On May 7, 2015, the California Supreme Court unanimously ruled that reverse payment (AKA “pay-for-delay”) Hatch-Waxman patent litigation settlements may be challenged under California state antitrust law. The highest court in California overturned the lower courts’ rulings to contrary, setting the stage for Cipro® (ciprofloxacin hydrochloride) purchasers to pursue their claims against Barr Laboratories Inc., Hoechst-Marion Roussel Inc., The Rugby Group Inc., and Watson Pharmaceuticals Inc. Interestingly, the manufacturer of Cipro®, Bayer is not named in the case, because it already settled with plaintiffs shortly before the U.S. Supreme Court ruled in FTC v. Actavis. The settlement involves a cash payment of nearly $400 million to Barr to delay launching its generic version prior to 180-days before the key patent expired. At the time this settlement was reached, the Federal Trade Commission (FTC) was not required to review Hatch-Waxman settlements for their potential anticompetitive effect.

The Court concluded that a third-party plaintiff challenging a reverse payment patent settlement must show four elements:

the settlement includes a limit on the settling generic challenger’s entry into the market, the settlement includes cash or equivalent financial consideration flowing from the brand to the generic challenger; and the consideration exceeds the value of goods and services other than any delay in market entry provided by the generic challenger to the brand, as well as the brand’s expected remaining litigation costs absent settlement.

Once these elements are met in a prima facie case, the defendants may come forward with additional justifications to demonstrate the settlement agreement nevertheless is procompetitive. If the plaintiff can dispel those justifications, they have carried their burden of demonstrating the settlement is an unreasonable restraint of trade under the Cartwright Act, the Court further concluded.

While the Court found that Actavis “is not dispositive on matters of state law,” it also found that California’s state antitrust law was “fully compatible” with federal antitrust law, which permitted the Court to adopt much of the U.S. Supreme Court’s reasoning in Actavis. At the same time, the California Supreme Court provided some elaboration for unanswered questions in Actavis. For example, the test includes “or equivalent financial consideration,” where the Court explained:

A side agreement involving difficult-to-value assets might conceivably be added to a patent settlement to provide cover for the purchase of additional freedom from competition. . . .This court long ago established that side deals should not be permitted to serve as fig leaves for agreements to eliminate competition.

At the same time, however, the Court noted that some cash payments may be permitted in Hatch-Waxman settlements:

Parties can still use financial considerations to bridge small gaps arising from differing subjective perceptions on their probabilities of success in litigation; what they cannot do is use money to bridge their differences over the point where competitive entry is economically desirable, for that gap is not one antitrust law permits would-be competitors to bridge by agreement.”

In sum, the ruling did not appear to impose a more stringent standard than Actavis. At the same time, it may encourage other state attorneys general to bring additional reverse payment cases on behalf of consumers under their own antitrust laws, even for cases not involving only money payments for delayed market entry.