No. 10-762

Dupreme eurt of the i nitel Dtates

LOUISIANA WHOLESALE DRUG CO., INC.,CVS PHARMACY, INC., RITE AID CORPORATION,

ARTHUR’S DRUG STORE, INC.,

Petitioners,V.

BAYER AG, BAYER CORP., formerly doingbusiness as Miles Inc., HOECHST MARION

ROUSSEL, INC., THE RUGBY GROUP, INC.,WATSON PHARMACEUTICALS, INC.,

BARR LABORATORIES, INC.,

Respondents.

On Petition For A Writ Of CertiorariTo The United States Court Of Appeals

For The Second Circuit

BRIEF OF AMICUS CURIAE NATIONALASSOCIATION OF CHAIN DRUG STORES, INC.

IN SUPPORT OF PETITIONERS

DON L. BELL, IINATIONAL ASSOCIATION OF

CHAIN DRUG STORES, INC.413 North Lee StreetP.O. Box 1417-D49Alexandria, VA 22313(703) 549-3001dbell@nacds.org

Counsel for Amicus CuriaeNational Association ofChain Drug Stores, Inc.

COCKLE LAW BRIEF PRINTING CO. 1800/225-6964OR CALL COLLECT (402/342-2831

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TABLE OF CONTENTS

STATEMENT OF INTEREST .............................

SUMMARY OF ARGUMENT ..............................

ARGUMENT: THE SECOND CIRCUIT’S RUL-ING IS INCOMPATIBLE WITH FEDERALPATENT LAW ...................................................

CONCLUSION .....................................................

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TABLE OF AUTHORITIES

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CASES

Blonder-Tongue Laboratories, Inc. v. Univ. ofIll. Foundation, 402 U.S. 313 (1971) ........................7

Bonito Boats, Inc. v. Thundercraft Boats, Inc.,489 U.S. 141 (1989) ...........................................3, 4, 8

Cardinal Chemical Co. v. Morton Int’l, Inc., 508U.S. 83 (1993) ........................................................6, 7

eBay Inc. v. MercExchange, LLC, 547 U.S. 388(2006) .........................................................................6

Illinois Tool Works, Inc. v. Grip-Pak, Inc., 906F.2d 679 (Fed. Cir. 1990) ...........................................6

In re Brand Name Prescription Drugs AntitrustLitigation, 186 F.3d 781 (7th Cir. 1999) ...................2

In re Ciprofloxacin Hydrochloride AntitrustLitigation, 363 F. Supp. 2d 514 (E.D.N.Y.2005) ..........................................................................4

In re Tamoxifen Citrate Antitrust Litigation,466 F.3d 187 (2005) ......................................... passim

In re Terazosin Hydrochloride Antitrust Litiga-tion, 352 F. Supp. 2d 1279 (S.D. Fla. 2005) ..............5

Lear, Inc. v. Adkins, 395 U.S. 653 (1969) .................4, 7

Medimmune, Inc. v. Genentech, Inc., 549 U.S.118 (2007) ..................................................................4

Nutrition 21 v. United States, 930 F.2d 867(Fed. Cir. 1991) ..........................................................5

Precision Mfg. Co. v. Auto Maintenance Ma-chine Co., 324 U.S. 806 (1945) ..................................6

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TABLE OF AUTHORITIES - Continued

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Schering-Plough Corp. v. Federal TradeComm’n, 402 F.3d 1056 (11th Cir. 2005) ..................4

Sinclair & Carroll Co. v. Interchemical Corp.,325 U.S. 327 (1945) ...................................................7

Sola Elec. Co. v. Jefferson Elec. Co., 317 U.S.173 (1942) ..............................................................7, 8

Stratoflex, Inc. v. Aeroquip Corp., 713 F.2d1530 (Fed. Cir. 1983) .................................................5

STATUTES

35 U.S.C. § 281 .............................................................4

35 U.S.C. § 282 .............................................................4

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STATEMENT OF INTEREST1

The National Association of Chain Drug Stores,Inc. ("NACDS") is a non-profit association of nearly140 retail pharmacy chains. NACDS members oper-

ate more than 39,000 retail community pharmaciesand dispense approximately 72% of Americans’ pre-scription drugs. Anticompetitive practices by drug

manufacturers, such as the practice at issue in thiscase, harm NACDS members and their customers bymaintaining artificially high prices for prescriptiondrugs. NACDS believes that its industry-wide per-spective on this important issue will be of assistanceto the Court and therefore respectfully submits thisamicus curiae brief in support of the Petition.

SUMMARY OF ARGUMENT

The rule of decision adopted by the Second Cir-cuit in Tamoxifen and applied in this case disregardsthis Court’s patent precedents by allowing private

1 All parties were notified ten days prior to the due date ofthis brief of the intention to file. All parties have consented tothe filing of this brief, and their letters of consent have beenfiled with the Clerk of the Court. Pursuant to this Court’s Rule37.6, amicus states that no counsel for a party authored thisbrief in whole or in part, and no counsel or party made a mone-tary contribution intended to fund the preparation or submis-sion of this brief. No person other than amicus made a monetarycontribution to the preparation or submission of this brief.

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parties to create what is in effect a "private patent"that provides its owner with greater protection fromcompetition than that afforded by the federal patentlaws. Federal patent law, however, incorporates apolicy favoring competition in the American economyexcept to the extent that competition is displaced bythe narrow and carefully drawn legal rules thatdefine the scope and duration of a federal patent. Byallowing private patents that fall outside those legalrules, the Tamoxifen standard seriously underminesfederal patent policy. This Court should grant certio-rari to maintain the proper balance between competi-tion and intellectual property protection.

ARGUMENT

THE SECOND CIRCUIT’S RULING ISINCOMPATIBLE WITH FEDERAL PATENT LAW

Generic entry is a critical event in the life of abranded pharmaceutical. As Judge Posner has noted,prior to entry of an AB-rated generic most "manufac-turers of brand name prescription drugs ... havemarket power." In re Brand Name Prescription DrugsAntitrust Litigation, 186 F.3d 781,786 (7th Cir. 1999).Generic entry effectively dissipates that marketpower and brings the benefits of lower-priced phar-maceuticals to wholesalers, retail pharmacies andAmerican consumers. Of course, since the savingsachieved by pharmaceutical purchasers along thedistribution chain come directly out of the pockets of

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the branded pharmaceutical manufacturers, thosemanufacturers have a strong financial incentive todelay the entry of an AB-rated generic as long aspossible.

In evaluating the lawfulness of the practices atissue in this case, the Second Circuit applied the legalstandard adopted in a prior 2-1 panel decision of the

same court. See In re Tamoxifen Citrate AntitrustLitigation, 466 F.3d 187 (2005). While the Tamoxifenstandard attempts to balance the societal interests inpromoting economic competition and enforcing legit-imate intellectual property rights, it gives too littleweight to the former and too much weight to thelatter. In particular, the standard applied by theSecond Circuit is inconsistent with federal patent lawbecause it disregards several critical limitationsinherent in the substantive and procedural rules thatmake up that body of law.

The federal patent laws define not only what isprotected by patent law, but also - and just as im-portantly - what is not protected. See Bonito Boats,

Inc. v. Thundercraft Boats, Inc., 489 U.S. 141, 151(1989). Patent law itself, unaided by federal antitrustlaw, incorporates a federal policy favoring competitionbefore, after and during the existence of a U.S. pa-tent, so long as that competition falls outside thenarrow and carefully limited scope of the monopolyconferred by the patent laws. This policy is strongenough to preempt state laws that purport to offerinventors protection from competition for inventionsthat do not qualify for protection under federal patent

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law. Id. at 151-57. As Justice O’Connor wrote inBonito Boats, the provisions of federal patent law"embody a congressional understanding, implicit inthe Patent Clause itself, that free exploitation of ideaswill be the rule, to which the protection of a federalpatent is the exception." Id. at 151 (emphasis sup-plied).

The Tamoxifen standard threatens to make "freeexploitation of ideas" the exception rather than therule in a number of independent ways.

First, the Tamoxifen standard rests on the propo-sition that the holder of a federal patent has anabsolute "right to exclude" that may be enforced bypaying competitors not to compete. See In re Cipro-floxacin Hydrochloride Antitrust Litigation, 363F. Supp. 2d 514, 524 (E.D.N.Y. 2005); see also Scher-ing-Plough Corp. v. Federal Trade Comm’n, 402 F.3d1056, 1066 (11th Cir. 2005). But patent law providesno such absolute right to exclude. As this Court hasnoted, "[a] patent, in the last analysis, simply repre-sents a legal conclusion reached by the Patent Office,"and one "as to which reasonable men can differwidely." Lear, Inc. v. Adkins, 395 U.S. 653,670 (1969).Contrary to the decision below, patent law providesfor judicial determination of both patent validity andinfringement, with the burden of proof imposed onthe patentee to prove infringement and the burden onthe alleged infringer to prove invalidity. 35 U.S.C.§§ 281, 282; see Medimrnune, Inc. v. Genentech, Inc.,549 U.S. 118 (2007) (federal courts have jurisdictionto decide patent validity even when the parties have

entered into a license and are complying with thatlicense agreement). Thus, any appropriate analysis ofexclusion payments must take into account thepossibility that the patent being enforced will bedeclared invalid. See In re Terazosin HydrochlorideAntitrust Litigation, 352 F. Supp. 2d 1279, 1298 (S.D.Fla. 2005) ("any construction of the patent’s exclu-sionary scope ... that fails to take into account thechances of the patent being held invalid would essen-tially afford pioneer drug manufacturers an unbridledpower to exclude others without regard to thestrength of their patent rights").

Second, in relying on the rebuttable presumption

of patent validity to justify exclusion payments, theTamoxifen standard not only disregards the distinc-tion between rebuttable and conclusive but alsotransforms a procedural device into a substantivelegal right. The presumption of validity "is a proce-

dural device, not substantive law." Stratoflex, Inc. v.Aeroquip Corp., 713 F.2d 1530, 1534 (Fed. Cir. 1983).Moreover, the presumption of validity applies only ina full adjudication on the merits. In proceedings shortof full adjudication - for example, at the preliminaryinjunction stage -"the patentee carries the burden ofshowing likelihood of success with respect to thepatent’s validity." Nutrition 21 v. United States, 930F.2d 867, 869 (Fed. Cir. 1991) (emphasis in original).In pharmaceutical as well as other patent cases,courts applying patent law frequently deny prelimi-nary injunctions on the ground that, at least until acourt has ruled on validity and infringement, the

alleged infringer has a "right to compete." See, e.g.,Illinois Tool Works, Inc. v. Grip-Pak, Inc., 906 F.2d679,684 (Fed. Cir. 1990).

Third, the Tamoxifen standard assumes that afinding of validity and infringement automaticallyresults in a judicially enforceable order excluding theinfringer from competing. In fact, even after a court

has entered a final judgment finding infringement,the patentee is not automatically entitled to excludethe infringer, but instead must satisfy the traditionalrequirements for injunctive relief. See eBay Inc. v.MercExchange, LLC, 547 U.S. 388 (2006).

Fourth, the Tamoxifen standard disregards thefact that, because patent enforcement imposes costson society in the form of monopoly rents, there is apublic interest in judicial determination of patentvalidity that is absent or greatly muted in other areasof the law. As the Supreme Court has emphasized,"[a] patent by its very nature is affected with a publicinterest" because of its potentially "far-reaching socialand economic consequences." Precision Mfgo Co. v.

Auto Maintenance Machine Co., 324 U.S. 806, 816(1945). As a result, the Court has adopted rules thatreduce the likelihood that invalid patents will be

enforced.

For example, in Cardinal Chemical Co. v. MortonInt’l, Inc., 508 U.S. 83 (1993), the Court disapprovedthe Federal Circuit’s practice of vacating a districtcourt declaration of patent invalidity once the Courtof Appeals affirmed a finding of non-infringement.

The Court noted that "’of the two questions [validityand infringement], validity has the greater publicimportance,’" and that a court follows the "’betterpractice by inquiring fully into the validity of [the]patent.’" Id. at 100 (quoting Sinclair & Carroll Co. v.Interchemical Corp., 325 U.S. 327, 330 (1945)). Like-wise, in Blonder-Tongue Laboratories, Inc. v. Univ. of

Ill. Foundation, 402 U.S. 313 (1971), the Court ruledthat a finding of patent invalidity in one case collat-erally estops the patent holder from relitigating theissue in a subsequent case against a different defen-dant, despite the fact that a finding of patent validityhas no such preclusive effect, because "the opportuni-ty to relitigate might, as a practical matter, grantmonopoly privileges to the holders of invalid patents."Cardinal Chemical, 508 U.S. at 101. And in Lear, Inc.v. Adkins, 395 U.S. 653 (1969), the Court held thatfederal patent law preempted a rule of state contractlaw providing that a patent licensee cannot raise theinvalidity of the patent as a defense in an action forunpaid royalties. The Court relied on the principlethat "federal law requires, that all ideas in generalcirculation be dedicated to the common good unlessthey are protected by a valid patent." Id. at 668.

Even before Lear was decided, this Court creat-ed an exception to the doctrine of patent licenseeestoppel in cases where the licensee alleged that thelicense violated the Sherman Act. See Sola Elec. Co.

v. Jefferson Elec. Co., 317 U.S. 173 (1942). In Sola,the Court ruled that, as a matter of federal law, thelicensee must be permitted to raise patent invalidity

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as a defense in an action to enforce a license agree-ment alleged to be unlawful under the antitrust lawsbecause "[a]greements fixing the competitive salesprice of articles moving interstate, not within theprotection of a [valid] patent, are ... prohibited by

the Sherman Act." Id. at 176.

In each of these four respects, the Tamoxifenstandard magnifies the branded manufacturer’srights beyond those it actually enjoys under federalpatent law. It thereby contravenes the federal policyin favor of competition embodied in that law.

CONCLUSION

In Bonito Boats, this Court ruled that the Stateof Florida could not constitutionally create patent-likeintellectual property rights broader than the limitedand carefully delineated rights embodied in federalpatent law. The Court ruled that "state regulation ofintellectual property must yield to the extent that itclashes with the balance struck by Congress in ourpatent laws." 489 U.S. at 152. Yet the Tamoxifenstandard allows private parties to do precisely whatthe State of Florida is constitutionally prohibitedfrom doing.

The Petition should be granted.

Respectfully submitted,

DON L. BELL, IINATIONAL ASSOCIATION OF

CHAIN DRUG STORES, INC.

413 North Lee StreetP.O. Box 1417-D49Alexandria, VA 22313(703) 549-3001dbell@nacds.org

Counsel for Amicus CuriaeNational Association ofChain Drug Stores, Inc.

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