.C.Cir.1981) ("[T]he conduct at issue is illegal if it threatens competition in areas other than those protected by the patent and is otherwise legal."); see also United States v. General Electric Co., 272 U.S. 476, 485, 47 S.Ct. 192, 195, 71 L.Ed. 362 (1926); E. Bement & Sons v. National Harrow Co., 186 U.S. 70, 91, 22 S.Ct. 747, 755, 46 L.Ed. 1058 (1902). The '444 Patent gave Bayer the right to exclude competition entirely for ciprofloxacin for the term of the patent, and any conduct within the scope of the patent is exempt from antitrust scrutiny. See Cipro II, 261 F.Supp.2d at 248 ("[A] patent holder does not run afoul of the Sherman Act unless the patent holder acts beyond the confines of the patent monopoly."). Defendants argue that a determination that the Agreements do not restrict competition beyond the scope of the claims of the '444 Patent ends the inquiry as to anti-competitive effects. Plaintiffs, on the other hand, argue that the exclusionary power of the patent for purposes of the anti-competitive effects analysis should be tempered by its potential invalidity.
While there have been to date only a handful of cases discussing the legality of patent settlement exclusion payments, some courts and commentators have dealt with the questions of whether and to what extent the validity of the patent should be a factor in appraising the legality of an exclusion payment, and what sort of inquiry into validity an antitrust court should make. The Second Circuit has not yet addressed these issues, but two federal circuits, two district courts (including one on which Judge Posner sat by designation) and the Federal Trade Commission ("FTC") have considered them. Although those courts have come to different conclusions regarding the legality of exclusion payments at issue in those cases, they have generally agreed that an antitrust court need not make an independent assessment of the underlying patent's validity.
The Eleventh Circuit's approach in Valley Drug
The Eleventh Circuit in Valley Drug Co. v. Geneva Pharma., Inc., 344 F.3d 1294 (11th Cir.2003), held that to the extent the effects of the subject settlement agreements are within the scope of the exclusionary potential of the patent, such effects are not subject to per se (or rule of reason) antitrust condemnation, even where the patent is later held invalid. Valley Drug, 344 F.3d at 1311. The two agreements at issue in that case were between Abbott, manufacturer of the pioneer drug Hytrin, and two of its generic competitors-- Geneva and Zenith. Id. at 1296. Abbott held multiple patents on Hytrin, a drug containing terazosin hydrochloride, which is used to treat hypertension and enlarged prostate, and Geneva filed several ANDA IVs on Hytrin over a period of years. Id. at 1298. Zenith, meanwhile, had also filed an ANDA IV on Hytrin, which was pending when two additional patents relating to the active ingredient in Hytrin were issued to Abbott. Id. Abbott listed the new patent information with the FDA, which then required Zenith to make a certification with respect to the newly-issued patents. Id. Rather than comply, Zenith filed suit against Abbott to force Abbott to delist the new patents, alleging that Abbott listed them with the knowledge that they were not applicable to Hytrin. Id.On March 31, 1998, Abbott and Zenith entered an agreement settling their delisting and infringement dispute, under which Zenith agreed not to sell or distribute any generic terazosin hydrochloride product until a third party entered the market or until one of Abbott's patents expired, in exchange for payments by Abbott of $6 million every three months. Id. at 1300. The next day, Abbott entered a similar agreement with Geneva whereby Geneva agreed not to sell or distribute any generic terazosin hydrochloride product until one of Abbott's patents expired, a third party entered the market or Geneva obtained a final court judgment from which no further appeal could be taken that its terazosin products did not infringe one of Abbott's patents or that the patent was invalid. Id. In exchange, Abbott agreed to pay Geneva $4.5 million per month. Id. Geneva subsequently prevailed in the patent infringement suit Abbott had filed against it, obtaining a judgment on September 1, 1998 that the patent at issue in that case was invalid. Id. at 1301.
The district court concluded that Abbott's agreements with Zenith and Geneva were per se violations of Section 1 of the Sherman Act, holding that the exclusionary effect of the agreements constituted an allocation of the market between horizontal competitors.
Id. at 1304. The Eleventh Circuit reversed, however, rejecting the argument "that the agreements by Geneva and Zenith not to produce infringing products are subject to per se condemnation and treble-damages liability merely because the '207 patent was subsequently declared invalid." Id. at 1306. The court ruled that "the mere subsequent invalidity of the patent does not render the patent irrelevant to the appropriate antitrust analysis." Id. at 1306-07. The court invoked the rationale of Justice Harlan's concurrence in Walker Process Equip., Inc. v. Food Mach. & Chem. Corp., 382 U.S. 172, 179-80, 86 S.Ct. 347, 351-52, 15 L.Ed.2d 247 (1965): "[T]o hold, as we do not, that private antitrust suits might also reach monopolies practiced under patents that for one reason or another may turn out to be voidable under one or more of the numerous technicalities attending the issuance of a patent, might well chill the disclosure of inventions through the obtaining of a patent because of fear of the vexations or punitive consequences of treble-damage suits." Id. at 1307. The court accordingly reserved any post hoc validity analysis for those cases in which the patent was procured by fraud or known by the patentee to be invalid. Id. at 1307.
The court concluded that "[p]atent litigation is too complex and the results too uncertain for parties to accurately forecast whether enforcing the exclusionary right through settlement will expose them to treble damages if the patent immunity were destroyed by the mere invalidity of the patent." Id. at 1308. The court held open the possibility that the size of the payment to refrain from competing could be evidence of a lack of faith in the validity of the patent or evidence that the patent was obtained by fraud but, citing this court's decision in Cipro II, noted that the asymmetries of risk inherent in a Hatch-Waxman patent litigation and the high profits at stake could induce even a confident patentee to pay a substantial sum in settlement. Id. at 1309-10.
The Valley Drug court thus took the position that an antitrust court need not consider the potential invalidity of the patent in an exclusion-payment settlement, except in those extreme cases involving fraud on the Patent Office or assertion of a patent known to be invalid, i.e., in circumstances giving rise to an allegation of Walker Process fraud or sham litigation. However, the court went on to direct the district court on remand to evaluate the defendants' claim that the exclusionary effects of the patent and the agreements were coextensive because certain provisions of the agreements were analogous to a consensual preliminary injunction and stay of judgment pending appeal. Id. at 1312. The court instructed that this evaluation should include a comparison between "the provisions of the agreement and the protections afforded by the preliminary injunction and stay mechanisms," and, furthermore, that the "likelihood of Abbott's obtaining such protections" should be considered. Id.
On remand, the district court interpreted the Eleventh Circuit's instructions as requiring an analysis of the likelihood that Abbott would have won a preliminary injunction at the time the agreements were executed, which it construed as requiring an analysis of whether Abbott would have been able to show that its patent was likely valid, rather than an analysis simply of whether the patent claims covered Abbott's product. In re Terazosin Hydrochloride Antitrust Litig., 352 F.Supp.2d 1279, 1295 (S.D.Fl.2005). The district court proceeded to determine the likely validity of the patent at the time the agreements were entered, employing the standards applicable to a preliminary injunction analysis. Id. at 1303-07. The district court ultimately concluded that Abbott would likely not have been able to show that its patent was likely valid at the preliminary injunction stage of its suit against Geneva and, therefore, held that the Geneva agreement went beyond the exclusionary zone of the patent and was a per se violation of the Sherman Act.
It is not certain that the district court correctly interpreted the Eleventh Circuit's opinion, and, indeed, the Eleventh Circuit seems to have expressed some doubt on that point in an unrelated opinion. See Schering-Plough, 402 F.3d at 1065, 2005 WL 528439, at *7 n. 14 ("On remand, the district court in Valley Drug still applied a per se analysis...."). In any event, the implication of the district court's reasoning conflicts with the proposition already rejected in Cipro II--that the legality of the Agreements is contingent on Barr's chances of having won at trial. See Cipro II, 261 F.Supp.2d at 202 ...